Hong Kong targets next Alibaba in IPO rules revamp

Bloomberg

Hong Kong’s stock exchange proposed to let “innovative” companies list in the Chinese enclave with dual-class share structures to avoid losing out on more initial public offerings by technology giants like Alibaba Group Holding Ltd.
Allowing shares with extra voting power is part of a package of measures that may be the biggest change to the exchange’s listing rules since 1993, when it allowed large Chinese enterprises to go public there.
The bourse wants to better reflect “the drivers of the new global economy,” Chief Executive Officer Charles Li wrote in a blog, after earlier saying he hopes “a significant number of innovative companies” will start to choose Hong Kong by the second half of 2018.
Alibaba’s decision to hold its $25 billion initial share sale in New York three years ago spurred intense debate among bankers, brokers, exchange officials, investors and politicians about lifting a longstanding ban on stocks with dual voting structures. In the end, fear that more Chinese technology firms may choose to list elsewhere trumped warnings from large investors like BlackRock Inc. that such structures erode market integrity.
The Securities and Futures Commission recognises that investors hope to tap a more diverse range of companies but also want strict safeguards to ensure that the share class doesn’t become commonplace, Chief Executive Officer Ashley Alder said.
Each multiple-vote share would represent no more than 10 times the votes of ordinary shares, according to a Hong Kong Exchanges & Clearing Ltd. statement. Only companies with a focus on new technologies will be able to use the dual-class structure and founders and executives will need to demonstrate how their contribution merits it.
In addition to the dual-class proposal, the bourse plans to let biotech companies list without track records of profitability. It’s testing the waters in an area that can be crucial for attracting big tech companies and said more sectors could get this treatment in the future.
Hong Kong is adopting dual-class structures — long favoured by technology firms as a way of letting founders and management retain control — as a new wave of fast-growing Chinese companies approach the stage where they might go public, from Ant Financial Services Group to Xiaomi Corp. and Tencent Music.
The planned changes also lift restrictions on secondary listings for “innovative” mainland Chinese companies and raise the minimum market capitalisation for main exchange IPOs to HK$500 million from HK$200 million. Another round of consultation in the first quarter of 2018 will consider the detailed rules.
The dual-share structure comes with requirements including an expected HK$10 billion minimum market capitalisation. The extra voting rights would disappear in some circumstances, such as the holder ceasing to be a director, and wouldn’t apply in others, such as choosing a non-executive director. That would help ensure that voting control won’t pass from generation to generation.
Some of the world’s largest and most influential tech companies, from Alibaba to Facebook Inc. and Google parent Alphabet Corp., use shares with enhanced voting power to protect their founders and management influence after going public.
Hong Kong’s exchange will be following major trading venues including New York, Canada and continental Europe in adopting dual-class shares.
The nation’s trajectory illustrates the power big companies wield as competition among exchanges for the hottest IPOs intensifies, said Martin Wheatley, the former head of the SFC in Hong Kong and the UK’s Financial Conduct Authority.
The push to adopt a dual-classed system, which had long been stalled by resistance from the securities regulator and large fund managers, gained momentum this year as Carrie Lam was elected as Hong Kong’s chief executive. The previous administration under Leung Chun-ying was too preoccupied with popular discontent to pay much attention to the issue.