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Hong Kong’s pitch to list tech stocks raises governance fears

Hong Kong’s pitch to list tech stocks raises governance fears

Hong Kong’s planned stock market for ‘new economy’ companies will offer sophisticated investors access to tech firms that aren’t currently listed in the territory, but it will also expose buyers to the perils of a dual-shareholding structure, analysts have warned.

The new stock market, which may launch as soon as next year, is intended to provide a home to two different types of companies: existing tech titans with a dual-shareholding structure and start-ups. Within the start-up category the aim is to focus on ‘new economy’ stocks, meaning initial public offering (IPO) prospects should focus on services and consumption rather than traditional sectors.

The level of risk associated with start-ups and the complexities of dual-shareholding structures means the proposed stock market will only be open to professional investors, according to Hong Kong Exchanges and Clearing (HKEX)’s consultation paper.

The popularity of the new exchange will ultimately depend on the quality of the companies it is able to attract, Colin Liang, portfolio manager of NN Investment Partners, told Citywire Asia. If the new exchange ends up listing major firms such as Meituan-Dianping, China’s top online seller of movie tickets and restaurant bookings, it’s sure to turn heads.

‘Meituan-Dianping is very dominant in its field and a very interesting internet company,’ he said. ‘If it is going to be listed on this board there will be a lot of private banking investors interested. However, if just random firms come and list on the board, nobody will be interested.’

Corporate governance red flag

Although the new exchange has been welcomed by some as it will diversify the market for sophisticated investors, it has also drawn criticism from corporate governance activists.

The core issue is that it will allow firms with a dual-shareholding structure to list in Hong Kong – something that’s currently banned on both Hong Kong’s main board and on its Growth Enterprise Market.

The dual-shareholding structure is mainly used for maintaining the power of a founder or CEO. It allows key personnel to have voting power of 10 times or 20 times of their actual shareholding.

US-listed tech giants including Facebook and Google have adopted this dual-shareholding structure. However, the structure has rarely been seen in Asia based on concerns that investors may lack the sophistication to understand the limitations of this set-up.

‘Within such a structure, the minority shareholders’ interest will not be well protected,’ Liang warned. ‘If the key person wants to scold the minority shareholders in a dual-shareholding structure… you cannot throw him out of the company, you cannot discipline him in terms of voting down some of his decisions, and nothing can be done.

‘The founder has the absolute control of the board members, no matter what happened.’

Capturing tech talent

The proposal for Hong Kong’s long-awaited new board was triggered by Alibaba’s $21.8 billion IPO in 2014 and its subsequent listing on the New York Stock Exchange. The listing caused a heated debate on whether Hong Kong should allow dual-shareholding structures to avoid missing out on the option to list tech titans.

Hong Kong’s new board aims to rival China’s New Third Board and the Nasdaq exchange in the US, which are both popular homes for small high-tech companies.

The new stock exchange proposal, which was announced in the middle of June, will be open to collect views until the middle of August.

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