Hong Kong Targets Innovation by Allowing Weighted Voting Rights Shares

Like many other stock exchanges, Hong Kong wants to be home to outstanding and innovative enterprises. In order to achieve this, the bourse recently started accepting weighted voting rights (WVR) stocks for listing among its other equities. A new “WVR” chapter (Chapter 8A) has been approved and added to the Listing Rules to attract Mainland and overseas companies in the innovative sectors.

It’s taken quite some time for Hong Kong to embrace this type of stock. It’s just too bad it required a big missed opportunity for it to finally take action.

In a class of its own

As the name suggests, WVR shares have two sets of holdings. What we can call the “upper” class is where we tend to find the company founder or founders, top managers — if they’re awarded stock — and other luminaries.

The upper class confers extra voting power on the shareholder. Historically, Hong Kong-listed stocks hewed to the exchange’s “one share/one vote” rule. This rule does not apply to upper class equities, which can have as many votes per share as the issuer likes.

The “lower” class, meanwhile, is the more “traditional” form of share, with the classic one-for-one voting rights weighting.

Why would a company want weighted voting rights or dual-class structure for its stock? Quite simply, it allows a small group of VIPs to maintain control of the enterprise, typically but not necessarily a company’s founder or founders. One prominent – and extreme — example is Facebook and its high profile CEO and founder Mark Zuckerberg. Facebook is a dual-class stock; Zuckerberg holds the much more heavily-weighted B class shares. All told, he owns less than 1% of the company’s total outstanding stock (both B and A classes included). However, thanks to the heavy load of those B shares he controls a well-in-the-majority 60% of its voting rights.

Dual-class shares are popular in the tech sector, populated as it is by young entrepreneurs eager to scale up to Facebook size. But older and more established companies have also taken the plunge – one example is US carmaking giant Ford.

Dual-class shares are everywhere; in fact, nearly 12% of the companies in the U.S. Russell 3000 index have them.

Due to the imbalance between number of shares owned and the proportion of voting power enjoyed, dual-class shares have been the target of sharp criticism. Skeptics argue that a dual-class structure gives “lower class” stockholders very little scope to influence their company’s strategy, as should be their right as owners. In fact, there are several instances where dual-class listers have conferred no voting rights at all on their “lesser” shareholders.

Proponents say that holding the “superior” class of shares provides an incentive for those lucky owners to stay in the driver’s seat, and manage the company in the most effective way they can. It’s a means to keep them in place and acting in every shareholder’s best interest.

Why Hong Kong accepted weighted voting rights shares

The Hong Kong Stock Exchange strictly maintained that “one share/one vote” policy for decades. Then along came Alibaba.

The sprawling company from mainland China was planning a huge initial public offering (IPO), and was considering the Hong Kong bourse as the place to do it. Most likely the exchange would have jumped at the chance, but there was one important caveat — Alibaba wanted a dual-class structure, which at the time (2014) was against the listing rules. Alibaba ended up listing on the New York Stock Exchange in an issue that raised an astonishing $25 billion (the largest IPO in history, by the way).

The loss of Alibaba’s record-setting IPO would cause any stock exchange to reconsider its strategy. Sure enough, in 2018 Hong Kong decided to relax its rules and allow weighted voting rights stocks for trading, albeit with a set of regulations and restrictions that include:

  • A mandate that the issuer be an “innovative” company.
  • A stipulation that only companies freshly listing on the exchange can have weighted voting rights structures; existing stocks are not allowed to modify their structure.
  • Prohibition on modifying the proportion of the two classes in relation to each other.
  • A proviso for “all shareholders of listed securities to be treated fairly and holders of listed securities of the same class to be treated equally.”
  • A minimum market capitalization of HK$10 billion.

The first weighted voting rights stock to list on the Hong Kong exchange was another notable mainland company, smartphone manufacturer and IoT platform, Xiaomi (SEHK:1810) on 9 Jul 2018. That company, then, became the pioneer heralding the arrival of other WVR stocks.

Hong Kong might have been late to the party, but at least it’s now ready to enjoy the festivities.


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