Large institutional investors in the U.S. and Europe are coming out against a proposal issued recently by Hong Kong Exchange & Clearing that seeks to allow companies with dual or multi-class share structures to conduct IPOs on a new listing venue. The skirmish is the latest in a series of battles among stock exchanges, activists and investors as companies seek to protect insiders and founders from activist funds pushing for M&A.
"We believe it is a mistake for [Hong Kong Exchange] to follow other exchanges, including those based in the United States, in a competition to offer reduced standards around public listings," the Council of Institutional Investors said in a letter obtained by The Deal.
At issue is a concept paper The Hong Kong Exchange, the fourth largest stock exchange in the world, issued in June. Companies traditionally conducting IPOs and listing on the exchange have been required to offer investors one vote with every share. However, the venue is now suggesting that it could soon allow companies to list on a new trading venue with "non-standard governance practices" such as those with "weighted voting rights." Governance experts in the U.S. argue that the phrase is essentially code for including companies with dual or multi-class share structures that give insiders control of the publicly-traded businesses.
The Hong Kong exchange's move to revisit its governance rules was driven partly by its loss of one of the biggest IPOs in recent years, Jack Ma's $25 billion Alibaba Group Holding Ltd. (BABA) listing in 2014, over its policy of giving shareholders one vote per share. Seeking to attract IPOs, the New York Stock Exchange accommodated Alibaba's demand that the e-commerce and media company's founders control a majority of the board.
The Hong Kong exchange had subsequently sought to permit companies to list with different voting rights, but it gave up the initial effort in 2015 after the venue was rebuffed by Hong Kong's regulator, the Securities and Futures Commission.
Nevertheless, the concept release suggests that the Hong Kong Exchange is reviving its effort to bring in multi-share class structures as it seeks to remain competitive in a global market for IPOs, particularly big ones. A number of stock exchanges in a variety of jurisdictions are vying for to participate in the upcoming Saudi Aramco issuance, which is slated to be the world's largest IPO. However, big institutional investors in the U.S., Hong Kong and elsewhere have been arguing vociferously against giving insiders control of public companies, arguing that corporate founders and other insiders aren't accountable to shareholders and that the moves represent the latest incitement in a war that is effectively resulting in a decline in corporate governance around the world.
Corporations, for their part, have sought to give founders and insiders control of the votes, partially so that they can avoid being targeted by activist investors who often seek to break up business or have them sold. Many technology companies in the U.S. have set up public structures giving founders control of the votes in an effort to ensure that their businesses aren't pushed to sell to technology titans, such as Google (GOOGL) or Amazon (AMZN) .
In addition to CII, the Hong Kong Investment Fund Association, Asian Corporate Governance Association, State Street Global Advisers and Norges Bank Investment Management have all taken issue with the Hong Kong proposal.
"Institutional investors rely on these voting rights to execute their stewardship responsibilities in investee companies," State Street said in a letter obtained by The Deal. "Any deviation from alignment between a shareholder's economic interest and his/her voting interest can potentially increase the risk of misappropriation of company assets by the controlling shareholders or management."
Rakhi Kumar, managing director and chief of State Street's environmental, social and governance investments and asset stewardship program, said the Hong Kong concept release is another example of the weakening of shareholder rights at key exchanges around the world. "The real way to stop this is from a regulatory perspective," Kumar said. "It's a competitive environment but we are seeing a race to the bottom."
And the Alibaba listing is just one of a long number of companies listing on U.S. exchanges that have structures giving insiders control. For example, Facebook Inc. (FB) CEO Mark Zuckerberg has control of 60% of the company's votes but a much smaller percentage of its equity. Investors frequently point to Sumner Redstone and his family owning a controlling stake in media giant Viacom Inc. (VIAB) as an example of insider control run amok.
A move by Snap Inc., the company behind the Snapchat app, to IPO earlier this year with only non-voting shares, acted as a galvanizing force among institutional investors who had been pushing for a return to the one-share, one-vote share structure. In recent months, major U.K. and U.S. indexes have issued rules that would prohibit companies like Snap from participating if they have either no public voting shares or even a very low float of voting shares.
"I think Snap definitely was a tipping point for us investors," Kumar said. "At what point do we say is enough is enough."
This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.
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