Hong Kong Exchange delays plans to allow companies to hold weighted voting rights

[HONG KONG] The Hong Kong exchange operator said on Wednesday it would delay changes that would allow companies to hold shares with more voting rights, as more time was needed for investors to become accustomed to recent rule changes.

Hong Kong Exchanges and Clearing (HKEX) said it would not launch a consultation proposing to allow companies to hold weighted voting rights (WVR) as had been planned as part of measures to lure large tech companies to list in the city.

In April, HKEX changed its rules to allow companies with weighted voting rights - also know as dual-class shares - to list in the city, as part of a broader shake-up of the listing regime.

So far, smartphone maker Xiaomi is the only company to have listed in Hong Kong with a WVR structure. Wednesday's announcement sent Xiaomi's shares to a two-week low.

Both the initial change and its extension have been controversial topics in the Asian financial hub, with some critics arguing that by undermining the principle of "one share one vote" they privilege certain shareholders over others.

Last week, the Shanghai and Shenzhen stock exchanges said they would bar investor access to Hong Kong-listed companies with WVR structures, citing the complexity of the holdings. The three bourses later agreed to set up a working group to address the issue.

Ownership of WVR shares has so far been limited to company founders. Under current rules, WVR shares lose their additional rights if the founder ceases to be a director of the company, or transfers the shares to another person.

The HKEX had said it planned to launch a separate consultation by July 31 to consider extending weighted rights to companies. However, on Wednesday, it said it needed to discuss the matter further with stakeholders to develop a broader consensus.

"I think the delay is because the exchange wants to slow things down, and talk more to people who have concerns about corporate governance," said Michael Wu, an analyst at Morningstar.

Jamie Allen, secretary general of the Asia Corporate Governance Association, said the safeguards the exchange had brought in to protect investors after the rule change were weak and hard to enforce.

"Extending WVRs to corporates would mean WVR in perpetuity," he said at a press conference on Tuesday.

However, some Hong Kong market participants fear that the first rule change does not go far enough to attract listings to Hong Kong. Hong Kong's listing reforms have come as the city jostles for the top global IPO venue crown with New York and China.

Chinese internet giant Tencent is seeking to list its online music unit in the United States, in part because weighted voting rights extend to companies there.

Bankers were calling for Hong Kong to review its rules even before they came into force. In March, Goldman Sach's Asia-Pacific head, Ken Hitchner, said the city could improve its new regime further by allowing companies to hold weighted rights, and also not limiting the amount of equity a company founder can hold - currently capped at 50 per cent.

REUTERS