The Stock Exchange of Hong Kong Ltd (SEHK)'s move to publish a Concept Paper for consultation on the "one-share, one-vote" principle - a listing rule that caused the city's bourse to lose the Alibaba initial public offering (IPO) a few months ago - is seen as untimely.

"We are concerned about the timing of this paper. Given recent IPO problems in Hong Kong and destruction of value, it seems inappropriate to discuss more flexibility," Michael Cheng, the research director for China and Hong Kong at the Asian Corporate Governance Association (ACGA) told China Daily.

Previous survey results revealed by the ACGA indicated an overwhelming opposition from big funds and institutional investors to non-standard shareholding structures.

Having stood its ground on the "one-share, one-vote" principle, which prompted Alibaba to move its IPO to the US, the SEHK has started revisiting its stance on prohibiting companies from issuing dual-class shares with different voting rights, said Roy Lo, managing partner at Shinewing (HK) CPA Ltd.

The launch of the Concept Paper marked the beginning of a three-month consultation to invite written comments on whether to allow a company seeking to list or that is listed in Hong Kong to adopt the weighted voting right structures that give certain persons voting power disproportionate to their shareholdings.

If the conclusion of this consultation is to support a change in the existing rule, a second stage formal consultation will be introduced. While Lo is confident that material change could be seen in the following year, Ronny Chow, head of the Corporate Finance Practice Group at Deacons, thinks that changes in the legal system could take years to achieve.

"If Hong Kong Stock Exchange (HKEx) is to conclude in favor of allowing weighted voting rights structures after this consultation, I would expect significant consequential changes to the Listing Rules, Takeovers Code and other relevant laws and regulations in Hong Kong, which is a task that could take a long time to complete," Chow said.

"Hong Kong should stick to one-share, one-vote. Unlike in the US, we do not have class actions nor a relatively more robust disclosure and enforcement regime," said Cheng.

Challenges are also predicted to arise from small and individual investors, who are concerned about being treated unfairly under the new structure.

Chow pointed out that there would be an education process for the Hong Kong investment community as well. "Hong Kong never had this weighted voting structures for the past many years, and (so) it is crucial that the investors, particularly those local retail ones, are given appropriate and proper opportunities to understand the possible implications on their investments."

Hong Kong Securities and Futures Commission (SFC) as an independent participant could be the best entity in the market to optimize the protection of investors, said Roy Lo of Shinewing.

A SFC spokesperson told China Daily that the commission welcomes the release of the Exchange's paper but expresses no views on the merits of allowing weighted voting rights.

Last October witnessed the city losing Alibaba's IPO deal over the "one-share, one-vote" principle. The SEHK rejected Alibaba's dual-class share structure proposal to enable its founders and top management to nominate many of its board members, despite holding a minority stake.

The mainland e-commerce giant is counting down on its New York Stock Exchange debut. Market estimated Alibaba could raise over HK$100 billion from its IPO.

Hong Kong's Financial Services Development Council stated in a research paper issued in June that it is concerned such a stance could cause Hong Kong to miss out on future IPOs.

According to the Concept Paper, as of this May, one third of the 102 US primary listed mainland companies have a weighted voting rights structure. They consist 70 percent of the total capitalization of all US listed mainland companies, the majority of which are involved in the information technology industry.

Charles Li, chief executive of HKEx questioned whether the "one-share, one-vote" is part of Hong Kong's core values in his web journal. The chief is worried that weighted shares have become a key consideration offsetting other advantages that Hong Kong has to offer.

selena@chinadailyhk.com

(HK Edition 09/04/2014 page8)