January 31, 2020 / 11:10 AM / 20 days ago

UPDATE 1-Hong Kong exchange proposes allowing corporate weighted voting rights

(Adds details)

By Alun John

HONG KONG, Jan 31 (Reuters) - The Stock Exchange of Hong Kong proposed allowing companies to hold shares that carry extra voting rights in new Hong Kong listings, in a consultation paper published Friday, an attempt to attract more innovative companies to the exchange.

The exchange, a wholly owned unit of Hong Kong Exchanges and Clearing (HKEX), in 2018 changed its rules to permit companies to list with shares carrying so-called weighted voting rights (WVR). Ownership of those shares was limited to individuals, though.

Smart phone maker Xiaomi was the first to list under that regime.

HKEX said the latest proposals were designed to attract innovative companies to Hong Kong, adding diversity to an exchange dominated by financial services and property companies.

Investment bankers and other IPO advisers are likely to welcome the potential new business. But corporate governance activists oppose it, arguing it undermines the principle of one share, one vote.

The Chinese internet company Tencent, for example, listed its online music unit Tencent Music on the New York Stock Exchange (NYSE) in 2018, in part because Hong Kong did not allow corporate WVR structures then.

The United States has long allowed such structures, although it also has additional investor-protection systems, such as class-action law suits, unavailable in Hong Kong.

Of the 50 largest Chinese unlisted companies, 42 had listed corporate shareholders as of November 2019. Without WVR access, “companies for whom this is an issue may continue to choose the U.S. over Hong Kong for their IPOs,” the consultation document said.

Under the proposals, the company holding the weighted voting rights must itself be listed on HKEX, the NYSE, Nasdaq or the London Stock Exchange’s main market. It must own at least 30% of the listed company, and it must provide a contribution “that cannot be easily replicated or substituted by other means.”

Other shareholders must vote on whether they still favour of the WVR structure 10 years after the company’s listing, and can renew the arrangements for further five-year periods.

The consultation period for the proposal lasts until May 1, 2020. (Reporting by Alun John, editing by Larry King)

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