The topic of different rights of the same shares is never out of date in Hong Kong, and its biggest problem is the balance of interests between shareholders and agents, and the listing of this kind of companies involves the protection of the interests of shareholders and public shareholders. The HKEx has been discussing this issue for nearly five years, and it is finally coming to an end.

On February 23, 2018, the HKEx released a consultation document on the listing system of emerging and innovative industries, which is the second round of market consultation of the HKEx. The first round was in June 2017. The consultation document made specific listing requirements for unprofitable biotech companies, innovative companies with different voting rights, and companies that listed Hong Kong as a secondary listing. The consultation period is one month. After the consultation period, the HKEx will issue a summary document, which is expected to accept applications for listing of three categories of companies in June.

The following are similar documents issued by the HKEx over the years

The listing requirements of the first and third categories of companies have something in common.

According to the contents of the consultation document, there are separate requirements on listing access for three types of enterprises, namely, biotech companies, innovative companies with different voting rights in the same shares, and secondary listed companies with qualified issuers. It does not mean that the type of enterprises can be listed on the Hong Kong Stock Exchange, but also meet the specific requirements set by the Hong Kong Stock Exchange.

The following are the requirements listed by Zhitong Financial APP through the HKEx consultation document:

Although the three types of enterprises have different listing requirements, they still have something in common. For example, core products and research and development are very important. In the listing requirements of biotech companies, at least one core product goes through the conceptual stage. At least 12 months before listing, the core product research and development is engaged in, and the funds raised should also be used for research and development, while innovative companies with different voting rights must conform to the concept of innovative industry. At the same time, R & D contributes a certain expected value to the company, and the second listed company should also meet the requirements of innovative companies with different voting rights.

At the same time, biotech companies and companies with different voting rights of the same shares have certain requirements for stable investors. Biotech companies are required to receive investment from an experienced investor at least six months before listing, and to withdraw their investment at the time of IPO, while companies with different voting rights of the same shares have the same requirements, but the time for shares is not required.

In terms of market capitalization, there are certain differences among the three types of companies. Biotech companies require a market capitalization of not less than 1.5 billion Hong Kong dollars when listing, companies with different voting rights of the same shares require a market capitalization of not less than 1 billion Hong Kong dollars, and companies with less than 40 billion Hong Kong dollars are required to earn no less than 1 billion Hong Kong dollars in the recent fiscal year. The market capitalization requirements of the second listed companies are the same as those of companies with different voting rights.

To sum up, all three types of companies are inseparable from the issue of different rights of the same share. although biotechnology companies are aimed at start-ups, they will also involve the arrangement of different rights of the same shares. while the companies listed in the second place look more like the Hong Kong Stock Exchange is trying to recover domestic innovative technology companies that have landed in the United States, such as BABA, JD.com and so on. We know that in 2013, BABA was banned from listing because of the different rights of the same shares in Hong Kong. Turn to landing in the US stock market.

Second, the thorny problems faced under the system of different rights of the same shares

(1) understanding the system of different rights of the same share

So what is the different rights of the same shares, and why did it take HKEx nearly five years to implement the relevant policies?

As the name implies, the so-called different rights of the same share are the same share of the stock, but have different voting rights. In developed countries, it is also called dual system, dual ownership structure and AB share structure. For example, in the ownership structure, the company's shares are divided into high and low voting rights. Each stock with high voting rights has 2 to 10 votes, which is called Class B shares, while one share with low voting rights has only one vote or even no voting rights. It is called Class A shares.

Class B shares are generally held by management, while management is generally held by founding shareholders and their teams, and Class A shares are generally held by peripheral shareholders, which are optimistic about the prospects of the company, so they are willing to sacrifice a certain amount of voting rights as bargaining chips.

The AB system is very popular in the United States, and the listing system is also perfect, which is also one of the main reasons why many domestic technology companies are listed in the United States. According to market statistics, of the 116 mainland companies listed in the United States, 33 have adopted the ownership structure of the same shares with different rights. The combined market capitalization of the above 33 companies accounts for more than 80% of the total market capitalization of mainland companies listed in the United States.

In the Hong Kong stock market, the AB share system also existed for a period of time. 1970 of the system sprang up on the Hong Kong Stock Exchange, but corporate governance and the struggle for corporate control appeared during its implementation. The system only survived for about 20 years. In 1989, the Hong Kong Stock Exchange cancelled the listing of B shares.

This time, the HKEx cannot be regarded as restoring the old system, because this time it has greatly increased the protection for investors, with a maximum of 10 votes per share on the authority of B shares. However, the HKEx still has reservations about the AB share system. in the consultation document, the HKEx says that it is convinced that the "one share, one vote" principle is still the best way to give shareholders equal rights and standardize their rights and interests in the company. the main purpose of the proposal to broaden the listing system and accept different voting rights structures is to attract quality and high-growth innovative industrial companies to list in Hong Kong.

(2) the balance of interests between agents and shareholders

In fact, what worries the HKEx is that there is a balance of interests between the company's agent and the shareholders in the AB share system, and the agent is the core of the whole company. Once something goes wrong, the company is paralyzed and the share price plummets. How can the HKEx account to the public investors?

(1) the contradiction of interests of the agent

The most important feature of the company system is the separation of ownership and management rights, and the company agent (professional manager) becomes the core of the company's development. in innovative and entrepreneurial companies, the founding shareholders generally play the role of agents. however, as the company grows slowly and needs more development funds, then it is necessary to introduce external investors, and the equity problem inevitably occurs.

For the founding shareholders, the position of the agent is unwilling to give up, but the new investors, especially those with large shares, can not allow the management to be laissez-faire, they will generally send several directors as the decision-making level. However, there is a situation in which the company is growing rapidly and there is no shortage of funds, and the start-up shareholders have a lot of leverage to negotiate with the entrants, so there are different rights of the same shares, and the entrants are willing to sacrifice part of their voting rights because they are optimistic about the company.

At the beginning, there will not be any problems, there is a voluntary balance between rights and interests, as agents do not meet the development situation, continue to seek external funds, share dilution is more serious, but still have the main right to vote, this is a problem. The problem of agent rent-seeking will be very thorny. In decision-making, agents may carry out a number of related party transactions for their own interests, or make favorable capital expenditure plans in financial policy.

In this way, maximizing the interests of shareholders will become empty talk.The contradiction between the interests of agents lies in how to balance the interests of shareholders and their own interests. If the company's cash flow is very abundant, agents may prefer their own interests, and decision-making risks may occur.

(2) there are still conflicts of interests among shareholders.

Agents are at risk, but so are new shareholders, especially those with "malicious" large capital. In the old one-vote-one-right system, if a malicious new entrant has absolute control, the management may face the risk of being washed out and replace all the management. Of course, those who entered in the past may accept that if the management will not move, but they will inevitably change their minds in the future, and the right to vote is in their hands, so it is not easy to change the management.

In general, companies suddenly face malicious buyout capital, management generally fight back, the most common way, such as through MBO (management buyout), to change the ownership structure of the company. However, if the initial capital is well-intentioned, but there is a contradiction between the development direction and the agent's decision, the shareholders may take the practice of ransacking the management for their own interests, which will be tricky. Before the law, the original agent had to leave the scene sadly.

It is difficult to weigh the interests of agents and shareholders, the same shares have the same rights, large capital shareholders gain advantages, face shareholder risks, different rights in the same shares, agents gain advantages, they will also face agent risks.

In the consultation document of the HKEx, we can see the trade-offs as far as possible, such as restrictions on different voting rights, the privilege of one vote is no more than 10 times that of ordinary voting rights, and the right of shareholders with the same rights to vote is guaranteed. For agents, there are requirements to strengthen information disclosure and corporate regulation.

To sum up, the HKEx is imperative for the listing system of the same shares with different rights. It is expected that a large number of innovative new economy companies and biotechnology companies will be listed in Hong Kong in June 2018. Companies such as JD.com, BABA and Baidu, Inc. are also likely to list in Hong Kong. The IPO of Hong Kong stocks will be the biggest attraction this year. Although there is a contradiction between the interests of agents and shareholders in the system of different rights of the same share, this scheme adds the protection of multi-tier shareholders and a layer of confidence in the participants (public shareholders) after listing.