Under revamped rules, Alibaba raised about $13 billion through its first secondary listing in Hong Kong in 2019. It was approved after regulators lessened their opposition to dual-class shares, weighted voting rights, and other structures, which were once deemed to pose an unacceptable risk to shareholders. That led to a flood of proposals. Over half of the 10 biggest Hong Kong IPOs since Alibaba’s debut were by other overseas-listed Chinese tech companies seeking a “homecoming.”
That may be understating the significance of this group. There are also two deals involving JD.com Inc., an Alibaba rival that raised $4.6 billion in its own secondary listing last summer. There are dozens more who could follow – including NetEase Inc., Baidu Inc., and Bilibili Inc. – despite some of the biggest fish having already sold shares in Hong Kong. The potential future business is lucrative.
Hong Kong Exchanges & Clearing Ltd. is doing more to facilitate secondary listing applications because of this. In order to streamline its listing regime for overseas issuers, the exchange proposes to replace a plethora of scattered regulations with a set of “core standards” that apply to all. HKEX says that current rules are “unduly burdensome and unattractive to prospective applicants,” and that its proposals ensure “appropriate safeguards.”
However, some investors are not convinced. The core standards, which are financed by institutional investors with more than $40 trillion in assets under management, create a deterioration in shareholder protection when compared to Hong Kong’s company law in some areas. According to the ACGA’s response to the exchange’s consultation paper, “this will result in a regulatory divide where different categories of issuers play by different sets of rules.” Secondary-listed firms often follow lower governance standards than primary issuers.
Several objections have been raised by the association. Companies with secondary listings get a free pass on complying with Hong Kong’s takeover code, rules on notifiable and related-party transactions, and on filing ESG reports and observing corporate governance standards. By requiring 10% of voting rights instead of 5% under Hong Kong’s Companies Ordinance, the proposed changes will make it harder for shareholders to call general meetings. It will be more difficult for shareholders to take legal action and challenge corporate malfeasance if they rely on listing rules instead of amending their articles.
As a key concern, the HKEX proposals offer companies the opportunity to gain dual primary listings while maintaining a structure such as weighted voting rights and variable interest entities – a method used by almost every major Chinese internet company to list overseas, and with ambiguous legal status in the mainland. If a company is delisted from its other market, these listings could then become primary listings. A recent executive order by former President Donald Trump led the New York Stock Exchange last month to remove China Mobile Ltd., China Unicom Hong Kong Ltd. and China Telecom Corp. shares.