The long-lasting debate of whether or not Hong Kong should allow new listing applicants to adopt weighted voting rights structures (“WVR Structures” or “Dual-Class Capital Structures,” allowing companies to issue classes of shares carrying disproportionate rights) got heated in 2013 when Alibaba Group (NYSE: BABA) announced it would pursue a listing in the United States instead of Hong Kong after the company failed to persuade Hong Kong authorities to allow its special voting structures. This controversy was a major reason Hong Kong Exchanges and Clearing Limited (“HKEX”), the operator of the securities and futures markets in Hong Kong, published its first consultation to seek market comments on WVR Structures in August 2014. When the consultation ended in June 2015, the HKEX determined it should move to a second stage consultation on a formal proposal to amend the Listing Rules of the HKEX. As stated in the consultation conclusions by the HKEX, any amendment to the Listing Rules requires approval by the Securities and Futures Commission (“SFC”), the statutory body regulating securities and futures markets in Hong Kong. However, six days after the HKEX issued the consultation conclusions, the board of directors of the SFC unanimously rejected the WVR Structures proposal, and stated that this proposal was inconsistent with “the core principles of fairness and transparency which underpin Hong Kong’s reputation as an international financial centre.” Nevertheless, in June 2017, the HKEX published a concept paper regarding the establishment of a new board for listing companies, in which the HKEX for the second time promoted the introduction of WVR Structures in Hong Kong.
This article will briefly analyze the reasons why WVR Structures are not favored by the SFC and the general public of Hong Kong by comparing the differences in regulatory and legal environment between Hong Kong and the United States.
Why WVR Structures are not favored in Hong Kong
Fundamentally, the regulatory environment in Hong Kong is completely different than that of the United States. First, the SFC, the equivalent of the United States Securities and Exchange Commission (“SEC”), does not possess similar authority as the SEC does to enforce securities laws and regulate the securities industry. Specifically, the SEC in the United States has the absolute power to enforce federal securities laws subject only to judicial scrutiny. See, e.g., Kokesh v. SEC, No. 16–529, 2017 WL 2407471 (2017) (limiting the SEC power to order disgorgement). In Hong Kong, however, the SFC’s regulatory function and authority is weakened by the HKEX’s regulatory role in setting and administering the Listing Rules.
Moreover, unlike in the United States, the HKEX has an inherent conflict of interest between its roles as both a regulator and a market player. In other words, the HKEX assumes a regulatory role in administering the Listing Rules while acting simultaneously as a for-profit exchange. Stock exchanges in the United States, on the other hand, are not market regulators and establish their own criteria for listing solely on a commercial basis.
In addition, the Hong Kong Government controls both the SFC and the HKEX which reduces the independence of both institutions. For example, the Hong Kong Government has directly or indirectly appointed seven of the HKEX’s total 13 directors even though the government owns only 6% shares of the HKEX according to Section 77 of the Securities & Futures Ordinance and Article 88(4) of the Articles of Association of the HKEX. The government also has the statutory power to appoint all the directors of the SFC. In the United States, the government does not appoint any director to the various stock exchanges. Although the commissioners of the SEC are nominated by the President of the United States with the advice and consent of the Senate, 15 U.S.C. § 78d(a) (2012), their independence is guaranteed by their staggered terms and by the rule that no more than three commissioners may belong to the same political party. Moreover, the commissioners are only subject to removal by the President for cause. See Humphre’s Ex’r v. U.S., 295 U.S. 602 (1935); see also Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477 (2010); SEC v. Blinder, Robinson & Co., 855 F.2d 677 (10th Cir. 1988). Given this lack of independence of the SFC and the HKEX, reforms in corporate governance and securities rules, such as creating a platform for WVR Structures, are more challenging to implement in Hong Kong.
Finally, the differences in legal remedies available to shareholders against managerial misconducts have made WVR Structures less appealing in Hong Kong to both the SFC and the general public. Shareholder activism has substantially improved corporate governance in the United States. Class actions initiated by private shareholders are a popular and often effective legal remedy favored by shareholder activists. United States shareholders are also able to retain counsels on a contingency fee basis in both direct and derivative lawsuits which makes access to justice affordable. Moreover, the SEC can launch enforcement actions against shareholders or directors who have manipulated WVR Structures. Both class actions by private shareholders and enforcement actions by the SEC are important methods in controlling managerial opportunism. In Hong Kong, however, there is no class actions option and private actions are costly, time-consuming and often counter-productive, and therefore are rarely initiated by injured shareholders. Furthermore, common law doctrine of champerty and maintenance in relation to attorney-client relationships adopted by Hong Kong still prohibits contingency fee arrangement between clients and solicitors. See Winnie Lo v. HKSAR,  15 H.K.C.F.A.R. 16 (C.F.A.); HKSAR v. Mui Kwok Keung,  1 H.K.L.R.D. 116 (C.A.). It is thus difficult for minority shareholders to launch lawsuits against the abuse of WVR Structures by controlling shareholders or directors. Consequently, SFC enforcement actions are the only possible way to confront such abuse. Nevertheless, these actions are of only limited effectiveness considering the high-volume workload and limited staff of the SFC.
It is reasonable for the HKEX to insist on “upholding the core principles of fairness and transparency” in the context of WVR Structures considering the nature of the regulatory environment and the limited legal remedies afforded to shareholders in Hong Kong. Compared with the United States, Hong Kong has a long journey ahead in corporate governance reforms and shareholder protection initiatives before WVR Structures can be established. Fortunately, efforts have been made to reform the regulatory and legal environment, as evidenced by HKEX’s recent consultation on Corporate Governance Code and Listing Rules and the Law Reform Commission of Hong Kong’s consultation and report on adopting contingency fees arrangement and class actions regime. If other reforms are adopted, WVR Structures will eventually arrive in Hong Kong.
Ken Zijian Ye serves as a graduate editor of the NYU Journal of Law & Business. He is an LLM candidate at NYU School of Law and an interpreter at NYU Clinical Law Center. Prior to attending NYU, he worked in the Hong Kong office of Skadden, Arps, Slate, Meagher & Flom focusing on capital markets and mergers & acquisitions. Ken graduated from The University of Hong Kong Faculty of Law in 2013.