HKEX Report丨Weighted Voting Rights: Angel or Evil to Investment?

北大汇丰金融研究院 2021-01-21

Editor's Note

Stocks with weighted voting rights (WVR) are usually known as dual-class stocks. A company with WVR structure issue at least two classes of shares with different per-share voting rights. New-economy innovative companies tend to adopt WVR structure in their initial public offerings in order to raise funds for business growth.

In Hong Kong, the new listing regime for companies with WVR structure provides a set of safeguards for investors, which are more comprehensive and have even stricter regulatory requirements than other major global financial centres. These measures could not only effectively reduce agency costs, but also limit principal costs.

Author: Chief China Economist's Office, Hong Kong Exchanges and Clearing Limited

REPORT SUMMARY

Stocks with weighted voting rights (WVR) are usually known as dual-class stocks. A company with WVR structure issue at least two classes of shares with different per-share voting rights. While the founders and management usually own one class of shares with multiple votes per share, another class of shares with one vote per share are issued to general investors. New-economy innovative companies tend to adopt WVR structure in their initial public offerings in order to raise funds for business growth while the founders could maintain company control to pursue innovation with disproportionately diluted shareholdings. Mainland China, which is undergoing economic transformation to a new economy, has abundant potential supply of such companies. These WVR companies can choose to list on major overseas markets which accept the listing of WVR companies, such as New York, London, Hong Kong, Singapore and Tokyo.

In Hong Kong, the new listing regime for companies with WVR structure provides a set of safeguards for investors, which are more comprehensive and have even stricter regulatory requirements than other major global financial centres. The investor safeguards offered by the new regime include high entry requirement on market capitalisation, sunset provisions and enhanced corporate governance and disclosure requirements. These measures could not only effectively reduce agency costs, but also limit principal costs. Principal costs matter when investors do not have expertise on innovative sectors (principal competence cost) and when there are potential conflict of interests among investors (principal conflict cost). With appropriate safeguards, a WVR structure for company listing is not necessarily an evil to investors but can be an angel in that it could contribute positively to stock price and operational performance of acompany. It is therefore potentially beneficial for long-term value creation.

In fact, international experience demonstrated a number of net benefits of WVR structure to investors for investing in companies with WVR structure. Firstly, the long-run share price returns of innovative companies with WVR structures in MSCI stock indices outperformed other index stocks across different regional and global indices. Secondly, there is no consistent evidence to support the potential adverse impact of WVR structure on companies’ business performance; this is also valid in respect of US-listed Chinese companies with WVR structure. Besides, founders of WVR companies are likely to create more firm value as they can implement innovative ideas based on theirexpertise without much interference from investors. WVR companies could actually broaden investment opportunities to meet the demand of investors with different risk appetites. In this relation, the index company MSCI introduced new index series adjusted for voting rights to cater for investor preferences.

In conclusion, the listing of WVR companies isnot a race to bottom, but widens the spectrum of investment opportunities. For an economy, the financial support to WVR companies contributes to its economic transition with new growth engines. For investors, they can choose to invest intrustworthy WVR companies, striking a balance between investment risk and opportunities.

FULL REPORT

（Please click to enlarge pictures）

For the PDF version, please click "Read More"

(Please wait for the downloading)