Xiaomi vindicates HK dual class decision – but at a cost

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Listing is a great result, but the rule change it required dilutes good governance.

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Lei Jun, co-founder of Xiaomi


May brought welcome news for Hong Kong.

Xiaomi, one of the world’s most successful smartphone manufacturers and China’s closest answer to Apple, will conduct its IPO on the city’s exchange, potentially raising about $10 billion.

For the Hong Kong stock exchange, this is vindication of a rule change specifically designed to capture tech listings like Xiaomi and a direct response to having missed out on the biggest, Alibaba.

The new rules allow for a weighted voting rights structure, also known as dual-class shares. In these deals, founding shareholders have greater power even if they are minority shareholders. The shares held by co-founders Lei Jun and Lin Bin will carry 10 votes each, while everyone else will get one vote per share.

HKEx did a lot of soul-searching before changing the rules and will feel that the Xiaomi news justifies the decision. The news that China Tower will also seek to raise about $10 billion in Hong Kong at roughly the same time has boosted the feel-good factor (despite the fact it’s not greatly convenient for Xiaomi and will make for a hell of a busy summer for Goldman Sachs, which is on both deals).

Disadvantage

But it is not without cost. There are real corporate governance concerns about dual-class shares. ‘Weighted voting rights’ means ‘unequal voting rights,’ pure and simple, and they carry the potential for minority shareholders – from mums and dads to big international institutions – to be disadvantaged.

Furthermore, there is a concern that this step will be one of several in a steady erosion of corporate governance that gives China greater control over Hong Kong’s markets, since the majority of listings that are expected to be attracted by the new rules are Chinese.

HKEx understands the trade-off perfectly well, but believes it could not afford to stand by and watch more vital deals pass it by. After Xiaomi, one of these days, will come Ant Financial and Didi Chuxing, China’s closest home-grown equivalent to Uber. The exchange wants them and never wants to miss another Alibaba.

The mood among Hong Kong investment bankers is that this was the right call. But they would say that. It means more deals to chase for them and more lucrative bookrunner mandates. They also point out that dual-class structures are considered just fine on the New York Stock Exchange. Also true.

But abandoning best practice in order to match the competition, however much success it brings along the way, feels like a race to the bottom.