Comments on the core values of the Hong Kong market

On the morning of April 8, Li, chief executive of HKEx, published an article in his personal blog yesterday to comment on the core values of the Hong Kong market. Li said that although Hong Kong has rejected the application of Alibaba (rolling information) in Hong Kong for listing under the rule of law and procedural justice, the problems in the Hong Kong market should continue to be discussed.

He said that if the Hong Kong market were to maintain the "same share rights" status, it would not be beneficial to either side of the Hong Kong market and would affect the core competitiveness of the Hong Kong market in attracting new economic companies.

He suggested that discussions should be promoted to allow Hong Kong to find a workable middle ground-to give the founders of the new economic Company a certain degree of autonomy in the equity structure and to allow the core interests of the public shareholders to be inviolable.

The following is the full text of Li blog:

Did we ask the right question?

--thinking about the core value of Hong Kong market

As Alibaba fades out of the media spotlight, we may be able to explore more rationally and openly the related equity system. After a period of hot debate: some people think that Hong Kong has suffered a great loss, but more people think that Hong Kong has won a spiritual victory because we have adhered to the core values of the Hong Kong market.

So what is the core value of the Hong Kong market? Can we maintain the long-term competitiveness of the Hong Kong market while adhering to the core values of the Hong Kong market? Originally, this debate on the equity system could be a good time to seriously explore these two issues, however, unfortunately, these two issues are rarely mentioned, most of the discussion is similar to the following questions:

Should Hong Kong change the "share ownership" system in order to cater for the listing of large mainland companies?

Should Hong Kong sacrifice the principle of "same-share ownership" for commercial interests?

Should Hong Kong blindly follow the United States in the corporate governance framework and abandon the spirit of "share ownership"?

These questions have one thing in common-the answer is all obvious. If these are the issues that we are about to discuss, I agree with some friends that we should give up and there is no need to waste any more time. However, these near-slogan problems just obscure the above two more important and more difficult to answer.

What is the core value of the Hong Kong market?

In my view, the core value of the Hong Kong market is the rule of law and procedural justice. It is precisely because of compliance with the spirit of the rule of law and procedural justice that we do not arbitrarily change the rules for a listed company and any major changes must be subject to prudent procedures. And because of the procedural justice, once the efforts to study the rules have begun, we should not stop because of the departure of one or two companies-the company is gone, the problem remains. Perhaps instead, we can return to the essence of the problem, and rational speculation.

Must the core value include "same-share rights"?

In this discussion, "same-share" seems to be regarded as the core value of the Hong Kong market. But is "share ownership" really the core value of the Hong Kong market? In the Hong Kong market, is the "same share right" really implemented?

Contrary to what most people think, because of some more important principles, the principle of "same share and right" has not been absolutely enforced in Hong Kong. For example, the HKEx itself is exempt from this principle, whether or not the Hong Kong government has a stake in the Hong Kong Stock Exchange (at present 5.8% per cent of the government), the Government has the right to appoint 6 of the 12 Non-executive directors on the board of HKEx and to appoint the Chairman of the board, the reason why the government can be exempted from the principle of "shares of the -to safeguard the public interest, because the HKEx is not a general listed company, but a statutory operator of the Central Market of Hong Kong and must put the public interest before the shareholders ' interests.

Another area where the principle of "same-share rights" is often broken in Hong Kong is the right to vote on connected transactions. In order to protect the interests of the public investors from being violated by large shareholders (such as family consortia or large shareholders of large state-owned enterprises), the listing rules in Hong Kong stipulate that controlling shareholders are barred from voting in shareholder votes involving connected transactions, irrespective of the importance of these connected transactions to the interests of the majority shareholder or the company concerned. The main policy rationale behind this practice of depriving large shareholders of voting rights is to guard against major shareholder conflicts of interest and protect public investors.

In view of this, the "same share right" itself is not a universal truth in Hong Kong.

is investor protection the same as "share rights"?

In this discussion, there are many people will "share the same rights" and "investor protection" natural link, but, investor protection and "share the same right" is really a thing?

"Same share Right" is only a rule, its subtext is: "Capital is king", Master capital Master company Destiny. and investor protection is a comprehensive safeguard system which covers a series of laws and regulations and protects investors, especially public investors, from infringement. In other words, the protection of investors is the purpose of "same-share rights" is one of many means. When the "same share of shares" can help protect investors to use, when the "same share" does not protect investors, we will abandon it, as in the case of linked transactions.

So in the discussion of the multiple shareholding structure, should investor protection be focused simply on "same-share rights", or should it go beyond "same-share rights"? The issue has been debated for years, both in academia and in the regulatory community. One side believes that "shares of the same rights, a single vote" sounds clear and intuitive, fair and reasonable, like "one person, one vote", so it is easy to arouse the resonance of everyone. Another view is that allowing the existence of multiple equity structures embodies the freedom of contract and freedom of choice of market participants, allow the freedom of contract to play a better role in the market; truly effective investor protection should be based on full disclosure and ex post facto supervision, and should not be added to the market with "Capital as the King" as the core of the "same share right". Who is right and who is wrong in these two views? Who will decide?

If investor protection is the core value we need to stick to, what is the specific content of investor protection?

In a listed company with large shareholder holdings, the regulator's focus will always be to protect the legitimate interests of public investors from being trampled on by large shareholders. In a decentralized listed company, the focus of regulation is to urge management to disclose information in accordance with the law, rather than "referee" among different shareholders.

In some tech companies or new economy companies, the issues we need to explore are more complex. Because these companies typically have three very different types of shareholders: Founder/Management shareholders, early-stage large institutional investors and public investors buying when new shares are issued. The interests of these three types of shareholders are unified for most of the time, but at some point there may be inconsistencies, especially in the long run, when the long-term benefits are sometimes clearly contradictory to those of the short-term.

In this case, what does investor protection need to include? Do they need to be protected when the founding shareholders are likely to be seized by short-sighted early investors or large institutional investors because they value the long-term interests of the company? Will they need to be protected when large institutional investors, early in the IPO, want to get out sooner? And the public investors who came in on the IPO, mainly because they were successful under the leadership of the founding shareholders, who had little say in the management of the company and, under normal circumstances, did not necessarily want a positive voice, what were their main interests? How to protect the interests of these public investors most effectively? Is it better for the founders to have more say in the fate of the company to protect the interests of these public investors, or is it more beneficial to the public investors to take control of the large institutional investors who have early stakes in the company?

If we believe that the founders of technology companies such as Apple and Google are really more important than other financial shareholders in the development of the company, should we give the founders more control over their dreams while creating greater value for all shareholders? If so, how much should be given to the appropriate? And how to prevent them from abusing this control right? Should the founder's control be withdrawn by the day when the founders cut their holdings and their interests were no longer in line with the interests of the public investors? How should I take it back? Who is responsible for taking back? These are difficult questions to answer, but they deserve our deep thinking.

The long-term competitiveness of the Hong Kong market

From the point of view of regulators, perhaps the easiest way to do this is to choose clear and simple principles or rules without having to take responsibility for balancing the interests of all parties; For example, US regulators have opted for the "full disclosure, Market-choice" principle to put complex issues of multiple equity structures on the market and investors themselves.

This option in the US market, which has been in operation for nearly 20 years, has given us a difficult problem. The United States is recognized as the largest and most developed capital market in the world, it is difficult to conclude that U.S. regulators allow the multiple equity structure stems from its indifference to investor protection, and so many companies such as Google, Facebook and so on have insisted on and successful listing and development of multiple equity structure, It is also hard to prove that American investors oppose or suffer from such structures. In the final analysis, the "right" in the "same right" is mainly reflected in the return. In fact, these companies also bring reasonable returns to investors.

Where should Hong Kong go? Simply following the United States is clearly not a favorite option for many people in Hong Kong because our market is very different from the US, especially in the legal system. Another simple thing to do is to reject all companies with different shareholding structures, including technology companies and new economy companies. With this approach, Hong Kong can no doubt maintain a "holy" position in respect of regulation, but since investor protection is the main driver of our choice, we should ask ourselves whether this is the best approach. Whose interests does it ultimately protect? Let us take a look at the impact of this approach on the different uses of the market:

For those mainland technology companies and new economy companies that are considering listing, Hong Kong has always been the ideal place for listing. But if the multiple-equity structure is far more than Hong Kong's other strengths, it is likely that they will have to "do something different". If this kind of company represents the trend of an era, Hong Kong may pass the trend.

For investors who are strongly opposed to a multiple-equity structure – whether international or local – they would not have been involved, no matter where they were listed, so the protection of such investors would be impossible to talk about.

For large institutional investors, if they are bullish on these companies or do not mind the multiple ownership structure at all, even if such companies eventually go public in the United States or other markets, they will still be free to invest, so it is not important for them to accept a multiple shareholding structure in Hong Kong.

For other local retail investors who are bullish on such companies, they either lose their investment opportunities or invest in the United States without the protection of Hong Kong local regulators. And if these investors go to foreign markets to invest, the regulators in Hong Kong will be less protective of these investors.

It seems, however, that maintaining the status quo does not seem to be conducive to any of the current markets in Hong Kong, but it actually affects the core competitiveness of the Hong Kong market in attracting new economic companies. So, in the midst of total rejection of the American model, is it possible for us to find a workable middle path--to give the founders of the new economic Company a certain degree of autonomy in the equity structure and to keep the core interests of the public shareholders from being violated?

As the rule of law, Hong Kong has won countless applause and cheers for upholding the rule of law and procedural justice, and I am also proud of Hong Kong's determination to defend these core values. However, we can not indulge in these praise, and then avoid the above difficult problems of deep thinking, the spirit of procedural justice is to give this debate on the changes in rules enough space and time, let the truth more and more clear. But procedural righteousness should not be an excuse for inaction.

I have described my dream in the blog, and in My dreams, various roles have been hotly debated over multiple ownership structures. Until today, I still hope that the discussion in the dream can become a reality. Since we all love Hong Kong This city, we all hope that she is more and more beautiful, more and more powerful. So let us talk together, and work together for the wisdom of Hong Kong tomorrow, to find answers to these difficult questions. If we still decide to keep the status quo after the discussion, it also means that we have really reached the biggest consensus in the market and convinced the people who disagree. Through discussion, we have also demonstrated to the world the tradition of the rule of law in Hong Kong and the rationality, tolerance and wisdom of the people of Hong Kong.