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Revisiting the viability to allow dual-class share structure companies to list in

the financial market of Hong Kong

Article  in  Common Law World Review · April 2018

DOI: 10.1177/1473779518791769

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Revisiting the viability to allow dual-class share structure companies to list in the
financial market of Hong Kong

John Kong Shan Ho*

The request of Alibaba, China’s largest e-commerce company, to allow a self-selected group
of its past and present management known as the “partners” the right to nominate a majority
of the directors in its negotiation with the Hong Kong Stock Exchange (HKEx) for an initial
public offering (IPO) in 2013 reignited a new round of debate over the one share, one vote
policy, which has survived for three decades in Hong Kong. Alibaba’s IPO application to
list on the HKEx was eventually rejected which ultimately led to the company’s decision to
list on the New York Stock Exchange (NYSE). In late 2017, the debate on whether
companies with dual-class share (DCS) structure should be allowed to list in Hong Kong
re-emerged as the HKEx has announced that it would amend its listing rules to enable
companies with DCS structure to list on its exchange, subject to certain safeguards and
restrictions. This article examines what measures Hong Kong could adopt to allow
companies with DCS structure to list on its exchange despite legal and institutional
shortcomings of its financial market. In doing so, it will also make reference to other major
financial markets in the world and examine how other jurisdictions have handled the issue of
DCS structure companies.
(Keywords: Corporate governance; Dual-class share; United States; United Kingdom; Hong
Kong; Singapore)

I). Introduction
While “one share, one vote” has widely been recognized as a bedrock principle of
good corporate governance in protecting shareholders’ basic rights, 1 some regulators
consider this principle to be too inflexible to cater for investors with different risk
appetites and issuers with different profiles. For example, entrepreneurs may wish to
raise equity capital to finance some promising growth of their companies, but at the
same time, they do not want to surrender too much control of their companies to those
outsiders who may have different visions on how to operate the companies. If all

*Associate Professor, School of Law, City University of Hong Kong.

1
For example, in the third OECD Principles of Corporate Governance, a good corporate governance
framework should ensure equal treatment of all shareholders, including minority and foreign
shareholders. All these shareholders should have the opportunity to obtain effective redress for the
violation of their rights.
1
stock exchanges stick to the “one share, one vote” principle, these entrepreneurs may
prefer not to offer shares of their companies to the public and simply shelve those
growth projects indefinitely until they can solicit sufficient funding from other
sources. In this case, the economies of the societies will suffer and investors may
lose promising investment opportunities with handsome returns.
One possible solution to this dilemma is to allow these companies to issue more
than one class of shares, so that one class carries disproportionate voting rights.2
These companies are said to possess a dual-class share (DCS) structure.3 By holding
super-voting shares and selling the rest of shares with inferior voting rights,
entrepreneurs can obtain sufficient funding to finance the expansion of their
companies and at the same time maintain their control. However, those holding
super-voting shares will not receive shares of the residual gains or losses from new
investments commensurate with their control; they may have incentives to make
sub-optimal corporate decisions beneficial to themselves but harmful to the
companies and those holding inferior-voting shares.4 The simple existence of this
possibility of abuse from controllers of companies with a two-tier share structure may
erode investors’ confidence, deterring them from investing in these companies.
In 2013, Alibaba, China’s largest e-commerce company, applied to list its shares
on the Hong Kong Stock Exchange (HKEx) and initially asked the exchange to allow
it to adopt a DCS structure where the senior management of the company would hold
first-class shares with more votes per share than the second-class shares which would
be sold to outside investors in the IPO. 5 However, two-tier share structures are
prohibited under the HKEx’s existing listing rules. Its Main Board Listing Rule 8.11
states that “(t)he share capital of a new applicant must not include shares of which the

2
Henry T.C. Hu, “New Financial Products, the Modern Process of Financial Innovation, and the Puzzle
of Shareholder Welfare” (1991) 69 Texas Law Review 1273, at 1294.
3
D.C. Ashton, “Revisiting dual class stock” (1994) 68(4) St. John’s Law Review 863-960, at 866.
4
F.H. Easterbrook and D.R. Fischel, “Voting in Corporate Law”(1983) 26 Journal of Law and Economics
395-427.
5
“Alibaba’s spotlight on HK regulation”, Webb-site, 18 September 2013, available at:
http://webb-site.com/articles/aligaga.asp
2
proposed voting power does not bear a reasonable relationship to the equity interest of
such shares when fully paid.” Not surprisingly, Alibaba was rejected by the Hong
Kong authorities as its proposed DCS structure violated the exchange’s Listing Rules.
Alibaba then suggested another proposal to give a self-selected group of past and
present management known as the ‘partners’ the right to nominate a majority of the
directors, giving them in effect a veto on any change of control.6 Although Alibaba’s
shareholders could turn down director candidates nominated by the partnership, the
partnership would then go back to the drawing board and select new nominees for
approval. There was no sunset rule imposed on the membership of this partnership.
Instead, the partnership could elect new partners with a 75% vote of the partnership
and fire partners with a 51% vote. 7 The partnership agreement could also be
amended with a 75% vote of the partners.8 Yet the Hong Kong authorities did not
seem to buy this proposal either and turned its application down once again.
Subsequently, in March 2014, Alibaba finally decided to choose New York over
Hong Kong for its IPO.9 The company eventually filed for its IPO in May 201410
on the New York Stock Exchange (NYSE). The company managed to raise more
than US$15 billion in New York, making it the highest profile listing at the time since
Facebook’s US$16 billion listing in 2012.
At the time of the Alibaba’s IPO application incident, the author of this paper
published an article in the 2014 edition of the Common Law World Review11 and
argued that due to the legal and institutional shortcomings and differences compared
with financial markets such as the United States (US), Hong Kong should be cautious
in allowing listed companies to adopt DCS structure. However, in late 2017 the

6
R. Chan and E. Yiu, “Alibaba in stand-off over I.P.O.”, South China Morning Post, 24 August 2013.
7
R. Barusch, “Dealpolitik: Alibaba’s structure v. dual class-the bottom line”, Wall Street Journal, 23
October 2013.
8
Ibid.
9
R. Chan and A. France-Presse, “Alibaba confirms it has chosen US over Hong Kong for IPO”, South
China Morning Post, 16 March 2014.
10
“Alibaba files for what could be biggest tech IPO ever”, South China Morning Post, 7 May 2014.
11
Raymond S.Y. Chan and John K.S. Ho, “Should Listed Companies Be Allowed to Adopt Dual-Class
Structure in Hong Kong?” (2014), Common Law World Review, 43:2, 155-182.
3
debate on whether companies with DCS share structure should be allowed to list in
Hong Kong re-emerged as the HKEx announced in its consultation conclusions for
new board12, that due to commercial considerations it would amend its listing rules to
enable companies with such share structure to list on its exchange, subject to certain
safeguards and restrictions.
This article is therefore written against such background and re-examines the
viability of allowing companies with DCS structure to list in the financial market of
Hong Kong. The paper is divided into the following sections. Section two will
examine the arguments for and against dual-class share structure from a theoretical
perspective. Section three will look at how other major financial markets with
similar Global Financial Centres Index (GFCI)13 score and ranking (namely: US, UK
and Singapore) have handled the issue. Section Four will examine the present legal
and institutional shortcomings of Hong Kong that could potentially undermine
investors’ protection should companies with DCS structure are to be allowed to list on
its exchange. Section five will examine the proposed reform on new board 14
conducted by the HKEx and why Hong Kong need to amend its listing rules in order
to allow companies with DCS structure to list in its financial market from a
commercial perspective. Section six will suggest safeguards and restrictions which
the regulator in Hong Kong could impose in return for relaxing its approval for listed
companies to adopt such share structure. It is ultimately argued that due to
commercial considerations, Hong Kong could adopt measures to allow companies
with DCS structure to list on its exchange despite legal and institutional shortcomings
providing there are appropriate governance measures in place to safeguard the
interests of investors. Section seven concludes.

12
HKEx, “Consultation Conclusions – New Board Concept Paper”, December 2017.
13
The GFCI is a ranking of the competitiveness of financial centres based on over 29,000 financial
centre assessments. The first index was published in March 2007 and since 2015, it has been jointly
published twice per year by Z/Yen Group in London and the China Development Institute in Shenzhen.
It is widely quoted as a source for ranking financial centres. New York, London, Hong Kong and
Singapore have been consistently ranked as the world’s top 4 financial centres by the index since
2007.
14
HKEx, “Concept Paper – New Board”, June 2017.
4
II). Pros and Cons of dual-class share structure

Traditionally, shareholder advocacy groups such as the Institutional Shareholder

Services in the US look unfavourably upon DCS. It is argued that an unbalanced
system of voting rights is likely to hurt a company’s corporate governance rating,
which may in turn affect how institutional shareholders treat the company.15 Such
argument hinges on the importance of shareholders’ voting rights which is based on
the theory of shareholder primacy. This essentially means that companies exist to
serve the interests of shareholders, or more specifically, the theory mandates that the
company be run with the goal of maximizing shareholder wealth.16

Shareholder primacy is simply viewed as a democratic legitimacy argument: the

company has to keep shareholder interests at the forefront because shareholders are
the voting polity. Corporate law scholars such as Easterbrook and Fischel in the
1980s provided a justification for this theory.17 In looking to grounding shareholder
primacy in economic theory, they looked to the traditional economic utility rationale
of creating the highest level of efficiency or overall social utility.18 This argument
returns us to the “nexus of contracts” models, 19 instead of being owners of the
company. In these models, shareholders were one group of many whose contracts
with one another jointly created the fictional corporate entity. Based on this analogy,
it is argued that shareholders are the sole “residual claimants” to the company’s
income. Creditors or bondholders have fixed claims, and employees generally
negotiate compensation schemes in advance of performance. The gains and losses
from any good or bad corporate performance are the lot of the shareholders, whose
claims stand last in line.20 As residual claimants, shareholders are therefore the

15
G.M. Hayden and M.T. Bodie, “One Share, One Vote and the False Promise of Shareholder
Homogeneity” (2008) 30(2) Cardozo Law Review 445-505, at 471.
16
D.G. Smith, “The Shareholder Primacy Norm” (1998) 23 Journal of Corporation Law 277.
17
Above n. 4
18
F.H. Easterbrook and D.R. Fischel, The Economic Structure of Corporate Law, 1991, 73.
19
M.C. Jensen and W.H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure” (1976) 3 Journal of Financial Economics 305, at 310-311.
20
Above n. 15 at 453
5
group with the appropriate incentives to make discretionary decisions because right to
vote (i.e. the right to exercise discretion) follows the residual claim.21 Therefore, the
existence of DCS whereby one class of shareholders enjoy no voting right for
example, undermines the shareholder primacy theory.
Yet it is often argued that the shareholder primacy theory is based on the notion
of “shareholder homogeneity”, which assumes that all shareholders are similarly
situated and share similar interests.22 However, in reality, shareholders may have
very different economic interests depending on a variety of factors. One of the main
assumptions behind the one share, one vote norm is that shareholders have a uniform
interest in wealth maximization. Since all shareholders are entitled to part of the
residual, they all have an interest in maximizing the size of that residual. But this
assumption is not empirically correct.23 Even if we assume that the ultimate goal of
the majority of shareholders is to maximize wealth, different shareholders may have
different time horizons for this maximization.24 For example, some shareholders
have yearly or quarterly profit margins to meet, some may have bought the shares
looking to take it over, and then either buy all of the stock or walk away, and other
shareholders buy the stock on a bet that the takeover attempt will succeed. In short,
shareholders can have different notions of what wealth maximization means. 25
Moreover, many shares in large corporations today are widely held by groups from
pension funds representing government employees to sovereign wealth funds
controlled by overseas governments, who may have other interests that differ from
those of the traditional private shareholders.26 Therefore, the varying interests of
shareholders do not comport with the notion of a shareholder electorate with one
homogenized goal. Thus shareholders will not have the same preferences and they

21
Above n. 15 at 454
22
Above n. 15 at 477
23
Above n. 15 at 492
24
I. Anabtawi, “Some Skepticism About Increasing Shareholder Power” (2006) 53 UCLA Law Review
561, at 579-583.
25
Above n. 15 at 493
26
Above n. 15 at 487-491
6
will not seek to effectuate those standards in lock-step voting patterns.27
Those who oppose DCS also assert that the use of such share exacerbates
collective action, free riding, and passivity problems that lead to
disenfranchisement.28 This is based on empirical studies which demonstrate that the
ownership composition of companies recapitalizing with DCS is often characterized
by large family or management ownership groups29 and below average institutional
holders. 30 Due to their ownership arrangements, a large proportion of public
shareholders would have to vote against any proposed governance measure for it to be
defeated. 31 Furthermore, with lower than average institutional holdings, the
outsider-shareholder group is thought to exhibit a high share turnover rate as well as
to suffer the consequences of dispersed holdings.32 Hence the costs of opposition are
higher than normal because communication and coordination expenses rise in
proportion to the extent of shareholder dispersal.
Several recent shareholder controversies have involved corporations with DCS.
The Murdoch family owns about 12% of News Corporation but controls almost 40%
of the votes, through a special class of shares which have superior voting rights.33
Such DCS structures are quite prevalent, especially at media firms and they can shield
managers from stock market short-termism and hostile takeovers. But two studies
conducted by Paul Gompers, Joy Ishii and Andrew Metrick, covering the years from
1994 to 2002, found that DCS companies perform worse than comparable companies

27
Above n. 15 at 502
28
J.N. Gordon, “Ties that Bond: Dual Class Common Stock and the Problem of Shareholder Choice”
(1988) 76(3) California Law Review 40, at 44-45.
29
M.M. Partch, “The Creation of a Class of Limited Voting Common Stock and Shareholder Wealth”
(1987) 18 Journal of Financial Economics 313, at 332
30
Above n. 3 at 908
31
Above n. 28 at 46
32
L. Lowenstein, “Shareholder Voting Rights: A Response to SEC Rule 19c-4 and to Professor Gilson”
(1989) 89 Columbia Law Review 979.
33
“Dual-class share structures: The cost of control”, Economist, July 21, 2011. Since the News Corp.
hacking scandal there have been calls from shareholders for a change in the share structure.
7
where all shares confer equal voting rights.34
Technology companies also prefer DCS structures because they allow founders to
raise capital without surrendering control. Google’s IPO in 2004 involved two
classes of shares. Before Facebook went public in 2012, it too created two classes of
shares. Despite owning just 18% of the company, Mark Zuckerberg, the founder,
controls 57% of the voting shares. Facebook’s US$16 billion IPO in May 2012
generated huge investor interest but the shares subsequently slumped in price (though
its share price has recovered significantly since 2013).35 Critics have claimed that
the controlling families and shareholders do not have proper incentives because they
do not have the same economic risk as the other shareholders.36 However, such
criticisms can be rebutted on the basis that shareholders knew what they were getting
when they purchased the shares. Corporate law should facilitate private ordering
and choice, which includes the possibility that certain shareholders will accept less
control as part of the bargain. This may mean a cheaper price and shareholders
should be allowed to make this bargain if they wish to do so.37 In fact, one study
finds that DCS do not trade at a big discount on stock markets. Dual-class IPOs
achieved only slightly lower price-earnings and price-sales ratios than comparable
single-class IPOs.38
The above arguments illustrate that the issuance of DCS may or may not be in the
best interests of shareholders, but such ownership model does not show any sign of
going out of fashion.39 It seems that whatever views one may hold about DCS

34
P. Gompers, J. Ishii and A. Metrick, “Extreme Governance: An analysis of dual class firms in the
United States” (2010) 3 Review of Financial Studies 23; P. Gompers, J. Ishii and A. Metrick, “Corporate
Governance and Equity Prices” (2003) 118(1) Quarterly Journal of Economics 107-155.
35
“Facebook’s IPO and Dual-Class Share Structures”, New Yorker, May 28, 2012. The value of
Facebook’s share has fallen from US$38 since its launch on May 18, 2012 to US$20 on August 20,
2012. Since 2013, Its share price has recovered significantly and as of late 2017, has been trading at
more than US$170 on NASDAQ.
36
Above n. 15 at 482
37
Above n. 15 at 482
38
S. Smart and C.J. Zutter, “Dual Class IPOs are underpriced less severely” (2008) 43(1) Financial
Review 85-106.
39
In 2014 and 2015, there were 36 and 27 dual-class IPOs in the US.
8
structures, they are likely to stay and remain popular for certain sectors and
companies. Therefore, it is important that we understand the development of
dual-class common share and its interplay with corporate control markets. The next
section therefore will look at how major financial markets across the world have
handled the issue of DCS structure.

III). Dealing with dual share structure by major financial markets

a). United States (US)

In the 1920s, public reaction instigated by academics and government officials in the
US became concerned with the growing power of the voting trusts and the investment
banking community. In response, in January 1926, the New York Stock Exchange
(NYSE) first disapproved an issue of non-voting common share.40 In May 1940, the
NYSE adopted a formal listing requirement relating to the use of DCS and the
standard remained in effect without any incident for the next 40 years. 41 Subsequent
attempts by listed companies to use DCS were for the part rejected by the Exchange,42
and no serious challenges to that policy occurred until the mid-1980s.
The DCS debate re-emerged as a result of an issuance of restricted shares by
General Motors (GM) in conjunction with its acquisition of Ross Perot’s Electronic
Data Systems Corporation in 1984. The debate gained further momentum following
the subsequent issuance of disparate voting share by over 40 companies between the
time of GM’s issuance and June 1987.43 The significance of the GM case was its
explicit challenge to the NYSE policy that it represented. Moreover, an increasing

40
J. Seligman, “Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote
Controversy” (1986) 54 George Washington Law Review 687, at 697.
41
NYSE Listed Company Manual, 1985, s. 313 (A), (C)
42
NYSE delisted Cannon Mills in 1962 after the company distributed non-voting common shares to its
common shareholders.
43
M.G. Warren III, “One Share, One Vote: A Perception of Legitimacy” (1988) 89 Journal of
Corporation Law 92-93.
9
number of family-controlled companies needed access to capital only available in the
open exchange markets. DCS was therefore a mean of gaining access without the
control dilution normally associated with new equity issuances. Meanwhile, the
NASDAQ (NASD) and the American Stock Exchange (AMEX), with less restrictive
dual-class listing standards were becoming increasingly competitive in the market for
corporate listings.44
In light of the above concerns, the NYSE appointed the Subcommittee on
Shareholder Participation and Qualitative Listing Standards in June 1984 to review its
dual-class listing standards.45 At the same time, the NYSE imposed a delisting
moratorium for dual-class capitalizations and recapitalizations that contravened the
NYSE policies on voting rights.46 In January 1985, the subcommittee recommended
a new listing standard by which listed companies would be permitted to issue
common share with unequal voting rights provided four conditions were met: (i)
two-thirds of all shareholders entitled to vote would have to approve the creation of
the second class of common share; (ii) if the issuer had a majority of independent
directors at the time the matter was voted on, approval by a majority of these
independent directors would be required. If the issuer did not have a majority of
independent directors, the approval of all such directors would be required; (iii) the
low-vote shares could not have a voting differential of more than ten to one; and (iv)
the other rights attached to the restricted voting shares must be substantially the same
as the rights of the high-vote shares.47
Many commentators at the time suggested that these recommendations were
primarily based on the fierce competition from the NASD and the AMEX, as well as
member dissatisfaction with the inflexibility of the existing rules as related to
takeover defence. The NYSE subcommittee recommendations triggered an

44
Above n. 3 at 896
45
Above n. 40 at 701-706
46
R.S. Karmel, “Qualitative Standards for Qualified Securities: SEC Regulation of Voting Rights” (1987)
36 Catholic University Law Review 809, at 817.
47
NYSE, Dual Class Capitalization: Initial Report of the Subcommittee on Shareholder Participation and
Qualitative Listing Standards, (NYSE: New York, NY, 1985) 3.
10
immediate congressional reaction that ultimately proved unsuccessful.48 Following
the dissemination of the subcommittee’s recommendations, officials of the Securities
and Exchange Commission (SEC), the NYSE, the NASD and the AMEX arranged for
a series of meetings intending to resolve the lack of uniformity among the exchanges,
yet their discussions proved unsuccessful. Shortly after the discussions concluded,
the NYSE proposed a new, revised amendment to its Listed Company Manual which
was even less restrictive than the original subcommittee’s recommendations.49
The proposed standard for voting rights required delisting only if the
recapitalization was not approved by a majority of independent directors and a
majority of shareholders. Under this proposal, listed companies that created
disparate voting rights share during the NYSE moratorium would have two years
from the date of the proposal’s approval to comply with the amendment. Companies
thereafter applying for listing would have to comply with the rule before listing would
be approved. Further, no exchange approval would be necessary if the disparate
voting class was outstanding when the company first went public, or if disparate
voting share was distributed pro rata among a distributor’s common shareholders in a
spin-off transaction in which the distributor was not the issuer.50
In response to the second NYSE proposal and the failure of the three exchanges
to reach a consensus on a minimum rule, the SEC eventually took action itself in June
1987, which created Rule 19c-4. This rule explicitly prohibited the exchanges from
listing, or continuing to list, the securities of an issuer that takes action resulting in the
nullification, restriction, or disparate reduction of the per-share voting rights of
holders of the company’s outstanding common shares or resulting in the creation of a

48
See Hearings on the Impact of Takeovers on Shareholders, Before the Sub-comm. On
Telecommunications, Consumer Protection, and Finance, 99th Cong., 1st Sess., 1985. Some Senators
expressed fear that anything less than one share, one vote rule would trigger a “race to the bottom”
among the exchanges.
49
Above n. 3 at 898
50
Above n. 3 at 898
11
ceiling on the voting power of any one individual shareholder.51 New issues were
unaffected and could be listed without exceptional regulation of voting rights. The
rule permitted companies to issue non-voting common share or a special class of
common share with limited voting rights, as long as it did not dilute the voting power
of existing shareholders.52 The rule also enabled a company to issue common share
with lower voting rights when engaging in a business merger or acquisition, as long as
the company made the merger or acquisition for a bona-fide business purpose.53 The
SEC received 1100 comment letters and elicited testimony from 17 people on
Rule19c-4. Amongst those comment letters, 1000 supported adopting the rule, of
which 800 were submitted by individual members of the United States Shareholders
Association, which advocated a one share, one vote standard with no exceptions.
However, Rule 19c-4 generated much debate not just regarding the desirability of
DCS, but on the larger issue of shareholder behaviour theory and the role of federal
government in corporate governance and financial regulation. There was
widespread criticism that the SEC’s intervention into areas traditionally left to state
regulation was improper. Thirty two commentators who expressed opposition to the
adoption of the rule during SEC’s consultation stage questioned the authority to adopt
a rule in the area of qualitative listing standards. The opposition included the
American Bar Association and the Business Roundtable.54 The Business Roundtable
eventually filed a suit in the Court of Appeals for the District of Columbia Circuit to
vacate the rule on the basis of a theory grounded in corresponding notions of
federalism. Rule 19c-4 was eventually struck down by the D.C. Circuit in June 1990
and DCS regulation was once again handed back to the exchanges and the states.55
Since the Business Roundtable decision, both the NYSE and the NASD have

51
In 1988, the SEC announced the adoption of Rule 19c-4 under the Securities Exchange Act 1934.
The rule was adopted on July 7, 1988.
52
K.D. Bayley, “Rule 19c-4: The Death Knell for Dual-Class Capitalizations” (1989) 15 Journal of
Corporation Law 7.
53
Above n. 3 at 899
54
Above n. 52 at 14
55
Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990)
12
adopted enforced listing standards embodying the spirit of Rule 19c-4. In June 1992,
the NYSE proposed a new listing requirement that would allow its listed companies to
establish unequal voting rights. Unlike the NYSE, the AMEX had not adopted Rule
19c-4 before the decision by the court of appeals, and unlike the NASD, the AMEX
had a pre-existing voting-rights policy.56 Hence the immediate effect of the court
decision for the AMEX was a reinstatement of the original policy before Rule 19c-4
was enacted. In September 1990, the AMEX appointed a Special Committee on
Shareholder Voting Rights to recommend an appropriate listing standard. Adopted
in April 1991, the proposed AMEX rule seeks to provide a balance between flexible
capital structuring and managerial accountability. 57 It requires that companies
seeking to recapitalize into a multiple-class structure or to issue additional shares of
higher-voting class share must obtain favourable votes from two-thirds of their
outstanding shares or a majority of shares unaffiliated with management or the
controlling group. Moreover, the AMEX decided that a multiple-class company
should have at least one-third of its board composed of independent directors or
provide that holders of the lesser voting class be entitled to elect exclusively at least
25% of the board.58
Likewise, in May 1994, the NYSE Board of Directors voted to modify the
Exchange’s voting rights policy, which had been based on Rule 19c-4. In the
NYSE’s own words, its policy is “more flexible”59 than Rule 19c-4, where it permits
issuances by listed companies that would have been permitted under Rule 19c-4, as
well as other actions or issuances that are not inconsistent with the new policy.
Section 313(B) of the NYSE Listed Company Manual stipulates that the exchange’s
voting rights policy permits the listing of the voting common stock of a company
which also has outstanding non-voting common stock as well as the listing of
non-voting common stock. However, certain safeguards must be provided to holders

56
Proposed Rule Change By American Stock Exchange, File No. SR-AMEX-91-13, June 11, 1991
57
Above n. 3 at 902
58
Above n. 56 at 27
59
See NYSE Inc., Listed Company Manual, section 313 Voting Rights.
13
of a listed non-voting common stock: (i) any class of non-voting common stock that is
listed on the Exchange must meet all original listing standards. The rights of the
holders of the non-voting common stock should, except for voting rights, be
substantially the same as those of the holders of the company's voting common stock;
and (ii) although the holders of shares of listed non-voting common stock are not
entitled to vote generally on matters submitted for shareholder action, holders of any
listed non-voting common stock must receive all communications, including proxy
material, sent generally to the holders of the voting securities of the listed company.60
The NYSE’s interpretations under the policy will be flexible, recognizing that both
the capital markets and the circumstances and needs of listed companies change over
time.61
Today the regulation of voting rights is primarily governed by the rules of the
exchanges and state law.62 No state departs from a one share, one vote default rule,
though state blue sky laws63 often impose restrictions on the sale of some shares with
disparate voting rights. Also, 18 states have adopted regulations prohibiting the
issuance of common stock with unequal voting rights. 64 Hence state securities
regulators represent an important supplement to exchange-based regulation. An
interdependency exists between blue sky rules and the exchanges. State exemptions
are the very foundation upon which the use of DCS vests. 65 Therefore, state
exemptions granted to the NYSE and the AMEX listed companies are of great
importance.
The SEC continues to assert that voting rights are fundamental and that a majority

60
See section 313(B) of the NYSE Listed Company Manual for details.
61
See section 313(A) of the NYSE Listed Company Manual for details.
62
S.M. Bainbridge, “The Short Life and Resurrection of SEC Rule 19c-4” (1991) 69 Washington
University Law Quarterly 565, at 574.
63
A blue sky law is a state law in the US that regulates the offering and sale of securities to protect the
public from fraud. Specific provisions of these laws vary among states and they all require the
registration of all securities offerings and sales, as well as of stockbrokers and brokerage firms. Each
state’s blue sky law is administered by its appropriate regulatory agency and most also provide
private causes of action for private investors who have been injured by securities fraud.
64
Above n. 40 at 713
65
Above n. 3 at 905
14
of current shareholders should never be permitted to diminish or eliminate the voting
rights of an opposed minority. Yet since the Business Roundtable decision, SEC
opposition is no longer of paramount importance.66 Though it has been argued that
the current case-by-case posturing of the NYSE has only exacerbated the
uncertainty 67 and the debates surrounding dual-class common share remain a
touchstone of corporate governance in the US.
Having examined how the regulator in the US have handled the issue of DCS
structure, the paper shall now turn focus to the other side of the Atlantic and explore
the approach adopted by the regulator in the United Kingdom (UK) in handling DCS
structure.

b). United Kingdom (UK)

Since the Global Financial Crisis (GFC), the UK regulator, Financial Conduct
Authority (FCA) and its predecessor, Financial Services Authority (FSA) have
introduced a series of reform to the listing regime of its financial market. A key
feature of London’s listing regime in its current form is its division into two
segments- premium and standard listing (previously known as primary and secondary
listing). The existing two-tier segments of its listing regime came into effect in April
2010 as a result of change that was introduced in October 2009, following a review of
the structure of the UK listing regime by the then FSA, with the aim of ensuring
clarity of the regime’s structure and issuers’ obligation under it.68
A “premium listing” denotes a listing with the more stringent “super-equivalent”
standards. These standards exceed the requirements laid down in the EU Prospectus
Directive and provide additional investor confidence, which in turn are considered to
promote shareholder confidence.69 A “standard listing” on the other hand, denotes a
listing that meets EU minimum standards. Standard listing covers issuance of

66
Above n. 3 at 904
67
Above n. 3 at 904
68
J. Usher, “London IPO options – a premium listing, standard listing or AIM?”, Mayer Brown London,
November 2010.
69
Ibid.
15
shares, Global Depository Receipts (GDRs), debt andand securitized derivatives that
are required to comply with EU minimum requirements.70 Before October 2009,
only companies incorporated outside the UK were eligible for a standard listing.
Since April 2010, standard listings became open to all companies regardless of
domicile. For the premium listing segment, only equity shares are now eligible.
Before changes were made in 2010, all equity securities were capable of having a
primary listing. Apart from equity shares, equity securities also includes securities
convertible into equity shares. Yet since 2010, securities convertible into equity
shares, preference shares and warrants can now only have a standard listing.
Similarly, equity shares which had a primary listing before the rule changed in April
2010 but which did not confer full voting rights so do not qualify for a premium
listing on 6 April 2010. These companies were able to retain a premium listing until
31 May 2012.
In October 2012, the FCA published another consultation paper entitled,
Enhancing the effectiveness of the Listing Regime71, with its conclusions published in
November 2013.72 In broad terms, the revised rules brought under the 2012/2013
consultation are intended to increase protections for minority shareholders in premium
listing companies with a controlling shareholder by: 73 (i). imposing a requirement for
such companies to enter into a relationship agreement with any controlling
shareholder; (ii). providing additional voting power for minority shareholders of such
companies when electing independent directors; and (iii). enhancing the voting power
of minority shareholders in such companies where the company wants to cancel its
premium listing.
The FCA’s consultation in 2013 move away from imposing a stand-alone

70
London Stock Exchange (LSE), Listing Regime, available at:
http://www.londonstockexchange.com/companies-and-advisors/main-market/companies/primary-a
nd-secondary-listing/listing-categories.htm
71
http://www.fsa.gov.uk/static/pubs/cp/cp12-25.pdf
72
FCA, “Enhancing the effectiveness of the Listing Regime: feedback to CP12/25 and further
consultation on related issues”, 5 November 2013.
73
Norton Rose Fulbright, “UK Listing Regime tightened for Premium Listed companies”, June 2014.
16
requirement for issuers to control the majority of their assets to looking at control of
the business as one part of a broader assessment of whether an independent business
is present is helpful, as it recognizes that there are a range of factors that will be
relevant to this determination and this will give applicants greater flexibility in the
way that they structure their business.74 The changes in relation to voting rights of
premium listed shares reinforce the view expressed in the 2012 consultations that
issuers should not be eligible for a premium listing where they have a share structure
that allows holders of an unlisted share class to decide matters where a premium
listing requires a shareholder vote. In essence, it means that companies with DCS
structures are unlikely to be eligible for a premium listing.75 Yet companies with
DCS structures may continue to list on the standard segment.
However, in a discussion paper published by the FCA in early 2017 76, there
seems to be a slight change in attitude towards DCS structure companies. In
reviewing the existing differentiation between premium and standard listing, the FCA
acknowledges that many stakeholders generally regard a standard listing as an
“unattractive option” for a listing because it lacks clarity. Its purpose and
obligations are unclear, while the name implies “second best”. More importantly,
advisors often tell companies not to pursue this option.77 A number of stakeholders
also raised concerns about the effectiveness of the UK’s primary equity markets in
providing growth capital, particularly for early stage science and technology
companies. In a Green Paper published by the UK government in January 201778, it
noted arguments put forward by supporters of DCS structures that the enhanced
voting rights they give to companies’ founders allow those individuals to focus more

74
Ibid.
75
UK Listing Rule 7.2.1A, Premium Listing Principles 3 and 4.
76
FCA, “Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape”,
Discussion Paper (DP) 17/2, February 2017.
77
Ibid. para. 3.7
78
Department for Business, Energy and Industrial Strategy (BEIS), “Building our Industrial Strategy”,
January 2017.
17
on long term performance and less on short-term market pressures.79 Although the
Green Paper did note that many UK-based institutional investors and shareholder
representative groups have opposed such share structures due to the risk they perceive
to high quality corporate governance and the interests of minority shareholders.80
A broader question that many stakeholders have raised is whether standard listing
is sufficiently understood or valued by issuers and investors to be effective. The
2017 discussion seeks to explore whether the current split of listing into standard and
premium segments is too binary and could be revisited to produce more effective
outcomes.81 During the consultation, some stakeholders suggested that there should
be a degree of accommodation for companies which cannot or do not wish to comply
with the super-equivalent requirements of premium listing.82 This has raised the
issue of whether the listing regime should balance the need to preserve UK-style
public company governance with a desire to accommodate companies from all over
the world. One possibility which the 2017 discussion paper has raised is the creation
of an “international segment”.83
The discussion paper argues that London remains as a highly attractive market
with a well-functioning market structure. It noted that other jurisdictions look to
London as an example, and that this is partly due to development of the brand which
is facilitated by Listing Rule requirements. UK’s relative strength for IPOs include
robust legal framework, strength of its corporate governance requirements, the depth
of capital available and the impact of index inclusion on likely analyst coverage.84
However, FCA’s data analysis illustrates that the number of traditional secondary
listings by large, established overseas companies with a primary listing in their home
jurisdiction is declining. This is due to part of a long-term international trend as it
becomes much easier for investors in most financial centres to trade shares in

79
Above n. 76, para. 1.20
80
Ibid. para. 1.21
81
Ibid. para. 1.18
82
Ibid. para. 3.15
83
Ibid. para. 3.16
84
Ibid. para. 2.20
18
overseas companies.85 Hence there have been very few new international issuers
seeking a standard listing of equity shares because issuers favour a GDR listing if a
premium listing is not an option. Yet GDRs are targeted at sophisticated investors
and are inaccessible to many retail investors who may wish to invest in successful
overseas companies.86 Furthermore, as mentioned earlier, many issuers perceive the
name of “standard listing” as second best and it has been reported that overseas
companies are reluctant to adopt such designation. 87 In response to this
phenomenon, FCA intends to explore whether an international segment for large
overseas companies would be more appropriate.
The proposal seeks to introduce a new route to UK listing for overseas companies
wishing to observe higher standards of conduct without having to comply with the full
suite of premium listing requirements. During the consultation, many stakeholders
argue that a highly international market like the UK should be at the centre of listing
activity supporting dynamic and emerging economies.88 According to the FCA’s
own words, “The rationale for having a distinct international segment is to create a
new, credible listing option for large international companies which may wish to
access UK markets but may feel that current UK listing requirements are not fully
appropriate”.89 This segment therefore, may be attractive to companies where there
is a founding family or government that wishes to retain control rights that are
incompatible with a conventional premium listing. The segment would need to be
clearly labelled, with a name reflecting that it is an international listing standard
aimed at attracting mature and successful companies.90 Hence it is believed that if
the international segment proposal is adopted, large international companies with
DCS structure can list on this segment. Also, if introduced, regulator would need to
clearly stipulate the purpose of this segment and develop appropriate mechanisms for

85
Ibid. para. 3.19
86
Ibid.
87
Ibid. para. 3.17
88
Ibid. para. 3.20
89
Ibid. para. 3.21
90
Ibid.
19
investor protections so as to foster market confidence.91
Having examined how regulators in the two major financial markets on both sides
of the Atlantic approach DCS structure companies, the paper shall now turn focus to
the Asia-Pacific and explore the approach adopted by the regulator in Singapore in
handling DCS structure for its financial market as a comparison.

c). Singapore
In October 2007, Singapore’s Ministry of Finance (MOF) set up a Steering
Committee to carry out a fundamental review of its Companies Act aimed at ensuring
an efficient and transparent corporate regulatory framework that supports the nation’s
growth as a global hub for businesses and investors.92 The committee published its
consultation paper in June 2011 and made a number of recommendations with regard
to shareholders’ right.
Under section 64(1) of its prior Companies Act 2006, each equity share issued by
a company must confer the right at a poll at any general meeting of the company to
one vote in respect of each equity share unless it is a management share issued by a
newspaper company under the Newspaper and Printing Presses Act.93 The 2011
consultation paper proposed a change in the law allowing public companies to issue
non-voting shares and shares carrying multiple votes.94 According to the Steering
Committee, most of the respondents during the consultation period agreed that public
companies should be allowed to issue non-voting shares or shares with multiple votes,
subject to certain safeguards.95 The rationale behind this according to the committee
is that it would allow companies greater flexibility in capital management.
Furthermore, it would be up to the Singapore Exchange (SGX) to determine whether
listed companies should be allowed to issue such shares.

91
Ibid. para. 3.22
92
Singapore MOF, “Report of the Steering Committee for Review of the Companies Act”, Consultation
Paper, June 2011.
93
Companies Act 2006, s. 64(1).
94
Above n. 92, Recommendation 3.4.
95
Ibid.
20
 However, during the consultation stage there was a minority of respondents who
expressed concerns that the proposal risks undermining minority rights and
compromising standards of corporate governance. They argued that Singapore is
different from other western developed markets because Singaporean companies are
predominantly controlled by a group of shareholders. Hence shares with multiple
votes can be used to severely undermine minority interests. 96 Companies in
Singapore generally grow out of a majority family-owned environment or
government-controlled entity.97 Until recently, government ownership was a key
feature of the corporate landscape in Singapore. Up to 80% of some
government-linked corporations (GLCs) are directly and indirectly controlled by the
government, while a smaller percentage of major non-government linked companies
in the banking, shipping and technology sectors are controlled indirectly through
inter-corporate equity shares between government-linked and non-government linked
corporations.98
The high concentration of ownership among company management and large
shareholders often led to the creation of dual-class boards in which directors who
represent significant shareholders are in a position to expropriate minority
shareholders with less committed representation. While large shareholders can
potentially improve the monitoring of managers because of the alignment of residual
and control rights, large shareholders represent their own interests. 99 Where
corporate governance is weak, large shareholders may expropriate wealth from
minority investors and other stakeholders.100
In response to the above concern, the Steering Committee decided to impose

96
Ibid.
97
K.H. Ho, Reforming Corporate Governance in Southeast Asia: Economics, Politics, and Regulations
(Institute of Southeast Asian Studies: Singapore, 2005) 265.
98
P.H. Phan and T. Yoshikawa, “Corporate Governance in Singapore: Developments and Prognoses”,
2004, Academy of International Business Annual Meeting, Research Collection, Lee Kong Chian School
of Business.
99
A. Shleifer and R.W. Vishny, “A Survey of Corporate Governance”, Journal of Finance, 1997, Vol. 52,
737-783.
100
Above n. 11, at 168.
21
necessary safeguards and restrictions solely for listed companies. It therefore
recommended the entire abolition of section 64 from the 2006 Act and inserted
section 64A to the amended Companies Act allowing public companies to issue
different classes of shares subject to certain safeguards and restrictions:101 (i). the
issue of shares with differential voting rights (particularly super-voting shares) should
be subject to a higher approval threshold, such as special resolution rather than an
ordinary resolution; (ii). Holders of non-voting shares should be accorded equal
voting rights for a resolution to wind up the company or a resolution which varies the
rights of the non-voting shares; and (iii). where there is more than one class of shares,
the notice of a meeting at which a resolution is proposed to be passed should be
accompanied by an explanatory statement setting out the voting rights (or lack of
them) attached to each class of shares.
One main reason for the Singaporean authority allowing companies to issue
different classes of shares is to help its stock exchange to compete for new listings
and for the country to maintain its competitiveness as a major financial centre.102
English football club Manchester United, controlled by the Glazer family, initially
considered listing on the SGX but eventually opted to list its shares in New York in
August 2012. A difficulty in obtaining approval for its DCS offer in Singapore at
the time was cited as a major reason for the change in listing venue.103
The enactment of section 64A of its Companies Act, which came into force in
early 2016, triggered a discussion between the Monetary Authority of Singapore
(MAS) and the Singapore Stock Exchange (SGX) whether to allow DCS listings on
the latter. The Listing Advisory Committee (LAC), which is an independent
committee set up in 2015 to advise SGX on listing policies, announced that it has
approved the listing of dual-class shares on the SGX in its FY2016 Annual Report.104
Yet the specific listing rules is to be finalized after SGX completes with its planned

101
See Singapore Companies Act, s. 64A for details.
102
“Singapore to Allow Dual-class Shares to Attract Listings”, Reuters, 3 October 2012.
103
Above n. 11, at 168.
104
LAC, “FY2016 Annual Report”, August 2016.
22
round of public consultations.
In February 2017, SGX eventually published the consultation paper regarding
DCS structures105 with the aim to draw feedback, views and suggestions from the
public regarding broad policy considerations on whether to introduce a listing
framework for DCS structures in Singapore.106 In fact before the publication of this
consultation paper, representative from the SGX attended a roundtable discussion
with the Faculty of Law, National University of Singapore (NUS) on the future of
DCS in Singapore.107 The initial conclusion from the roundtable discussion was that
these shares “might be something worth trying as long as investors are fully aware of
what they are actually buying”.108 The roundtable discussion ended without any
clear answers and solutions to the questions and problems raised on such share
structures. Yet there were three key takeaways from the event: 109 (i). the
safeguards, if implemented, would be unique since they are more comprehensive than
elsewhere: (ii). investor awareness and education are crucial. Investors must be
given the choice to invest in dual-class shares but only during the IPO stage; and (iii).
any DCS framework will be supplemented by the existing SGX one.
The SGX consultation paper of 2017 clearly stated that the concentration of
control in owner managers in a company with a DCS structure carries entrenchment
and expropriation risks.110 Entrenchment risks arise when owner managers become
entrenched in management of the company. While expropriation risks arise where
owner managers seek to extract excessive private benefits from the company, to the
detriment of minority shareholders. In order to mitigate entrenchment and
expropriation risks, the consultation paper suggested certain safeguards. 111 For

105
SGX, “Consultation Paper – Possible Listing Framework for Dual Class Share Structures”, 16
February 2017.
106
Ibid. para. 1.12.
107
Michelle Dy, “The Future of a Dual-Class Shares Structure in Singapore”, Roundtable Discussion
Report, Centre for Banking & Finance Law, Faculty of Law, NUS, December 2016.
108
Ibid. p. 7.
109
Ibid.
110
Above n. 105, p. 23
111
Above n. 105, p. 25
23
example, in order to minimize the concentration and entrenchment of voting rights in
owner managers, it proposes a maximum voting differential of 10:1 and argues that
this is a commonly adopted voting differential in other jurisdictions which allow
listing of dual-class shares. 112 To minimize expropriation risks, it proposes to
enhance the independence element of companies with a dual-class share structure by
requiring that if the chairman is not an independent director, at least half of the board
must comprise independent directors, with a lead independent director appointed. If
the chairman is independent, at least one third of the board must be independent.113
It also proposes to restrict multiple vote shares to having voting power of one vote per
multiple vote share when voting on election of independent directors.114
In July 2017, the SGX announced that companies with a DCS structure that is
primarily listed in “developed markets” can seek a secondary listing on the
exchange.115 It defines developed markets as any of the 22 markets the international
index providers FTSE and Morgan Stanley Composite Index (MSCI) classify as
“developed”. All companies seeking for a secondary listing must still be subject to
the listings review process and satisfy the suitability criteria. However, in statement
dated 28 July 2017, the SGX warned that approval of secondary listing of DCS
companies should not be taken to suggest that a decision in favour of primary listings
is a foregone conclusion.116 Tan Boon Gin, CEO of SGX Regulations, said that
DCS will provide investors with more choice, while enhancing market knowledge and
familiarity with the risks and benefits of such companies.117 On 19 January 2018,
Loh Boon Chye, CEO of SGX declared that the exchange will be allowing DCS

112
Ibid.
113
Ibid.
114
Ibid. p. 26
115
The Strait Times, “SGX clarifies on secondary listing of dual-class shares
116
Douglas Appell, “Singapore’s stock exchange gives dual-class shares a secondary listing toehold”,
available at:
http://www.pionline.com/article/20170731/ONLINE/170739996/singapores-stock-exchange-gives-du
al-class-shares-a-secondary-listing-toehold
117
Ibid.
24
companies to be primarily listed.118 According to Loh, the key focus of DCS is to
assist companies make the transition into the new economy. In supporting the
SGX’s decision, the MAS says it will review the safeguards that SGX will be
proposing to mitigate the risks of DCS.119 Rules relating to DCS will be announced
at the end of the first quarter of 2018, paving way for the first listing of its kind to take
place within the year.
As illustrated above, lessons and experiences provided by other major financial
markets in the world show that the issue of whether DCS structure companies should
be allowed listing remains highly controversial. Yet many exchanges allow these
companies to be listed due to commercial considerations and competition pressure
from rival exchanges. The US adopts the most liberal approach in allowing such
companies to be listed whereas the UK takes a more cautious approach and only
allows these companies to list on certain segments of its financial market due to
corporate governance concerns.
Having examined the experiences of other major financial markets in dealing
with DCS structures, the paper will now turn focus to examine the existing legal and
institutional shortcomings of Hong Kong as to potentially why investors’ protection
maybe undermined should companies with DCS structure are to be allowed to list on
its exchange.

Section IV). Legal and institutional shortcomings of Hong Kong in relation to

investors’ protection
Many texts and articles have extensively discussed the background of the Alibaba IPO
application to the HKEx back in 2013120 and how it was eventually rejected. Hence

118
J. Lim, “SGX says will implement dual-class shares”, Channel NewsAsia, 19 January 2018, available
at:
https://www.channelnewsasia.com/news/business/sgx-says-will-implement-dual-class-shares-98772
52
119
Ibid.
120
For example see Chan and Ho, above n. 11.
25
it is not the intention to repeat them here again. Suffice to say that after rejecting
Alibaba’s request for granting exemption to its IPO application, HKEx was criticized
by the company’s management as not proactive enough to cater for future trends and
changes. They urged the Hong Kong authorities to look forward otherwise the rest
of the world would pass it by.121 They compared the HKEx with US exchanges, for
example, where DCS structures are welcomed despite the fact that these structures
have been criticized as not providing sufficient protection to investors elsewhere.
This brings up an interesting question: How (or why) financial market such as the US
can embrace DCS structures but Hong Kong cannot? It has been widely recognized
by legal researchers and practitioners that the US has some legal and institutional
frameworks not available in other countries, allowing its listed corporations to adopt
DCS structures with less investor protection but still good enough to safeguard their
investors from controllers’ abuses.122 The most important regulatory frameworks
relevant to DCS structure are shareholders’ remedies against controllers’ abuses and
the litigious culture.
Unlike western financial markets such as the US and UK where the ownership of
most listed companies is diversified, Hong Kong stock markets are dominated by
companies with concentrated ownership. In around 60% of publicly listed Hong
Kong companies, a family controls at least 10% of voting rights.123 This ownership
structure implies that agency costs arising from the separation of ownership and
control are less likely to be prevalent. Yet conflicts of interest could arise between
controlling shareholders and minority shareholders, making the expropriation of the
latter a distinct possibility.124 Moreover, more than a third of the companies listed on
the HKEx have ownerships that can be traced to mainland China, and a large number

121
E. Yiu and R. Chan, “Alibaba hits back over IPO rejection”, South China Morning Post, 27 September
2013.
122
The Law Reform Commission of Hong Kong (LRCHK), Conditional Fees Sub-committee, Consultation
Paper: Conditional Fees, September 2005; The LRCHK, Report: Class Actions, May 2012.
123
R.W. Carney and T.B. Child, “Changes to the ownership and control of East Asian corporations
between 1996 and 2008: The primacy of politics” (2013) 107 Journal of Financial Economics 494-513.
124
Y.L. Cheung, P.R. Rau, and A. Stouraitis, “Tunneling, propping, and expropriation: evidence from
connected party transactions in Hong Kong” (2006) 82 Journal of Financial Economics 343-386.
26
of the remaining companies have close business relationships with companies in
China. 125 The different legal systems between Hong Kong and China create
additional opportunities for expropriation by companies that can shift assets across the
border, since rulings by courts in Hong Kong are not easily enforceable in mainland
China.126 Therefore, the availability of shareholders’ remedies against controlling
shareholders’ abuses is particularly important in combating these abuses.
Hong Kong inherited its law on shareholders’ remedies from the UK system,
whereby minority shareholders intending to bring legal actions against controlling
shareholders for corporate abuses and malpractices need to rely on derivative action
and unfair prejudice remedy which were put on statutory footing under the Companies
(Amendment) Ordinance 2004.127 But just like its UK counterpart, the prospect of
shareholder litigation in response to misconduct of breach of directors’ duties is not
good.128 A study of shareholder litigation against directors of public companies
concludes that generally there are few such cases in the UK, especially in comparison
to other common law jurisdictions such as Australia and the US.129 This echoes the
English court’s tradition to view derivative action as the last resort rather than the first
port of call. The ruling in Mission Capital Plc v. Sinclair130 and Franbar Holdings
v. Patel131 provide some reference regarding the court’s traditional reluctance to
allow derivative actions to continue.
It has also been argued that statutory derivative action and unfair prejudice
provisions in Hong Kong suffer from a series of defects and have failed to provide

125
Ibid, at 345.
126
Ibid.
127
Sections 731-738 of the Companies Ordinance (Cap. 622) for statutory derivative action; Section
724 of Cap. 622 for unfair prejudice remedy.
128
R. Tomasic, “Shareholder Activism and Litigation Against UK Banks – The Limits of Company Law
and the Desperate Resort to Human Rights Claims?”, Paper prepared for conference on “Directors
Duties and Shareholder Litigation in the Wake of the Financial Crisis”, The Centre for Business Law and
Practice, University of Leeds, 20 September 2010.
129
B.S. Black, “The Legal and Institutional Preconditions for Strong Securities Markets”, UCLA Law
Review, 2001, 48, 781.
130
[2008] BCC 866.
131
[2008] BCC 885.
27
minority shareholders with adequate protection.132 Although the judiciary has been
consistent all along, holding that the threshold for bringing a derivative action be
prima facie in the interests of the company, is low133 yet the court may inquire into
whether the intended proceedings, even if successful, would positively serve the
interests of the company, be it commercially or otherwise. 134 If the court has any
hesitation in this regard, it could require the applicant to be responsible for the costs
ordered against the company and to give an undertaking that he/she shall not seek
contribution or indemnity from the company.135 More recently, the court in World
One Investments Ltd v. Chow Cheuk Lap,136 held that a petitioner in bringing such a
claim should demonstrate that its case is at least likely to succeed or has
overwhelming balance on the merits. 137 The case concerns a proposed share
placement scheme by a public company whereby the plaintiff alleged that the
defendants failed to exercise reasonable care in approving the scheme with ulterior
motive of having the shares acquired by their associates to increase their own voting
power as shareholders. However, in delivering the judgment, Anthony Chan J held
that such ulterior motive is very difficult to understand in the context of a public
company because these shares can be easily bought in the open market. 138 Likewise,
while there has been much judicial consideration of the issue of corporate wrongs
litigated in the context of unfair prejudice claims, there remains considerable
uncertainty as to circumstances in which the unfair prejudice petition can be used to
redress corporate wrongs. 139 Therefore listed companies being involved in any

132
John K.S. Ho, “Bringing responsible ownership to the financial market of Hong Kong: how effective
could it be”, Journal of Corporate Law Studies, 2016, Vol. 16, 2, 437-469, at 457.
133
See Re F&S Express Ltd [2005] 4 HKLRD 743; Re Grand Field Group Holdings Ltd [2009] 3 HKC 81; Re
Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKC 531.
134
Above n. 133, see Re Li Chung Shing Tong (Holdings) Ltd.
135
P. Kwan, “Statutory Derivative Actions – New hope for minority shareholders?”, Deacons (2 April
2012).
136
[2013] 3 HKLRD 701.
137
Ibid. at 704
138
Ibid. at 706
139
R. Cheung, “The Statutory Unfair Prejudice Remedy in Hong Kong: Part 3”, Company Lawyer, 2008,
Vol. 29, 348.
28
unfair prejudice case is unheard of in Hong Kong. A search of the Westlaw HK
database for the period from 2004 to 2014 reveals no listed company had ever been
challenged under this provision.140
The biggest deterrence from bringing private actions is legal cost. Unlike some
common law jurisdictions such as the US and Australia, there is no securities or
shareholders class action in Hong Kong, which is a colonial legacy. 141 A class
action is a legal procedure which enables a representative plaintiff to sue on his/her
behalf and that of other persons with similar interests. Securities or shareholders
class action is an important mechanism for protecting investors from abuse of
controllers and managers of a listed company, as there may be a large number of
investors adversely affected by a corporation or its controllers but each investor’s loss
is too small to justify undertaking individual litigation economically against the
abusers.142
Without class action and proper funding, plaintiffs of these lawsuits will need to
pay their legal costs but the benefits will be shared by all investors. In contrast, all
the legal costs of the corporation and its controller can be borne by the corporation,
which will be ultimately shared by its shareholders. It would therefore be very
difficult for retail investors in Hong Kong to sue a defendant with strong financial
backing from its listed corporation who may request a transfer of the case to the High
Court and even all the way to the Court of Final Appeal. Adding to the burden of
those Hong Kong investors who intend to sue for abuses from the controllers is the
“loser pays” system adopted in Hong Kong. Under this system, plaintiffs risk

140
The search was conducted with the search parameters “section 168A” and “Companies Ordinance”
and “unfair prejudice” and “listed”. The new CO (Cap. 622) is only effective since March 2014. Before
this Ordinance became effective, similar unfair prejudice remedies provisions were contained in
section 168A of the Old CO (Cap. 32), which was effective after 2004. Therefore, the search focused
on the ten-year period in which the old provision was in force.
141
Hong Kong is currently examining a proposal to introduce class action. The UK enacted the
Consumer Rights Act 2015 which came into effect on 1 October 2015, introducing for the first time an
“opt out” class action regime. This allows competition law claims to be brought on behalf of a
defined set of claimants.
142
Above n. 132, at 458.
29
paying not only their legal costs, but also all or at least part of the defendant’s costs if
their case fails.
Neither contingent nor conditional fees are permitted in Hong Kong given that
they were rejected by the Hong Kong Law Reform Commission (LRCHK) back in
2007 due to the reluctance of the insurance industry to provide after-the-event (ATE)
cover.143 Also, champerty and maintenance are still outlawed in Hong Kong,144
further deterring lawyers from offering any help to those abused investors.
In contrast, in financial markets where DCS listed companies are allowed, such as
the US, there are legal and institutional frameworks that are available to safeguard the
interests of investors and prevent controllers’ abuses. The US has long had
securities class action lawsuits. The Private Securities Litigation Reform Act 1995
(PSLRA) passed by the US Congress was designed to address potential abuses in
securities fraud class actions, and to supplement Rule 10b-5 of the Exchange Act.145
According to a research conducted by NERA Economic Consulting, between 2008
and 2013 alone, a total of 1,356 securities class actions were filed in the US federal
court, accounting for an annual 4.4% of US-listed corporations being the targets of
these filings; most of them were the largest corporations with deep pockets. 146
Indeed, there are debates in the US as to whether private securities class actions
encourage frivolous securities lawsuits whereby defendant companies are often under
pressure to settle the claims as defending against these lawsuits could prove extremely

143
Hong Kong Law Reform Commission Report – Conditional Fees, 9 July 2007.
144
In Winnie Lo v. HKSAR [FACC 2/2011] the Court of Final Appeal seem to have hinted that reform in
this area may be expected. Bokhary PJ asked whether the ingredients of the torts and crimes of
maintenance and champerty were consistent with the protection of the fundamental right to access
to justice.
145
Rule 10b-5 of the Exchange Act provides shareholders with the right to sue for losses suffered due
to fraudulent statements made by a company whose equity they own. Listing in the US subjects
foreign companies to this rule and allows them to be sued in the US for fraudulent statements “made
anywhere in the world”. Though only US investors can sue under this rule, all investors are likely to
benefit from it because of the disincentives it provides for managers to release fraudulent
information.
146
R. Comolli and S. Starykh, “Recent Trends in Securities Class Action Litigation: 2013 Full Year
Review”, NERA Economic Consulting, 2014.
30
costly.147 However, in adopting the PSLRA, Congress and the SEC expressly took
the view that private securities litigation helps to deter wrongdoing and is an
“indispensable tool” with which defrauded investors can recover their losses without
having to rely upon government action.148
The above analysis illustrates how existing legal and institutional shortcomings of
Hong Kong can potentially undermine investors’ protection should companies with
DCS structure are to be allowed to list on its exchange, as compared to the US for
example. Yet does it mean that Hong Kong should never allow DCS structure
companies to list on its exchange due to these legal and institutional shortcomings?
This is where the paper will now turn to discuss by first examining the proposed
reform on new board conducted by the HKEx and why Hong Kong need to amend its
listing rules in order to allow companies with DCS structure to list in its financial
market from a commercial perspective.

Section V). Proposed reform by the HKEx

DCS structure is not novel to the Hong Kong investing community. This share
structure has already existed in Hong Kong for decades. Although the HKEx cannot
force its existing listed companies with DCS structure to switch to a single-class share
structure in accordance with the one share, one vote principle, the exchange has been
rather reluctant to allow any of its existing listed companies with a single-class share
structure to change to a dual-class one, or to any IPO application with a DCS
structure.149 One prominent example is Jardine Matheson Holding Limited. In
March 1987, the company applied to the HKEx for a change in its share structure and
proposed to switch to a DCS structure by a bonus issue to its existing shareholders.
At the time, the Jardine Group wielded very strong bargaining power against the

147
M.A. Perino, “Did the Private Securities Litigation Reform Act Work?”, University of Illinois Law
Review, 2003, 913, at 923-926.
148
Ibid. at 919.
149
Above n. 11, at 169.
31
Hong Kong authorities for its request. 150 Yet both the exchange and the
Government’s Office of Commissioner for Securities151 rejected Jardine’s request for
the sake of market integrity. In response, the group in 1991 moved its primary
listing to London, although it maintained its secondary listing in Hong Kong until
1994.152
At the time when Jardine proposed the change to a DCS structure in 1987, there
were five existing companies listed on the HKEx that already issued two-tiered
shares.153 Among these five companies, only Swire Pacific remains listed on the
HKEx now. The other four had already been privatized and delisted from the
exchange before 2004. Since the rejection of Jardine’s application for a change to a
DCS structure in 1987, the HKEx’s one share, one vote principle 154 was not
challenged again until Alibaba brought up the issue in 2013.
After rejecting Alibaba’s IPO application, the HKEx conducted a review of its
operating model and a consultation paper was published in August 2014155 to seek
views as to whether its listing rules should be changed to permit listed companies with
DCS structure. In June 2015, the HKEx then published its consultation
conclusions,156 where the responses indicated support for a second stage consultation.
The consultation conclusions included an outline of features of a draft proposal which
the HKEx intended to refine through discussions with stakeholders before submitting
it for formal consultation. The features of the draft proposal were aimed at ensuring

150
Jardine group accounted for 12% of the market capitalization of the HKEx at the time and was the
largest private employer in the city.
151
The Government’s Office of Commissioner for Securities was the securities regulator at the time
before the Securities and Futures Commission (SFC) was formed in 1989.
152
Above n. 11, at 170.
153
Swire Pacific; Wheelock Properties; Realty Development Corporation; Lane Crawford; Grand Hotel
Holdings.
154
Listing Rule 8.11 of the HKEx main board states that the share capital of a new applicant must not
include shares of which the proposed voting power does not bear a reasonable relationship to the
equity interest of such shares when fully paid. There are two exceptions to the rule. The first is in
exceptional circumstances agreed by the exchange, and the other is when listed companies already
have dual-class share listed.
155
HKEx, “Concept Paper – Weighted Voting Rights”, August 2014.
156
HKEx, “Consultation Conclusions – To Concept Paper on Weighted Voting Rights”, June 2015.
32
that companies would only be allowed to list with DCS structures in certain limited
circumstances and subject to a number of safeguards.157 But on 25 June 2015, the
Securities and Futures Commission (SFC) issued a statement and “unanimously
concluded” that it does not support the draft proposal for primary listings with DCS
structures.158 In light of this statement issued by the SFC, the HKEx decided in
October 2015 not to proceed with its draft proposal to allow companies with DCS
structures to list in Hong Kong.159
There are many reasons why the SFC objected to the proposal at the time and one
of them is that under the HKEx’s draft proposal, DCS structures would be limited to
new listing applicants and that anti-avoidance measures would be introduced to
prevent existing issuers from circumventing the prohibition on them implementing
such structures. Yet the SFC questioned the effectiveness of the proposed
anti-avoidance measures. To work, there needs to be mechanism to prevent existing
issuers using arrangements such as spin-offs to get around the restriction.160 As far
as the SFC is concerned, this issue is particularly important for Hong Kong because as
discussed above, many listed companies are already majority controlled. By
permitting this kind of share structure may make the controlling majorities even more
entrenched.161 Hence the proposed reform by the HKEx to allow DCS companies to
list in Hong Kong was shelved for two years until June 2017, with the publication of
its Concept Paper – New Board,162 which the article will now discuss.

a). New Board proposal

According to the HKEx, the aim of publishing the concept paper on new board is to
seek market feedback on the establishment of a new board, separate from the main

157
Ibid. Ch. 5, at 44.
158
SFC, “SFC statement on SEHK’s draft proposal on weighted voting rights”, 25 June 2015.
159
HKEx, “Listing Committee Announces Way Forward on Weighted Voting Rights”, 5 October 2015.
160
Above n. 158.
161
See comment by Ashley Adler, Chief Executive Officer of the SFC, “Opening remarks at SFC’s media
luncheon”, 19 March 2015.
162
Above n. 14.
33
board and the Growth Enterprise Market (GEM) 163 in order to broaden capital
markets access in Hong Kong by opening up to a more diverse range of issuers.164
According to the HKEx, Hong Kong has successfully established itself as an
international financial centre and as a leading listing venue. HKEx has been the top
IPO venue by funds raised in five of the past eight years.165
However, a review of its current market structure has identified gaps within its
current listing regime that need to be addressed in respect of companies from “new
economy” industries in order to provide greater diversity and investment opportunities
to investors in Hong Kong.166 One major reason why Hong Kong has been the
world’s largest IPO venue is due to the “mainland China” factor. One of the most
significant financial developments in Hong Kong during the past two decades is the
influx of mainland Chinese companies. From 2006 to May 2017, the concentration
of mainland Chinese issuers has increased from 50.3% of the market capitalization of
companies listed on the HKEx to 64%. During the five years ending 2016, mainland
IPOs accounted for 60% of the total number of IPOs in the Hong Kong market and
91% of IPOs funds raised. 167 Yet the consequence of its success in attracting
mainland Chinese companies has been a significant and growing dependence (or
over-dependence) on the mainland.168 International companies that have listed in
Hong Kong in the past ten years account for only 11% of the total market
capitalization versus 55% for the LSE and 30% and 20% for NYSE and NASDAQ.169
As the Hong Kong Financial Services Development Council (FSDC) put it,
“Although Hong Kong can be justifiably proud of its successes so far, it is still some

163
Hong Kong launched the GEM board in 1999, at the height of the dot-com boom to attract listing by
technology companies and start-ups. Unlike the main board, it does not require companies to be
profitable, while main board listing candidates need to have a combined profit of HK$50 million on
the three years before listing.
164
Above n. 14, at 6.
165
Ibid. at 9.
166
Ibid. at 6.
167
Ibid. at 10.
168
Ibid.
169
Ibid. at 11.
34
way from its stated goal of becoming a truly international IPO centre”.170
Apart from high level of dependency on mainland Chinese listings, most of the
issuers listed on the HKEx are in traditional “low-growth sectors”, notably in the
financial and property sectors which make up 44% of its total market capitalization.171
The biggest challenge for Hong Kong is attracting companies from new economy
industries to list on its market, which in the last decade make up only 3% of its market
capitalization, as compared with 60%, 47% and 14% for NASDAQ, NYSE and
LSE. 172 As a result of this, Hong Kong’s market valuation in terms of
price-to-earnings (P/E) ratio is the lowest among its major peers, trading at 13.4 times
versus a peer group average of 24.6 times.173 Even the HKEx admits that its low
exposure to higher growth sectors will lead to stagnation and a lack of investor
interest, further depressing valuations and in turn dampening appeal to prospective
new issuers.174
More importantly, in recent years, the mainland Chinese listing venues and
regulator have pursued a series of measures to bolster the attractiveness of its listing
venues for raising equity capital. Steps to widen the mainland markets’ offering to
prospective issuers and to simplify the onshore listing process are likely to pose an
increasing competitive challenge to Hong Kong, in particular, when the valuation
premium of the mainland market is taken into account. 175 Apart from rising
competition for mainland Chinese listing venues, Hong Kong faces heavy competition
from the US for the listings of some of the most sought after mainland Chinese
companies from the information technology (IT) sector. The major attraction of the
US market for many of these companies is that DCS structures are permitted, whereas
Hong Kong does not allow them. Although only 28% of mainland Chinese
companies with primary listings in the US have DCS structures, their combined

170
FSDC, “Paper No. 9: Positioning Hong Kong as an IPO Centre of Choice“, June 2014.
171
Above n. 14, at 11.
172
Ibid.
173
Ibid. at 12
174
Ibid. at 13.
175
Ibid.
35
market capitalization of US$561 billion represents 84% of the market value of all
US-listed mainland companies. Their market capitalization is also equivalent to
15% of the entire market capitalization of the Hong Kong market.176 These are the
type of companies that the Hong Kong market is currently underweight in.
In consideration of the drawbacks and challenges which the Hong Kong market is
now facing, the HKEx proposed to set up a new board to cater to the different needs
and different types of issuers and investors. It proposed to subdivide this new board
into two segments – “New Board PRO” and “New Board PREMIUM”.177 New
Board PRO is proposed to open to professional investors only and New Board
PREMIUM is opened to both retail and professional investors. Both segments
would impose no restriction on secondary listings by mainland Chinese companies
and would allow DCS companies.178 The justification for restricting such share
structures to a new board rather than the main board, would mean that the main board
would not be affected by any attempt at circumvention.179 It would also alleviate
any concern of the SFC for allowing these companies to be listed on the main board.
However, during the consultation, the SFC backed away from its position on the
one share, one vote principle.180 Both the SFC and government want to see DCS
listed on the main board instead of a proposed new board, as they do not want to see a
fragmented market structure and this seems to be consistent with Chief Executive
Carrie Lam Cheng Yuet Ngor’s agenda, who earlier signalled the government’s
determination to reform the city’s capital markets to attract more technology
companies.181 It is to this discussion which the paper shall now turn to by examining
the consultation conclusions of the new board concept paper and why it makes
commercial sense for the HKEx to amend its listing rules to allow companies with

176
Ibid.
177
Ibid. at 26.
178
Ibid.
179
Ibid. at 27.
180
E. Yiu, “Regulator’s U-turn paves way for dual-class share companies to raise funds in Hong Kong in
pilot plan”, South China Morning Post, 27 October 2017.
181
Ibid.
36
DCS structure to list on the main board instead of having a separate new board.

b). Listing of dual-class share companies on main board

During the consultation, the HKEx received from a broad range of respondents that
were representative of all stakeholders. The responses overwhelmingly supported
the need to widen the listing criteria in order to attract a more diverse range of issuers
to the Hong Kong market. Yet the approach for doing so was the subject of strong
debate.182
On the issue relating to DCS structures, many respondents perceived this as a
competitive issue with the risk of missing out on the listing of a large number of
mainland Chinese new economy companies and how this could pose as a threat to
Hong Kong’s position as a premier global listing venue. 183 Most respondents
believed that implementing DCS should be accompanied by safeguards that provide
minimum shareholder protections against long-term entrenchment of founders and
against the risk of expropriation by holders of these shares.184 This is a point which
the article will return to discuss in more details later.
Another major controversy which the consultation exercise discussed extensively
is the necessity of having a new board to accommodate DCS companies. A large
number of respondents expressed concerns that the establishment of a new board
would bring more and unnecessary complexity into the listing framework of Hong
Kong and that many high quality issuers would prefer to list on the main board,
making a new board less attractive.185 As a result of the feedbacks which the HKEx
received, coupled with the SFC and government attitude in preferring DCS to be
listed on the main board as mentioned earlier, the HKEx concluded that instead of
setting up a new board, it would insert a new chapter to its existing main board listing

182
Above n. 12, at 7.
183
Ibid. at 9.
184
Ibid.
185
Ibid. at 10.
37
rules in order to cater for the needs of DCS companies.186 This practice is in line
with the exchange’s current practice under Chapter 18 of its main board listing rules
which is specifically designed to cater for the needs of mining companies.187
From a commercial and competition perspective, the author concurs with the
HKEx’s findings of rejecting the proposal of a new board to accommodate the needs
of DCS companies. Lessons and experiences from the past and elsewhere provide
that setting up alternative segment in the financial market to cater for specific
companies or industrial sectors not only does not benefit the market but rather
complicate matters. The Growth Enterprise Market (GEM) board which Hong Kong
launched in 1999, at the height of the dot-com boom to attract listings by technology
companies and start-ups is one such example. Unlike the main board, listing on the
GEM does not require companies to be profitable, while main board listing candidates
need to have a combined profit of HK$50 million in the three years before listing.188
However, GEM has been a disappointment, with its turnover and market
capitalization representing less than 1% of the market’s total. As of 2015, there are
only 200 companies listed on GEM189, compared with more than 1,700 on the main
board.190 It has been argued that listing on the main board and GEM is similarly
expensive and time-consuming, which makes it hard for the latter to attract company
listings.191
Likewise, experiences from the UK’s financial market as discussed above, also
show that by having less stringent listing requirements and allowing DCS companies

186
Ibid. at 24.
187
In 2010, the HKEx amended Chapter 18 of its main board listing rules whereby mining companies as
defined under its listing rules can obtain waiver from the requirement to meet the financial tests of
main board Listing Rule 8.05.
188
Listing Rule 8.05 of the HKEx – “profit test”.
189
For details on the number of GEM listings, refer to the GEM website, available at:
www.hkgem.com/statistics/e_default.htm?ref=3%3A
190
For details on the number of the main board listings refer to the HKEx website, available at:
www.hkex.com.hk/eng/stat/statistics.htm
191
John K.S. Ho, “Regulating equity crowdfunding in Hong Kong: Appreciating Anglo-American
experiences and recognizing local conditions”, Common Law World Review, 2016, Vol. 45, 4, 319-339,
at 326.
38
on its standard listing segment rather than on its premium listing segment does not
seem to have benefitted the market on the whole. As mentioned above, in reviewing
the existing differentiation between premium and standard listing, the FCA
acknowledges that many stakeholders generally regard a standard listing as
unattractive for a listing because it lacks clarity. Its purpose and obligations are
unclear, while the name also implies second best. As a result, overseas companies
are reluctant to adopt such designation and advisors often tell companies not to pursue
standard listing.
Therefore, in order to ensure quality listing by issuers and the long term
development of its financial market, the HKEx has made the right decision to simply
amend and insert a new chapter in its main board listing rules to accommodate DCS
companies.
In recognizing the competitive pressures that Hong Kong faces in attracting
listings by new economy companies, the SFC has thrown its weight behind the
HKEx’s proposed listing reform that will allow companies with DCS to list.192 The
SFC acknowledges the challenge that Hong Kong faces is one of competition, since
50% of the mainland Chinese technology companies listed in the US have DCS
structures, versus only 17% for non-mainland Chinese technology companies. 193
According to Carlson Tong Ka Shing, chairman of the SFC, “one share, one vote”
remains as the “gold standard” since it has never been proven that companies with
DCS perform better in the long run. However, he believes that in order to attract
new economy companies to list in Hong Kong and to make its market more vibrant,
change is necessary.194
Furthermore, the latest statistics show that the total amount of funds raised on the
Hong Kong stock market in 2017 dropped to the lowest in almost a decade as the city

192
E.Yiu, “Securities commission backs introduction of dual-class shares on Hong Kong stock
exchange”, South China Morning Post, 20 December 2017.
193
Ibid.
194
Ibid.
39
dropped to third in global IPO rankings.195 The drop in funds raised and slip in
ranking is at least partly blamed on the fact that Hong Kong is failing to attract new
technology companies, given that only 6.9% of the IPO funds raised on it market were
from these companies. A more detailed analysis also shows that in terms of tech
IPOs, Hong Kong is only ranked tenth worldwide, behind the likes of New York,
Switzerland, South Korea and Shenzhen.196 This shows there is an urgent need on
Hong Kong to diversify its financial market and appeal to prospective new issuers in
order to prevent stagnation and a lack of investor interest in the long run.
Certainly the biggest risk and challenge in allowing DCS structure companies to
list in Hong Kong is how to ensure investors are adequately protected, in particular
given the legal and institutional shortcomings of its financial market and legal system
as discussed above. From a practical perspective, one must acknowledge that these
shortcomings will not be resolved in the near term. The proposal to introduce a class
action regime has been recommended by the Hong Kong Law Reform Commission
(LRC) since 2009197, with the publication of its final report in 2012198. Yet almost a
decade has passed since its first recommendation and there is still no sign as to when
the class action regime will be formally introduced. Even if it would be
implemented, it intends to do so in phase by starting with consumer protection
cases199 and it will take many more years before shareholders or securities class
actions will be permitted. Minority shareholders will continue to face challenges in
bringing statutory derivative action or unfair prejudicial remedy against corporate
controllers since there is no sign of the “loser pays” principle rule alleviating even if
class action is to be introduced. Nor would third party funding (TPF) for litigation

195
E. Yiu, “Funds raised on Hong Kong stock market fall to lowest in a decade”, South China Morning
Post, 27 December 2017.
196
Thomson Reuters 2017.
197
Consultation paper available at: http://www.hkreform.gov.hk/en/publications/classactions.htm.
198
The LRC of Hong Kong, “Report Class Actions”, May 2012, available at:
http://www.hkreform.gov.hk/en/docs/rclassactions.e.pdf
199
Ibid.
40
be allowed under the proposed class action regime. 200 Hence given so many
impediments under its legal system, private enforcement by investors against
corporate controllers to prevent abuses would continue to be impracticable.
Likewise, the corporate governance landscape of the Hong Kong financial market is
unlikely to change in the near future either given the large number of
family-controlled and state-owned companies that are listed on its exchange.
But if Hong Kong is to wait for all these shortcomings to be resolved before it
can allow companies with DCS structure to list on its exchange, it would be
unimaginable as to how long this would take. By applying one set of regulations
demanding the highest investor protection standard, the Hong Kong listed securities
market may risk losing flexibility and competitiveness.201 Overseas companies with
an eye for sophisticated and strategic long-term investors may find compliance with
these “one size fits all” regulations contradictory to their needs and may, as a result,
be diverted to other markets that are more able to meet their profiles. 202 With its
regional arch rival, Singapore, also announcing its decision to allow companies with
DCS structure to list on its exchange in January 2018, competition for IPOs is likely
to become even more intense. Therefore, instead of prohibiting companies with
DCS structure to list on its exchange, Hong Kong should follow the footstep of its
Singaporean counterpart by allowing these companies to list on its exchange subject
to certain safeguards and restrictions. It is to this discussion which the paper shall
now turn focus towards.

VI). Safeguards and restrictions in return for dual-class shares structure

In proposing to allow companies with DCS structures to list on its main board, the
HKEx has proposed a number of safeguards and restrictions. Applicants will be
required to establish that they are both eligible and suitable for listing with such share

200
Ibid. at 241.
201
Above n. 170
202
Ibid.
41
structure. These rules intend to strike a right balance between allowing companies to
adopt such structure to raise capital and maintaining fairness to shareholders in terms
of investor protection. Therefore, a number of important questions in relation to
investor protection are needed to be addressed in setting these listing rules. For
example, who should be entitled to subscribe superior-voting shares? Are there any
sunset clause and other limitations on the superior votes? And what are the
disclosure requirements for the relationships between superior-voting shareholders
and directors/senior management?
One major rationale of DCS structure is to offer an opportunity to a
founder-manager to preserve control of his/her company in a rapidly changing
business environment after raising capital from the public to fund some expansion
projects of the company. By selecting the company’s management team for
example, the founder-manager can direct his/her company to focusing on its
long-term strategic aims without fears of the short-termism of stock markets and the
possibility of hostile takeovers by opportunistic acquirers. This explains why many
technology companies prefer to adopt dual-class share structure. It follows logically
from this argument that only founder-managers and current senior managers who
shares similar visions of founder-managers’ should be eligible for awarding the rights
of subscribing superior-voting shares in those companies adopting DCS structure.203
These rights should only be granted to companies at their IPO. In other words,
existing listing companies should not be allowed to issue superior-voting shares, no
matter whether they have already issued superior-voting shares or not, as this issuance
will affect the voting rights of the existing shareholders who are not offered to
subscribe these shares.
Prohibition of existing listing companies against issuance of superior-voting
shares can also prevent those listing companies with a single-class share structure to
switch to a dual-class one simply for benefiting their controlling shareholders. Hong
Kong has already experienced this situation three decades ago. During the

203
B. Reiter, “Dual-class shares: Not the enemy”, Lexpert, October 2010.
42
Sino-British talks on Hong Kong’s future in the 1980’s, many listed issuers expressed
their wish to issue superior-voting shares to their controlling shareholders in an
attempt to maintain control of their companies at lower costs while taking the money
overseas to avoid potential political uncertainty subsequent to the handover of Hong
Kong’s sovereignty to China, leaving minority shareholders of those companies to
take up most of that risk. Hong Kong regulators were adamant to reject the idea at
that time.204 Since then the “one share, one vote” policy has been upheld by Hong
Kong up to now. This incident demonstrates that Hong Kong has adopted this
policy due to historical and political reasons.
Therefore, the HKEx in its consultation conclusions recommends measures
against ring-fencing and only eligible persons are allowed to hold DCS. Firstly, only
new applicants will be able to list with a DCS structure.205 HKEx will put in place a
general anti-avoidance rule to protect shareholders from companies attempting to use
artificial means to circumvent this restriction. Secondly, after listing, issuers with
such DCS will be prohibited from increasing the proportion of weighted voting rights
in issue or issue any further such shares. In relation to beneficiaries of DCS, it
proposes to restrict such shares to those who are (and remain as) directors of the
issuer.206 More importantly, these shares attached to a beneficiary’s shares will lapse
permanently if the beneficiary: (i). ceases to be a director; (ii). dies or incapacitated;
or (iii). if the shares are transferred to another person. Accordingly, this is to ensure
that only persons who are responsible for the issuer’s performance and who owe
fiduciary duties to the issuer are able to benefit from such share structure.207
One issue that was hotly debated during the consultation is whether DCS should
be allowed to exist indefinitely for these companies. Some respondents expressed
that sunset clauses should be incorporated into the DCS structure design when a

204
“Review of rules takes time, Alibaba just can’t wait”, Sing Tao Daily, 18 March 2014.
205
Above n. 12, at 50.
206
Above n. 12, at 50.
207
Ibid.
43
company launches its IPO.208 These clauses define the situations under which the
superior-voting rights of the superior-voting shares will terminate and the shares will
then resume to having one vote per share. These situations normally occur when the
rationales for the DCS no longer exist. For instance, as mentioned DCS structure is
commonly adopted by a founder-manager to preserve control of his/her company
against the short-termism of stock market and the possibility of hostile takeovers by
opportunistic acquirers when the company is still at its early stage of development
with unstable operating performance. After the company has been listed for some
years, its operations should become more stable and capable to deal with investors’
expectation and potential hostile takeovers. Therefore, the superior-voting rights of
the superior-voting shares should be terminated after the company has been listed for
certain period, say ten years. The superior-voting rights should also be tied to the
continued engagement of the holder in a senior executive position in the company.
In other words, if any of these superior-voting shareholders step down from the senior
management of the company, their shares will lose their superior-voting rights.
Yet the HKEx eventually decided that a time-defined sunset clause could make
Hong Kong less competitive vis-à-vis other markets, such as the US, where there is no
such requirement. 209 Therefore, as a compromise, it recommended imposing
measures against ring-fencing and only eligible persons allowed to hold such shares.
Further, like its Singaporean counterpart, in order to mitigate expropriation and
entrenchment risks, the HKEx would also require the voting power of dual-class
shares not to exceed more than ten times of the voting power of ordinary shares and
ordinary shareholders must hold at least 10% of the votes. Also, material changes to
constitutional documents and variation of class rights must be decided on a one share,
one vote basis.210 In terms of disclosure, companies with such share structure will be
required to be identified with unique stock code and appropriate warning language,

208
Ibid. at 52
209
Ibid.
210
Ibid. at 51.
44
rationale and associated risks to be disclosed in its listing documents211.
In order to further enhance investor protection, the HKEx would also initially
limit applicants permitted to list with such share structures to those companies that
have an expected market capitalization of not less than HK$10 billion. The rationale
is to limit applicants to established and high profile companies that are already subject
to some degree of public scrutiny. It also ensures that the economic interest in the
company held by beneficiaries of dual-class shares will be large enough to align their
interests with those of other shareholders. If an applicant with such share structure
has an expected market capitalization of less than HK$40 billion, the exchange will
also require the applicant to have at least HK$1 billion of revenue in its most recent
audited financial year.212
One may argue that evaluating eligibility of applicants on the basis of revenue or
market capitalization by the HKEx is perhaps too conservative because the growth
potential of many technology companies are assessed by intangible values such as
concepts or ideas. However, such cautious approach by the HKEx is consistent with
Hong Kong’s regulatory philosophy which adopts a more ex-ante and hands-on,
paternalistic approach to preventing disaster from occurring in the first place by
imposing more stringent IPO requirements and full vetting of all issuers’ public
disclosures, as opposed to ex-post sanctions adopted in markets such as the US.213
Hence there is a greater expectation in Hong Kong from the investment community
that the regulator will be more cautious in protecting their interests.214
Another issue that was discussed extensively during the consultation is whether
mainland Chinese companies with DCS structure already primarily listed in the US
can be allowed to have a secondary listing in Hong Kong. As mentioned earlier,
many such companies such as Alibaba bypassed Hong Kong for the US due to the
permission by the latter to adopt such share structure. Some believe that the

211
Ibid.
212
Ibid. at 50.
213
Above n. 132, at 464.
214
Ibid.
45
proposal by the HKEx to reform its listing regime is also partly driven by its
motivation to lure these companies to list in Hong Kong.215 In response, the HKEx
has decided that “Non-Greater China Companies”216 and “Grandfathered Greater
China Companies”217 will be able to secondary list with their existing DCS structures
and not have to comply with many of the safeguards as mentioned earlier except for
the disclosure requirements.218 As the HKEx put it, this concessionary route to
secondary listing is intended to remove the “centre of gravity” test and allow such
companies to list in Hong Kong since they are likely to attract greater interest from
Hong Kong investors. From a competition perspective, the exchange even believe
that should these companies attract greater interest from Hong Kong investors, there
is a possibility that the majority of trading in their shares will at some point, migrate
from the company’s exchange of primary listing to Hong Kong.219
Perhaps one major challenge which the HKEx faces is how to precisely define
“new economy” companies as only such companies with DCS structure would be
allowed to list on its exchange.220 This is in line with the proposals of the concept
paper to attract more high growth companies from innovative sectors as they are
currently lacking in the Hong Kong market. The exchange acknowledges that it is
difficult to define such companies as there is no universal definition for them and such
definition can evolve over time. At present, the HKEx considers an innovative
company to possess more than one of the following characteristics:221 (i). success
demonstrated to be attributable to the application of new technologies, innovations
and/or business model to the company’s core business which serves to differentiate

215
E. Yiu, “Change the rules and they will come: Tech firms are knocking on Hong Kong’s doors to raise
capital”, South China Morning Post, 29 December 2017.
216
Defined as Greater China companies that are primarily listed on a qualifying exchange after the
publication of the HKEx’s consultation conclusions.
217
Defined as Greater China companies that are primarily listed on a qualifying exchange on or before
the publication of HKEx’s consultation conclusions.
218
Above n. 12, at 55.
219
Ibid. at 56.
220
Ibid. at 49.
221
Ibid. at 47.
46
the company from existing players; (ii). research and development is a significant
contributor of expected value and constitutes a major activity and expense; (iii).
success is demonstrated to be attributable to unique features or intellectual property
and (iv). has an outsized market capitalization or intangible asset value relative to its
tangible asset value.
HKEx proposes to publish a guidance letter on the characteristics of an
innovative company and the characteristics for an innovative company set out in the
guidance letter will be used in the determination of an issuer’s eligibility to list with a
DCS structure and for the secondary listing route.222

VII). Conclusion
“One share, one vote” is widely recognized as a bedrock principle of corporate
governance, ensuring that directors and managers are accountable to shareholders as a
whole. Controllers who own higher voting shares through a DCS structure will have
the incentive to seek disproportionate gains and abuse those investors holding lesser
voting shares. Yet DCS structure could enhance the value of certain types of
businesses, such as technology companies as founder-managers can direct their
businesses to focusing on long-term strategic aims without fears of the short-termism
of stock markets and the possibility of hostile takeovers by opportunistic acquirers.
One observation identified in the discussion of this paper is that unlike the US,
where DCS structures are allowed, Hong Kong lack the legal mechanisms such as
securities class actions that can serve as checks and balances to counter the
deficiencies of dual-class shares. Yet it is argued here that by implementing some
safeguards and restrictions such companies can be allowed to list on its financial
market and simultaneously strengthen its competitiveness as a major IPO centre.
As financial centres face fierce external competition for businesses and
investments, regulators certainly have the responsibility to frequently review
regulations to ensure they are business-friendly. The main reason why Hong Kong

222
Ibid. at 47-48.
47
 has been the world’s leading IPO centre for the past few years is that almost 80% of
funds raised in Hong Kong were by companies from mainland China. These
companies also constitute 64% of the total market capitalization. But over the next
five to ten years, China’s reform program, such as deregulation, market liberalization
and enhancement of the rule of law, may reduce its need to rely on Hong Kong. In
2017, both the Shanghai and Shenzhen stock exchanges were ranked in the top two in
terms of number of IPOs completed and Hong Kong came third. 223 Also, its
arch-rival in the region, Singapore, has also recently announced to allow companies
with dual-class shares to list on its exchange, competition for IPOs is likely to become
more intense. Hong Kong must therefore reform its listing regime and make its
market more flexible in order to cater for different companies. At the time of
writing, the HKEx has announced that companies seeking to list dual-class shares
may be allowed to apply for listing by June 2018.224
There are, to be sure, concerns that by allowing DCS companies to list in Hong
Kong may undermine investors’ protection and lead to “race to the bottom” regulation
as each financial centre competes to attract companies by relaxing listing
requirements.225 However, it is important not to jump to conclusions about the
temptation of markets to compete with each other. For example, studies conducted
in the US indicate that the share price tends to be higher for Delaware corporations
than for corporations of other states, suggesting that shareholders view the lax
Delaware rules as better than those of other states.226 It is therefore confidently
submitted here that due to commercial considerations, the HKEx is correct to adopt
safeguards and restrictions to protect investors so as to enable companies with DCS
structure to list on its exchange despite legal and institutional shortcomings.

223
G. Lee, “Shanghai and Shenzhen stock exchanges continue to chip away at Hong Kong’s IPO
attractiveness”, South China Morning Post, 27 December 2017.
224
E. Yiu, “Companies seeking to list dual-class chares may get green light to apply for Hong Kong
listing by end June”, South China Morning Post, 16 January 2018.
225
R. Boxwell, “Dual-class share structures would be ill-advised in Hong Kong”, South China Morning
Post, 25 October 2016.
226
Mark J. Roe, “Delaware’s Competition”, Harvard Law Review, 2003, CXVII, 588.
48

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