The foregoing discussion focuses on circumstances where conflicted shareholders are not allowed to vote in order to protect other minority shareholders. In contrast, that WVR structures allow certain shareholders to have more votes than others is a different factual matrix. In both cases the fundamental issue remains the same, namely, whether altered voting rights should be allowed in view of concerns about minority shareholder protection. As mentioned above, Hong Kong, UK and Mainland China (and presently Singapore) do not allow companies with a WVR structure to be listed in their Exchanges on the basis that such a structure is against the OSOV principle. However, since the rejection of Alibaba's application for listing in Hong Kong, HKEX has been actively seeking views on the relaxation of the restriction, first in its two papers on WVR in 2014 and 2015, and more recently in its paper on a new board which envisages the possibility of allowing companies with WVR structures to list.
Singapore appears to have decided as early as 2014 in favour of moving towards the direction of allowing WVR, however, there is some resistance to the proposal, predictably from among institutional investors such as fund managers.
The proportion of United States companies that employ dual-class structures has increased from 6.8 per cent of the Russell 3000 index two years ago to 8.9 per cent now. It has been suggested recently that the rise in hedge fund activism has led to an increased concentrated ownership by fortifying the incentives of entrepreneurs to retain control in order to insulate themselves from the market for corporate influence, and that recent evidence shows that there is a general upward trend in the adoption of dual-class stock, and this structure is becoming «the current flavor.» This is not dissimilar to the context in the mid 1980s when companies were seeking to make themselves takeover proof and commercial pressure from General Motors led to WVR being accepted on the NYSE, despite efforts of the SEC to prevent it. However, as a result of the market's distaste for Snap's dual class listing which was regarded as "frankly an insulting display of indifference and greed, even for Wall Street,» as the ordinary shares do not carry any voting rights at all, the Standard & Poor's 500 Index has banned dual class companies from joining the index. This ban does not apply to existing companies such as Facebook, Alphabet, Berkshire Hathaway etc., which are grandfathered in.
Discussion
In Hong Kong, one way of examining this issue is whether allowing companies with WVR structures to list on the SEHK would be a good thing for Hong Kong's development as a fund raising and international financial centre. While an important focus of the HKEX's push for WVR has been to compete against New York, markets also compete on a range of other issues, such as the transparency, efficiency and predictability of the listing process. They also compete on the costs and potential liability of being listed in a particular venue. Moreover, there are developmental objectives beyond competitiveness, and this includes the ability of a market to provide channels for raising capital to support the development of innovation and the real economy. If permitting WVR would facilitate small growth companies to innovate there is a case that the OSOV principle may not always need to be adhered to. However, because the CG systems in each of the jurisdictions studied are subject to very different political, commercial, social and philosophical influences, market development in its application is driven by different forces in each jurisdiction.
The main concern is that, in the absence of the OSOV principle, the founders who have control through WVR may more easily abuse their position and act for their own personal gain at the expense of the minority investors who do not have such voting powers. As mentioned earlier, the OSOV principle has in other instances been overridden by public regulation-based adjustments, e.g. conflicted shareholders being not allowed to vote. In the United States, where WVR is permitted, the same concern about a controlling shareholder abusing of the minority may instead be addressed by the application of fiduciary law in the courts (see Appendix III.7.3).
There is no clear evidence that WVR structures lead to poor corporate performance. The evidence from international literature shows that investors apply a discount to the ordinary shares to reflect the risk of private benefit extraction by controlling shareholders, but does not show that WVR structures lead to poor performance; on the contrary, empirical evidence shows that WVR structures are beneficial for small growth companies and provides incentives to controlling shareholders to innovate and grow the company. The issue is whether, if there is a market for such listed companies, should the exchange as a market facilitator and the industry regulator endeavor to allow such listings. There is nothing wrong in principle for the HKEX to propose allowing WVR companies to list. However, given that minority shareholder protection is a legitimate concern, the SEHK and SFC should work together to consider how minority shareholder protection could be fostered within a WVR listed issuer.
The United States has relied on fiduciary law, class action lawsuits and contingency fees as mechanisms that empower shareholders and enable them to seek redress in respect of misconduct by directors and controlling shareholders. However, the connection between WVR and class action rights is often misunderstood and overstated. While class action rights are available for matters involving individual rights such as «suits to compel the payment of a dividend, to protest the issuance of shares impermissibly diluting a shareholder's interest, to protect voting rights or to obtain inspection of corporate books», a breach by a director of fiduciary duty to the company is primarily a matter for a derivative action taken on behalf of the company. Most shareholder class action suits in the United States are brought in respect of either misrepresentation in financial documents or securities fraud under section 10(b) of the Exchange Act of 1934 and Rule 10b-5 (respectively accounting for 97% and 84% of all class action suits in 20 1 3) - they are not brought in respect of abuse of power, although it remains open to question to what extent disclosure breaches and fraud occur as a consequence of some form of abuse of power.
The topic of permitting companies with WVR structures to list in a public market is clearly a highly complex one that has deeply divided the market in Hong Kong as to its benefits and drawbacks. While allowing such companies to list would undoubtedly lead to growth in the total market capitalization of the SEHK, the question is really whether such growth will foster the underlying strategic objectives of Hong Kong's capital market over the long term. For the purposes of the present study, there is no clear evidence from the jurisdictions studied suggesting that WVR structures would promote good CG. Accordingly, no recommendation can be made in that regard.
Peeling away the ostensible considerations in the OSOV vs. WVR debate, there are really only two underlying issues: on the basis of what developmental objectives should the Hong Kong market be competing with other markets; and what mechanisms should the market employ to protect minority shareholders from the risk of abuse by a controlling shareholder? Although the first of these may seem not relevant to the CG debate, policy objectives may be implemented in ways that give rise to different types of CG issue, such as the risk of abuse mentioned above. On the premise that CG is important for Hong Kong as an international financial centre, the above two issues are in fact intimately connected. For example, if WVR structures are subsequently permitted in Hong Kong, it will be essential to consider the mechanisms that foster standards of good CG that are equivalent to or better than what is currently expected of Hong Kong listed issuers. As discussed in other sections of this Report, the effectiveness of different mechanisms impacts on shareholder protection, in particular the efficacy of enforcement and the real availability of remedies. While OSOV has undoubtedly stemmed abuse, there nevertheless remain many issues arising out of the predominance of controlling shareholders in the Hong Kong market.
The foregoing leads to Recommendation E4.9.3 «Market development».