Alibaba’s announcement in March that is planning an initial public offering (IPO) on Wall Street is more bad news for the Hong Kong Stock Exchange (HKSE), the world’s leading IPO market between 2009 and 2011. The Chinese online retailer’s choice of New York for its public offering is understood to stem from Hong Kong’s reluctance to allow a corporate structure that would give Alibaba’s management different shareholder rights to public shareholders. New York is also believed to offer greater liquidity and investor appetite in the current climate, particularly for technology companies.
Greg Puff, corporate partner and head of Akin Gump’s Hong Kong office and Asia practice, believes that the Hong Kong exchange may have to consider altering its listing rules so that it can continue to compete with the world’s leading capital markets. ‘I’m sure the HKSE is disappointed about the decision to take the listing to the US, but the exchange is strong, and has many candidates for listing', he states. 'I don’t see any lasting damage to the HKSE from this, although I’m sure it will continue to closely examine whether any of its listing rules should be modified to modernise its listing regime.’
In 2011, Hong Kong’s Hutchison Port Holdings Trust listed in Singapore, because Hong Kong did not allow the listing of business trusts. This prompted the Hong Kong authorities to adjust the regulations so that business trusts could be listed, and later in the year the HKT Trust IPO hit the market.
Unlike the HKSE, the US capital markets are more open to the types of corporate structures favoured by Chinese companies. Many Chinese companies like Alibaba are reluctant to cede too much influence and control to public shareholders. Reports indicate that Alibaba’s management, including founder Jack Ma, is eager to preserve its right to appoint the majority of board members.
‘I don’t see any lasting damage to the HKSE from this, although I’m sure it will continue to closely examine whether any of its listing rules should be modified to modernise its listing regime’
Greg Puff, corporate partner and head of Akin Gump’s Hong Kong office and Asia practice
Caroline Berube, managing partner of China-based firm HJM Asia Law & Co and Senior Vice-Chair of the IBA Asia Pacific Regional Forum, says there is a clear conflict between Hong Kong’s stock regulations and the proposed ‘partnership policy’ of Alibaba. Valerie Ong, a corporate partner at Singaporean firm Rodyk & Davidson, believes that this impasse could create tension for a number of Asian corporate issuers. She believes many will look to Wall Street to satisfy their desire to retain a high level of control over a listed company: ‘Some bourses are reticent to list companies with different rights for the public shareholders', she states, 'but the US has been open to different types of share structures. There is a school of thought that promotes freedom to structure the share capital that makes sense for the founders and for investors, so that everybody wins. That view would allow founder shareholders to retain superior voting or controlling rights, so long as the structure allows investors to ride on the company’s growth and delivers great returns to them.’
Beyond any regulatory and corporate governance concerns, Alibaba will no doubt be attracted by New York’s current liquidity and investor enthusiasm, particularly for tech stocks. Chinese electronic commerce company JD.com is also lining up a public offering on Wall Street later this year.
‘For high tech companies especially, Nasdaq was always the natural place to go to irrespective[of whether] the company was from China, Singapore or elsewhere. It allows the company to tap the global market,’ Ong remarks. ‘The companies that seek fast growth often give the US the first shot when it comes to a listing.’
The current Wall Street fervour amongst Chinese corporate issuers represents something of a turnaround. In recent years a series of Chinese companies have de-listed themselves from the US capital markets and have been taken private. Poor stock performance and the increasing influence of short sellers had caused them to turn away from New York. Puff believes that the current cohort of Chinese companies looking to raise capital in the US will not be deterred by the fact that so many have recently gone in the other direction: ‘Many companies being taken private had been in the US for some time, or had listed there when there were a large number of similar companies listing. They also had experience in raising additional capital, and finally were affected by overall market sentiment regarding Chinese companies. On the other hand, companies such as Alibaba are listing at a different time when sentiment might have changed.’
Alibaba is expected to raise some $15bn through its IPO, a similar figure to the $16bn that Facebook managed in 2012. The high-value offering could give the company a net worth that would place it amongst an elite grouping of US-listed companies, such as Wal-Mart and IBM.