By Liz Hoffman and Telis Demos
Looser corporate-governance standards are luring foreign companies to US markets, a development causing concern among some large investors.
Overseas companies like Chinese e-commerce giant Alibaba Group Holding have recently opted to list their shares in New York rather than in their home markets or on other international exchanges, in part because the US in some respects is more lenient, people familiar with the matter say.
Unlike venues in London and Hong Kong, their main rivals in the race for global listings, the New York Stock Exchange and the Nasdaq Stock Market allow corporate insiders who collectively own less than half their companies’ stock to exercise control through dual-share structures and other means. In addition, many foreign companies are exempted from some of the disclosure requirements imposed on US Corps.
“If you’re looking to do dual-class, the US is where you can do that,” said Alex Cohen, a former Securities and Exchange Commission official who is now a partner at law firm Latham & Watkins. “That’s certainly a draw for some companies.”
So far this year, at least 15 foreign companies have filed papers in preparation for initial public offerings in the US, according to a search of securities filings, with most likely to trade on Nasdaq or the NYSE. That puts 2014 on track to be the busiest year for such filings since at least 1996-though the increase in activity comes amid a broader pickup in IPOs, with firms listing at the fastest rate in years.
The US exchanges are eager to land foreign listings because of the fees and prestige they bring, and to bolster the ranks of traded companies, which have slumped in recent years. The total number of firms listed on the NYSE or Nasdaq fell by 38% between 1997 and 2013, to 5,008, according to the World Federation of Exchanges.
The two US exchanges allow insiders to exercise control through mechanisms such as separate classes of shares that carry extra votes. These setups are just one of a number of governance provisions allowed in the US that are effectively forbidden on foreign stock exchanges including Hong Kong’s, where the people familiar with the matter say Alibaba had considered listing. And, unlike many Asian exchanges, those in the US don’t insist companies be profitable when they go public. The US markets are desirable for other reasons, too, including deep pools of investor cash.
“We have markets with a high degree of compliance, transparency, and great liquidity,” said Ed Knight, general counsel and chief regulatory officer of Nasdaq OMX Group. “That is the value proposition we put before companies.”
Representatives for NYSE, which is owned by IntercontinentalExchange Group, and the SEC, which oversees the exchanges, declined to comment.
Alibaba won’t have a dual-class share structure. Still, a small group of company insiders who collectively own less than 50% of the company will retain the right to nominate a majority of board members once the firm goes public, according to the people familiar with the matter. Other Chinese companies are bringing dual-class setups to New York. Weibo Corp, China’s version of Twitter, and Alibaba rival JD.com have both filed for US IPOs this year and plan to issue so-called supervoting stock for certain shareholders, according to regulatory filings.
Indeed, at all but one of the nine Chinese companies that went public in the US last year, insiders have influence beyond their economic stakes, according to a recent study by law firm Ropes & Gray.
But many US investors oppose these setups, which they say make it harder for shareholders to hold boards accountable.
“These structures just are not in the interests of public investors,” said Michael McCauley of the Florida State Board of Administration, which manages about $87bn in stocks. “It’s a race to the bottom.”
The Council of Institutional Investors, a trade group whose members oversee some $3tn in assets, has pressured Nasdaq and the NYSE in recent years to stop allowing dual-class structures. And the California Public Employees’ Retirement System, the country’s biggest state pension fund, with $285bn in assets, has said it is considering boycotting IPOs that don’t give equal voting rights to all shareholders.
Investor demand for shares of fast-growing companies, particularly in the tech sector, has emboldened their founders, says Paul W Boltz Jr, a Ropes & Gray lawyer in Hong Kong. “With the resurgence of interest among investors in Chinese tech companies, management are willing to push the envelope on governance,” he says.
The ability to exert outsize influence is prized by many corporate insiders, in part because it helps them fend off hostile takeovers and activist investors. Historically, dual-class structures have been used by family-owned companies like Ford Motor Co and News Corp, which owns The Wall Street Journal. Such arrangements can help family owners maintain control as they bring in new shareholders. In recent years, dual-class structures have become popular among startup tech companies such as Facebook.
Representatives for Ford, News Corp and Facebook declined to comment.
The exchanges’ differing standards are in part rooted in differences between investor bases in the US and in other countries, lawyers say: The US requires companies to be transparent about their business and governance models but leaves the final investment decision to shareholders, who are often sophisticated fund managers. In markets with a high proportion of individual investors, like Hong Kong, stock exchanges have taken a more activist approach to governance, lawyers say.
In an extra sweetener, some foreign companies are allowed to forgo certain requirements that apply to US companies. Firms that qualify for the so-called “foreign private issuer” exemption can, for example, file earnings statements twice a year rather than quarterly, which can cut compliance costs and smooth out destabilizing swings in their stock prices. They also don’t have to report when their executives buy or sell stock, as public US companies do.
Weibo and JD.com have said they will qualify as foreign-private issuers, as will King Digital Entertainment PLC, the Anglo-Swedish maker of the “Candy Crush Saga” videogame, a firm set to go public in late March. These companies will still have to comply with many US disclosure and other rules, including provisions adopted after the Enron and WorldCom scandals of the early 2000s.
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