The topic of Weighted Voting Right structures (“WVR”), which give certain persons voting power or other related rights which are disproportionate to their shareholdings, has sparked lots of discussion and debate in Hong Kong since the release of a Concept Paper published by HKEx in August 2014 and the listing of Alibaba Group on New York Stock Exchange October the same year. On 30 April 2018, the HKEx started accepting listing applications from issuers with WVR Structures (link). Will Xiaomi or WeLab be the first issuer?
No doubt, the HKEx and regulators will be eager to ensure appropriate regulations and guidelines are in place to protect non-WVR shareholders’ rights to vote, and enhance corporate governance and disclosure. But the potential changes create an interesting, yet challenging, proposition from a valuations perspective: How does WVR structure or a similar situation affect the value of a shareholding? In many of our business valuation assignments, it is necessary to consider adjustments to reflect the potential impacts of factors such as “key man” risks, lack of marketability of family-owned businesses, the likelihood of new / minority investors being “locked out” of business decisions determined by the existing management, pre-emptive rights of certain shareholders, and restrictions on sale of shares, etc. Such factors are generally presented in a negative light, however the listing of WVR structures are often presented as “Premium Listings”.
It is not surprising to see studies support the view that the controlling right adds value. In other words, shares with superior voting rights are more valuable than shares with ordinary voting rights. But the question is how much valuable? Professional eyes and skills are needed to conduct thorough industry research, detailed financial analysis and risk assessment, like all other business valuations.
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