(Bloomberg) -- Whatever you think Xiaomiย Corp. might beย worth,ย it's probably less.
The Chinese smartphone maker is set to be the first prospective listing to take advantage of looser Hong Kong rules thatย allow dual-class stocks. With a valuation anywhere between $60 billion to $100 billion, it's also on course to be the world's biggest float since Alibaba Group Holding Ltd.
But with that kind of shareholdingย structure, investors should go in with their eyes wide open. Essentially, it's one that gives Chairman and CEO Lei Jun and his co-founders majority control, leaving little say for minorities.
Lei andย Xiaomi's President Lin Bin will hold Class A shares that carry 10 votes each. Class B stock, the sort allotted to ordinary shareholders, will have one vote. So Lei, with 31.4 percent of Xiaomi, and Lin, with 13.3 percent, will have a lot more control than their combined interest suggests.
That power doesn't stop with the shares. Xiaomi's prospectus states that any meeting of directors โshall have no less than two directors, one of which shall be the company's founder, Lei Jun (or his duly appointed alternative director),โ meaning a meeting of just Lei and Lin would makeย a quorum.
Lei could turn out to be the executive who cements Xiaomi's future success, or the genius who needs to be shielded from analysts and their short-term financial projections.
Would-be investors also need to consider whether Xiaomi is more than a hardware company with razor-thin margins, orย whether toย avoid it altogether because its IPO may be a flop, a la Good Doctor.
Firms with dual-class share structures in the U.S. tend to trade at a discount over the longer term.
Google owner Alphabet Inc. paid existing shareholders compensation when it rolled out shares with weighted voting rights,ย while Facebook Inc., whose CEO Mark Zuckerbergย has less than 1 percent of the stock but 60 percent of the voting power, backed down from selling shares with no sayย after investors revolted. Zuckerberg's extraordinaryย control has raised red flags after it emerged the social media giant had allowed an outside party to collect users' data on a grandย scale.
While Hong Kong does have some safeguards to protect minority shareholders, the most effectiveย of them all โย class action lawsuits โย aren't possible in the city's legal system.
In some respects, investors in Hong Kongย should be no stranger to a handful of interests having a tight grip over large swathes of the market. Family-owned companies are common, as are Chinese state-controlled firms. There's a greater chance of Xiaomiย going bustย than, say, a train maker with Beijing's implicit backing.
The buyer beware argument is often trotted out by proponents of the dual-class system, but that worked better at a time when passive and index funds didn't dominate global flows. And whileย activists are starting to descend on the region, it's early days.
Safe to say, Xiaomi's mega-IPO won't be winning many corporate governance fans any time soon.
Buyers should indeed beware: of a backward step for governance, of key-person risk, and of stretched valuations.
To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.
Only โinnovativeโ companies (a description that's open to interpretation) can take advantage of multiple-share structures, and listing candidates should have a minimum market value of HK$10 billion billion), plus, at most, one share can be worth voting rights.
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