Xiaomi Converts Its 5.6 Million Class A Share into Class B Share
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Xiaomi Converts Around 5.6 Million Class A Share into Class B Share. PHOTO: Credit to HKEX

Xiaomi Corporation (Xiaomi, stock code: 1810) submitted Next Day Disclosure Return on 1 February 2019, saying, 5,591,700 Class A ordinary shares will be converted into the same amount of class B share. The conversion ratio is 1:1.

In this disclosure document, it states that Xiaomi has 23,901,146,847 shares (comprising 6,695,187,720 class A ordinary shares and 17,205,959,127 class B ordinary shares) the closing balance as of 31 January 2019.

As it can be calculated that 28% of its shares are Class A shares while the other 72% are Class B Shares.

The number of Class A share will be converted constitutes 0.02% and 0.08% of the total current total share and total Class A share issued. 

Who will convert their own Class A share into Class B share?

To answer this question, we first need to answer why shares are divided into different classes and who would typically own class A and class B shares.

One common reason is to seize voting power within a certain group of shareholders. Most of the time, the founders or founding team would like to hold more voting power per share in order to have better controls over the company. Usually Class A share comes with more voting rights than Class B shares, for example, one Xiaomi Class A class has ten voting rights per share held while one Class B only represent one voting right.

This dual-class structure is widely used in internet companies or startups, founders only have access to limited financial resources which means they need finance several rounds and the ownership will typically be diluted. Diluted ownership could possibly lead founders to lose control over the firm and firms pushed by investors to pursuing short term goals in terms of long term ones.

In addition, the only two people hold Xiaomi’s Class A share who are LEI Jun, the founder, and CEO of Xiaomi, and LIN Bin, the co-founder and president of Xiaomi. All the other shareholders hold Class B shares.

What will happen after the conversion?

Since the number of Class A shares constitutes only a small proportion of the total share or total shares, LEI and LIN will still have control over Xiaomi. Therefore, rarely a real substantial difference will be made.

However, this might be a signal to the existing or potential investors that Xiaomi would like to hear more voices from them as it reduces its owned shares with voting rights.

Previously, investors typically hold a negative attitude towards dual class shares as their influences are restricted. Other than investors, security exchanges and index compilers around the world generally hold a doubtful attitude on dual-class structure.

For now, security exchanges in mainland China do not allow dual-class shares to be listed. Companies insisted this structure would have to choose to be listed overseas such as the US or Hong Kong. For example, Alibaba firstly decided to go public on the Hong Kong stock exchange; however, dual-class was not allowed at that time then it finally went public in the US under a dual-class structure.

Overall, there is only a few stock exchanges that allow dual-class share listing. Hong Kong stock exchanges approved it in April, 2018.

As EqualOcean covered earlier, investor pressured index compliers not to include dual-class in their track lists as a protest against reduced influenced given to the investors.

More on this disclosure document

On this disclosure document, it also mentions that 12,444,600 class B ordinary shares will be exercised as options by employees (other than directors), according to the pre-IPO employee stock incentive scheme.

The number of employee options takes about 0.052% of the total shares issued before. The weighted average issue price HKD 0.1798 (USD 0.023) per share.

Closing market price per share of the immediately preceding business day is at HKD 9.84 (USD 1.25) at a 98.17% discount.

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