Alibaba's plan to stuff board hardly in investors' interests
Alarm bells should be ringing for regulators over management's bid to secure the advantages of a public listing without ceding some control
For the founders of successful companies, going public with a stock exchange listing is often a deeply traumatic experience.
From being the absolute masters of their creation, suddenly they are no longer fully in charge. Instead, they are set about with inconvenient rules and badgered by investment bankers, lawyers and accountants, all telling them what to do.
Worst of all, they find they now have to deal with a host of small shareholders; an awkward bunch who clearly don't appreciate how privileged they are to be allowed to invest in the founders' company, and who might even think they are entitled to a say in how the business is run.
Many bosses deeply resent the imposition, and even though they want the advantages of a public listing, they try to retain as much control over their company as they possibly can.
For example, when Google went public in 2004, it did so with two classes of shares; a device which allowed the management to keep control of 60 per cent of the company's voting power.
The founders of Alibaba, the privately held mainland internet retail giant planning an estimated HK$100 billion offering on the Hong Kong stock exchange, would like to do something similar.
Alibaba is being pushed to go public by its investors, a line-up of private equity and sovereign wealth funds who want a more liquid investment.
But the company's bosses don't want to surrender their control.
They argue that in order to preserve Alibaba's culture and to ensure they can focus on long-term business development, they need to protect the company from unwanted interference from shareholders.
Unfortunately for Alibaba founder Jack Ma Yun and his colleagues, Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia won't allow any offerings with dual share class structures. He made that clear two years ago, when he rejected Manchester United's listing proposal as against minority shareholders' interests.
In response, Alibaba has come up with a different plan. Instead of asking for two share classes, Alibaba's management team, which collectively owns 10 per cent of the company's shares, wants to retain the exclusive right to nominate the majority of the directors.
This, they say, will allow the company to pursue long-term opportunities free from unreasonable demands to boost short-term profitability, while still allowing shareholders to approve appointments and police connected party transactions.
This is hardly the first time a company's bosses have attempted to stuff their board with compliant directors, despite controlling only a relatively small shareholding.
For example, the Hong Kong government owns less than 6 per cent of HKEx, but it still awards itself the right to appoint six of the exchange's board members, not including its chief executive.
Precedents aside, for Alibaba's management to demand the right to determine the composition of the company's board following its listing doesn't look great.
The only reason the management team could possibly want to retain exclusive command of a majority of board nominations is because it is anticipating future conflicts with minority shareholders.
From a small investor's point of view, that is hardly an encouraging stance. Worse, Alibaba has previous form. In 2007 at the height of Hong Kong's stock bubble, the company launched a HK$13 billion listing for its wholesale business, Alibaba.com
In a frenzied first day trading, the shares soared to almost three times their issue price. Within a month, however, they topped out, before going into a protracted decline.
In 2012, after a corruption scandal and with trading volumes flagging, Alibaba took its listed subsidiary private again, paying just HK$13.50 a share - the same as the original issue price five years before.
Given the company's record, both the Hong Kong stock exchange and the local regulators should now think long and hard about whether Alibaba's proposal is really in the interests of ordinary shareholders, and whether they want to set a precedent by acceding to Alibaba's proposal.
The point about equity investment is that it is meant to be equitable. At the moment, however, it looks very much as if Alibaba's management wants all the advantages of a public listing without surrendering any of its control over the company.