Ma's grip on Alibaba all in the name of preserving its founders' culture
The complex governance structure rejected by Hong Kong regulators not only gives Alibaba partners control, but also has zero chance of changing
As Alibaba drums up its initial public offering in the US, there will be increasing expressions of regret about Hong Kong giving up the big cake in return for upholding its "one share, one vote" principle.
It is indeed big. Despite a slowdown in its growth, the e-commerce giant's valuation is still estimated at US$200 billion.
While some are gritting their teeth, the big question to ask is what would Hong Kong have had to sacrifice to keep Alibaba's IPO here.
Judging from the corporate structure detailed in its filing made to the US regulators, the sacrifice would have been too big to bear.
It is a governance structure that will not only give Jack Ma Yun and the 26 Alibaba partners control over the board but also one that has zero chance of changing unless their stake drops below 5 per cent.
To Ma, it means being able to cash in 40 per cent of his 8.9 per cent holding if needed without compromising his control.
This is how it's structured.
The company's article of association states that the Alibaba Partnership, which holds 13.9 per cent, will nominate a simple majority of directors for shareholders to vote on.
It will be a sure win because both SoftBank and Yahoo - holding 34.4 per cent and 22.5 per cent respectively - have agreed to vote along the same lines as the partners.
Of course there is a good chance that SoftBank and Yahoo will eventually sell down. Their relationship with Ma has been far from cordial ever since 2011 when Ma pocketed Alipay - a payment service processor - from Alibaba behind their backs.
Yet, Ma has no need to worry. In case of a change in control of the company and the new shareholders rejecting directors nominated by the partnership, the partners will simply install some interim directors until the next annual shareholders' meeting. So on and so forth. This arrangement will not be changed unless 95 per cent of the shareholders agree to do so.
It is not about control by Ma, Alibaba said, rather to preserve the culture shaped by the founders.
Unlike dual-class ownership structures that employ a high-vote class of shares to concentrate control in the hands of a few founders, the company said this approach is designed to embody the vision of a large group of management partners.
To be fair, Ma is not dominating, at least on paper. Various hurdles are put in place to give the partnership arrangement a rule-by-majority look.
For example, the partners decide their director nominations by a simple majority vote. It even specifies that the partners can kick Ma and chief executive Joe Tsai out of the partnership with a simple majority vote.
The reality is, however, more complicated.
A partnership committee, comprising Ma, Tsai and three executives, decides three important things. One, who qualifies as partners. Two, who is to be nominated as director. Three, it makes recommendations to independent directors on each executive partner's share of cash rewards.
While no one will be stupid enough to go against him, Ma and the incumbent committee members can seek re-election for an unspecified time.
By the way, Ma and Tsai have also been exempted from retiring from the partnership, even when they are no longer employees.
Given his firm control, it is therefore not surprising that Ma sees no need to get a first right of refusal from SoftBank and Yahoo in any future sell down.
Alibaba conceded that "this governance structure and contractual arrangement will limit shareholders' ability to influence corporate matters, including any matters determined at the board level".
Faith is the key. No wonder Alibaba compares its partners to "evangelists" in preaching its "mission, vision and values, both within our organisation and externally to customers, business partners and other participants in our ecosystem".
This is perhaps why Alibaba has been able to provide scant details on certain crucial matters.
There is the mystery over who owns the remaining 20 per cent of Alibaba and whether they are selling.
In 2012, Alibaba announced the issue of new shares to some investors. Among them were the country's sovereign wealth fund and Boyu Investment, a private equity firm set up by the grandson of former Chinese president Jiang Zemin. No specifics have ever been given.
Then, there is the uncertainty over how exactly Ma is going to ensure the company's interest in various related-party transactions with him. Among them is Alipay, which provides payment services to Alibaba.
In a written commitment, Ma said he "intends" to reduce his economic interest in Alipay over time to a percentage that does not exceed his ownership in Alibaba. He also promised that he would make no economic gain from that.
Just how reassuring is this expression of intent?