Alibaba's new proposal may still hurt shareholders
The mainland e-commerce giant is seeking a majority say on future board nominations
Mainland e-commerce giant Alibaba Group's latest proposal to cement founder Jack Ma Yun's control of management after a possible listing in the city might be more acceptable to objectors than a dual shareholding structure. But it is not a perfect solution.
Senior sources at the stock market regulators - the Securities and Futures Commission and Hong Kong Exchanges and Clearing - have told White Collar categorically that they would reject any application for a dual share structure to allow Ma and Alibaba's management to keep control of the company after a listing.
It is a logical position. Allowing it would go against similar requests from Jardine Matheson in the 1990s and the application last year from English football club Manchester United. Dual share structures, permitted in the US but not Hong Kong, give some shareholders more voting rights than the others.
Regulatory sources said they would not consider a dual-shareholding structure because many investors did not like it.
"One share, one vote", is what fund managers and investors say is fair and equal in Hong Kong, as do the regulators.
Sources at Alibaba say that this line of argument is spurious because the firm is not asking for a dual class structure.
What it wants is to be allowed a partnership structure in which senior management would have the power to nominate a simple majority of the board members and then have shareholders vote on those nominations.
Ma and the management team own a combined 10.4 per cent stake in Alibaba, while Japan's Softbank and US internet giant Yahoo own more than 60 per cent.
Sources at Alibaba and bankers close to it portray this as merely a waiver under an existing provision of listing rule 8.11 which states: "The share capital of a new applicant must not include shares of which the proposed voting power does not bear a reasonable relationship to the equity interest of such shares when fully paid."
It lists two exceptions - one in exceptional circumstances agreed by the exchange, and another when listed companies already have dual shares listed.
The Alibaba argument goes that if the exemption to the rule wasn't intended to be used, it wouldn't have been created.
Some might say that is a little like saying rules are there to be broken - or exempted if they don't suit you.
Putting that point to one side, this supposed compromise would still have the net effect of reducing the number of candidates that could be nominated as board directors by the firm's major shareholders.
That worries regulators who fear their decision could be blamed in any future dispute between Alibaba management and shareholders.
They remain concerned about any proposal that may ultimately amount to giving one group of shareholders more rights than others.
Regulators must consider this carefully.