Alibaba faces bumpy road in US flotation after abandoning Hong Kong offering
Mainland e-commerce giant may meet similar problems with structure in the United States, lawyers say
George Chen and Ray Chan
The United States will not be an easy option for the potential US$15 billion listing of Alibaba, which has been stuck in a war of words with the Hong Kong stock exchange and regulator over its listing plan.
Government and financial industry sources familiar with the situation told the South China Morning Post that the e-commerce giant would face similar problems regarding its shareholding structure as it did with Hong Kong authorities if it decided to list on the New York Stock Exchange or its smaller rival Nasdaq.
Unlike the stock markets in the US, Hong Kong's listing policy does not allow companies to issue two classes of shares. What Alibaba has been seeking goes even beyond dual class - an arrangement that would help founder Jack Ma Yun and his management team retain control of the company.
In the partnership structure that Alibaba has been pushing for, the average shareholder would be even more disadvantaged than the dual-class listing model the US permits, and this is why it would encounter the same resistance there as well, lawyers say.
In the system allowed in the US, equity shareholders have the power to nominate or dispose of directors. Under Alibaba's preferred structure, they would not enjoy these rights, leaving them with no effective monitoring role, said lawyers specialising in initial public offerings.
The dual-class voting structure is common in the US markets as many technology firms, including Facebook and Google, adopted it to go public. It allowed the senior management, including the founders, of Facebook and Google to retain control of the companies even as they tapped the market for funds.
Also, if Alibaba wants to restructure the company's current partnership model into a dual-class voting model, it will take a long time to go through the internal processes and garner the approval of its existing shareholders. Besides, the partnership Ma prefers is not common for a company of Alibaba's size seeking a listing in the US, say lawyers.
"Hong Kong regulators want absolute transparency in disclosure as well as suitability for listing, which includes corporate governance, while the Securities and Exchange Commission [of the US] is not a prudential regulator and focuses on whether a company's disclosure includes all information that investors would regard as material to their investment decision, including whether the company meets the corporate governance standards of the relevant stock exchange," said Steven Winegar, a Hong Kong-based partner at law firm Paul Hastings.
Both the Securities and Futures Commission and the Hong Kong stock exchange operator have made it clear to Alibaba that there is no room for exemption for any company as listing rules do not allow preferential treatment of one set of shareholders over another. Alibaba may find itself similarly hamstrung in persuading the US regulators, given its history of a public spat with Yahoo over a secret transfer of Alipay's ownership to Jack Ma's private company.
Alibaba has more than 20 partners, including Ma, his co-founders and other senior executives. Ma and the management team own a combined 10.4 per cent stake in Alibaba. Japan's SoftBank and US internet giant Yahoo, which together own more than 60 per cent, are not included in the partnership structure that was established internally in 2009. SoftBank and Yahoo have both said they support Alibaba's partnership structure.
Ma's problems with a US listing for Alibaba goes beyond the partnership structure. The bigger concern would be rebuilding his credibility on Wall Street after a 2011 dispute with Yahoo, one of Alibaba's early investors and major shareholders, on secretly transferring one of the most valuable assets of the group to a third party.
Ma shocked Wall Street in May 2011 when investors realised he had transferred Alipay, a leading online payment system created and owned by Alibaba, to a private company held by Ma outside the group. Yahoo was outraged and some US fund managers even threatened to sue Ma in the US. Yahoo and Alibaba later resolved their differences.
The case, which came to be commonly known as the "VIE problem" on Wall Street - referring to an investment vehicle called a "variable interest entity" that allows mainland firms to access capital from foreign investors through offshore platforms rather than through their mainland entities to avoid China's tight and complicated foreign exchange controls.
The incident triggered a round of sell-offs in US-listed mainland firms, including Sina.com China's No2 web portal, as US investors became suspicious of mainland companies imitating the Alibaba case.
"It is still permissible for Chinese companies to list with VIEs in their corporate structure, but investors are mindful of Yahoo's months-long battle over the ownership of Alipay," Winegar said.
In a Xinhua piece in 2009, Ma said: "Let all Wall Street investors scold us. We insist that clients are No1, employees are No2 and shareholders should be No3."
Asked about Ma's 2009 comments, an Alibaba spokesman told the Post: "Shareholders are important and we respect them, but they come at No3 because they are the beneficiaries of doing No1 and No2 right."
Alibaba declined to elaborate on its persistance in a partnership structure.