Recently, Alibaba Group Holding Ltd. gave up its initial public offering (“IPO”) in Hong Kong Stock Exchange (“HKEx”) after the HKEx declined to amend its rules related to shareholder rights and board member nomination.
This IPO battle has led to questions for HKEx as to whether it needs to alter its listing rules; in addition, this battle has sparked much public debate as to the value of different corporate governance structures, such as the one proposed by Alibaba – namely, a partnership system, which allows members of senior management to nominate a majority of directors. While a dual-class share structure has been discussed by a number of news articles as one of the primary reasons for Alibaba’s IPO failure (which is confusing!), the co-founder and executive vice chairman of Alibaba Joe Tsai stated in a blog that the company never made such proposal.
Alibaba’s partner committee consists of 28 partners, mainly founders and senior executives, who collectively own approximately 13% of the Company’s interest. SoftBank Corp. (9984) and Yahoo! Inc (YHOO), Alibaba’s two biggest shareholders with stakes of approximately 37% and 24%, respectively, each have a seat on Alibaba’s four-person board of directors, but neither company is represented among the 28 partners. In fact, there are no outside investors in the partner committee.
If the proposed partnership is allowed, after the IPO the 28 partners would keep control over a majority of the board with their small ownership. Under this structure, although shareholders will still be able to approve or reject any proposed directors, they will not be able to nominate their own candidates from taking control of the board by nominating a majority of directors. Thus, regulators, the HKEx’ listing committee and the Securities and Future Commission, concluded that the partnership would still exercise control despite holding just 13% of the shares, and refused to make an exception.
Some bitterness continues to linger regarding the failure of Alibaba to move forward with its IPO on HKEx. Mr. Tsai posted a column on September 26th on Alibaba’s blog and stated that “we understand Hong Kong may not want to change its tradition for one company, but we firmly believe that Hong Kong must consider what is needed in order to adapt to future trends and changes. The question Hong Kong must address is whether it is ready to look forward as the rest of the world passes it by.”
Alibaba claims that the proposed partnership system is intended to maintain a mechanism to safeguard the Alibaba culture and build sustainable business through collaboration of partners, and that it will protect the long-term interests of the company’s customers, company and all shareholders. Mr. Tsai also defended the company’s structure, saying “Our governance structure is a creative way to address the core issues that matter to shareholders while staying true to who we are – which we cannot, and will not, change.”
The decision of the HKEx to not bend must have been difficult, particularly in light of the potential windfall from Alibaba’s listing, the increased prestige and reputation for the exchange, and the anticipated increase in future trading volumes. In the end, however, the regulators decided to stand steadfastly in their defense to treat all shareholders equally, not amending rules in order to accommodate Alibaba’s corporate structure. In a blog post on September 25th, Charles Li, the CEO of the HKEx, has defended the HKEx’s stance, writing “…as enshrined in our charter, in the event of a conflict, public interest is put ahead of shareholder interest at HKEx.”
As of now, Alibaba has not yet made a final decision on the timing, location and terms for the issue. A listing in New York, on the NYSE or NASDAQ, is now most likely. Other prominent tech companies , such as Google and Facebook, have listed on these exchanges with a dual-class share structure.
Alibaba’s stance may align with short-term oriented investors; however, it should be of potential concern for long-term institutional investors. Regardless of its ultimate listing location, Alibaba’s ambition to preserve its partnership system will not avoid any dissension with investors and corporate governance experts, who will rightly question whether partnership interests are being placed ahead of shareholder interests.