Alibaba deal could raise bar on investors’ rights

By Doug Young Source:Global Times Published: 2013-10-28 20:23:01

Illustration: Chen Xia/GT

Illustration: Chen Xia/GT

Leading e-commerce firm Alibaba may be heading for a compromise that would allow it to list on the Hong Kong Stock Exchange, in a deal that would come as a victory for minority shareholders of publicly listed firms. Hong Kong securities officials should be praised for sticking to their principles of protecting minority shareholder rights in this case rather than agreeing to Alibaba's requests to win this mega-IPO likely to raise billions of dollars.

Alibaba itself should also be proud of its good example if it ultimately reaches a compromise that allows it to list in Hong Kong. By agreeing to better protect the rights of minority shareholders, the company would be sending an important message to other overseas-listed Chinese mainland firms whose founders too often treat their companies like personal fiefdoms.

Alibaba and Hong Kong securities regulators have been at loggerheads since August, when word first emerged that the mainland's leading e-commerce firm was seeking a rule exemption that would allow founder Ma Yun and other top managers to maintain control of the company after an IPO. Under their original proposal, a group of Alibaba's partners would have retained the right to nominate a majority of the company's board, giving them control of the company regardless of their actual stakeholdings.

That scheme, which involved the issuing of two classes of shares with different rights, isn't normally allowed under listing rules of the exchange, which argues such a structure undermines minority shareholder rights by diluting their control. Alibaba argued its top managers needed to maintain control of the company to chart its longer-term course, which sometimes conflicts with minority investors who remain more focused on near-term profits.

After Hong Kong refused to grant Alibaba's exemption, media reported the company was considering a listing in New York or even London, even though Hong Kong remained its first choice. Now the latest media reports say Alibaba may be preparing a new plan that would better protect minority shareholders.

Under that plan, the company would require that its chief executive officer (CEO) be selected from one of its 28 partners, meaning that in principle all major decisions made by the CEO would have to have the support of a majority of those partners, according to the reports.

In fact, most Alibaba shareholders would probably be happy to let Ma and his management team run the company, since they have done an excellent job in building it into one of the mainland's most valuable Internet firms over the last decade. The company's value has soared from about $2.5 billion in 2005, when it took on Yahoo as a major strategic investor, to as much as $100 billion now, marking a fortyfold increase.

But at the same time, there's no guarantee that Ma and his team will continue to run the company so well in a fast-moving Internet industry where fortunes can and do quickly change. If Alibaba ever does start to stumble in the future, its nonmanagement investors should have the right to change the team and even have a say in the company's future direction.

Ma's desire to maintain control over his company is relatively common among mainland Internet firms, which are often headed by their founders. While such founders usually retain only minority stakes in their firms after going public, they often maintain tight management control and show limited regard for minority investors.

Online game company Giant Interactive came under the spotlight in 2011 when investors learned it had invested in an insurance company that had little relationship to its core gaming business. That conflict may have been partly behind founder Shi Yuzhu's decision this year to retire as CEO. In a move with similar overtones, solar energy pioneer Suntech made questionable investments in a solar power fund that ultimately fueled the company's rapid tumble into bankruptcy and led to the ouster of the man behind those investments, founder Shi Zhengrong.

Founders of privately funded mainland firms need to learn that they have a responsibility to their minority investors, and should try hard to win the respect of those investors through prudent management. In this case Hong Kong should be commended for its determination to respect those investors, and Ma and Alibaba should also be applauded if they ultimately settle on an ownership structure that gives those investors the rights they are due.

The author is a former company news reporter from Reuters. He writes about China's company news at

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