With the filing of its latest draft prospectus with the US Securities and Exchange Commission, Alibaba has opened a little more of the kimono (or should that be "cheongsam"?) to reveal how the world’s most powerful e-commerce conglomerate will be governed.
Most importantly, Alibaba has disclosed details of how the infamous "Alibaba partnership" will operate.
This was the key issue in the dispute between Alibaba and the Hong Kong regulators. Hong Kong was concerned that Alibaba's corporate governance arrangements, including in particular the Alibaba partnership, violated the "one share, one vote" principle of the Hong Kong rules by effectively enabling a small group of senior management with a minority shareholding to control the company’s board of directors.
Now we have the opportunity to see for ourselves whether the Hong Kong regulators’ concerns were legitimate.
The filing reveals that the Alibaba partnership currently comprises 27 members of the Alibaba group’s senior management.
The partnership itself is governed by a five-person partnership committee, led by founder and chairman Jack Ma, vice chair Joe Tsai and CEO Jonathan Lu. New partners may be admitted to the partnership, subject to approval by the partnership committee and a partnership vote. The partnership itself votes on a “one partner, one vote” basis -- ironically something denied to Alibaba shareholders. The partnership committee also allocates the annual cash bonus pool among partners, and has the sole right to nominate their own successors to the partnership committee.
But it is the partnership’s director nomination rights that are the centerpiece of the whole arrangement, and again the all-powerful partnership committee is in control.
Alibaba’s articles of association provide that the Alibaba partnership has the exclusive right to nominate a majority of the members of the board of directors of Alibaba. Board nominees are proposed by the partnership committee, and confirmed by a simple majority vote of the Alibaba partnership. After that, the nominees are put to shareholders for approval.
But it is here the arrangement takes an unusual turn. One would expect that, if shareholders vote down the director nominee proposed by the partnership, the partnership would have to come up with another nominee and put the nominee to shareholders again, until their proposed directors receive the approval of shareholders. Not so. Under Alibaba’s arrangement, if a partnership director nominee is not elected by shareholders, the partnership has the right to go ahead and appoint their nominee anyway, and their appointee then serves as director until the next annual general meeting – effectively short-circuiting the shareholder approval process. It is no doubt this feature which raised the concerns of the Hong Kong regulators, as it effectively disenfranchises shareholders of their right to vote on who will manage their company.
Not content with relying on the Alibaba partnership, Jack Ma has built in a series of additional corporate governance controls which render Alibaba immune from activist shareholders, corporate raiders and hostile takeovers. Among them:
· A voting agreement, pursuant to which major shareholders SoftBank and Yahoo (holding a combined 56 per cent of the company pre-IPO) will agree to vote their shares in favour of any Alibaba partnership board nominees.
· A “staggered board” arrangement, which prevents the entire board of directors being removed at the same time (something that a corporate acquirer would seek to do upon taking over the company).
· A “poison pill”, which permits the board to make massively dilutive share issuances without shareholder approval in the event an unwelcome suitor emerges. This also would not be permitted in Hong Kong.
Alibaba seeks to distinguish its partnership arrangement from the dual-class share structures adopted by many internet companies, perhaps seeing themselves as something of an enlightened oligarchy in contrast to the benevolent dictatorships of Google and Facebook:
“Unlike dual-class ownership structures that employ a high-vote class of shares to concentrate control in a few founders, our approach is designed to embody the vision of a large group of management partners. This structure is our solution for preserving the culture shaped by our founders while at the same time accounting for the fact that founders will inevitably retire from the company.”
However, seen in totality, Alibaba’s corporate governance arrangements suggest an insecure and paranoid founder, intent on maintaining control of his company at all costs. As many corporate governance experts and shareholder interest groups will tell him, the best way to maintain control of your company is to do a good job managing it, in the best interests of all shareholders. You would think Yahoo might have given Jack the same advice.
In this latest filing Alibaba has also unveiled the full roster of its board of directors. Seen in the context of our previous speculation at China Spectator that Alibaba is setting itself up for an eventual return to list in Hong Kong, these board appointments make rather intriguing reading.
Alibaba has appointed three independent non-executive directors, or INEDs, composing one-third of their nine member board. By happy coincidence, this meets exactly the Hong Kong requirements on INEDs, pursuant to which listed companies must have -- wait for it -- not less than three INEDs comprising at least one third of the board.
(Alibaba has also designated Yahoo founder and former CEO Jerry Yang as an INED, but given Yahoo's substantial shareholding in Alibaba, and Yang's long association with Alibaba through the Yahoo relationship, he would not likely be regarded as sufficiently "independent" to qualify as an INED under Hong Kong rules.)
What is more, all three of the INEDs appointed by Alibaba have strong Hong Kong connections.
Former Goldman Sachs vice chairman Michael Evans was based in Hong Kong for many years serving as chairman of his former firm's Asian operations.
Walter Kwauk was a senior partner of accounting firm KPMG in Hong Kong as well as holding leadership positions in their Beijing and Shanghai operations. As a Hong Kong CPA, Mr Kwauk neatly helps fulfil the Hong Kong requirement that at least one INED hold accounting qualifications.
But it is Alibaba's final INED appointment that is most intriguing: Mr Tung Chee Hwa, the first Chief Executive of Hong Kong after the Handover to China -- the highest position in Hong Kong's post-1997 government and a post broadly equivalent to that of Governor. While Tung’s standing with Beijing was substantially diminished after he was forced to resign prior to the end of his term in the face of huge public protests in Hong Kong, he remains a classic Hong Kong establishment figure, one of the small group of tycoons and their families who have always run Hong Kong, pre- and post- Handover.
One wonders why Alibaba should need a figure with such strong Hong Kong connections on their board, someone who could effectively lobby the Hong Kong government and regulators to amend listing rules, grant waivers or accommodations – all in the interests of improving and globalizing the Hong Kong market, for the greater good of Hong Kong, of course. Who knows, maybe he'll come in handy?
Antony Dapiran is a Hong Kong-based international lawyer.