Alibaba IPO: Shareholders can buy shares, not influence
Alibaba’s governance structure is not as unfriendly to public shareholders as the dual-class share arrangements you can easily find among other public tech companies—Facebook, Google, Zynga, Groupon—some of which have done well by shareholders and some less so. But it is still not fair.
The company’s IPO filings make very clear that the “partnership”—made up of the founders, the movers and shakers of Alibaba—will elect the majority of the board. And this situation will not change unless 95% of shareholders vote to change it. This level of support would likely require Yahoo, Chinese telecom firm SoftBank, and Alibaba Executive Chairman Jack Ma to sell their stakes in the company. An unlikely scenario.
What is so bad about a partnership electing a majority of the board and the public shareholders electing the rest of the team (well, the rest of the board except for the director elected by SoftBank)? It gives the partnership outsize influence over the board compared to its economic exposure in the company’s stock.
The partnership, as of the filing, holds about 326 million shares among its members, which include Jack Ma, who personally owns more than 200 million shares (8.9% of company stock), and Joseph Tsai, the vice chairman, who owns around 83.5 million shares (3.6% of company stock). Since the partnership owns about 14% of outstanding stock in total, this means the other 26 partners own about 14 million shares collectively. While this seems like a lot of shares, proportionately it is not. It’s a lot less, for example, than Yahoo’s stake (22.6%) and less than SoftBank’s (34.4%). Yet SoftBank gets to elect only one director, and Yahoo none at all.
Ma’s interests could be worth $13.8 billion at a $68 IPO price. If that price is hit, Ma also has 2.1 million stock options with an exercise price of $5—which were awarded to him back in 2010 and would immediately be worth $132 million at IPO—and another 390,000 restricted shares that could be worth $26.5 million. And more, if the share price climbs after it starts to trade, Joseph Tsai holds equity awards worth exactly half of those allotted to Ma. Given their existing holdings, these equity awards seem unnecessary.
Yes, this partnership structure is not as bad as a dual-class structure, one where partnership shares equal 10 votes for each share on every matter that comes up for a vote. But this is not a democratic corporate structure. It is an arragement that Hong Kong—not a democracy—refused to allow, which is why Alibaba is listing on the New York Stock Exchange in the U.S., where you would think that rules about undemocratic processes might be stricter.
The partnership knows what “one vote, one share” means, since its own bylaws include this statement: “Consistent with our partnership approach, all partnership votes are made on a one-partner-one-vote basis.” If it’s good enough for the partners, it should be good enough for shareholders.
But that’s not all. The board—which is largely elected by the partners, and major shareholders in lockstep with the partners—decides on bonuses for the partners. Alibaba’s board, on the recommendation of the compensation committee, approves an annual cash bonus pool equal to a percentage of adjusted pre-tax operating profits. The first distribution is to non-partner managers, the remainder goes to the partners, and the “partnership committee” decides which partner gets what. Again, this wouldn’t pass muster in Hong Kong, but it seems to be okay in the U.S.
In an Alibaba blog, Joseph Tsai offers a defense of the partnership, which, he argues, has been given outsize power so it can “set the company’s strategic course without being influenced by the fluctuating attitudes of the capital markets.” With its two major shareholders voting in lockstep with Ma and Tsai, this “alternative good corporate governance” is neither good nor necessary. The returns on the stock may outweigh all these concerns, as they did at Facebook. On the other hand, they may not, as was the case with Zynga.