Alibaba Partners Keep Control After Shunning Hong Kong for U.S.

Alibaba Group Holding Ltd. will be governed by a partnership with exclusive right to nominate a majority of its board of directors, the company said yesterday, unveiling the details of a structure that kept it from pursuing an initial public offering in Hong Kong.

The partnership has 28 members, and will elect new ones each year. The members are required to maintain a “meaningful level of equity interest” in the company, according to a U.S. regulatory filing. The system enables Alibaba founder Jack Ma and his management team to keep control as the Hangzhou-based company expands beyond its origins as an online marketplace.

While Hong Kong’s regulators rejected the structure, it is permitted in the U.S. where companies more commonly create two classes of shares to keep insiders in charge. Investors have proven willing to give up their rights at Facebook Inc. and Google Inc., and won’t be turned off by the partnership rules as they’re lured by Alibaba’s growth, said James Post, a professor at Boston University School of Management.

“This is one giant step away from the pure governance model, but having had Facebook and Google do something similar, people are willing to take a deep breath and say, ‘We can live with this,’” said Post, a professor of corporate governance and ethics. “Jack Ma is very successful but he’s also very controlling. They happen to have found a market in the U.S. that’s accommodating.”

‘Culture Carriers’

To join the partnership, new members -- who will need to be “culture carriers” who show a commitment to the company’s values, will be approved by three-quarters of the existing partnership, the filing says. Any partner, including Ma and co-founder Joseph Tsai, can be removed by a simple majority vote of the group, the filing says.

Once the partnership nominates directors, ordinary shareholders will be able to vote for the nominees, and Alibaba said it expects to enter an agreement in which its largest shareholders -- SoftBank Corp. and Yahoo! Inc. -- will agree to vote their shares in favor of the nominees at each annual meeting. SoftBank will also be able to nominate one director, as long as it owns a 15 percent stake in the company.

Yahoo, which is selling shares in the IPO, currently owns about 23 percent of the company. SoftBank owns another 34 percent, the IPO filing shows.

Alipay Criticism

Alibaba investors would be accepting limited oversight of management just as Ma embarks on a deal spree that’s pushing the company into new areas from online mapping to TV content. The company and its founders have struck more than $5.6 billion of acquisitions this year, including holdings in television companies, department stores and a financial software group, data compiled by Bloomberg show.

“You’re pretty much relegated to sitting on the sidelines and hoping that management does the right thing,” said Stephen Yang, an analyst at Sun Hung Kai Financial Ltd. in Hong Kong. “There’s always a risk of overextending with acquisitions. It will become more of a concern when growth begins to slow and decisions don’t turn out so well.”

Alibaba has faced complaints from shareholders in the past. In 2010 it transferred ownership of Alipay, an online payment business, to a company controlled by Ma. That move led to a dispute with shareholder Yahoo, which said it didn’t learn of the transfer until seven months later.

Alibaba has an agreement with to pay Alipay for payment processing services with a term of 50 years, the filing shows. It is renewable for periods of 50 years after that.

Long-Range Plans

The partnership model “can shield the company’s long-range development plans from the short-term, profit-seeking trends of the capital market,” Ma said in a September letter to employees obtained by Bloomberg News. Tsai said Sept. 26 the company isn’t willing to give up the structure.

“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,” Tsai wrote in a blog post at the time.

Alibaba started the partnership system in 2010. The 28 elected partners include co-founder Tsai and Chief Executive Officer Jonathan Lu.

A dual-class structure helped Facebook’s Mark Zuckerberg and Google co-founders Larry Page and Sergey Brin keep control of their companies after they went public. Manchester United Plc, the English soccer club, also considered a share sale in Hong Kong before eventually settling on the U.S., where Class B shares owned by the Glazer family carry 10 votes apiece versus one vote each for the Class A shares sold in the IPO.

More Say

Compared to the dual-class model, Alibaba’s structure does allow shareholders more of a say, even if it’s not ideal, said Erik Gordon, a professor at the Stephen M. Ross School of Business at the University of Michigan

“At Alibaba, if the shareholders are absolutely opposed to a particular person, they can vote no and then the partnership has to come up with somebody less offensive to the stockholders,” he said. “There is no such mechanism at Google.”

Maintaining control of the board also gives Alibaba’s partners flexibility to expand into new areas as they compete for online spending with Tencent Holdings Ltd. and Baidu Inc. Tencent, which previously focused on online games, has expanded into financial services and mobile messaging while search engine operator Baidu has ventured into video and online travel services.

Alibaba agreed in April to buy mapping service AutoNavi Holdings Ltd. and in March said it would pay HK$6.24 billion ($804 million) for control of ChinaVision Media Group Ltd., gaining access to content from games and films to English Premier League soccer.

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