Alibaba puts Hong Kong bourse in IPO quandary

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Alibaba puts Hong Kong bourse in IPO quandary

Hong Kong has a choice: grant Alibaba Group Holding a shareholder structure that mirrors the world’s largest Internet companies, or stick to rules meant to protect ordinary investors and risk losing the largest initial public offering since Facebook.

China’s biggest e-commerce company asked Hong Kong’s stock exchange to allow a partnership of more than 20 executives and shareholders to nominate a majority of board members, a person with knowledge of the matter said last week. That would enable founder Jack Ma, who owns just a 7.4 percent stake, and his management team to maintain control after an IPO.

Alibaba’s proposal would be a way around the Hong Kong exchange’s ban on IPOs with different classes of shares, a structure frequently used by U.S. technology companies including Facebook and Google. Granting the request leaves the bourse open to criticism that it’s putting the company’s interests ahead of shareholders, the Asian Corporate Governance Association said.

“We are pretty certain that it won’t fly,” said Jamie Allen, the Hong Kong-based ACGA’s secretary general, in an interview. “The right to nominate directors is a basic right, so we don’t believe that the exchange will accept this.”

An IPO by Alibaba would be a coup for Hong Kong, home to only one other major Internet company: Tencent Holdings,, the operator of the WeChat service.

Hangzhou-based Alibaba, which connects businesses and consumers to each other across China, has a value of about $87 billion, according to the average of 11 analyst estimates released last month. It could raise about HK$100 billion ($12.9 billion) in an IPO, Ernst & Young said in June.

That would be the world’s biggest since Facebook raised $16 billion in May of last year, and the city’s largest since AIA Group’s $20 billion offering in October 2010.

Under Alibaba’s proposal, all shareholders would still vote on the company’s nominees with partners being able to nominate an alternate board member if shareholders reject a candidate, the person familiar with Alibaba’s thinking said. No other investor rights would be changed, the person said. Deals involving company executives, major expenses and compensation would be voted on by all shareholders, according to the person.

The proposal will have to be approved by the Hong Kong stock exchange’s listing committee. The Hong Kong’s Securities and Futures Commission, or SFC, has the power to object to a listing application on “certain grounds,” according to a 2011 report by the regulator.

Under Hong Kong’s listing rules, new applicants must not include shares whose voting power doesn’t bear a “reasonable relationship” to the equity interest. Exemptions can be granted for stock that was already listed with a dual class and “exceptional circumstances agreed with the exchange.”

Florence Shih, a Hong Kong-based spokeswoman for Alibaba, and officials at Hong Kong Exchanges & Clearing and the SFC declined to comment.

“Alibaba seems to see this process as negotiation with the exchange rather than the listing process being fairly set in stone,” said Allen of the ACGA. “There is a degree of negotiation but usually on more peripheral things, not on something quite as fundamental as the right of shareholders to nominate directors.”

Alibaba’s partnership includes Ma, cofounder Joseph Tsai, Chief Executive Officer Jonathan Lu and at least five women.

Bloomberg
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