A Modern Day Tale of Alibaba and the 28 Partners

Published October 05, 2013

Mak Yuen Teen

The Hong Kong Exchanges and Clearing Ltd (HKEx) has just shut the door on what is touted to be the most-anticipated IPO since Facebook. Alibaba, with an estimated value of US$80 billion and as much as US$120 billion according to some bullish analysts, is expected to raise as much as US$15 billion from the IPO and will now do so in the US instead.

Alibaba had proposed to list on the HKEx with a structure that would allow its 28 partners, mainly founders and senior executives, to keep control over a majority of the board, even though they will own only around 13 per cent of the company. In other words, these 28 partners would like the public’s money but would like to control those responsible for watching them use it.  They, and whoever follows after them, are supposed to always have the best interest of the company at heart and to preserve the “company culture”. Unlike the tale of the 40 thieves, we are supposed to have 28 angels here.

HKEx, like some other exchanges, have dual regulatory and commercial roles, and its decision is surprisingly uncommercial, which to me is a good thing in this case. I wonder how many other exchanges around the world would have turned away such a listing. NYSE Euronext and the Nasdaq are reportedly jostling for it.

I can understand why some bankers, lawyers and advisers in HK have questioned whether HKEx should have done more to accommodate Alibaba and have called for changes to HK’s financial market framework (Reuters, 27 Sep). Given the fees they stand to earn, it must feel like seeing the treasures in the cave only for the door to shut on them.

The HKEx has also been criticised by one of the founders, Executive Vice Chairman Joseph Tsai, essentially for being out of touch with the times – out of touch with old-fashioned values like sticking to one’s principles and fairness. If the HKEx has allowed Alibaba to list with such a structure which entrenches the founders and management, this exception must become the rule, otherwise there would have been one set of rules for the big boys, and another for everyone else. The HKEx has made exceptions to rules for other listings before – and may have regretted it.

Two of Alibaba’s major shareholders, Softbank and Yahoo!, have come out in support of this structure. The irony could not be thicker as it was not too long ago that Yahoo!, in particular, was involved in a rather public spat with Jack Ma, Alibaba’s founder, a spat which may give some clue as to how Jack Ma uses power when he has it.

Yahoo! was a major shareholder of Alibaba, owning as much as 43 percent of the total shares at one time, after Alibaba took over the operations of Yahoo!  China in exchange for 40 percent of Alibaba’s shares in 2005. One of Alibaba’s crown jewels was Alipay, a third-party online payment platform launched in 2004. In 2010, a new regulation in China required all online payment systems to be wholly owned by the Chinese in order to retain their operating licenses. Alibaba arranged for Alipay to be transferred to Zhejiang Alibaba, a company which was 80 percent owned by Jack Ma and 20 percent owned by the co-founder and a key management executive of Alibaba. The transfer was carried out in two phases: the first involved a 70 percent transfer in June 2009 and the second transfer of the remaining 30 percent was made in August 2010. Net consideration totaling RMB 330 million was reportedly paid.

On 10 May 2011, Yahoo! disclosed in its 10-Q filing to the U.S. Securities and Exchange Commission that 100 percent ownership of Alipay had been transferred to Zhejiang Alibaba under Jack Ma’s majority ownership. Yahoo! claimed that it did not know about the ownership transfer until 31 March 2011. Yahoo!, which had a representative on Alibaba’s board, also claimed that the Alibaba board had not approved the decision. Yahoo!’s share price immediately plunged by 7.3 percent.

Alibaba disputed Yahoo!’s claims and mentioned that the transfer was discussed at virtually all board meetings since as far back as two years ago. Alibaba further claimed that the board gave “informal consent” to the management team to fully deal with Alipay matters in July 2009.

However, in an interview (DigiCha, 6 July 2011), Jack Ma stated that in the six years since Jerry Yang (ex-Yahoo! CEO) and Masayoshi Son (Softbank’s representative) joined the Alibaba board, “not one decision had been approved by the board”, and that “a lot of things had been discussed outside of the board and the board has come to an agreement in the minutes of their meetings.” He also mentioned that making a decision through the board was useless since the board directors would not have agreed to it and Alipay may collapse as a result of delayed application for an operating license under the new regulations.

After months of negotiations, Alibaba, Yahoo! and Softbank announced on 29 July 2011 that they have signed an official agreement with regards to the transfer of Alipay. Under the agreement, the holding company of Alipay will pay Alibaba 37.5 percent of its total equity value from the proceeds of any liquidity event – such as an IPO – subject to a minimum of US$2 billion and a maximum US$6 billion. Prior to any liquidity event, the holding company of Alipay will pay Alibaba 49.9 percent of Alipay’s pre-tax profits, in addition to software licensing fees and royalties.

Yahoo! and Softbank have their deals and all is forgiven. And they are now telling public shareholders that they support the structure to entrench the founders and management – essentially to trust the founders and management despite their own bad experience.

I don’t think so – and I applaud the HKEx for doing the right thing even if it costs them a US$15 billion IPO.


The discussion on the dispute between Yahoo! and Jack Ma, Alibaba’s founder, is based on the case study written by a group of NUS BBA (Accountancy) students, which was part of a collection of case studies edited by the writer and published by CPA Australia this year.

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