Today’s initial public offering (IPO) of Chinese e-commerce giant Alibaba in New York is expected to be one of the largest in history. But with its dual-class share structure, we believe that the company’s listing exposes investors to significant governance risks. Hermes EOS strongly supports the equal treatment of all shareholders, especially the principle of one-share, one-vote.
In late 2013, the company’s proposed listing in Hong Kong caused a stir. As Hong Kong does not allow dual-class structures, Alibaba negotiated with regulators and explored mechanisms which would have allowed the Alibaba partners to retain control over board nominations. Hermes EOS worked closely with the Asian Corporate Governance Association and other investors to highlight how an exemption from the listing rules would have significantly compromised the protection of investors in Alibaba. We also warned about the impact this would have had on the reputation of the Hong Kong Stock Exchange (HKEx). Therefore, we welcomed the decision by the Securities and Futures Commission of Hong Kong not to allow Alibaba to list on HKEx with special rights.
Alibaba will now get the IPO it wanted by listing in the US. The company’s proposed governance structure allows the founders and senior management to control a majority of the board, despite holding only 16% of shares. It has also put a voting agreement in place which enables the founders, management and other major shareholders such as Softbank and Yahoo! to support each other’s board nomination in voting. In addition, executive chair and founder Jack Ma will be chair of the nomination and corporate governance committee. This has raised significant concerns about the ability of the board to carry out effective independent oversight. Furthermore, Alibaba’s articles of association contain other anti-takeover provisions which limit the rights of public shareholders. The lack of independent oversight and equal shareholder rights for minority shareholders overall is likely to expose public investors to significant governance risks, especially in the event of related party transactions.
In the US, many technology companies have adopted multiple-class share structures, which disenfranchise minority shareholders and often disproportionately increase the power of one or a few shareholders. Hermes EOS therefore encourages issuers with multiple-class share structures to adopt the concept of one-share, one-vote. Above all, we only support IPOs of companies that in our eyes respect shareholder rights, thus providing a level playing field for all investors.
Please also see the comments of Hermes EOS CEO Colin Melvin in the Wall Street Journal.