Although few retail investors in the United States have even heard of Chinese e-commerce behemoth Alibaba, anticipation on Wall Street this week for the company’s forthcoming I.P.O. is palpable.1 Touted by many as a uniquely positioned hybrid of eBay, Amazon, and Google, the company announced its plans earlier this year to go public in New York despite heavy speculation that it would list on the Hong Kong Stock Exchange.2 Ever since, investment bankers, hedge fund managers, and market experts alike have helped stir a worldwide wave of frenzied investor interest in Alibaba. In fact, demand for a piece of the IPO has been so high that Alibaba recently raised the price range for its looming stock debut.3 Analysts now predict it could become the largest IPO of all time – and for good reason.4 Unlike other Internet giants to go public in recent years, such as Facebook and Twitter, the Chinese tech darling possesses a rare combination of burgeoning bottom line fiscal performance and inconceivable growth potential.5 The company generated a staggering $2 billion in profit during the most recent quarter, and it boasts more than 280 million users whose online purchases account for about half of all packages delivered in China each year.6 Taking into account China’s rapidly emerging middle class population – i.e., millions of Chinese households with disposable income and an appetite for online shopping – Alibaba offers investors the allure of unprecedented long-term growth.7 Yet trigger-happy investors would be wise to note several issues that could ultimately thwart the overwhelmingly sunny forecast for Alibaba. To be sure, an unavoidable amount of risk accompanies any investment in a company’s initial public offering, especially when it comes to promising Internet businesses in the wake of the dot-com bubble. But in the case of Alibaba, unanswered questions about the company’s complex governance plan, as well as inconsistent Chinese regulatory practices, provoke legitimate cause for concern.
Among the vast sea of information nestled within the over two thousand pages of Alibaba’s registration statement, the company outlines a legal structure that could pose serious risks to U.S. shareholders.8 Most notably, it provides for control to be firmly entrenched in the hands of “a group of insiders known as the Alibaba Partnership,” who will collectively own the “exclusive right to nominate candidates for a majority of the board seats.”9 Should the company’s shareholders object to the Partnership’s proposed candidates, Alibaba’s group of executives is allowed to appoint directors unilaterally and “in its sole discretion and without the need for any additional shareholder approval.”10 This effectively guarantees that the Alibaba Partnership’s chosen directors always maintain a majority of the board.11 The practical consequences, of course, are that shareholders will be severely limited in their ability to influence any corporate matters that are to be decided by the board. What’s more, the New York Stock Exchange allows foreign companies to enjoy exemptions from several corporate governance requirements. As a result, Alibaba is “not required to have a majority of its board be independent, to have a compensation committee made up of independent directors or to adopt and disclose a code of ethics for directors and officers.”12 Additionally, because Alibaba is a foreign company, potential investors must also consider the risk posed by the sweeping differences between Chinese and American regulatory practices. Alibaba has already publicly asserted that it will not be bound by the U.S. securities regulations that require the filing of timely and detailed financial statements after issuing an IPO.13 Such a blatant disregard for transparency could spell big trouble for Alibaba with major institutional investors.
Still, in spite of such glaring issues surrounding Alibaba’s legal complexity, there remains plenty of excitement among investors hungry for a piece of the next big Internet conglomerate. As the market prepares for the forthcoming splash of Alibaba’s IPO, only time will tell if the risk is worth the reward.
Jesse Solomon, Alibaba is coming: Should you buy it?, CNN Money (Sept. 15, 2014, 10:10 AM), http://money.cnn.com/2014/09/14/investing/alibaba-ipo-should-you-buy/. ↩
Michael J. De La Merced, As Investors Salivate, Alibaba May Raise Price of I.P.O., N.Y. Times (Sept. 12, 2014, 8:20 AM), http://dealbook.nytimes.com/2014/09/12/alibaba-to-close-order-books-early-and-may-lift-price-of-i-p-o/. ↩
See Andrea Chang & Julie Makinen, Alibaba plans IPO in U.S., not Hong Kong, Los Angeles Times (Apr. 16, 2014, 5:57 PM), http://www.latimes.com/business/la-fi-alibaba-20140417-1-story.html#page=1. ↩
Id.; see Solomon, supra note 1. ↩
Solomon, supra note 1. ↩
Carlos Tejada, U.S. report casts doubt on legal structure of Alibaba, others, MarketWatch (June 20, 2014, 10:03 AM), http://www.marketwatch.com/story/us-report-casts-doubt-on-legal-structure-of-alibaba-others-2014-06-20. ↩
Lucian Bebchuk, Alibaba’s Governance Leaves Investors at a Disadvantage, N.Y. Times (Sept. 16, 2014, 2:00 PM), http://dealbook.nytimes.com/2014/09/16/alibabas-governance-leaves-investors-at-a-disadvantage/. ↩
William Alden, The Risks of Investing in Alibaba’s I.P.O., N.Y. Times (May 6, 2014, 6:58 PM), http://dealbook.nytimes.com/2014/05/06/the-risks-of-investing-in-alibabas-i-p-o/. ↩
Jon Swartz & Gary Strauss, Alibaba IPO plans: Many questions unanswered, USA Today (May 7, 2014, 6:24 PM), http://www.usatoday.com/story/money/business/2014/05/07/alibabas-plans-leave-many-questions-unanswered/8810587/. ↩