Stock Markets Move Towards Sidelining Shareholders

As the dust settles on Alibaba’s IPO, the single largest initial public offering to date, experts have turned their attention to a less-celebrated aspect: the relative lack of shareholder control in firm operations.   Alibaba listed on the NYSE, an unexpected choice over the Hong Kong Stock Exchange1

Although every Alibaba share technically has equal rights, the company specified a “partnership” of thirty people, including CEO Jack Ma, who will have exclusive control over nominations to a majority of board seats. 2  This unconventional structure is supposedly necessary to “preserve the firm’s culture.” 3

This type of dual-class is not uncommon in Chinese and American tech firms.  Proponents of structuring tech companies with multiple classes of shares argue that it helps “founders of fast-growing firms to raise the necessary capital to pursue their long-term ambitions without having to deal with short-term mood swings among investors.”4

In 1988 an SEC ban on such structures was invalidated when a court ruled that the agency had impermissibly exceeded its authority.  As a result, the SEC passed a rule banning companies from changing structure post-offering.  However, companies have the discretion to implement multi-share structures pre-offering.  This rule is meant to prevent shareholders from being blind-sided by structural changes once they have made their investments.5

As a result of the United States’ relatively lax rules, more than half of all companies with skewed voting structures are listed in the U.S.6 Although Britain’s market regulator recently banned these structures for firms listed on the main market of the London Stock Exchange, other jurisdictions seem to be doing the opposite.7 For example, the European Union considered a similar rule in 2007 but did not ultimately pursue it.  France passed a rule which effectively doubles voting rights of all shares held by the same person for more than two years.  Although France’s rule was designed for the purpose of blocking hostile foreign takeovers, its result is the abandonment of the traditional “one share, one vote” system.8


  1. HKEx).  According to an Economist article, this choice was driven by the fact that the Hong Kong Stock Exchange requires that shareholders have a proportionate stay over management.  ((Out of Control, Economist (Sept. 20, 2014), 

  2. (Paul Hodgson, Alibaba IPO: Shareholders Can Buy Shares, Not Influence, Fortune (Sept. 18, 2014, 10:45AM), 

  3. Economist, supra note 1. 

  4. Economist, supra note 1. 

  5. Economist, supra note 1. 

  6. Economist, supra note 1. 

  7. Economist, supra note 1. 

  8. Economist, supra note 1.