Alibaba’s insistence on keeping control of the company in the hands of management has taken an interesting twist, with the e-commerce leader now reportedly eying New York as the preferred destination for its highly anticipated multibillion-dollar IPO. Company watchers will know that Alibaba was reportedly leaning towards Hong Kong for its listing, but ran into a roadblock when Hong Kong securities regulators refused to grant it an exemption that would have allowed its top managers to retain control of the company. This unexpected twist raises the 2 interesting issues: The most immediate is where exactly this mega IPO will take place; and more broadly speaking, it also speaks to the issue of who should control a company once it goes public — its managers or its investors.
Let’s start with the first issue, which is in the headlines following the latest reports that Hong Kong securities regulators have rejected Alibaba’s request for an exemption to local listing rules. (English article) The exemption Alibaba was seeking would have seen the company use a corporate structure that let its top managers maintain control of its board. Such structure is not normally allowed in Hong Kong, which operates under the principle that all shareholders should be treated equally in terms of their voice in running a company.
Alibaba had previously been choosing between New York and Hong Kong for its listing, which some observers say could raise up to $15 billion. It was reportedly leaning towards Hong Kong, which is closer to its mainland China base and where its name is much better known than in New York. The latest reports are saying the rejection by Hong Kong is driving Alibaba to consider New York as its preferred IPO location, since the corporate structure Alibaba is seeking is allowed by the 2 major US stock exchanges.
My initial reaction to reading the news was that Alibaba was bluffing to pressure Hong Kong regulators into changing their minds. But on more thought, I really do think Alibaba is serious about going to New York so that it can list under the corporate structure it is seeking. That opinion is based on my knowledge of the company’s opinionated founder Jack Ma, who has very strong views about how to run his company and doesn’t like taking orders from people outside his inner circle. In this particular case, I don’t see either side backing down, meaning the IPO is ultimately likely to happen in New York.
From a broader perspective, the case does raise the interesting issue of whether investors should be entitled to control companies they hold shares in. One prominent Hong Kong shareholder activist argued that shareholders should have such control, and that he would mount a protest campaign if Hong Kong granted Alibaba an exemption. The argument from such activists is that if investors are going to give a company money, then they should be entitled to a voice in how the company is run.
My own view is slightly different, and centers on the concept of disclosure. Generally speaking, I do think that someone who gives a company money should have a voice in that company’s decision-making processes. But a person should also be able to waive that right if he wants, leaving the decision making to others.
In this case, Alibaba would disclose its planned ownership structure in advance, allowing investors to decide whether or not they still wanted to buy shares in a company where they would have only limited say in management decisions. Accordingly, I do think Alibaba should be allowed to use its proposed corporate structure if it makes the proper disclosures. From a practical perspective, that means it will probably have to go to New York to get what it wants.
Bottom line: Alibaba is likely to list in New York, since Hong Kong is unlikely to reconsider its decision to reject the company’s proposed corporate structure for its IPO.