The WSJ reports, "Alibaba Group Holding Ltd. seems proud of its novel governance structure. As described in its preliminary prospectus filed Tuesday, Alibaba is effectively controlled by a partnership which the filing said currently consists of 28 partners, all of whom who are members of management of Alibaba and related entities. But is it a good structure for the long term?
The governing documents of Alibaba, the prospectus says, will provide that the partnership is entitled to nominate a majority of the board of the company, subject to the approval of those nominees by the Alibaba shareholders. If shareholders don’t approve a partnership nominee, then the partnership has the right to appoint a different person to serve as a director until the next annual meeting, when the process starts all over again".
"But the filing shows that the chances of shareholders not approving a partnership nominee are slim. That’s thanks to a contractual commitment by SoftBank Corp., which currently owns over 34% of Alibaba, and Yahoo Inc., which currently owns over 22% of Alibaba, to vote their shares in favor of all of the partnership nominees. (This contract expires when Softbank’s ownership dips below 15% of Alibaba.) Considered together with the approximately 9% owned by Jack Ma, Alibaba’s founder and Executive Chairman, until those three major holders sell down or are diluted (we don’t know how many shares they are planning to sell in the IPO, though Yahoo will definitely sell some), any fight to defeat a partnership nominee would be at least an uphill battle. Besides, why bother to try when the partnership will just put on the board a replacement?
Still, investors in the IPO aren’t likely to be too troubled by this governance structure. Investors in technology and other companies are accustomed to investing in companies with dual classes of stock which permit founders continued control for substantial periods by giving them extra voting power. (Newscorp, the owner of The Wall Street Journal, has dual classes of stock.) While not the same as Alibaba’s structure, it also offers a way of maintaining control, although the prospectus indicates that Alibaba thinks the partnership system is a better one".
"An investor in Alibaba, with its impressive track record of growth, is unlikely to be buying stock in the company with the thought that it wants to be able to throw out management. And if things don’t turn out well, an investor in the IPO could just sell the stock.
But here is the paradox of this situation. If the governance is extensively repeated at other new companies, eventually we will have some companies that are poorly managed and in which the shareholders have little or no say".
