Alibaba and Dual-Class Shares

In September 2014 shares in Alibaba, the Chinese internet retailer, were sold to the public for the first
time. It was a huge issue raising a record $25 billion. Investors rushed to buy, and on the first day of
trading Alibaba’s stock price jumped 38%.

Alibaba’s stock was floated on the New York Stock Exchange rather than on the Hong Kong exchange,
which might have seemed the more natural choice. The reason for management’s rejection of Hong
Kong was that the exchange has a one-share-one vote rule that forbids the issue of different classes of
share with different voting rights. By contrast, both the NYSE and Nasdaq allow the listing of dual-class
shares, and many U.S. internet firms, such as Google, Facebook, Groupon, and LinkedIn have adopted
structures that allow the company founders to maintain control.

Dual-class shares have their advocates, who argue that they allow management to focus on the long-term
development of the business without worrying unduly about those shareholders who are predominantly
concerned with short-term profits. But many institutional investors have pressured the U.S. exchanges to
ban dual-class shares and have pointed to the dangers of allowing managers to become entrenched. An
extreme example is that of Hollinger International, whose former CEO, Conrad Black, held all of the
company’s B shares. This gave him 30% of the equity but 73% of shareholder votes. He was able to run the
company as a personal fiefdom, extracting huge management fees and enjoying a lavish lifestyle, until he
was finally convicted for fraud and served an un-lavish prison term.

In the case of Alibaba, control is kept forever in the hands of Alibaba’s executive chairman, Jack Ma, and
the other members of the management team. Although they hold only a small proportion of the shares,
they can ensure that their candidates have a majority of the seats on the board regardless of how few
shares they own. The resulting dangers for investors are that a poorly performing management will be
impossible to remove, and that management may be tempted to divert value from Alibaba by placing
sweetheart deals with other businesses that they own.

For the New York Stock Exchange the listing of Alibaba stock might have seemed a coup, but for many it
did little to enhance U.S. exchanges’ reputation for encouraging good governance.