CASE STUDY: ALIBABA: OPEN

SESAME
SUMMARY
In 2013 Alibaba group holdings limited decided to go for an IPO an initial public offering to
expand the company by raising capital. Three contemplating alternatives for stock exchange
were chosen, the Hong Kong exchanges and clearing limited (HKEx), the New York Stock
Exchange (NYSE) and the NASDAQ. The company decided to go for HKEx but their
application was rejected because Alibaba operates on a separate 28-man partnership structure
which goes against the rules and regulations of HKEx and it operates on ‘one vote’ ‘one share’
structure and resembles the DCS structure which provides power to smaller groups with
acquisition of fewer shares. Charles Li the CEO of HKEx described this proposal of negotiation
as something which cannot be compromised of altered for a single party as there are many other
companies which are not listed due to the regulations placed on them by HKEx and the stock
exchange would suffer major loss and backlash from general public.
“It is very important for HKEx to not make exceptions and to maintain market integrity, especially in
light of what has happened with Chinese companies in recent years… There are plenty of companies
in Hong Kong and China that would want to do similar things, so making an exception creates a very
difficult scenario.”58 – Arjan Van Veen, Analyst at Credit Suisse. “Losing one or two listing candidates
is not a big deal for Hong Kong; but losing a generation of companies from China’s new economy is.
And losing it without a proper debate is even more unacceptable.”59 – Li, CEO of HKEx

During the year leading to the rejection of Alibaba’s application for listing both the senior
executives and the Hong Kong Securities and Future Commission held private discussions
for HKEx to implement some changes in the rules but HKFSC constantly opposed the dual-
partnership structure of Alibaba and both parties could not come to a consensus.
Since there was not any progress in pursuing HKEx with multiple proposals, Alibaba issued a
statement for embarking on US listings. Following this statement both the NYSE and NASDAQ
proposed their bids in an attempt to persuade Alibaba and in the end, the listing was given to
NYSE and Alibaba launched their IPO on 21st September 2014. On the first day at the stock
exchange, the listing held the record for biggest IPO at US$ 25 Billion. The stock gained over
more than 35% of its share price of 68$ and closed at US$93.89 and on second day dropped
slightly just below US$90.
This case study is for the purpose of discussing issues in dual structure corporations, mismatch
between share ownership and control, and the tension between regulatory and commercial
authorities in stock exchange.
 DISCUSSION QUESTIONS
Q1) Briefly discuss dual class shares and how such a structure is similar to or differs from
Alibaba’s 28-man partnership system. Does Alibaba’s partnership system increase
stakeholder value?
Dual-Class share structure gives companies different classes of stock. Each class of stock can
differ in ways such as the strength or weakness of voting rights, and dividend payments.
Typically there are two class structures, one that is available to the public and then managers or
executives of the company.
The class structure of stock that is reserved for only management often gives an unfair advantage
in a way they can have more control without sacrificing their equity. It also allows companies to
raise capital through the public without losing their ownership of the company.
Alibaba is an e-commerce giant with multiple products and services. Alibaba is looking forward
to the expansion of current services globally and also the innovation to be able to achieve
development and cooperation in the future. Public investors are likely to disfavour innovations
with long term benefits because results are not visible in a short period.
The management of Alibaba and their dual-class share structure are more likely to have a
concentration of power which defeats checks on managerial misconduct. In publicly traded
companies, each share has voting rights and shareholders elect a board of directors. Companies
like Alibaba, who has a dual share structure, remove the election of public shareholders electing
a board of directors.
Q2) Why might the major shareholders, Yahoo! and Softbank, be willing to approve the 28-
man partnership structure?