Alibaba Group Holding Ltd. will be, barring an unlikely reversal in sentiment, the biggest initial public offering in U.S. history when it debuts later this year. Yet it might never have been on that list, as the Chinese Internet retailer’s first preference was to list its shares on the Stock Exchange of Hong Kong.
Alibaba decamped to the U.S., however, when the Hong Kong exchange held true to its long-standing “one share, one vote” policy and nixed the company’s plan to allow a small committee of founders to elect the majority of its board.
Alibaba’s decision could be seen as a victory for good governance and could have prompted questions in the U.S. and Canada as to why its exchanges are more forgiving of unequal voting rights than Hong Kong’s. That’s not how it’s shaping up, however.
Alibaba’s choice, as well as the success of a number of high-profile companies like Google and Facebook, dealt a blow to North American efforts toward equal shareholder voting rights – and has left the Hong Kong exchange questioning whether it will be losing out on a generation of tech-stock listings.
“One share, one vote” policies are designed to directly link economic ownership of a company with its voting control, and prohibit structures found in a number of companies in the U.S., Britain and Canada. Many of these companies operate what’s called a “dual-class” voting structure, in which one class of shares carries multiple votes. That means that a group of shareholders with a relatively small economic interest in the company can have outsized clout.
In Canada, dual-class share companies emerged in the late 1980s, giving family-owned companies the ability to access the public markets for capital while still maintaining control of the firm, according to a report last year from the Canadian Coalition on Good Governance. Some industries that are subject to government restrictions on foreign ownership, or with special regulatory factors like the broadcast industry with its limited number of licenses, found unequal voting rights structures an effective way to discourage hostile takeovers.
Alibaba does not propose dual-class shares; indeed Alibaba co-founder and executive vice chairman Joe Tsai bristled at the phrase in his blog (titled “Alibaba Offers an Alternative View of Good Corporate Governance”). He noted a dual-class structure allows the holders of multiple-vote shares to outvote others on all matters, and Alibaba’s shareholders will get one vote per share on matters like substantial transactions.
Alibaba does plan, however, to allow a group of 28 founders, who collectively own about 14 per cent of the company right now, to nominate five members of what is planned to be a nine-member board. Investor Softbank, which currently owns about one-third of the company, gets to nominate another director.
“Why do we insist on our governance structure? Our overarching objective is to maintain the Alibaba culture,” Mr. Tsai says, citing the company’s mission of “helping the ‘small guy’ to succeed.” Also, Mr. Tsai says, the company intends to maintain the voting structure indefinitely, replacing the founders with new partners because “a group of partners who cherish the same culture and ideals is more likely to carry forward our principles and make good decisions for all stakeholders with a long-term view.”
In this, Mr. Tsai echoes any number of companies who have defended their unequal-voting structure, such as Facebook and Google Inc., which recently created a class of shares with no voting rights at all.
In Canada, the unequal-voting issue gained traction in 2010, when Magna International paid founder Frank Stronach a significant premium for his special-voting shares. The transaction closed, despite a lawsuit and opposition from some of the company’s shareholders. At the same time, prominent U.S. tech companies were going public and, like Alibaba, trumpeting their unequal voting rights as a virtue, not a vice.
“We wanted to try to pre-empt that from happening in Canada in the future by saying we do not see this as a best practice,” says Stephen Erlichman, the executive director of the Canadian Coalition on Good Governance, an alliance of major institutional investors that published a set of guidelines for dual-class share structures last year. “We have divided views amongst our membership, but the vast majority of our members do believe that dual-class share companies should not exist on a going-forward basis, and that if they’re still going to be listed here, these are principles that should be followed.”
But the success of Google shares, which are up nearly 1,000 per cent in their 10-year life, is making these arguments harder to believe. And the growing influence of activist investors in the U.S. and Canada may make the limited-voting structure even more appealing to the management and boards who may need to fight them.
Charles Li, the CEO of the Hong Kong exchange, said on his blog that “one share, one vote” is a “nice and simple” approach that “will certainly help maintain Hong Kong’s nominal regulatory purity.” But if the exchange maintains its ban, he says, companies who want to deviate from the policy will go to other exchanges, and local Hong Kong investors who want to participate will lose the protections his exchange offers. Investors who are opposed to the unequal voting structures, by contrast, won’t buy the shares, no matter what exchange they’re on.
“We should ask then: between blindly following and completely rejecting the U.S. model, is there a middle road onto which we could walk where we could consider allowing some weighted share rights to founding shareholders of technology companies, while at the same time ensuring that we adequately protect the core interests of the public investors?”
Investors have generally shrugged off concerns about multiple-voting shares and unequal voting rights at some big-name companies:
Insiders already owned shares with 10 votes apiece, compared to the one vote for public shareholders. When the company split its stock earlier this year, it created a new class of shares with no votes attached. A shareholder proposal this spring to eliminate unequal voting and give each share in the company one vote failed, with less than a quarter of the shares voting ‘yes.’
Like Google, another tech company that says it’s important to maintain its founders’ vision, Facebook has two classes of shares, with the ones held predominantly by insiders getting 10 votes for every one held by the public.
Power Corp. of Canada
One of the grandfathered dual-class companies on the TSX, the company introduced its share structure in 1925. Its controlling shareholders, the Desmarais family, have 10 votes for every one vote for the common investor.Report Typo/Error
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