Editors’ note: Updates column to clarify what structure Alibaba has proposed.
Alibaba Group Holding Ltd. can do in New York what it can’t do in Hong Kong — a fact that should be noted by retail IPO investors in the U.S.
The securities-listing rules of the Hong Kong Stock Exchange that have prompted the fast-growing, China-based online retailer to look elsewhere for an initial stock sale may also soon be seen as relics of an archaic (albeit safer) financial era.
The management structure that Alibaba wants to preserve even as it goes public is similar to the one that Google GOOG, +0.40% , Facebook FB, -0.19% and many other tech companies built into their own IPOs.
While not the same as a dual-share structure per se, Alibaba’s proposal would still allow the company’s management partnership to retain control of the board of directors, even if an IPO significantly dilutes their ownership stakes.
Known as a dual listing, it allows a company’s founders and earliest investors to retain voting control even if the IPO significantly dilutes their ownership stakes.
By creating what are usually called Class A shares that usually have 10 times the voting power of the Class B shares sold to IPO investors, a dual-share structure protects the company from hostile takeovers.
It also prevents annoyances by activist shareholders — like corporate raider Carl Icahn or hedge fund manager David Einhorn — which is why the structure has long been flagged by shareholder advocates as less accountable to common shareholders.
The type of proxy fight that Einhorn took to Apple AAPL, +0.21% over dividend payments, and that Icahn took to Dell over its private takeover plan, came after those guys each had bought up single-digit stakes in those companies, respectively.
Their moves may have been motivated by profit, but they also forced into the open concerns held by many other shareholders — including pension and mutual fund managers — whose stakes are too small to get their voices heard by the board of a large, public company.
Icahn presses Apple for $150 billion buyback, and more
What's News: Carl Icahn tweets about dinner with Apple CEO Tim Cook to push for bigger buyback. President Obama blames House Republicans for government shutdown. Google and EU near settlement. New YouTube music awards to challenge MTV.
Yet the management team of Google likely will never face the type of shareholder pressure that both Einhorn and Icahn applied during the last 12 months to Apple CEO Tim Cook.
That’s because their dual-share structure guarantees that founders Sergey Brin and Larry Page will always call the shots at the search giant.
Facebook has a similar structure that helped preserve CEO Mark Zuckerberg’s voting control even after the company sold more than a billion IPO shares.
The 28 members of Alibaba’s managing partnership, including founder and chairman Jack Ma, want to have a similar degree of control over their company, which is why they asked officials at the Hong Kong Stock Exchange for an exemption to its rule barring dual-class listings.