“Open Sesame”: The Myth of Alibaba’s Extreme Corporate Control and Governance

What the paper says

Chinese Internet companies have flocked to U.S. exchanges to raise capital in recent years. These companies have employed a novel and poorly understood corporate ownership structure – the variable interest entity (VIE) and disproportional control structure. The VIE structure was created in response to the Chinese restriction on foreign investments; it carries the risk of being declared illegal under Chinese law. Around 30% of these companies adopted a dual-class share structure or other disproportional control-enhancing mechanism to enhance insider control. The percentage is much higher than that of U.S. public companies, which is about 6%. This Article uses Alibaba as a case study to analyze the legal challenges posed by the VIE and disproportional control structures. Specifically, it sheds some important light on risks inherent in the VIE structure, along with some potential policy solutions to protect investors and reduce information asymmetry. Unlike most U.S. high-tech companies who adopt dual-class share structure, Alibaba chose to concentrate corporate power by granting an insider partnership the exclusive right to nominate majority of the directors. This profoundly impacts both shareholder democracy and corporate governance. This Article links Alibaba’s insider-controlled VIE structure to the dual-class shareholding structure frequently employed by Silicon Valley technology firms. We assess the various mechanisms that such companies use to enable insiders to wield disproportional control and reduce external checks and balances. While excessive insider control exposes shareholders to greater agency costs, we argue that a charismatic founder-executive – in this case, Alibaba’s Jack Ma – together with voluntary commitments made by him in the prospectus can mitigate some of the excesses of disproportional insider control. * Assistant Professor, City University of Hong Kong, School of Law. J.S.D., Stanford Law School. ** J.D., University of Oregon School of Law; M.A., Fudan University. Earlier drafts of this paper have been presented at the 12 Asian Law Institute Conference of National University of Singapore, which was held by National Taiwan University in Taipei, Taiwan on May 21 & 22, 2015, and the Faculty Seminar at Institutum Iurisprudentiae, Academia Sinica in Taipei, Taiwan on August 11, 2015. The authors are grateful to Yun-Chien Chang, Jean-Marc Coicaud, Umakanth Varottil and other participants in the seminar for helpful comments.