1.
a) Describe dual-class share structures.
A dual-class share structure is when a single company issues various types of shares. For
examples, a dual-class share structure can consist of shares like Class A and Class B shares,
which can be differentiated by distinct voting rights and dividend payment amounts/schedules.
With dual-class share structure, two share classes are often issued. One share class is
available for purchase by the general public, which the other is offered to key stakeholders such
as executives, founders, and other close people. The first class, offered to the general public,
contains limited voting rights, while the latter class has more voting ability. Often, the latter
class provides the majority control of a firm.
These dual-class share structures are devised to give specific stakeholders more power
and voting rights than normal shareholders. A famous example of this is Warren Buffett and
Berkshire Hathaway. Buffett has a relatively small stake in the firm, but regardless, he and his
team are the majority shareholders.
Dual-class share structures have caused controversy and debate. Supporters of dual-
class share structures believe that it allows leadership teams to put the long-term interests of
the firm first, while the general public may focus only on the near-term financial gains.
Opponents of dual-class share structure believe it permits a small minority of shareholders to
gain massive control over the firm, with little input from the general public shareholders.
Additionally, while the power is consolidated in the hands of a few, the majority of the capital is
being provided by others.
b) Is Alibaba’s “partnership structure” different from a dual-class structure? Why or
why not?
Alibaba’s partnership structure is different from other public company’s share structures,
however it is not as unfriendly to investors. It is different because every partnership share
equals 10 votes in every eligible matter, as opposed to one single vote. With the current
structure, 28 managers will be in control of the firm via their share ownership in the partnership
system.
For example, the election system is different. The 28-person partnership at the firm will
exclusively have the rights to nominate a majority of directors. Alibaba regular shareholders will
have the option of rejecting director candidates that will be nominated by this partnership, but
then they could just select new nominees for approval.
c) Does “voting premium” imply that “minority” shareholders are losing money?
This voting premium does not imply that minority shareholders are directly losing
money, however it does imply that they will have far less control over Alibaba’s decisions, which
could lose them money in the future.
From the perspective of a an Alibaba common shareholder, the partnership structure
and voting premium discourages the possibility of activist investors, who are arguably the only
group of people interested in seeking the available minority seats. The partnership as it stands
controls the majority slate, so it is safe to say there won’t be many fights over control of the
minority seats.
A dissenting minority of directors will have little power in the overall scope of Alibaba,
particularly since upper management may decide to make decisions outside of the board room
(where minority seats will know the full context of decisions), and thus they minority will be
shut out completely from company decisions, let alone taking over the majority. These policies
will discourage activists from participating if they know their efforts and money will all be in
vain.
2.
a) Why do the NYSE and NASDAQ allow a dual-class structure, while HKEx opposes
it?
Dual-class structures offer additional classes of shares that permit shareholders to have
different voting rights, putting them at a significant advantage over traditional shareholders.
According to HKEx, their conservative standards for IPOs comes from their focus on
protecting individual/smaller investors from abuse, as opposed to protecting institutions.
Additionally, since the 1990s, the HKEx has rules dictating that that a minimum percentage of
shares during an IPO must be made available to the Hong Kong public (10 -50%).
Conversely, the NYSE and NASDAQ do not subscribe to the same rules or belief
structure, and thus they allow the dual-class structure. Also, according to Charlie Li, the US’s
aggressive litigious culture provided checks and balances, and deterrents against abuse of the
system.
b) If you were Charles Li, what would you do? Why?
If I were Charles Li, I would continue with the current HKEx rules and not change our
rules or make exceptions for particularly large potential IPOs. The belief system is in place
because the China/Hong Kong business climate is different than that of other countries. Just
because they are an exchange, does not mean it should bend its rules. The remainder of the
Chinese business climate needs to catch up to world standards before it can change the rules
and be more similar to other exchanges.
3.
a) What are the pros and cons of listing in Hong Kong versus New York?
Pros:
- Hong Kong is an economic gateway to Mainland China as well as the remainder of the free
world
- The HKEx provides bilingual legal documents and communication
- Liquid Market with Free Flow of Capital
- Strong Legal System and Sound Regulatory Framework
- Objective Listing Criteria and Streamlined Vetting Process
- Innovation to Attract More Listing Applicants
Cons:
- HKEx does not allow for multiple class share structures
- Higher taxes and fees on transactions
- New York investors have more interest in tech firms and value them at higher multiples
- A lower HKEx valuation would generate a lower IPO price
b) If you were Jack Ma, where would you list? Why?
If I were Jack Ma, I would list on the New York Stock Exchange.
I would do this because although HKEx offers many benefits and tighter legal benefits
than the NYSE, the HKEx still does not permit multi-class share structures. This is a con that
cannot be overlooked, as the consolidation of voting rights and power is still a top priority and
nearly a necessary condition of going public. Because of this, the benefit of a multi-class share
structure on the NYSE outweighs the negatives.
4. When is the optimal time for Alibaba to go public?
The optimal time for Alibaba to go public would be 9:30AM EST, which is the same time
the market opens, because they’d be able to maximize the amount of time they’re on the
exchange for opening day, and people will have the option to place their orders and make plans
the previous few days.
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