Alibaba first approached Hong Kong and wanted to list its IPO there. 

But there was a problem. 

Paul Gillis, Professor at Peking University and author of the popular China Accounting Blog, explains what led Alibaba to list in New York instead, and what this incident means for Hong Kong's future as a financial hub for Chinese companies. 


The Root of Disagreement

''Alibaba wanted to have a structure that kept control in the hands of management. That is something that technology companies have focused on ever since Steve Jobs got thrown out of Apple. He got thrown out because he was no longer in charge of the company.''

''Since then many technology companies, including Facebook, structured their IPOs in a way that there were two classes of stock: a class of stock that would be held by the insiders, Zuckerberg in the case of Facebook, would keep control even if they sold their shareholder interest down to a minority.'' 

''Chinese companies really like that structure. They do not want to have public shareholders vote them out of their jobs. They would prefer a structure with the two classes of stock, one class that they own with boting control, and another class that shareholders have with all the same benefits except for no voting control.''

''Hong Kong does not allow that. They say one share one vote. It is a fundamental principle in Hong Kong corporate governance. The US does not have that. The SEC (Securities & Exchange Commission) in the US will allow you to use any corporate structure as long as you can explain the risk to investors and they can make a decision whether they want to invest or not in a company where they do not get the right to vote.''

''The way the IPOs have been going recently, shareholders do not seem to care too much about the right to vote.''


Alibaba Seeks Compromise, Hong Kong Declines


''What Jack Ma and Alibaba did is go back to Hong Kong, say they understand the one share one vote model, but have another proposal, to use a partnership model. This partnership will be made up of a number of Alibaba executives, they would propose Directors for the Board, and then the shareholders can vote on the Directors that are nominated by this partnership.''

''Hong Kong studies that very hard, and finally decided they could not accept it. Alibaba then abandoned its plan to list in Hong Kong.''


Why Hong Kong's Current System Is Under Threat

''This is a very threatening event for Hong Kong because if they do not win the major IPOs coming out of China, then their stock exchange’s future is in doubt. Its primary purpose for existing is to serve Chinese companies that want to list abroad and need access to the world.'' 

''If it is not accessible to private companies because they will not allow them to maintain their control structures, then these private companies will go to NY, and that will be troubling.'' 

''Hong Kong will be under great pressure to modify its rules.''

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