Sep 27, 2013 05:14 PM

Alibaba Never Proposed Dual-Class Share Structure, Executive Writes

(Beijing) – Alibaba Group's executive vice president and founding partner has written that the e-commerce giant never proposed to the Hong Kong Exchanges and Clearing Ltd. (HKEx) that it use a dual-class share structure.

Cai Chongxin wrote in an open letter to the city's securities regulator, the Securities and Futures Commission (SFC), on September 26 to explain why the company chose to structure itself the way it has.

The move comes as media reports suggest the e-commerce giant failed to reach an agreement regarding its shareholding structure with the HKEx, the operator of Hong Kong's bourse.

There has also been speculation that Alibaba will turn to the United States for its long-anticipated listing. A source from Alibaba who did not want to be named said the company is still working toward a listing in Hong Kong, and negotiations with the SFC "are still under way."

Cai confirmed in his letter that Alibaba has held talks with the securities regulator in the former British colony several times regarding the "possible connection between management innovation and capital market regulation."

"As a company with its main business in China, Hong Kong is out preferred choice for public listing," Cai said.

The disagreement between Alibaba and HKEX involves the company's partnership structure, which would enable partners to nominate the majority of board members in order to retain company control after a public listing.

Analysts have said a possible solution would see Alibaba adopt a dual-class share structure similar to that of Google, Facebook and Baidu Inc., which gives different weight to stockholders. There has been also speculation Alibaba proposed using a dual-class share structure.

However, Hong Kong's stock exchange, citing a need to protect investors, does not allow new listings to have dual-class share structure. The stock exchange in New York does allow it.

Cai said Alibaba's structure is different from the typical dual-class share structure and "will not limit any shareholder's right in voting on an independent director and major transactions."

He added: "We have never anticipated that the Hong Kong regulatory body would change its rules only for Alibaba, but we do think Hong Kong should seriously consider innovative supervision that fits future development."

Cai said the partnership structure, which grants partners rights to nominate board members and veto major decisions, will "reduce the short-term impact from market fluctuation and ensure long-term interests for company customers and investors."

In a September 10 email to employees, Alibaba's founder and chairman, Jack Ma, confirmed that has been using a pilot version of this arrangement since 2010 and had elected 28 partners since then through a rigorous selection process.

Charles Li, president of HKEx, wrote on a blog on September 25 that the HKEx would always put the public's interests first, but added that certain changes could be made should the SFC agree.

Alibaba's two largest shareholders, Yahoo! Inc. and Softbank Corp., are not among the company partners but they have approved the partnership structure. Sun Zhengyi, the president of Softbank, said on September 27 that his company strongly supported Alibaba's partnership structure.

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