The acknowledgement, on page 42 of a 300-plus-page filing,
highlighted longstanding questions about the Chinese e-commerce
giant's complex corporate structure and potential conflicts of
interests surrounding Ma, who started Alibaba in his one-room
apartment in 1999 and has since branched out into markets as diverse
as e-payments and financial investment.
To be sure, such warnings of potential conflicts were included in
the prospectuses of many founder-controlled tech companies,
including Facebook Inc and LinkedIn Corp. But Alibaba's warning
stands out given Ma's numerous investments in third-party firms that
partner with his company.
One hot-button issue is Ma's control of Alipay, the PayPal-like
affiliate established by Alibaba in 2004, which continues to provide
the lions' share of payment services for the company's retail
Four years ago, Alibaba spun out Alipay to a group including Ma, who
holds a 46 percent stake in Alipay through another company, Zhejiang
Alibaba E-Commerce Co.
A row ensued: Alibaba investors including Yahoo Inc and SoftBank
Corp objected to the spinoff, which Ma argued was needed to comply
with Chinese central bank regulations governing foreign ownership of
In 2010, China's central bank issued regulations governing online
payment companies. "These regulations stipulated that the scope of
business, the qualifications of any foreign investor and any foreign
ownership percentage would be subject to future additional
regulations," Alibaba said in its IPO filing.
Alibaba, Yahoo and SoftBank settled the matter in 2011, but not
before David Einhorn, the Greenlight Capital hedge fund manager,
sold all of his Yahoo shares in frustration at what he deemed mutual
"finger-pointing" between the companies.
Alibaba reiterated on Tuesday its longstanding position that the
2010 spinoff was intended to conform with the central bank
regulations. But it also admitted that new rules on foreign-owned
payments institutions hadn't appeared. "At the time when the
licenses were first issued, no such additional regulations governing
foreign-owned payment companies had been put in place."
The company declined to comment beyond the prospectus on the matter
of Ma's potential conflict or his investments. It also declined to
comment on media reports that it is in talks to buy back a stake in
the payments firm, or whether Ma would recuse himself from any
Beyond Alipay, analysts and attorneys say they are concerned about
Ma and Alibaba's related-party transactions and "variable interest
entities" -- firms associated with Alibaba in which Ma has a
In the prospectus, Alibaba says structures such as "variable
interest entities" are to its benefit. The investments give Alibaba
flexibility in the face of Chinese regulation. Ma can assume legal
ownership of a company and agree to transfer "all economic benefits"
to Alibaba when legally permitted, the prospectus said.
According to Tuesday's prospectus, Ma has a 40 percent stake in
"several entities" with ties to Yunfeng Capital, an investment firm
that has operated alongside Alibaba.
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"You've got this complex web of variable interest entities, limited
shareholder voting rights," said Jim Angel, associate professor of
finance at Georgetown University. "There's definitely a lot of
questions over this offering, but there's no doubt that Alibaba is a
major e-commerce play."
The deals can be complex. In April, Alibaba agreed to loan 6.5
billion yuan (about $1 billion) to co-founder Simon Xie. Through
another company formed with Ma, Xie would then purchase a minority
stake in Wasu Media Holding Co, an internet TV firm. Alibaba at the
time announced it had reached a cooperation deal with Wasu Digital
TV Media Group, the listed company's parent. It did not mention the
loans or investment.
Alibaba also holds a stake in a separate TV and film company, and
M&A lawyers have said the purchase could have been designed to
circumvent anti-competition rules.
"This arrangement certainly raises serious questions about corporate
governance," a Beijing-based attorney at a multinational law firm
said when the investment was made. The person declined to be
identified because of the sensitivity of the matter.
"Alibaba's tendency to do these kinds of deals makes the company
appear to be cavalier about these kinds of conflicts. Here you have
a guy in senior management taking 6 billion yuan out of his company
to make an investment in another firm that he controls."
Ma's investments do not ring alarm bells for everyone.
"This is one of those risk factors they have to tell you about, but
you don't have to worry about it as long as Jack Ma retains a
meaningful stake in Alibaba," said Lise Buyer, an IPO adviser who
guided Google Inc's 2004 offering.
"This seems to me that something investors should be aware of, but
not something they should be particularly nervous about at this
stage in the company's life," Buyer said. "Call me in a year."
But Buyer raised another issue -- the fact that Alibaba had just
four board members. It intends to expand that to nine, but investors
should wait to see who gets appointed before its listing, she said.
"It would be nice to see that before putting your money down," she
(Additional reporting by Sarah McBride and Deepa Seetharaman in San
Francisco, Editing by Edwin Chan and Peter Henderson)
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