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 In Alibaba's latest filings with the U.S. Securities and Exchange
Commission (SEC), it said Ma this year initiated a bonus program
that allowed senior executives and Alibaba staff to acquire share
rights at an affiliated company he controls.
Alibaba on Tuesday underscored the potential conflict of interest
from Ma's role as Alibaba's executive chairman and as the
controlling shareholder at the company which holds Alibaba's
affiliated Alipay payment business - even as the company said it was
forging a closer relationship with the unit.
"If conflicts arise," Alibaba said in an amended SEC filing, "such
conflicts may not be resolved in our favor."
Companies routinely amend their filings ahead of an IPO. In
Tuesday's filing, Alibaba expanded its "risk factors" comments, but
it was not clear whether this reflected any concerns raised by the
SEC or potential investors.
Alibaba's CEO Jonathan Lu, chief people officer Lucy Peng, and chief
risk officer Shao Xiaofeng, are among 20 senior executives who have
benefited from the bonus program, taking share rights which provide
the holder with the economic benefits of the stock, company
registration documents show.
All 20, along with Ma, are members of the Alibaba Partnership, the
27-member group which will have the exclusive right to nominate a
majority of Alibaba's board of directors, documents show.
A bonus scheme granting employees at a listed company shares in an
unlisted affiliate doesn't raise any legal concerns, but it is
unusual for a firm to allow an executive to independently determine
compensation, corporate governance experts say.
The scheme potentially further separates Alibaba investors from
voting control of the company, said Charles Elson, director at the
Center for Corporate Governance at the University of Delaware. "For
investors, it's a troubling structure. Public shareholders are going
to put up lots of capital, but get very little back in terms of
control."
The rewards program, which Ma intends to continue using, may also
deepen the 49-year-old executive chairman's control of Alibaba's
executive management, and allow him to further influence how the
company's board is selected.
"Alibaba is doing many things that go against what is considered
best practice in corporate governance," said Paul Gillis, an
accounting professor at Peking University's Guanghua School of
Management. "These kinds of structures can be dangerous in a large
organization because they lack transparency and may misalign the
interests of shareholders and employees."
PAYMENT, FINANCIAL SERVICES
Ma this year began distributing share rights for Zhejiang Alibaba
E-Commerce (Small and Micro Financial Services Co), a Hangzhou-registered
company that holds Alipay and other financial services licenses. Ma
stripped Alipay from Alibaba four years ago in a controversial move
that damaged relations with major shareholders, led by Yahoo Inc.
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Alibaba's 20 executives acquired about 42 percent of Small and Micro
Financial Services' shareholding rights through participation in
Hangzhou Junao Equity Investment Partnership, an entity registered
late last year which is controlled by Ma through a separate unit,
Hangzhou Yunbo Investment Consultancy Ltd.
Alibaba said on Tuesday that Ma believes the equity-related awards
tied company employees "to the success" of Small and Micro Financial
Services, which has entered into a more far-reaching framework
agreement with the e-commerce firm.
As of March, the Alibaba executives agreed to pay 921.3 million yuan
($149 million) for the share rights, company registration documents
show. The rest of Small and Micro Financial Services was recently
transferred to Hangzhou Junhan Investment Partnership, another
entity controlled by Ma, Alibaba said in its filings.
In March, Ma also used Junhan to give similar share-based awards to
most Alibaba employees, Alibaba said in a July SEC filing. Ma
intends to "issue additional share-based awards" to Alibaba staff
"from time to time in the future," it added.
The Junhan share-based employee awards will be vested "upon the
fulfillment of requisite service," Alibaba said. Similar awards by
Junhan will be subject to the approval of the company's audit
committee.
The awards, to be settled in cash, are similar to share appreciation
awards and are linked to the valuation of Small and Micro Financial
Services. Junhan has the right to buy back the awards if the company
should sell shares in a public offering.
Ma's own stake in Small and Micro Financial Services would be
"reduced over time" to equal his 8.9 percent shareholding in Alibaba
Group, with the share reduction to take place over the next 3-5
years, Alibaba said on Tuesday.
While Alibaba isn't obliged to pay for the awards, and the Alibaba
founder pledged not to receive "any economic benefit" from the
reduction in his shareholding in Small and Micro Financial Services,
the company will record future related costs, it said.
"Jack (Ma), through his role with us and his control over Junhan
could be in a position to propose and promote further share-based
grants that result in additional, and potentially significant,
expenses to our company," Alibaba said in Tuesday's filing.
(Editing by Ian Geoghegan)
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