Although it might seem like it given all of the fawning press coverage, not everyone is gung ho about the impending Alibaba IPO. Mark Mobius, the head of emerging markets for Franklin Templeton Investments, warns investors that Alibaba’s voting structure will leave shareholders with almost no influence over management — and almost no legal recourse if problems develop at the firm. Mobius described Alibaba as a “very dangerous situation” for shareholders.
Problems with Alibaba structure
A number of analysts have noted issues regarding Alibaba’s corporate structure on two fronts. The first issue is that the company’s partners control appointments to the board of directors. in effect leaving shareholders with no direct voice.
The other issue analysts have mentioned is that Alibaba is listing as a variable interest entity (VIE). Although arguably necessary to deal with China’s strict foreign investment rules, a VIE results in a complex ownership structure that would mean major problem for anyone trying to take legal action against the firm.
“You’d have to go to a Chinese court and it would be very difficult, maybe even impossible,” Mobius explained. “The founders have control of the key assets of the company and if something goes wrong there’s nothing you can do about it. This is the bottom line.”
In fact, Alibaba’s corporate structure was rejected by the Hong Kong stock exchange for this reason during preliminary talks about a possible listing there. Alibaba next applied to the New Yourk Stock Exchange where it was cleared for an IPO.
Even Alibaba’s excellent prospects and dominant position in the Chinese e-commerce market does not make it irresistible for Mobius.
“My advice for investors is to be very, very cautious and look at the fine print, and don’t … get involved in these things if [you’re] not going to have any recourse,” he said.
The above-mentioned concerns over the corporate structure of Alibaba have not dampened investor appetite for shares, however. Earlier this week, Alibaba decided to increase the price range for the IPO shares to $66 to $68 a share from $60 to $66, confirming strong demand for the shares.