Alibaba vs corporate governance: Rules for listing around the world

As the number of high-profile IPOs increases, Ashfords partner James Lyons compares corporate governance rules around the world and how this impacts on where a business lists.

Chinese e-commerce giant Alibaba is now reportedly considering a New York listing after discussions with the Hong Kong Stock Exchange (HKEx) ended in September 2013 following a conflict between Alibaba’s proposed governance structure and pressure from the HKEx’s regulators and investors to uphold shareholder equality in publicly listed companies.

Specifically, the 28 partners at Alibaba proposed that they alone should retain control to nominate the majority of the board despite between them holding an aggregate minority shareholding of less than 15 per cent of the company.

This proposed structure has proven controversial. The Hong Kong market works from a fundamental public policy that all listed companies’ shareholders are to be treated in the same fair way and as such, multiple share classes such as those envisaged by Alibaba are not permitted on the HKEx.

This differs in the US. The US listing policy allows for dual share classes in which a class of equity shareholders may have the power to nominate or remove directors as a quid pro quo for ensuring compliance with more stringent reporting requirements. It is thought that Alibaba may consider restructuring its management arrangement to take advantage of this dual-class policy in the US.

Alibaba would not be the first. In August 2011, Manchester United decided not to list in Hong Kong and chose the New York Stock Exchange (NYSE) where it has a two-class equity ownership structure that lets insiders retain control. Technology giants Google and Facebook, both listed on Nasdaq, also take advantage of two classes of stock. It seems the US is suited for companies that are interested in unique corporate structures offering particular controlling rights.

So how might such a listing structure be treated in the UK? Good corporate governance is a major component of being listed on either the Main Market or the Alternative Investment Market (AIM) of the London Stock Exchange (LSE). And whilst neither the Listing Rules nor the AIM Rules prevent a listed company from having more than one class of share, the principle of board control resting in the hands of a minority shareholding seems at odds with the well established corporate governance codes and practices in the UK.

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When making an application for admission to AIM, a company must select a Nominated Adviser (Nomad) to report on its suitability for listing on the market. Whilst the AIM Rules contemplate the possibility of a company having multiple share classes, the respective rights attaching to the different classes would likely be deemed relevant by the company’s Nomad when considering whether it is able to make the required confirmation to the LSE that the company is appropriate for admission to trading on AIM.

This is particularly likely in a case similar to Alibaba’s, where the proposed class rights would provide the holders of a separate class of securities with significant and preferential rights to the holders of the traded shares, a governance structure contrary to UK corporate governance principles and which may be viewed adversely from an investor relations perspective.

Similarly, the UK Listing Authority’s form of application for the admission of securities to the Official List also provides for the possibility that the company may have more than one class of securities. However, the UK Corporate Governance Code (the Code), to which premium listed companies adhere through a ‘comply or explain’ regime, states that the shareholders’ role in corporate governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. A comply and explain culture exists, in which principles such as effectiveness, accountability, and relations with shareholders must be adhered to or adequately justified.

If applying for listing in London, Alibaba’s proposed management structure would not exhibit the principles of the Code, and an adequate justification for maintaining control of the board amongst a minority of shareholders is likely to be a very difficult ‘sell’ here in particular amongst institutional investors.

Whilst the partners of Alibaba state that their multiple class structure can assist in ‘shielding the company’s long-range development plans from the short-term profit-seeking trends of the capital market’, it appears that such an argument would have little standing with the LSE when compared to the level of corporate governance that it encourages and which investors expect.

As a result of the Alibaba story, many commentators have said that the HKEx’s inflexibility in corporate governance may affect its ability to attract big initial public offerings, which in turn will have a bearing on its long-term success. Conversely, however, the stringent corporate governance standards to which listed companies adhere on the London Stock Exchange are one of the London market’s perceived strengths in continuing to attract companies and investors, allowing London to retain its position as one of the leading global markets.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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