How Jack Ma Completely Controls Alibaba
How Jack Ma Completely Controls Alibaba
Author’s note: You can watch the video below.
I have no idea what is going on with Alibaba but I thought that with the recent news it is a good time to share this video about Jack Ma’s control of the company. He has always struck me as a nice and open fellow. But there was always this weird undercurrent about him that hints at the ruthless capitalist underneath. He likes to hobnob with Masayoshi Son and SoftBank … but boom he separates Alipay from Alibaba without communications.
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Who controls Alibaba Group? The answer is of course Jack Ma, China’s richest man. If you want to be a smart mouth, you might also answer with “the Communist Party of China”. But it is Jack Ma.
Okay, we are done with the video right? If you want, but the way he exercises that control is pretty interesting. Chinese companies are well known for their insanely complicated structures. Alibaba is more complicated than most.
In this short video I want to look at how Jack Ma maintains control of two of China's biggest companies. Even if Jack Ma was to retire (as he has already) and sell every share of Alibaba Group (and Ant too), control of both companies can probably never be taken away from him.
How It Usually Works
In the United States and other western countries, the amount of control a person or entity exercises over a company depends on their share ownership. Shareholders elect a board of directors. The board is then able to fire and replace senior management as needed.
For most normal western corporations, it is possible for shareholders to buy a stake in the company and agitate for change. They can attempt to convince fellow shareholders to elect their own nominees to a company's board in a process known as a "proxy battle". I recently discussed one such proxy battle in my video about Broadcom attempting to buy out Qualcomm.
These types of investors are known as activist shareholders. A lot of people have bad impressions of these activist shareholders, calling them "corporate raiders". Such people can definitely exist.
But positive things can come out of activism as well. One example is Microsoft and a hedge fund called ValueAct. This fund bought $2 billion in Microsoft stock and then quietly worked with the company to replace then-CEO Steve Ballmer with Satya Nadella. This new CEO led Microsoft into a new era as a cloud-focused services company and the stock has soared ever since.
Now ValueAct was able to do that because Microsoft's structure has a simple concept. One share is one vote. There are a few companies that do not follow this structure. Google and Facebook for example have different classes of shares that have unequal number of votes. It will be very hard to attempt to vote out Mark Zuckerberg. Tech investors usually tolerate this because they highly value company founders.
Alibaba Group founder Jack Ma today owns less than 5% of the $500 billion company. Joe Tsai, his close cofounder and owner of the Brooklyn Nets, holds even less. Something like 3%. This stake is quite low for a founder, and is today dwarfed by that held by SoftBank.
So there is some risk that Softbank or some other large shareholder can decide to remove Jack. So to protect the founder's control, Alibaba goes beyond a simple multi-class shareholder vote structure.
Alibaba’s Structure
When Alibaba was founded February 20, 1999 in Jack Ma's "Lakeside Gardens" apartment, Jack Ma could have funded the corporation all by himself. He chose not to, asking seventeen other people to invest and be his cofounders.
These eighteen partners would lay the future of Alibaba's early growth and help it become the e-commerce titan it is today. In 2010, Alibaba solidified the "partnership" structure by creating a Cayman Islands partnership called Lakeside Partners LP.
Alibaba Group's stock is publicly traded in the United States as an American Depository Share or ADS. You can buy an ADS today through Robinhood or something like that. There is one class of ADS out there, unlike those other founder-led tech companies like Facebook and Google.
This structure could place potential voting control of the company in the hands of those with the most shares. So Alibaba's charter gives Lakeside Partners, the aforementioned Cayman Partnership, the power to appoint a simple majority of the board at all times.
The 36 current members of this Lakeside Partnership are almost all either Alibaba or Ant Group executives. 27 Alibaba and 8 Ant. Jack Ma can control the votes of these nominees in a few ways. First, either Ant and Alibaba directly employs these people. If they piss off Jack then, they can lose their jobs.
But second, those directors only have their positions as members because they were chosen by a subcommittee within the Lakeside Partnership: The Partnership Committee.
Yes, stick with me here. Even within this exclusive group of people, there is another even more exclusive group. This group of 5 to 7 directors cycles out every 5 years ... except for two guys. Guess who they might be? Jack Ma and Joe Tsai. The two Continuity Partners.
Jack and Joe will be Continuity Partners for as long as they want - until the age of 70, unless removed through death or incapacitation. Every other Partner has a retirement limit of 60 years.
VIEs, the Big Red Button
It is commonly meme'ed in investor forums that when you buy shares of the Alibaba ADS, you are not buying shares in the actual corporate entity that owns Taobao and T-Mall. Instead, you are buying shares in a Cayman Islands-domiciled corporation that has signed contracts with the actual Chinese entity to receive its profits. This Chinese entity is referred to as a Variable Interest Entity.
The Chinese VIEs hold the actual Chinese licenses that allow Alibaba to do its business. The four most important VIEs are Zhejiang Taobao Network Co., Ltd., Zhejiang Tmall Network Co., Ltd., Alibaba Cloud Computing Ltd., and Youku Information Technology (Beijing) Co., Ltd. As you can guess from their names, they correspond to Alibaba's most important corporate assets.
If you go strictly by Chinese law, VIEs are illegal and in prior years, Chinese courts have invalidated a similar structure. But because the government has never actually been called to test and do something about it, it leaves the whole thing alone as a matter of strategic ambiguity.
What this practically means is that nobody is going to try to sue Jack over Alibaba's control. Neither in China or anywhere else. If someone tried, they run the risk of the court declaring the VIE illegal and dissolving the whole thing. The outside investors as such would be entirely hosed.
I would call this path of action though a last resort. A big red button. But it has been exercised before. It was this red button that Jack pushed in transferring ownership of Alipay from Alibaba to himself.
Ant Group
Ant Group is the PayPal to Alibaba's eBay. Ant Group used to be just AliPay, which helps facilitates financial transactions between customers and sellers. The company renamed itself and became the biggest single fintech player in the country.
Ant has been in the news a lot recently, largely because of its canceled IPO and certain comments Jack Ma has made in public. I did a video about it. But another thing to keep in mind about Ant Group is that Jack has total control over it as well. Ant is the key that keeps Alibaba Group locked up in Ma's pocket.
In 2010, Alipay applied to the People's Bank of China for a license to transact payments. The PBOC faxed a request to Alipay, asking whether or not there was a VIE contract arrangement between itself and foreign owned investors. The answer was yes. The foreign owners were then Yahoo and SoftBank.
Jack Ma judged this request to be a sign that the PBOC will cancel the Alipay license. He canceled the VIE contract between Alipay and the foreign owned investors (Yahoo and SoftBank) and transferred it to himself. It was a whole kerfuffle.
Jack Ma has complete control of Ant. Alibaba might have 33% equity share but Jack controls it through two general partnerships of which he owns a 100% share. These two partnerships have 50% of the voting interest. Furthermore, the Ant board is chosen by Ant and Alibaba together. And as you remember, Alibaba has 8 Ant Group executives in its Lakeside Partnership.
Conclusion
So it all flows back to Jack Ma. Jack controls Ant. Jack uses that control to control Alibaba. And vice versa. One helps with the other. The thing that I kind of find interesting is that the Partnership Committee's elevated status within the Alibaba Partnership kind of reflects the Chinese Communist Party's powerful Politburo Standing Committee structure. I wonder if that was intentional. Probably not.
You can make an argument that this structure hurts minority shareholders. There is a real precedent of it happening, as when Jack Ma transferred Alipay to himself. If Alibaba was an American company, then this can be labeled a self-dealing transaction and open Jack to litigation. After all, he enriched himself - even if he claims it had been necessary.
People and investors tolerate this because they are tempted by the size of the market and they like Jack Ma. The company and its founder are tightly bound. I think Ma knows this as he has not given up these powers and control even as he has stepped down from various positions and essentially “retired”. Jack will continue to play a part in the company’s direction for the foreseeable future whether investors like it or not.
Unless of course, the Party decides otherwise.