Alibaba whom originally attempted to be listed on the Hong Kong Stock Exchange, made as a condition of its listing, the ability for it to retain control over the composition of directors on its board. This would have given 28 partners (mainly founders and senior executives, who own about 10% of the company) the power to nominate a majority of its board members (South China Morning Post, 2013).The SEHK, on the other hand, wanted to hold true to its principle that all shareholders should be treated fairly and rejected the proposal (Wall Street Journal, 2013). The Securities and Futures Commission (SFC) said giving partners that much voting power would cut across the one-share, one-vote principle that underpins Hong Kong's securities law.
More recently, towards the end of January 2015, it was claimed that Alibaba misled investors in the lead-up to its IPO, after a Chinese government regulator revealed the group had failed to disclose a regulatory probe (Financial Times, 2015), criticising Alibaba for inadequate supervision of its eCommerce merchants. This information was not released publicly until now, as it may have impeded Alibaba’s preparations for its initial public offering! The US Securities and Exchange Commission, which enforces IPO disclosure rules, refused to address this situation which in my opinion should be taken more seriously, as it is a punishable offence! This exemplifies that the enforcement of rules in the US are weak, further indicating poorer corporate governance standards in the US.
The availability of reliable information is vitally important to investors. Having current up-to-date information will allow them to make rational decisions and investments (Slovic, Fleissne, & Bauman, 1972). The efficient markets hypothesis (EMH) developed by Fama (1965), popularly known as the Random Walk Theory, is the proposition that current stock prices fully reflect available information about the value of the firm. Alibaba have failed to provide this information to the public. In order for a stock market to be efficient, in both the strong and semi-strong form, share prices must reflect all historic and publicly available information (Fama, 1970). This was not present at the time when investors rushed to buy shares in the company back in September 2014.
Figure 1: Alibaba's share price from December 2014 to February 2015
 |
| Source: Financial Times (2015) |
Following the announcement of this information being
leaked to the public at the end of January 2015, Alibaba's share price dropped
quite significantly, indicating that investors were clearly unhappy about
this.
Minority expropriation problems have been a long-running
feature in the block-held corporate economy of Hong Kong (Barker &
Chiu, 2015). This is identified throughout academic literature, most
significantly in LaPorta et al. (1998) whose study showed that countries with
concentrated share ownership have poor investor protection. However, Shleifer
and Vishny (1997) argue Hong Kong’s strong legal environment may prevent large
investors from expropriating minority shareholders’ rights. This is supported
by LaPorta et al's (1997) analysis of legal protection and enforcement in a
range of different countries including Hong Kong. The case of Alibaba’s IPO suggests that Shleifer
and Vishny's (1997) argument is extremely viable,
even though they wrote their paper 18 years ago! In my opinion corporate
governance in Hong Kong has developed significantly since these studies, given
Hong Kong’s corporate governance reforms over the past decade.
I think it is admiral that the SEHK and SFC are committed to maintain a high level of minority shareholder protection and are determined not to dilute their high corporate
governance standards. The SEHK and SFC seem determined not to ‘water down’ corporate
governance standards even though having Alibaba listed on the SEHK would have been greatly beneficial. The loss of Alibaba’s potential listing in Hong
Kong due to a failure to agree on an acceptable governance structure between
issuer and regulator caused fury in the investment and professional
services industries due to the loss of fee revenues such as flotation that the deal would have
generated.
On the other hand, I can’t help but feel disappointed
that Alibaba are allowed to get their own way on the NYSE. To me, this implies
that corporate governance standards in the US are significantly lower than that
of Hong Kong. I am currently writing my dissertation which is heavily based
around corporate governance in Hong Kong, and I am therefore aware that unlike
the majority of Europe and Hong Kong, US companies follow a rule based
governance code rather than principles based (Sama & Shoaf, 2005). In my
opinion, this approach is a step back and doesn’t reflect
the spirit of the corporate governance codes.
To conclude, I believe the SEHK made the correct decision
to refuse Alibaba’s initial public offering. If Alibaba was allowed to be
listed on the SEHK, both the SEHK and SFC would need to dilute Hong Kong’s
corporate governance standards, which would be a shame as corporate governance
has improved significantly in Hong Kong over the past decade. In addition, I can’t help but
feel frustrated at the fact Alibaba can so easily be listed on the NYSE. This
example is a simple indicator that governance standards are lower in America
than in Hong Kong. If anyone has any opposing views, please leave a comment below.
References
Barker, R., & Chiu, I. H. -. Y. (2015). Protecting
minority shareholders in blockholder-controlled companies: Evaluating the UK's
enhanced listing regime in comparison with investor protection regimes in new
york and hong kong. Capital Markets Law Journal, 10(1), 98-132.
doi:10.1093/cmlj/kmu031
Bloomberg (2014). Alibaba’s Banks Boost IPO Size
to Record of $25 Billion. Retrieved 08th February 2015,
from http://www.bloomberg.com/news/articles/2014-09-22/alibaba-s-banks-said-to-increase-ipo-size-to-record-25-billion
Fama, E. F. (1965). The behavior of stock-market prices. The
Journal of Business, 38(1), 34-105. doi:10.1086/294743
Fama, E. F. (1970). Efficient capital markets: A review
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Financial Times
(2015). Alibaba denies
misleading investors over Chinese regulator’s probe. Retrieved
08th February 2015, from http://www.ft.com/cms/s/0/8e6a7c70-a6dd-11e4-8a71-00144feab7de.html#axzz3ViEBkWqm
LaPorta, R., Shleifer,
A., & Vishny, R. W. (1997). Legal determinants of
external finance. The Journal of Finance, 52(3), 1131-1150.
doi:10.1111/j.1540-6261.1997.tb02727.x
LaPorta, R., Lopez‐de‐Silanes, F.,
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of Political Economy, 106(6), 1113-1155. doi:10.1086/250042
Sama, L. M., & Shoaf, V. (2005). Reconciling rules
and principles: An ethics-based approach to corporate governance. Journal
of Business Ethics, 58(1/3), 177-185. doi:10.1007/s10551-005-1402-y
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doi:10.1111/j.1540-6261.1997.tb04820.x
South China Morning Post (2013). HKEx Mulls
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2015, from http://www.scmp.com/business/money/markets-investing/article/1343234/hkex-mulls-consultation-shareholding-structures
The Wall Street Journal (2013). HKEx to Alibaba:
Thanks, but No Thanks. Retrieved 08th February 2015, from http://blogs.wsj.com/moneybeat/2013/09/25/hkex-to-alibaba-thanks-but-no-thanks/
