Last week, Fa-Alpha Chen a PhD student reading law at the University of Cambridge, presented an overview of Alibaba. Below is a briefing of some of his discussion:
A Portrait of Alibaba – By Fa-Alpha Chen
This topic will give a brief introduction of Alibaba in the dimensions of corporate governance and IP.
- The business units of Alibaba
Most people understand Alibaba as a platform involving E-commerce. However, Alibaba has already expanded its business in quite broad fields, covering digital finance (Alipay), cloud computing and big data (Alibaba Cloud), culture and entertainment (Youku, UC),Travel (Navi: Autonavi; Bicycle sharing: Hellobike),item delivery (Cainiao), etc.
Some of the business units were incubated from E-commerce, e.g. Alipay and Alibaba Cloud, while some were the outcome of acquisition of other companies, e.g. Youku and Autonavi, both of which were previously US-listed companies before going private to be private subsidiaries of Alibaba.
- Alibaba Partnership
Even though Alibaba adopts the one-share-one-vote principle, the real controller of this company is not the largest shareholder. Instead, the Alibaba Partners as a whole is the actual controller.
When going public on NYSE, Alibaba (Stock Symbol: BABA) designed a unique framework above the board, namely, Alibaba Partnership, which in fact decides the operation of Alibaba. This partnership enjoys two special rights: one is the exclusive right to nominate directors, while the other relates to the allocation of bonus.
According to the articles of association, even though the director nominees should be appointed at the general meeting of shareholders, in case these nominees are denied by the general meeting of shareholders or leave the board after election regardless of the reason, Alibaba Partnership enjoys the right to appoint an interim director who serves until the following annual general meeting of shareholders. There is no limitation of such an appointment in terms of frequency, which means that as long as the nominees chosen by Alibaba Partnership are not elected by the general meeting of shareholders, this Partnership could appoint interim directors constantly. Such a stipulation results in an effect that Alibaba Partnership has the actual power to nominate directors, even though in the name of nominees or interim directors. Furthermore, pursuant to the articles, whenever the directors nominated (including the interim directors appointed) by Alibaba Partnership take up less than a majority of the total directors on board, Alibaba Partnership is empowered to appoint additional directors to the board at its sole discretion without any additional shareholder approval to ensure that the directors nominated or appointed by Alibaba Partnership could comprise a simple majority of the board. According to BABA’s recent annual report, there are eleven directors on the board currently, of which five are Alibaba Partnership nominees. Consequently, this Partnership is entitled to appoint two additional directors to increase its nominees to seven, occupying a simple majority of the thirteen directors in total.
Alibaba Partnership also determines the allocation of corporate bonus. The allocation of bonus,prima facie, is decided by the compensation committee according to its articles of association. However, the compensation committee is established by the board of directors. Since Alibaba Partnership controls at least a simple majority of the directors as discussed above, it determines the de facto allocation of bonus.
Several other stipulations in the articles of association make Alibaba Partnership unbreakable. Firstly, the election of partners is the own business of this Partnership. The number of partners is dynamic and new partners are elected annually. The election of new partners requires the approval of at least 75% of all the partners without the participation of shareholders. Secondly, Alibaba Partnership’s nomination rights and related provisions of the articles of association cannot be changed unless upon 95% of voting rights. Due to the agreement between Alibaba Partnership and the largest two shareholders of BABA named Softbank and Yahoo which hold approximately 30% and 15% of shares respectively, as well as the fact that the co-founders Jack Ma and Joseph C. Tsai jointly hold about 8% of the total shares, it is impossible for outsiders to collect 95% of voting rights to abolish this Partnership per seas well as its exclusive directors nomination right. Lastly, there is a bottom clause that where any change of control, merger or sale of BABA, Alibaba Partnership should not be transferred or otherwise delegated or given a proxy to any third-party with respect to the right to nominate directors.
- IP Related Facet
Each year, Alibaba spends a lot of money to import movies, TV drama, music from overseas producers, e.g. Sherlock 4 from BBC. Since it relates to cross-border IP licence, the relevant protection via litigation against infringement is, in practice, a difficult problem in China.
Firstly, who has the right to initiate litigation? IP license could be conducted on either an exclusive or non-exclusive basis. The right to initiate and deal with litigation is another right other than Intellectual Property Rights. In order for Alibaba to file litigation, it should get relevant authorisation from overseas producers. The litigation could be filed in Alibaba’s own name or on behalf of both itself and the foreign producer, depending on the contract terms.
Secondly, all the documents (e.g. Letter of Authorisation) should be legalised through notarisation, e.g. A notary issues a certificate to certify that the Letter of Authorisation between BBC and Alibaba is signed on his face and the signature is true. According to the Articles of Association of BBC, the person who signed the Letter of Authorisation has the right to do so. The Ministry of Justice needs to certify that the notary is qualified. Chinese authority needs to certify the certificate issued by the Ministry of Justice of the UK. All the documents need to be translated in Chinese by a qualified translator.
Lastly, the litigation will be quite time-consuming, and it is normal for such a litigation to last for 2-3 years to receive a final ruling from the court. Moreover, the compensation for the plaintiff is very low.