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JACK MA: How he controls ALIBABA through a series of Voting Rights.




 Jack Ma is the founder of Alibaba (USD 681 Billion listed in NYSE). Jack MA effectively holds only a 4.8 % stake in Alibaba as of 25 July 2020 and is worth USD 48.8 Billion as per current rates. He controls the entire Alibaba Holdings Group and Ant Financial (now renamed as Ant) and will eventually control both these entities till the date he decides to retire his personal control over these huge companies. 

Let’s see a few companies where Jack Ma has a direct and/or indirect stake. 

 
  • Alibaba 

  • Ant Financial 

  • Taobao Marketplace 

  • Tmall 

  • 1688.com 

  • AliExpress 

  • Cainiao Network 

  • Ele.me 

  • Koubei 

  • Alipay 

  • Amap 

  • Lyft Inc 

  • Youku Tudou Inc.,(equivalent to YouTube) 

  • Alibaba Pictures Group 

  • South China Morning Post (SCMP) 

  • Lazada Group 

  • Intime Department Store 

  • Paytm 

  • Snapdeal 

  • Paytm Mall 

  • Zomato 

  • BigBasket 

  • Xpressbees 

  • Juhuasuan.com ( equivalent to Groupon) 

  • Alibaba Cloud Computing 

  • Aliwangwang ( instant message service) 

  • Laiwang ( messaging application) 

  • Sina Weibo ( Equivalent to Twitter) 

  • Asiaray Media Group Singapore 

  • Wavemoney Myanmar 


    Jack Ma virtually controls the promoters , Shareholders to hold majority voting rights in some of these companies. 


    How does Jack Ma control all his companies with such low shareholding?



    1. Alibaba Holdings Group ( AHG) is registered in the Cayman Islands and through a series of contracts owns the Alibaba partnership in China.


    2. Alibaba is a Variable Interest Entity ( VIE) , which means it’s registered in the Cayman Islands and makes 90 % revenue in mainland China.


    3. VIE structure relies on a network of fundamental contracts to function. The first set of contracts involves financing. The offshore-listed company, through a loan agreement provides capital to the Chinese Op. Co. by way of the WFOE ( wholly foreign owned enterprise) 

    The Chinese owners also execute an “equity pledge agreement,” which guarantees equity to the WFOE. The WFOE also typically has an “options agreement” with the Chinese owners to purchase equity in the Chinese Op. Co. at the lowest permissible price under the PRC law. Finally, a “consulting or technical service agreement” allocates the operating company’s profits to the WFOE.

    The second set of contracts regulates shareholders’ rights through a proxy agreement. The WFOE obtains the shareholder rights of the Chinese Op. Co. Some VIE-structured companies may use a “preferential stock structure,” which deprives shareholders of traditional voting rights.


    4. Alibaba is an offshore company listed in NYSE and has a series of contracts with its onshore operating company in mainland China. These Shareholders only own a stake in an offshore company and not directly in the operating company. Lack of direct controlling financial interests in VIE companies denies traditional voting rights. 


    5. Alibaba’s board is controlled by a combination of its top managers and partners, even though Japan’s SoftBank Group Corp. and Altaba Inc. formerly known as Yahoo Inc. holds 28.8% and 14.8%, respectively, according to an Alibaba stock exchange filing. Altaba (formerly Yahoo inc) agreed to vote its shares in favor of the election of all of the Alibaba Partnership’s  director nominees and the SoftBank director nominee. 


    6. A separate entity, known as Alibaba Partnership and headed by Alibaba founder Jack Ma, has the right to nominate the majority of the company’s board of directors despite the fact that the partners would maintain a minority stake in Alibaba Holdings Group (AHG). 


    7. With Alibaba, because the partners are entitled to decisions regarding assets reallocation and cash flow attribution, so they effectively receive a larger share of the company’s income. The board is also free to make deals that benefit the partnership at the expense of Alibaba Group’s outside investors.


    8. China does not allow foreign ownership in certain protected industries such as Internet, Finance and Telecommunications. Hence VIEs are created to raise funds outside China. 


    9.Alibaba Partnership operates in China and owns essential key technology and business licenses on behalf of Alibaba Holdings Group (AHG). 


    10. Alibaba Partnership and other shareholders own AHG. 


    11. Jack Ma and Joe Tsai are designated as continuity partners, who may remain partners until they reach the age of seventy (and this age limit may be extended by a majority vote of all partners). 


    12.  All partners except continuity partners are required to retire upon reaching the age of sixty or upon termination of their qualifying employment.


    13. Though Jack Ma stepped down as chairman, Ma will continue to remain a lifetime partner of Alibaba Partnership, a group comprising of 36 members who have the right to nominate a majority of the company's board of directors


    14. Partnership is registered in Cayman Islands as an exempted limited partnership consisting of 36 members, out of which 5 prominent members dictate both the Nomination of partners and Partnership Committee members. 


    15. Morgan Stanley Capital International (MSCI) has listed AHG as the worst corporate governance entity four times.


    16.  USTR (Office of United States Trade Representative) identifies Taobao Marketplace (subsidiary) as a Notorious Market 


    17. Alibaba Partnership pays royalties to AHG and funnels off capital from China. The Alibaba partners transfer all profits from Chinese Op. Co. to WFOE, and eventually to an offshore listing company, serving as the crucial moving part to the VIE machine. The “Exclusive Technical Services Agreement” requires the operating company to pay the WFOE nearly all of its “pre-tax profits” but disguises this payment as a “service fee” to the WFOE. The services provided by a WFOE in the e-commerce industry typically include “website maintenance, programming, sales support, fulfillment services, curriculum development, etc.” In some cases, the WFOE may also receive a royalty for licensing key intellectual property (IP) assets to the operating company. In sum, a Chinese Op. Co. can legally funnel all of its profits through a WFOE to reach the offshore holding company. 


    18.   AHG —the holding company for Alibaba listed on the New York Stock Exchange (NYSE)—claims that it is not subject to tax in China


    19.  Furthermore, the Cayman Islands are not members to any double tax treaties, which makes it more difficult to obtain information and ensure transparency. The Cayman Islands operate as a “secrecy jurisdiction” for corporations and their subsidiaries to hide from taxes and regulation


    20. Alibaba has USD 15.45 Billion outstanding loans in the form of unsecured senior notes and term loans as on 31 March 2020. 


    21. Jack Ma, Joe Tsai (the executive vice chairman) and J. Michael Evans, the president and director, have purchased their own aircraft for both business and personal use. The use of the above-mentioned directors’ and executive officers’ own aircrafts in connection with the performance of their duties is free of charge to AHG, and AHG has agreed to assume the cost of maintenance, crew and operation of the aircraft where the cost is allocated for business purposes.



    22.  In 2011 Jack Ma transferred ownership of Alipay, the payments arm that has since been renamed Ant Financial, out of Alibaba and into a company that he controlled personally. 


    23.   Alibaba owns 33 % of Alipay , but Jack Ma effectively controls about 50 per cent of the voting interest in Ant Group and also Alipay processes 100 % of Alibaba payments. 


    24.  As of March 31, 2020, Hangzhou’s Junhan Equity partnership and Hangzhou Junao Equity partnership held approximately 50% of Ant Group’s equity interest, AHG held 33% and other shareholders held the remaining equity interest.


    25.  Economic interests of Ant Group through Hangzhou Junhan Equity partnership are owned by Jack Ma, Simon Xie and other employees of AHG, Ant Group and its affiliates and investee companies.


    26.  Jack Ma is able to exercise the voting power of Junao Equity partnership  and Junhan Equity partnership, two of the major shareholders of Ant Group, because he owns 100% of the general partner of both Junao and Junhan Equity Partners 


    27.   The Alipay commercial agreement has an initial term of 50 years and is automatically renewable for further periods of 50 years and is subject to AHGs right to terminate at any time upon one year’s prior written notice. If the Alipay commercial agreement is required by applicable regulatory authorities including under stock exchange listing rules, to be modified in certain circumstances, a one-time payment may be payable to AHG by Ant Group to compensate for the impact of the adjustment.


    28. The data sharing agreement initially between Alibaba and Alipay had a minimum term of ten years. In May 2015, AHG board approved the extension of the term of the agreement to a total of 50 years.


    29. Zomato - Alipay holds an edge in voting rights. For instance, it can vote on all matters submitted for the consideration of the company’s shareholders, including those who hold ordinary equity shares. Moreover, if any laws don’t permit Alipay to exercise its voting rights, then Zomato founder Deepinder Goyal shall vote as per its instructions. Also Alipay has secured the right to become the largest shareholder in Zomato as well and that Alibaba can also subscribe to the food delivery company’s shares. Besides, Alipay will have a say on any strategic agreements by Zomato in payments, online-to-offline services and e-commerce segments. 


    In effect Alibaba China business is owned and controlled by Jack Ma and the public outside shareholders own stakes in an offshore entity which receives revenue entirely at the discretion of an Operating Company which is not legally owned by this public listed entity and cannot be owned by any foreign entities as per prevailing PRC laws. 


    Credits : MacKensie Larson and Annual report of Alibaba filed with SEC




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