Date
18 December 2017
The damning SAIC report suggests Alibaba intended to conceal certain negative information from potential investors ahead of its US listing. Photo: HKEJ
The damning SAIC report suggests Alibaba intended to conceal certain negative information from potential investors ahead of its US listing. Photo: HKEJ

Was losing Alibaba IPO, a blessing in disguise for Hong Kong?

E-commerce behemoth Alibaba is in the eye of the storm.

First, it has been waging a war of words with China’s State Administration of Industry and Commerce (SAIC) over fake goods and misconduct.

Then comes its results announcement saying third-quarter sales missed market expectations. The stock tanked more than 8 percent on Thursday.

The share price tumbled nearly 13 percent for the week, wiping US$32.8 billion off its market value.

Many people and investors were disappointed when Alibaba announced its decision to list in the United States, rather than Hong Kong, in September.

But with its present troubles, Alibaba is showing investors should not have fretted about the listing choice in the first place.

The partnership structure that Alibaba sought — and got — from US regulators, something it couln’t bring the Hong Kong stock exchange to do, gives the group nearly absolute control of the post-IPO board.

This governance structure limits shareholders’ ability to influence corporate matters, including any issues determined at the board level.

Individual shareholders’ voice is largely muted as a result.

This structure was the major sticking point in its early plans to list in Hong Kong but Hong Kong decided to keep its longstanding “one share, one vote” principle.

Also, the lack of a class action law in Hong Kong leaves shareholders helpless if anything bad happens.

“We have expected that Alibaba will face tons of lawsuits, including those from consumers, regulators as well as shareholders,” Ming Pao Daily quoted a fund manager as saying.

Without the class action law, it is not easy for Hong Kong shareholders to come together and claw back losses as one. Investors are left with no protection at all, the fund manager said.

Meanwhile, US class action lawyers are rolling up their sleeves and gearing up for a fight.

On Thursday, US-based law firm Pomerantz said it is investigating claims on behalf of investors that Alibaba employees took bribes and did not effectively address complaints about its website.

The lawsuit is based on the accusations by SAIC.

Also, it has been reported that the US Securities and Exchange Commission has been trying to determine whether there are major differences between what the SAIC report found and what Alibaba disclosed in its IPO prospectus.

However, shareholders’ hands will be tied if such a thing happens in Hong Kong. They can do nothing but watch the share price slump.

The fight between Alibaba and SAIC started last week when a SAIC report revealed that more than 60 percent of goods sold on Alibaba’s Taobao platform are counterfeit.

Taobao returned fire by forwarding a Taobao online shop owner’s post on its official Weibo account.

The post said the problem was in the SAIC survey method and accused the SAIC official who made the assessment as too emotional.

The watchdog dropped a bombshell by releasing a white paper, accusing Alibaba of “long-existing problems in mismanagement of transaction activity and other issues”.

It also said Alibaba was too lax in policing its sites against counterfeit and pirated goods.

Worse, SAIC said the agency had talked with Alibaba on the problems in July but the damning report was kept confidential to avoid interfering with Alibaba’s IPO, a clear evidence that the e-commerce giant intended to conceal or hide something from potential investors and shareholders.

What SAIC will do next is crucial, as most of the lawsuits will certainly be based on its report and the white paper.

Taking a surprise turn, SAIC’s white paper was suddenly taken down from its official website. The link no longer works.

Alibaba founder Jack Ma is said to have a good relationship with the central government, so he may have been pulling strings behind the scene to make the negative report go away.

It’s also possible Ma has already made some sort of deal with Beijing to clean up Alibaba’s act in return for keeping the report from the public.

It would be interesting to see how things will unfold.

Timeline:

Jan. 23 – SAIC releases a report showing Taobao had the lowest rate of authentic goods among a group of six e-commerce companies, with only 37.25 percent of 51 product samples found to be genuine.

Jan. 27 –Taobao fires back by forwarding an online shop owner’s post on Weibo. The owner says the inspection was flawed and contradicted previous data, pointing out the authority’s sample was too small to adequately represent the enormous trade volume on the platform. The author also questions Liu Hong-liang, internet-monitoring director of SAIC, of singling out Taobao.

Jan. 28 – SAIC responds with a white paper on Alibaba, blaming it for lax checks on sellers using its e-commerce platforms. It also criticizes the business practices of Taobao shop owners. Alibaba replies that Taobao has no choice but to admit fault and try to tackle the problem. However, it says the platform is not responsible.

Jan 29 – The fight between Alibaba and the government escalates when state media People’s Daily, siding with SAIC, sharply rebukes Alibaba for making excuses. It also warns companies not to misuse their wealth and prestige. Alibaba says it has established a special team of 300 people to crack down on the counterfeits. The SAIC’s white paper is deleted from its website and Alibaba shares plunge as much as 10 percent on weaker-than-expected revenue for its fiscal third quarter.

– Contact us at [email protected]

RA

EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe