There may be some virtue in quitting while you’re ahead, but Jack Ma’s announcement that he will step down as chairman of Alibaba Group in September next year still caught many by surprise, and has triggered a lot of speculation as to the real reasons behind his decision.
While he is currently the chairman and a partner of Alibaba, Ma only holds a 6.4 percent stake in the group. That makes him the third largest shareholder of the company he founded, behind Softbank and Altaba, which hold 28.8 percent and 14.8 percent respectively.
But under Alibaba’s partnership structure, all company decisions will be made by the Alibaba partners. As a partner of the group, Ma can continue to exercise his control over the company even if he has no official title.
Alibaba currently controls hundreds of companies operating in China under a foreign ownership since the group is listed in the United States and the majority of its equity shares are held by Softbank and Altaba.
Under Chinese laws, foreign companies are not allowed to take control of a government-licensed internet business such as operating a website or an e-commerce platform. In order to bring Alibaba’s operating arms in China under foreign control, Ma and co-founder Simon Xie were made owners of the group’s variable interest entities (VIEs). The VIEs hold Alibaba’s business licenses to operate websites in China while taking investment from outside China.
A company filing shows that Ma and Xie have passed the ownership of VIEs to a group of five, although the names of the new owners are not disclosed.
While Alibaba said Ma’s decision to step down is intended to reduce his administrative burden, such a change has been in effect under a VIEs enhancement plan.
The plan aims to make VIEs structure more stable and self-sustaining by distancing the natural person interest holders from the VIE through multiple layers of legal entities, including a partnership structure.
According to the filing, the VIEs will be owned by two limited partnerships in China, each of which will hold 50 percent equity interest. Each of these partnerships consists of a China limited liability company, as general partner, which is formed by five selected members of the Alibaba partnership and the management consisting of Chinese citizens, and the same group of natural persons as limited partners.
As such, these legal structures are still under the control of Ma and his partners.
Investors need not worry about the future of Alibaba even if Ma cedes control of these legal structures. Ma will still play an influential role in the partnership system he has created; all the partners will still have to follow him as the five-member team will only serve as his proxies in the company.
Nonetheless, there are regulatory risks. The government has yet to confirm the validity of the VIE structure. So if the VIE structure is ruled illegal in China, the US-listed shares of Alibaba could have zero value as the foreign company has no direct control of the Chinese operating arms.
Some observers conjecture that escalating trade tensions between the US and China could bring further uncertainties to the VIE arrangement. Beijing may decree that all Chinese technology firms operating domestically must be controlled by local firms, a development that could demolish the VIE structure.
The market is closely watching whether Ma would also give up his ultimate control of Ant Financial, which owns the Alipay mobile payment platform.
In 2011, Alibaba transferred the payment arm to a separate company controlled by Ma without the board’s permission. Media reports said Ant Financial is seeking to launch an initial public offering that would give it a valuation of US$150 billion.
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