Alibaba Case Study

1. Describe dual class share structure.

The dual class share structure means that the company issues different classes of shares which have different voting right, but present the same underlying ownership of the company. The mismatch between voting rights and capital enables shareholders to own a small portion of total stocks but get most of the voting power; in other words, some shareholders can get more voting rights than others, and thus can control the company with minority cash flow. The objective of this structure is to ensure founders who want to maintain control as well as want the public market to provide financing.

Advantages: 1.to allow both founders and top executives to control the company together, and protect founders’ vision. Company may benefit from this structure, because founders top executives pay more attention on the most recent quarterly figures, while founders care more about long-term development; 2. more transparency; 3. Encourage earlier IPO.

Disadvantages: 1.unfair for ordinary shareholders. 2. allow managers take more risk

2. Is Alibaba’s “partnership structure” different from dual class share structure?

The partnership structure would operate to allow the firm’s senior management to nominate a majority of candidates for the board of directors, which would be then voted upon by the shareholders. And shareholders only have the right to vote down the candidate, but at the same time the founders can nominate another candidate. This partnership structure go against the right of shareholders, because it means the founders can nominate repeatedly to threaten the normal operation of the broad of directors. Actually, the entire company is controlled by founders, the investors lose their control.

3. Does “voting premium” mean that “minority” shareholders are losing money?

It depends. Voting premium allows minority founders to control majority shareholder voting power with only small fraction of the total equity in the company. This special structure gives original founders to participate in controlling and voting together with top executives.  More importantly, these founders have long-term vision for the development of the company, and are different from public investors who are potentially fickle-minded and short-sighted. Thus by using voting premium can reflect the desire to govern the company for long-term success while also balancing the rights of shareholders. So the minority shareholders will not lose their money, instead they will get more in the long run.

On the other hand, because this voting premium is downright unfair, and creates an inferior class of shareholders and hangs over power to a select few, who are allowed to pass the financial risk onto others. Managers who own the super-class stocks can spin out of control, and can entrench themselves into the operations of the company, regardless of their abilities and performances. Finally, dual-class structure may allow management to make bad decision with few consequence, thus in short-term minority shareholders are losing money.