Introduction and Basic Control Question

• Jack Ma controls Alibaba Group despite being China's richest man
• Communist Party of China also has influence, but Jack Ma maintains operational control
• Chinese companies known for insanely complicated structures; Alibaba more complicated than most
• Jack Ma can maintain control even if he retires and sells every share of Alibaba Group and Ant

Western Corporate Control vs Chinese Structure

• Western countries: control depends on share ownership
  • Shareholders elect board of directors
  • Board can fire/replace senior management
  • Activist shareholders can buy stakes and agitate for change through proxy battles
• Example: Value Act hedge fund bought $2 billion Microsoft stock, replaced Steve Ballmer with Satya Nadella
  • Microsoft follows "one share = one vote" structure
• Some exceptions: Google and Facebook have different share classes with unequal voting rights

Alibaba's Ownership Structure

• Jack Ma owns less than 5% of $500 billion company
• Joe Tai (co-founder, Brooklyn Nets owner) owns ~3%
• SoftBank is single largest investor
• Low founder ownership creates risk of removal by large shareholders

Lakeside Partners Partnership Structure

• Founded February 20, 1999 in Jack Ma's Lakeside Gardens apartment
• Jack Ma chose 17 co-founders instead of self-funding
• 2010: Created Cayman Islands partnership called Lakeside Partners LP
• Alibaba stock trades as American Depository Shares (ADS) in US
• Unlike Facebook/Google, Alibaba has one class of shares
• Lakeside Partners has power to appoint simple majority of board at all times

Partnership Committee Control Mechanism

• 36 current Lakeside Partnership members: 27 Alibaba executives, 8 Ant Group executives
• Jack Ma controls through employment (can fire members) and selection process
• Partnership Committee: 5-7 directors, cycles every 5 years
• Two permanent "continuity partners": Jack Ma and Joe Tai
  • Remain until age 70 unless removed by death/incapacitation
  • Other partners must retire by age 60

Variable Interest Entity (VIE) Structure

• Investors buy shares in Cayman Islands corporation, not actual Chinese entity
• Chinese VIEs hold actual licenses for Taobao and Tmall
• Four most important VIEs:
  • Zhejiang Taobao Network Co. Limited
  • Zhejiang Tmall Network Co. Limited
  • Alibaba Cloud Computing Limited
  • Youku Information Technology Beijing Company Limited
• VIEs technically illegal under Chinese law but government maintains strategic ambiguity
• Courts could invalidate structure, making investors lose everything ("big red button")

Ant Group Control and Alipay Transfer

• Ant Group (formerly Alipay) is PayPal to Alibaba's eBay
• Became biggest fintech player in China
• 2010: Alipay applied for payment license from People's Bank of China (PBOC)
• PBOC asked about VIE contracts with foreign investors (Yahoo and SoftBank)
• Jack Ma cancelled VIE contract and transferred Alipay to himself
• Current structure: Alibaba has 33% equity share in Ant
• Jack Ma controls Ant through two general partnerships (100% ownership)
• These partnerships have 50%+ voting interest in Ant
• Ant board chosen jointly by Ant and Alibaba
• 8 Ant executives in Alibaba's Lakeside Partnership creates circular control

Political and Investment Implications

• Partnership Committee structure mirrors Chinese Communist Party's Politburo Standing Committee
• Structure potentially hurts minority shareholders (precedent: Alipay transfer)
• Would be considered self-dealing transaction in US, subject to litigation
• Investors tolerate structure due to market size and Jack Ma's appeal
• Jack Ma retains control despite stepping down from positions and retiring
• Not listed on Alibaba senior management page (Joe Tai still is)
• Will continue influencing company direction unless "the party decides otherwise"