Hong Kong Exchanges & Clearing Ltd. has turned away Alibaba Group Holding Ltd.’s initial public offering following the latter's proposal for a governance structure that leaves executives in control, reports Bloomberg.
Alibaba, therefore, is leaning toward making the New York Stock Exchange its home market.
Alibaba, founded by former English teacher Jack Ma, may raise about HK$100 billion ($12.9 billion) in an initial sale, Ernst & Young LLP said on June 28. That would make it the world’s biggest IPO since Facebook Inc. raised $16 billion last year and Hong Kong’s largest since AIA Group Ltd.’s $20 billion sale in 2010, according to data compiled by Bloomberg.
Bloomberg says that allowing Alibaba’s partnership to veto board nominations would enable Ma, who owns 7.4 percent of the stock, and his management team to run the company without worrying about being pushed out by an activist investor with a different strategy.
Hong Kong’s exchange is under pressure from regulators and investors to uphold standards after accounting scandals involving Chinese companies from Hontex International Holdings Co. to Boshiwa International Holding Ltd.
“The benefit of turning away people who ask for favors is that it will maintain standards and attract better quality companies,” David Webb, a former exchange director who founded local governance watchdog Webb-site.com, told Bloomberg by telephone. “If you maintain standards, investors pay for the quality. If you improve them, they’ll pay more.”
While the U.S. allows dual-share structures, Alibaba would be subject to more stringent reporting requirements and a class-action litigation system, which does not exist in Hong Kong. Chinese companies listed in the U.S. have been plagued by governance issues.
“There’s obvious downside from what would very likely have been a fantastic IPO for HKEx and, subsequently, a huge volume driver for the market,” said Matthew Smith, an analyst at Macquarie Group Ltd., who has the stock rated at the equivalent of sell. “But it would have been difficult for them to abrogate their own rules just because it’s Alibaba.”