The media has been doing a thorough job of covering the Yahoo/Alibaba/Alipay so I am only going to summarize the situation in the briefest terms. Yahoo (along with Softbank) owns a large portion of Alibaba, which in turn, owned Alipay. Alipay is in the online payment business, which, according to Chinese law, means it cannot be foreign owned. A few weeks ago, Yahoo alleges it just recently learned that Alibaba had transferred ownership of Alipay to a fully domestic Chinese entity. Alibaba is saying it did that so as to bring Alipay in line with the laws prohibiting foreign ownership of an online payment company.
Financial advisory services and investment banks frequently call me when something like the above story breaks. Typically, they are calling because they want to know what to advice their own clients (usually either investors or investment firms). In most cases, I spend 1-2 hours reading the news regarding the latest story on which I am to opine and then I draft up a quick analysis and then we talk.
This Yahoo/Alibaba/Alipay story was different. I spent nearly a full day reading just about every story on it (this was a few weeks ago so it is possible something has changed since then, but my quick perusal of the news today did not turn up anything) and even then I still felt that I was lacking sufficient facts. Nonetheless, I went ahead and answered a bunch of questions from various Wall Street firms, consisting mostly of the following:
- Was what Alibaba/Alipay did ilegal?
- What can Yahoo do about it?
- Why did Alibaba/Alipay do what it did?
- Is it possible Yahoo really did not know about it until just recently?
- What is the Chinese government going to do?
- Is this sort of thing unprecedented?
- Will this lead to a decline in foreign investment into China?
- Are we going to hear more stories like this in the future?
Here again are the questions, this time with answers to the best of my ability:
Was what Alibaba/Alipay did legal? I do not know and I cannot answer that without having access to Alibaba’s and/or Alipay’s corporate documents. China does not protect minority shareholders nearly to the same extent as the United States. Alibaba’s or Alipay’s corporate documents may very well have given a small group within the company authority to do exactly what was done here. I have not seen anyone from Yahoo claim what happened was illegal, which makes me think that it may have been perfectly legal. In other words, it is quite possible that Alibaba/Alipay had every legal right to do what they did.
At which point, the advisers asked me if it was possible that Yahoo would have agreed to such a corporate structure and I responded by saying that was possible and I had in fact been involved in many cases where foreign companies had, usually without knowing, put themselves in similar situations.
What can Yahoo do about it? I do not know as it so much depends on whether Alibaba/Alipay acted legally or not. Yahoo has essentially three options: legal, economic, and political. I do not know what sort of strength they have in any of these three arenas vis a vis Alibaba/Alipay. I do not even know in what forum it would be best to fight on any of these fronts (United States, Mainland China, Hong Kong, British Virgin Islands?).
Why did Alibaba/Alipay do what it did? Do what? Make the ownership transfer or do it allegedly without telling Yahoo? I think what Alibaba/Alipay is saying about the need to make the transfer makes sense, legally. I do not know why it appears not to have kept Yahoo more in the loop.
At which point, many of the advisers told me that they had heard that when Yahoo’s new CEO, Carol Bratz, came on board, she tried to rein Jack Ma in and did so in a way that caused him to lose face. The word on the street is that this is payback for that.
What will the Chinese government do? This whole thing is pretty public and if in the end it makes it seem as though Chinese companies can just go off and seize assets that belong to foreign companies (whether this is what happened or not), it will not be good for China business. Therefore, I am guessing that the Chinese government wants this matter resolved and resolved “somewhat fairly” and is probably operating behind (or in front of) the scenes to try to accomplish that.
Is this sort of thing unprecedented? Not at all. My tiny law firm has been involved in probably a dozen similar matters. The only difference here is that we are dealing with extremely well-known companies. This sort of thing goes on all the time with small and mid-sized companies and nearly every time it is due to a fault in the initial structure of the business. The Chinese company took advantage of the legal ignorance of the foreign company and set things up so that it would eventually be able to shut the foreign company out, purely legally. Is this what happened to Yahoo? I do not know.
Will this lead to a decline in foreign investment into China? To a large extent it will depend on how it is finally resolved. But probably not.
Are we going to hear more stories like this in the future? Yes.
What do you think?