Alibaba and Fee Shifting Provisions
The Alibaba IPO received a great deal of attention. The offering generated over $24 billion, the largest on record. Discussions of the offering also focused on significant corporate governance issues, including the authority of the Alibaba Partnership to select a majority of the directors on the board.
What did not receive much (dare one say "any") attention was the existence of a fee shifting provision in the Company's Amended and Restated Memorandum and Articles of Association (Alibaba is incorporated in the Cayman Islands). Article 173 provides:
- Unless otherwise determined by a majority of the Board, in the event that (i) any Shareholder (the “Claiming Party”) initiates or asserts any claim or counterclaim (“Claim”) or joins, offers substantial assistance to or has a direct financial interest in any Claim against the Company and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits in which the Claiming Party prevails, then each Claiming Party shall, to the fullest extent permissible by law, be obligated jointly and severally to reimburse the Company for all fees, costs and expenses (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) that the Company may incur in connection with such Claim.
The provision has some unique aspects. It applies only to shareholder claims (not claims of former shareholders). The provision shifts fees in claims against the Company but not, apparently, against directors. Finally, the provision is avoided by a shareholder who obtains a judgment on the merits.
The provision, therefore, presumably makes suits under the federal securities laws (but not, apparently, derivative suits) less likely. Moreover, while the provision does not appear to apply to derivative suits, these are already difficult to bring. As the Registration Statement notes, "shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts", id. at 66, and "as a general rule, a derivative action may not be brought by a minority shareholder." Id. at 280.
As for the federal securities laws, Morrison may impose barriers to the extent the Company does an offering in China and, as a result, is listed on a foreign stock exchange. In addition, the suits face barriers with respect to collection. As the Registration Statement notes:
- Substantially all of our assets are located in China. In addition, most of our directors and officers are residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or our directors and officers, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
Whatever the impact, the provision was apparently not discussed in the Registration Statement, although its possible that I missed the description (the registration statement was 319 pages long with another 116 pages devoted to the financial statements).