Alibaba.com Limited (HKG: 1688)’s Founder Makes Questionable Deals

Jack Ma, the founder of Alibaba.com Limited (HKG: 1688), has made a series of deals that authorities are questioning. Investors and corporate-governance experts are suspicious of the founder’s activities as the Chinese Internet company plans to offer the world a public offering that could be the largest in history.

In one of these skeptical deals, Mr. Ma and a group of his investor friends invested in a company through private vehicles on behalf of Alibaba.com. In another deal, Mr. Ma cofounded a private equity fund that invested along with Alibaba.

The Chinese Internet giant came to an agreement with the United States securities regulations about its filings. The legal papers were last updated June 26^th. They stated that Mr. Ma invests on behalf of Alibaba occasionally, and will make sure that his personal gains are limited from these transactions by either transferring the profits to Alibaba or donating the proceeds to charity.

However, experts do not view these arrangements favorably. Such investments are bound for trouble because they blur the line between personal interests and business interests. The involvement of Mr. Ma and Alibaba together in transactions that may yield benefits for himself and a group of allies, could prove disastrous for most of Alibaba’s shareholders, who have little to no control of the company’s ventures.

Simon Wong, a corporate-governance advisor from Northwestern University and London School of Economics stated that this conflict of interest leaves Alibab’s minority stock holders vulnerable to being cheated.

The internet company carries out orders from huge shopping sites in China such as Taobao and Tmall.

Alibaba declined to comment, naming its pending IPO as the reason. The internet company plans to offer its shares to the public on the New York Stock Exchange sometime in August this year. According to analysts, its IPO could generate over $20 billion and increase the value of Alibaba to over $200 billion.

Alibaba has assimilated itself in the Cayman Islands so that it can bring in foreign investors without getting into trouble with Chinese regulations on non-Chinese owned companies. The licenses needed to operate Alibaba in China are held by domestic bodies tied contractually to the offshore bodies.

However, this technicality prevents Alibaba from taking a direct stake in Chinese companies, because it makes Alibaba a foreign entity.

For example, in April Alibaba and Yunfeng, a private-equity fund established by Mr. Ma based in Shanghai, acquired a 18.5% stake in YoukuTudou Inc (NYSE: YOKU), a Chinese online video company.

And in January, Alibaba and Yunfeng bought a majority stake together in Citic 21CN Co., a Chinese pharmaceutical data management company, again through a vehicle owned by Alibaba.

Mr. Ma promises that it will donate all these profits from these deals to Alibaba’s own carity.