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The negotiations for the initial public offering (IPO) of Alibaba in Hong Kong between the e-commerce giant and the Hong Kong Exchange and Clearing Ltd (HKEx) at one time were thought to have faltered. It was feared that HKEx would either lose the Alibaba IPO, or depart from its long-cherished principle of equal voting rights for equal number of shares - something it holds sacrosanct to ensure fairness. It is reported that the Alibaba IPO would raise between $15 billion and $25 billion. If that happens, it will be a big boost for HKEx and Hong Kong as a global financial center.

Alibaba has always indicated that Hong Kong is its preferred destination for launching the proposed IPO. However, initial negotiations between the company and HKEx hit a wall as its innovative proposal for corporate governance appears to be contradicting the bourse's stated principle of equal voting rights for equal number of shares owned.

HKEx is certainly correct to maintain that arbitrary departures from existing rules should be avoided. However, departures need not be arbitrary, and rules have to evolve with the times without compromising the principle of fairness. As long as any departure is properly approved as per due process involving decision makers who have no conflict of interest and who are widely recognized as knowledgeable about financial markets and corporate governance, the system can only become more flexible without compromising the principle of fairness.

According to Alibaba, the proposal stems from the fact that the success of the company has been built on the founders' unique visions and plans. To allow the founding entrepreneurs to have control of the company is to allow them to realize their visions, and this will be good for shareholders.

Alibaba now stresses that it is not proposing a two-class structure for shares. Allowing some shareholders to enjoy disproportionate privileges certainly would go against the fairness principle. Since HKEx is as much a regulator as a commercial concern, it has the responsibility of ensuring fairness and protecting the interests of shareholders.

In a surprise move, HKEx Chief Executive Charles Li acknowledged in a recent blog that "because these founders are so vital to their companies, protecting them is also a form of investor protection. In fact, most international markets are willing to allow shares with differentiated voting rights."

While Charles Li talked about differentiated voting rights, Executive Chairman of Alibaba Jack Ma toned down his demand, which was "misunderstood" by reporters and "misrepresented" by lawyers handling the negotiations with HKEx. "The aim of the 'partner' scheme is not for the partners to elect all directors of the board. Rather, it is that the CEO of Alibaba should have worked in Alibaba for at least five years and have the capability of perpetuating the Alibaba corporate culture." The "partner" scheme was introduced in 2010 and 28 key personnel, all with at least five years' management experience at Alibaba, enjoy the title of "partner".

Ma's position sounds reasonable enough but Alibaba's request should indeed not require a two-class structure for shares, which would give owners of the privileged class of shares unfair control of the company. The latest narrative merely spells out a prerequisite for anyone to become the CEO of the company, which by all account sounds quite reasonable. These partners share the same Alibaba corporate culture and the same vision of working for the long-term interest of the company, which Jack Ma once said would last at least 102 years.

As reasonable as this may sound, it will imply that a majority shareholder may lose control of the company. But if all main shareholders agree, as is reported, there is no reason why HKEx should disallow the IPO under the proposed terms. According to some reports, both Softbank and Yahoo, two major shareholders, have already agreed to Alibaba's proposal.

Because subscribers to the IPO will be well informed of the exception to the rule in advance, should an exception be granted, no one can argue that this will be unfair to them. Moreover, over a longer term, some of the partners may cease to be partners (for example, in case of death), and the shares that they hold will pass on to the beneficiaries of their estates. The beneficiaries of their estates will not, under the partner system, automatically have control over the company.

Thus, the Alibaba proposal actually has a built-in sunset clause when it comes to the partners' control over the company. Quite apart from the fact that the partners' roles essentially revolve around the election of the CEO, the privileges of the partners are non-transferable - as partners cease to be partners, their control will lapse. On the other hand, associating control with "special shares" cannot be justified. Signs indicate that the demands of Alibaba and those of HKEx are converging. It is reasonable to expect that the HK listing of Alibaba will become reality in time.

The author is director of Center for Public Policy Studies, Lingnan University.

(HK Edition 11/12/2013 page1)