Potential Knock-On Effects of the Coming Alibaba IPO Disclosure Crisis

An extraordinary disconnect has taken place between China‘s regulatory body, State Administration for Industry and Commerce (SAIC), and one of the country‘s largest commercial businesses, Alibaba Group Holdings, Ltd.  The coming crisis centers on a highly public spat between Alibaba and the Chinese government that has led to SAIC allegations that it communicated serious concerns over the sale of many counterfeit goods, bribery and other illegal activity by Taobao (the company‘s largest e‑commerce platform) in July 2014 ‘‘‘ some two months before Alibaba‘s initial public offering (IPO) on the New York Stock Exchange that valued the firm at more than $230 billion.  (The IPO itself raised a record-breaking $25 billion.)  These critical July discussions between SAIC and Alibaba were said to be, in effect, covered up so as not to affect the IPO.

The problem here is that these SAIC allegations represented material risk for prospective investors that was omitted from the company‘s IPO prospectus and SEC filings.  Such ‘‘‘material omissions‘ can be legally actionable by shareholders.  Indeed, we believe that the chances of a class action lawsuit are quite high and growing by the hour.  Alibaba has lashed out at these government accusations ‘‘‘ in an exceptional display of defiance ‘‘‘ by accusing a senior official of SAIC, Liu Hongliang, of misconduct and have threatened to file a formal complaint.  SAIC poured gasoline on the flames in writing by alleging that Alibaba‘s business practices represented the company‘s ‘‘‘greatest credibility crisis‘ since its inception.

Alibaba has traditionally enjoyed a ‘‘‘healthy relationship‘ with the government, despite innovations like online payments that were seen as challenging the dominant role of China‘s state-owned banks.  This brand of entrepreneurial independence could help explain the government apparently tiring of Jack Ma, Alibaba Founder and Executive Chairman, just as it has recently tired of billionaire ‘‘‘super man‘ Li Ka-Shing (cited in IntelTrak‘s alert of yesterday, January 29, 2015).  Protecting China‘s prized state-owned enterprises (SOE) may well emerge as a common theme in these unusual Chinese government actions.

The bottom-line is that Alibaba will likely be forced to defend itself from accusations by certain prospective investors that the content of these alarming pre-IPO discussions between the company and the government (i.e., SAIC) constituted ‘‘‘material risk‘ information that they had every right to know prior to the IPO itself.  The release by SAIC of a secret ‘‘‘White Paper‘ relented to its concerns was especially unfriendly, and even legally perilous for the company.  The SEC is said to be assessing the SAIC probe of Alibaba and the firm‘s disclosures in its prospectus.