March 20, 2014 12:00 pm

JD.com’s US IPO includes anti-takeover measures

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JD.com – the Chinese ecommerce rival to Alibaba – will be virtually takeover-proof once it completes its listing in New York later this year, thanks to provisions in its prospectus described by lawyers as “very unusual”.

The company, which hopes to raise up to $1.5bn, is set to become the largest-ever Chinese initial public offering in the US – at least until Alibaba’s hotly-anticipated listing later this year.

The most eye-catching detail in the JD.com listing document is a provision stating that the board of directors cannot vote on any matter unless the founder and chairman Richard Liu is present. This effectively prevents the board from taking any decision against Mr Liu’s wishes, as he could simply block a vote by staying at home.

Another line in the prospectus dictates that Mr Liu’s “incapacity” to act as chairman would not include “any confinement against his will”, meaning that the founder would retain control even if were he to find himself in jail.

Gene Buttrill, partner at Jones Day in Hong Kong, said such provisions were “very unusual”, and reflected both China-specific concerns about personal safety, and the desire to protect against ordinary shareholders, including pre-IPO investors, acting through the board of directors.

Due to the pre-IPO quiet period, JD.com was unable to comment.

Shareholding structures at Chinese companies are increasingly under the spotlight. Alibaba originally sought a listing in Hong Kong, but was unable to persuade the city’s authorities to allow a partnership structure that would give founder Jack Ma other top executives, who together own a little more than 10 per cent, control of board nominations.

However, US listing rules are far less strict, and many technology companies employ dual or even triple-class share structures. Google, for example, offers C-class shares, which come with no voting rights at all.

Mr Liu owns approximately 19 per cent of JD.com’s shares but through other agreements with shareholders he controls the voting rights of another 36 per cent of the company.

Upon JD.com’s listing, Mr Liu will be the only shareholder granted B-class shares, which each come with 20 votes. The rest of JD.com’s shareholders, including those who invested pre-IPO, will have A-class shares, each carrying one vote. As such, Mr Liu will need to hold only 5 per cent of the company’s equity in order to retain majority voting power.

Aside from Mr Liu and JD.com’s directors, the company’s shares are held by investors such as Tiger Global Management, Russian investor DST Global Funds and Sequoia Capital, the Silicon Valley-based venture capital firm.

David Webb, a Hong Kong-based corporate governance activist, said that the structure of the deal meant investors would “just be along for the ride”, and have almost no say in the company’s decision making.

Mr Liu’s B-class shares will revert to A-class on the event of him leaving the board, preventing him from handing down his voting powers to other members of his family.

JD.com is headquartered in Beijing, though the listed entity will be a Cayman Islands-registered business. It will also be a VIE – or variable interest entity – a common structure for Chinese web companies.

JD.com released earnings in its updated IPO document, which showed net losses narrowed to Rmb50m ($8.07m) in 2013, from around $400m in 2012.

JD.com’s listing is also being closely watched because it recently sold a 15 per cent stake to Tencent, the Chinese internet company – a deal one banker described as “transformational” for both companies in their battle with Alibaba. Tencent has the option to take up a further 5 per cent during the IPO.

Additional reporting by Arash Massoudi in New York

This article has been updated to correct JD.com’s net loss in 2013, which was Rmb50m ($8.07m), instead of $410m as originally stated.

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