Alibaba IPOs as A Cayman Islands Holding Company

If you thought that the recent Alibaba (BABA) IPO was done using a Cayman Island Holding Company because it would have been illegal otherwise, you would be correct. In the business world, this is why a certain type of people flock to the relative lawlessness and loopholes of the Caymans. The IPO would have been illegal because foreigners are forbidden to own significant assets in China. The new Caymans company has a contract to receive the profits from the Chinese Alibaba. Unlike almost all other equities, owners will have zero say in the company’s management as power will be retained by Jack Ma.

I have had the opportunity to meet and work with dozens of Chinese visitors and immigrants and I always ask what the biggest difference between our countries is. The most surprising answer I heard was that the U.S. is a country ruled by laws; China by people. Chinese contracts do not always have the same validity and enforcability that we expect from our American ink, paper, and courts. I can only guess that this profit moving contract specifically designed to circumvent Chinese law will have its validity challenged by those who sell short.

Is it hypocritical that a Chinese company can IPO on an American exchange, and be utilized worldwide when similar companies have been banned by the Chinese government? Google, Twitter, Bing, WordPress and Blogspot have been blocked by the great firewall so that Chinese competitors like Baidu can have international protection, and likely would have failed without this protection. I like Alibaba, but if the idea is so simple that Jack Ma can do it, then we should expect more competition from new companies doing the same things. The only advantage they have is Metcalfe’s Law, which suggests that a network twice as big is 4x more valuable.