Deal Reached on Alipay Transfer. Cue the Lawyers.

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Very few details have emerged thus far. Here’s what the Wall Street Journal has:

Yahoo, which owns around 40% of Alibaba, in mid-May said it was blindsided when Alibaba transferred ownership of Alipay earlier this year to a new company owned by Alibaba Chief Executive Jack Ma. Alibaba and Mr. Ma said the transfer was legal and Yahoo was aware of plans for it.

As part of the proposed agreement between Alibaba and Yahoo, reached last week, Alibaba and Mr. Ma would promise not to hurt the value of Taobao, a giant Alibaba-owned e-commerce site, by using Alipay to siphon off Taobao’s revenue in the future[.]

[ . . . ]

The proposed resolution could also include plans for Mr. Ma’s new company to further compensate Alibaba Group for the Alipay transfer, in part to take into consideration future revenue from processing fees it extracts from websites other than Taobao, the person added.

It’s unclear how much Mr. Ma’s new company paid Alibaba Group for the Alipay transfer.

So let’s go through this in reverse order. First, the question of compensation. Was the Alipay transfer done as an arms-length transaction, or was it a sweetheart deal? How much is reasonable for that very valuable asset? This is all still a mystery, yet it is at the heart of the dispute. It’s difficult to get too excited about this “resolution” until more details about compensation dribble out.

Second, and related, the deal might include compensation based on future revenue. I don’t know about you, but if these guys don’t trust each other, do you actually see them agreeing to some sort of earn-out structure? Looks like a great way to make litigation a foregone conclusion. Strike two.

Third, Mr. Ma promises not to hurt the value of Taobao via use of Alipay. Wow, the devil is sure in the details there, isn’t it? I really, really hope that there was some very good lawyering done here, because that scares the crap out of me.

It sounds sort of like a non-compete, and although I’m sure one could draft in some specific restrictions on Mr. Ma’s future actions, I bet there are about 100 other things he and his advisors will be able to come up with sometime down the road to attempt to sidestep the promise. The question at that point (after it goes to arbitration/court) will be whether Mr. Ma acted in good faith.

I’m starting to get kind of a queasy feeling about this, but I suppose I should withhold judgment until we learn more.

8 responses on “Deal Reached on Alipay Transfer. Cue the Lawyers.

  1. Fredrik

    I don’t know about you, but I think the devil is very much in the details of what Yahoo and Alibaba agreed about the transfer of the company as well.

    My guess is that they all agreed to transfer it into a newly created VIE, what they didn’t agree upon was tearing up the contracts linking the two. And as no one seems willing to take any VIE-arrangement to court, ever, they’re left with nothing to do but try to get some form of compensation in another way.

    Once again just guessing, but it seems to me what really happened was that Yahoo’s representative misunderstood the risks involved in a VIE structure.

      1. Fredrik

        I would expect to see some change in that, Alipay going missing as well as a bunch of VIE companies having their trading stopped should have some effect surely.

        Latest I’ve seen is JGBO, which has consistently “refused” to move any of the company’s assets out of the VIE…

        1. Stan Post author

          Nice post on Jiangbo. Why do you think they are refusing? Don’t want to pay transaction tax? Control issue? Some potential problem with SAFE?

          1. Fredrik

            Well the issue with VIEs is that there are always quasi-good explanations available for doing almost anything.

            When I started looking at the company I assumed they’d simply had bad advisors for the VIE contracts, there was some strange stuff with capitalising the VIE and so forth. I assumed that they simply had a bad VIE structure which was causing them issues transferring the money into the WFOE. SAFE is always a good scapegoat for not transferring the money out of the country but they have the standard consulting deals so there’s no reason the money shouldn’t be able to go into the WFOE unless the structure is poorly set up.

            Their interest expenses almost quadroupled in one year due to their inability to move money out of the country, they blamed SAFE, but also suggested there were other issues, and all of the assets are still in the VIE so it looks like they didn’t even transfer the money within the realms of their consulting contracts.

            Add to this the name Frazer Frost, and now questions from the SEC, I’m growing more pessimistic by the day.

          2. Stan Post author

            That’s weird. SAFE can be decent excuse if you’ve screwed up re: business scope and are taking funds offshore directly, but if the onshore (i.e. VIE to WFOE) transfer didn’t even take place, SAFE is irrelevant. It’s bizarre – an onshore transfer between two companies is not a difficult thing to do, particularly for what I assume is a standard service WFOE. All you have to do is make sure you pay your business and income taxes.

            Must be another, more nefarious, explanation . . .

          3. Fredrik

            My thoughts exactly.

            They seem to be trying their best to explain themselves and it sounds plausible unless you know what to look for. There are other minor things they talk about in their 10-K that don’t make much sense either, but the big one for me has always been why all the assets are in the VIE.

            I don’t like companies that don’t own what they can in a WFOE anyway, but overuse of VIEs has been rising ever since the they started tightening up on listing overseas through SPVs, so it’s now more norm than exception.

            I don’t think we’ll get very far speculating as to the reason why this is the case, but I’m putting it somewhere in the scope of: management have no idea what they are doing and have gotten the cheapest, and worst, advice possible, to they are trying to properly rip some people off.