Market Overview

Alibaba IPO Is A Red Flag For Shareholder Voting Rights


In recent years several IPOs have started limiting shareholder voting rights, to the point they are all but non-existent or so diminished that investors no longer have any say in how the company is managed. This may not seem important to an investor who only owns 100 or 1000 shares of stock, but it is a serious situation.

Company officials often state they want to maintain control for the benefit of the company, investors, and customers. However this is like saying that in a democratic society the average person should not be allowed to vote, only a privileged few. General market commentary shrugs this emerging transition from shareholder controlled public companies to Board Members, Officers, and original Owners having total control as nothing for the average investor to worry about. 

What is missing from the commentary is the empirical fact that the bulk of the outstanding shares of stock are not held by small lot investors, but by Institutions such as Mutual and Pension Funds. The average S&P500 stock has 70-75% of its shares held by institutions. Some big blue chips have 90% institutional ownership, and the best of the Small Caps average institutional ownership holdings of 80-90%.

The Mutual Fund industry is a 64 trillion dollar industry worldwide, and that doesn’t include Pension Funds. The largest Mutual and Pension Funds have the savviest, most experienced, and best managers in the business. Their investment decisions are based on analytics that are well beyond the scope of the average investor. These shareholders represent their fund holders in terms of how they vote on corporate issues, and they have the expertise to understand the businesses they hold.

Facebook (NASDAQ: FB) limited its shareholder rights which caused the Institutions to shun its IPO, at the start and throughout its first year. Even now FB is held more for Charters and Trusts, with a mere 50% of institutional holdings.

Alibaba is coming to IPO and has similar limited shareholder rights.  It was turned down by Hang Seng, Hong Kong’s Exchange because of voting right restrictions the CEO of Alibaba had placed on the IPO. NYSE approved the IPO, primarily due to its financial struggles. However this sets a new precedence for other upcoming IPOs, which is harmful for both institutional and individual investors.

One of the most important aspects of a publicly traded company has been shareholder voting rights, when the true owners of the company had some say in the direction of the company. Many corporations are very influential worldwide. Their global market reach extends into major centers of commerce, their market cap is enormous, and their impact on political situations is far greater than most realize.

Limiting voting rights may allow CEOs and the Board of Directors more latitude but giving one person or a few, total control over a massive international corporation opens the door to a dictatorship management style.  It is also setting the stage for a far more serious situation in the future, when CEOs and Board Members have too much control the inevitable “power breeds corruption” syndrome is likely to emerge.

Trade wisely,

Martha Stokes CMT

Sources: Alibaba Website, Facebook Website, SEC filings, Wikipedia “64 Trillion Mutual Funds”

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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