The Problem With the Smart Lawyering Behind Alibaba's IPO

The Problem With the Smart Lawyering Behind Alibaba's IPO Gary/Fotolia The New York Stock Exchange

“I don’t want a lawyer who tells me what I can’t do. Give me a lawyer who finds a way to do it.”

I’ve heard that boast from lots of general counsel flaunting their toughness. If you’re a Big Law attorney, you’ve heard it too. It’s a remark that always bothered me. What Mr. or Ms. Corporate Lawyer is really saying is: “I don’t care what the law says, find me a way around it, damn it!”

I was reminded of that stubborn and reckless mindset when I read Steven Davidoff’s excellent column in The New York Times Tuesday dissecting legal issues in the proposed initial public offering of Chinese Internet giant Alibaba Group Holding Limited. Davidoff warns potential investors that there are a lot of risks, as indicated in the company’s pre-IPO filing with the Securities and Exchange Commission.

Davidoff, a professor at the Michael E. Moritz College of Law at The Ohio State University, points out that it’s not clear that Alibaba will be able to circumvent China’s law blocking foreigners from owning Chinese property. To get around this prohibition, Alibaba is using a structure called a variable interest entity, which is “chock-full” of risk, Davidoff writes, and hasn’t always worked for other Chinese companies. That means Alibaba’s future shareholders might find that they don’t actually have any ownership interest in the company’s Chinese assets.

It doesn’t bother me that Alibaba may be a risky bet. If you want to throw money at the company, be my guest. The IPO document outlines those risks, and if you don’t read it, or if you read it and don’t understand it and still invest, then too bad for you. Anyway, you shouldn’t put money into an IPO if you can’t afford to lose it.

I’m more bothered by the legal mindset that underlies this offering. It’s the determination of supersmart lawyers (in this case, at Simpson, Thacher & Bartlett) who think that if they can just devise a structure that’s complex enough, they can get around the law. When I read Alibaba’s IPO document, hoping to understand this variable interest entity trick, I got dizzy. For starters, the structure involves an interest-free loan to relevant variable interest entity equity holders, exclusive call option agreements, exclusive technical service agreements and equity pledge agreements. Oh, and Alibaba is a Cayman Island corporation, which always sets off alarms for me. I’ll admit I didn’t expend enough of my diminishing brain cells to comprehend how this all works.

What is clear is that these structures were created to satisfy someone who said: “I don’t care that foreigners can’t own property in China. Find a way to do it.” This strategy reflects the same complicated cleverness that underlies tax shelters, collateralized debt obligations, derivatives and many of the other financial instruments that have caused so much harm. This harnessing of bright minds for such dubious projects may be profitable for Wall Street, but it doesn’t always end well for others.

Summary Judgment is American Lawyer senior writer Susan Beck’s regular opinion column for the Litigation Daily.

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