Sale of the century – Alibaba's GC on the company's record-breaking IPO

Timothy Steinert – general counsel for Chinese e-commerce giant Alibaba – talks to Elizabeth Broomhall about the biggest IPO in history, the company’s move into the movie business and his plans for a bigger legal team

From a young English teacher’s one-bedroom apartment in the Chinese city of Hangzhou to the bustling trading floor of the world’s largest stock exchange, the Alibaba Group is one of the biggest achievements of this century. Founded in 1999 by 50-year-old former academic Jack Ma, the company started making its fortune by connecting Chinese buyers and sellers through a series of web-based platforms. Since then it has built up its portfolio to include an online electronic payment services business, a shopping search engine and a cloud computing arm, among other things. The business now accounts for 80% of China’s online transactions. As for Ma, he has been dubbed China’s richest man by Forbes.

In 2014 Alibaba also gained international recognition for its record-breaking $25bn (£15.9bn) initial public offering (IPO) in New York, which dominated business headlines for much of the year and to date remains the largest new listing in history. The company is forecast to expand further in 2015.

Timothy Steinert is Alibaba’s Hong Kong-based Mandarin-speaking, US-born general counsel and a former Freshfields Bruckhaus Deringer partner. “When I joined in 2007 we had about 35 people [in the legal department]… now we have about 160 legal staff,” he says, adding that total employee headcount has grown from around 7,000 eight years ago to 30,000 today. “One of the reasons for our success is that individual companies [here] have not developed their own e-commerce platforms the way they have in the West. We came in and established an economy-wide website – so if you want to buy [online] you can go to our site.”

Given the surge in Chinese internet users, Alibaba’s growth is hardly surprising. China currently has the largest internet population in the world with 618 million users, and in 2013 recorded some 302 million online shoppers, according to its IPO prospectus, which quoted government agency China Internet Network Information Center. Forecasting growth in mobile internet users in particular, Alibaba, along with rivals Tencent, Baidu and Sina, is working hard to retain its domination.

“It’s a very fast-moving industry. Everybody knows there is something new every day,” explains Steinert. “There are different functionalities and products. Some things are fads and disappear, and some things become really big. I think the challenge for our industry is keeping up with the next thing and trying to be at the forefront.”

As for the in-house lawyers, most are based in Hangzhou, Steinert says, with 30 people in Hong Kong, 15 in Beijing and another three in the US. Around two-thirds of the lawyers support the business on day-to-day commercial matters, with the other third comprising practice specialist teams such as M&A, intellectual property, disputes and compliance. Steinert is a former US capital markets lawyer who joined Alibaba from Freshfields shortly after advising the company on a transaction. He had previously worked for Coudert Brothers in Beijing and Davis Polk & Wardwell in New York and Asia. Since college, he has always had an interest in China – making him an apt candidate for the job.

“I hit the right timing,” he says humbly. “Freshfields wanted to build a US securities practice because a lot of the IPOs were listed here but sold around the world including the US. So I joined to do that and we built up the best practice in town. It was when I was preparing for the IPO of Alibaba.com – the B2B site – in late 2006 that I reconnected with Joe Tsai, who was the CFO at the time… At that point I had been in private practice for almost 20 years and I was thinking of other interesting things to do. It was the combination of the internet and Alibaba being a rising company, a Chinese company and a Chinese company with strong management [that attracted me].”

Challenges and rewards The team’s work is fairly typical, he says, from writing website terms and conditions for online sellers and advertisers to managing buyer-seller disputes, helping protect the intellectual property of sellers and dealing with customer complaints. On the financial side of the business – Alibaba also owns small loans and insurance businesses – lawyers are required to work with regulators to establish new legislation, while at a company-wide and strategic level there are acquisitions and investments, compliance issues and capital raising deals to manage. The main challenge for the team, which relates to being both an internet company and a Chinese business, is dealing with previously unencountered problems.

“For our company and for the legal team the lack of precedents and clarity in the regulatory environment combine to make it challenging,” explains Steinert. “Compared with a traditional industry where the laws are very clear and it’s been done before or the steps are well trodden, often our lawyers have to make it up as they go along and help the business teams make judgements that no one has ever made. That’s difficult, but for the right people it’s very rewarding.”

On the M&A side, Steinert says lawyers are also tasked with having to do extensive due diligence in what is often a compressed timetable, sometimes dealing with potentially risky investments where the companies have very different cultures, or those whose ambitions have outpaced their internal growth. But he points out that this is fairly standard in the fast-moving internet industry. From a compliance perspective, new challenges are also arising as China looks to better regulate the online world and to protect its consumers. More generally, Steinert says a lack of stability in the market can give rise to concerns.

“China is still a developing legal system, both on the legislative side and the enforcement and judicial side,” he says. “Because it’s still developing there are lots of opportunities but there is also a lot of uncertainty.”

The largest ever IPO: behind the scenes One of the legal team’s recent big deals was of course the company’s mammoth IPO, which was simple in structure but complex because of the sheer scale of the transaction. “It was the same as any IPO – just a few more zeros on the end,” Steinert laughs. “The extra complication was that we have two other major shareholders – Yahoo and SoftBank – and a long list of institutional investors, so handling our relationship with them over the course of the IPO was a challenge. We also have about 12,000 employees who own stock in the company, so we allowed them to sell part of their shares in the IPO. Dealing with the lock-up and that whole process times 12,000 was a side deal in itself.”

Complicating matters further was the desire among existing shareholders to retain a degree of voting control, which is not normally permitted by the Hong Kong Stock Exchange (HKSE) where Alibaba had originally wanted to list. Ultimately, following many discussions with regulators, the company turned to the US, choosing the New York Stock Exchange instead. “There were added challenges because of the prominence of the transaction – there was quite a lot being written about it, particularly in Hong Kong,” says Steinert. “We had government relations aspects because as a Chinese company many of us expected to list in a Chinese market – either Hong Kong or the mainland.”

The decision not to list in Hong Kong was, he explains, a consequence of the regulators’ interpretation of the rules. “They decided that our proposal didn’t fit within the listing rule, which, actually, it could have fit in. [The rule] says there shall be no Class B listings except in extraordinary circumstances. We tried very hard to list in Hong Kong. We wanted to list on a Chinese stock exchange. We feel our major sellers and buyers are Chinese, our ecosystem is focused mainly in China and we wanted to keep it within the same market.”

Compared with the problems of listing, choosing external counsel was easy: the two lead firms on the IPO – Simpson Thacher & Bartlett and Sullivan & Cromwell – have strong international securities practices and both had worked for the company on the 2007 IPO of subsidiary Alibaba.com on the Hong Kong market (the B2B website was taken private again in 2012). Simpson Thacher in particular had done a lot of M&A work for Alibaba and been involved in pre-IPO financing.

Had the listing been in Hong Kong, Freshfields would have been “an obvious top candidate” Steinert says, the magic circle firm boasting a strong securities team locally and also having advised on the earlier Alibaba.com listing. Indeed, it had been working with the company consistently on HKSE matters until it was privatised in 2012. However, as a non-US securities firm, Steinert says Freshfields wasn’t the best choice for a US listing.

Finding the right firms While many firms are used regularly by Alibaba, as yet there is no such thing as a formal panel. The company is moving in that direction though, Steinert explains, going through a three-party bidding proposal process for major transactions. However, he says he still prefers to remain flexible on the choice of firm given the nature of the business. “The needs change from time to time,” he adds. “Whereas an investment bank, for example, is already in the markets that it expects to be in; it’s a steady business in known areas and the leading law firms in those areas are pretty well established, so it’s easier to say ‘this is my panel and I’m going to stick to it’.”

Steinert adds that cost is less important than quality, and that annual legal spend now tops between $25m (£16m) and $50m (£32m) depending on the year. “We try to stick to two or three firms in each area – [in terms of] both expertise and geography,” he explains. “We want to generate competition among the firms but we don’t want to spread the work around too much because then people don’t have the incentive to work with us and they’re not familiar enough with us. Conflicts are pretty important when it comes to our main competitors. We’re very sensitive to that because of the competition in China.”

Aside from the firms already mentioned, others previously used include Sheppard Mullin Richter & Hampton for international cross border, Hogan Lovells for offshore IP, Wachtell Lipton Rosen & Katz for US public M&A and Fangda for PRC issues. As for new firms, Steinert says he will consider anyone, but it helps greatly if they can gain more depth in internet deals. “I know because I’ve been there: it’s very challenging for firms because you need volume of business to justify the investment in people – but the more they can be expert at what we do the more they can help us,” he explains. “It’s trite but it’s true. The big firms try to focus on big-ticket transactions and big clients that will provide them with lots of deal flow, but those companies aren’t necessarily internet companies.”

Let them entertain you At the moment the needs are moving in the direction of entertainment following its recent acquisition of film production business Ali Pictures, and as managers look to boost the amount of time users spend on the website. “Now we’re going into the entertainment business so we’ll probably use some different firms that are good at that,” Steinert sums up. “We want to plug in the pieces so that your whole day is spent at Alibaba. One of the key areas is digital entertainment – getting books, TV shows, movies and games on the site. So we need people in licensing, who have experience in different types of content, movie production, that kind of thing.”

The company also wants to increase its international profile and cross-border activity, and to boost support on the litigation side. Steinert says it is likely he will hire another 40 lawyers in the near future – possibly this year.

“We’re going to be investing in more people in digital entertainment, we’ll be expanding our disputes team and we’ll be building up the international commercial team. It will grow as our needs grow but I can see it reaching 200 pretty soon.”

————————————————————————————————————————— What is Alibaba? Alibaba is a Chinese e-commerce company headquartered in Hangzhou, the largest city in the Zhejiang Province in eastern China, 100 miles southwest of Shanghai. It operates platforms that allow businesses in China to sell online to each other and to businesses abroad, and for consumer transactions. Its main wholesale or B2B sites are Alibaba.com and 1688.com, while its three main consumer sites are Tmall, Taobao, AliExpress and group buying site Juhuasuan. It also boasts a series of other internet-based and finance businesses. ————————————————————————————————————————— Alibaba in numbers Employees: 30,000 Legal staff: 160 Market capitalisation: $267bn (£171bn) Offices outside mainland China: seven Users of Alibaba’s China retail marketplaces*: 279 million buyers and 8.5 million sellers Gross merchandise value from China retail marketplaces*: $296bn (£189bn) (* in 12 months ending 30 June 2014) ————————————————————————————————————————— Snapshot of Alibaba acquisitions in 2014

• Acquired digital mapping company AutoNavi in a $1.6bn (£1bn) take-private transaction
• Took a controlling stake in ChinaVision Media Group for $804m (£514m), rebranding as Ali Pictures
• Acquired the shares it did not own in mobile browser UCWeb – said to be the biggest acquisition by a Chinese internet company in history – in a bid to boost its profile in the mobile web market
• Took an 18% stake in Sina Corporation’s Weibo – China’s version of Twitter – for $586m (£374m)