In September, Alibaba Group launched the largest IPO in history, raising $25 billion from investors keen to own a slice of China’s most successful e-commerce company. For the moment, the potential for vast wealth overrode concerns about Alibaba’s unusual corporate structure and governance practices. Maybe it shouldn’t have. Alibaba uses what is called a variable interest entity (VIE) structure, which has its roots in the collapse of the energy giant Enron in 2001 and could likewise be the downfall of investors in Alibaba and other Chinese stocks.
The VIE structure involves control of a company through contracts instead of ownership. In other words, significant parts of Alibaba are not owned by the public company but are, rather, held in corporations, which are owned by the Alibaba founder Jack Ma and his close associates. These corporations have signed contracts with the Alibaba Group that give the public company
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