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Alibaba IPO comes with unusual business structure

BEIJING--Foreign nationals who want to buy Alibaba Group shares in the Chinese e-commerce giant's U.S. public offering will need to get comfortable with an unusual business structure.

Alibaba's online and mobile commerce businesses will be controlled by a “variable interest entity,” an arrangement meant to allow investors to buy into Internet and other businesses in which Beijing bans or limits foreign ownership.

Used since the 1990s by Internet operators such as Baidu Inc. and Sina Corp., VIEs are based on contracts that say an offshore entity in the Cayman Islands or another corporate haven will control a Chinese company. Foreign shareholders get a stake in that offshore vehicle and profits but no ownership of the Chinese company.

“The VIE structure is the only way at present to play this game,” said Paul Gillis, a professor at Peking University's Guanghua School of Management. “So if you want to invest in restricted sectors of China's economy, you have to get comfortable with the VIE structure.”

Chinese regulators have left the status of VIEs ambiguous. Most operate uneventfully, but courts have rejected contracts if they were deemed to be an attempt to evade ownership curbs.

Regulators could shut down VIEs, but “that would be too disruptive,” said Gillis. “They don't mind the ambiguity because it puts them in a position of strength over the companies to make sure that they comply with government policy.”

Such uncertainty is one of a number of risks investors have accepted to gain a stake in China's economy. Even after a steep deceleration in growth, it is forecast to expand by about 7 percent annually in coming years.

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A chef walks in the headquarter campus of Alibaba Group in Hangzhou in eastern China's Zhejiang province on Wednesday, Aug. 27. Foreign nationals who want to buy Alibaba Group shares in the Chinese e-commerce giant's U.S. public offering will need to get comfortable with an unusual business structure.(AP

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