Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
(in millions)
|
|
Cash and cash equivalents and short-term investments
|
|
|
122,341
|
|
|
111,518
|
|
|
146,747
|
|
|
205,395
|
|
|
193,238
|
|
|
28,794
|
|
Investment securities and investments in equity investees
(1)
|
|
|
52,146
|
|
|
125,031
|
|
|
155,874
|
|
|
182,707
|
|
|
251,471
|
|
|
37,470
|
|
Property and equipment, net
|
|
|
9,139
|
|
|
13,629
|
|
|
20,206
|
|
|
66,489
|
|
|
92,030
|
|
|
13,713
|
|
Goodwill and intangible assets, net
|
|
|
48,508
|
|
|
87,015
|
|
|
139,528
|
|
|
189,614
|
|
|
333,211
|
|
|
49,650
|
|
Total assets
|
|
|
255,434
|
|
|
364,245
|
|
|
506,812
|
|
|
717,124
|
|
|
965,076
|
|
|
143,801
|
|
Accrued expenses, accounts payable and other liabilities
(2)
|
|
|
21,967
|
|
|
29,491
|
|
|
48,269
|
|
|
83,210
|
|
|
123,898
|
|
|
18,462
|
|
Deferred tax liabilities
|
|
|
4,510
|
|
|
6,480
|
|
|
10,361
|
|
|
19,312
|
|
|
22,517
|
|
|
3,355
|
|
Bank borrowings
(3)
|
|
|
3,599
|
|
|
6,175
|
|
|
36,907
|
|
|
40,181
|
|
|
42,783
|
|
|
6,375
|
|
Unsecured senior notes
(4)
|
|
|
48,994
|
|
|
51,391
|
|
|
54,825
|
|
|
85,372
|
|
|
91,517
|
|
|
13,636
|
|
Total liabilities
|
|
|
97,363
|
|
|
114,356
|
|
|
182,691
|
|
|
277,685
|
|
|
349,674
|
|
|
52,104
|
|
Total Alibaba Group Holding Limited shareholders' equity
|
|
|
145,439
|
|
|
216,987
|
|
|
278,799
|
|
|
365,822
|
|
|
492,257
|
|
|
73,348
|
|
Total equity
|
|
|
157,413
|
|
|
249,539
|
|
|
321,129
|
|
|
436,438
|
|
|
608,583
|
|
|
90,681
|
|
-
(1)
-
Includes
both current and non-current investment securities and investments in equity investees.
-
(2)
-
Includes
both current and non-current other liabilities.
-
(3)
-
Includes
both current and non-current portion of bank borrowings.
-
(4)
-
Includes
both current and non-current portion of unsecured senior notes.
6
Table of Contents
Selected Operating Data
Annual active consumers
The table below sets forth the number of annual active consumers on our China retail marketplaces for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended
|
|
|
|
Jun 30,
2017
|
|
Sep 30,
2017
|
|
Dec 31,
2017
|
|
Mar 31,
2018
|
|
Jun 30,
2018
|
|
Sep 30,
2018
|
|
Dec 31,
2018
|
|
Mar 31,
2019
|
|
|
|
(in millions)
|
|
Annual active consumers
|
|
|
466
|
|
|
488
|
|
|
515
|
|
|
552
|
|
|
576
|
|
|
601
|
|
|
636
|
|
|
654
|
|
Mobile MAUs
The table below sets forth the mobile MAUs on our China retail marketplaces for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The month ended
|
|
|
|
Jun 30,
2017
|
|
Sep 30,
2017
|
|
Dec 31,
2017
|
|
Mar 31,
2018
|
|
Jun 30,
2018
|
|
Sep 30,
2018
|
|
Dec 31,
2018
|
|
Mar 31,
2019
|
|
|
|
(in millions)
|
|
Mobile MAUs
|
|
|
529
|
|
|
549
|
|
|
580
|
|
|
617
|
|
|
634
|
|
|
666
|
|
|
699
|
|
|
721
|
|
GMV
The table below sets forth the GMV in respect of our China retail marketplaces for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31,
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
(in billions of RMB)
|
|
Taobao Marketplace GMV
|
|
|
2,202
|
|
|
2,689
|
|
|
3,115
|
|
Tmall GMV
|
|
|
1,565
|
|
|
2,131
|
|
|
2,612
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GMV
|
|
|
3,767
|
|
|
4,820
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Rate Information
Most of our revenues and expenses are denominated in Renminbi. This annual report contains translations of Renminbi amounts and Hong Kong dollar amounts into
U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise stated, all translations from Renminbi and Hong Kong dollars into U.S. dollars and from
U.S. dollars into Renminbi in this annual report were made at a rate of RMB6.7112 to US$1.00 and HK$7.8498 to US$1.00, the respective exchange rates on March 29, 2019 set forth in the
H.10 statistical release of the Federal Reserve Board. We make no representation that any Renminbi, Hong Kong dollar or U.S. dollar amounts referred to in this annual report could have
been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part
through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On May 31, 2019, the noon buying rate for Renminbi and Hong Kong dollars
was RMB6.9027 to US$1.00 and HK$7.8387 to US$1.00, respectively.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
7
Table of Contents
D. Risk Factors
Risks Related to Our Business and Industry
Maintaining the trusted status of our digital economy is critical to our success and growth, and any failure
to do so could severely damage our reputation and brand, which would have a material adverse effect on our business, financial condition, results of operations and prospects.
We have established a strong brand name and reputation for our digital economy. Any loss of trust in our digital economy or platforms could harm our
reputation and the value of our brand, and could result in consumers, merchants, brands, retailers and other participants reducing their levels of activity in our digital economy, which could
materially reduce our revenue and profitability. Our ability to maintain trust in our digital economy and platforms is based in large part upon:
-
-
the quality and functionality of products and services as well as the quality and appeal of content available through our digital economy;
-
-
the reliability and integrity of our company and our platforms, as well as of the merchants, software developers, logistics providers, service
providers and other participants in our digital economy;
-
-
our commitment to high levels of service;
-
-
the safety, security and integrity of the data on our systems, and those of other participants in our digital economy;
-
-
the effectiveness and fairness of rules governing our marketplaces, various platforms and overall digital economy;
-
-
the strength of our measures to protect consumers and intellectual property rights owners; and
-
-
our ability to provide reliable and trusted payment and escrow services through our arrangements with Alipay.
Sustained investment in our business, strategic acquisitions and investments, as well as our focus on
long-term performance, and on maintaining the health of our digital economy, may negatively affect our margins and our net income.
We focus on the long-term interests of the participants in our digital economy. We continue to increase our spending and investments in our business,
strategic acquisitions and certain initiatives. Many of our newly invested businesses have lower or negative margins, and others are in the early stages of exploring, establishing and optimizing
appropriate monetization models, many of which are less efficient in attracting and converting paying merchants, subscribers or other participants as compared with certain of the marketplaces and
other businesses we operate. We believe these investments and initiatives are crucial to our success and future growth, but they will have the effect of increasing our costs and lowering our margins
and profit, and this effect may be significant in the short term and potentially over longer periods. We expect our margins will decrease as we continue to make these and similar investments. From
fiscal year 2018 to fiscal year 2019, our adjusted EBITDA margin declined from 42% to 32%. These investments and initiatives include:
-
-
expanding and enhancing our core commerce offerings, including our logistics network and capacities, local consumer services business, our
New Retail initiatives, direct sales and cross-border and international businesses;
-
-
strengthening and expanding various facilities and increasing our employee headcount;
-
-
researching and developing new technologies and improving our technological infrastructure and cloud computing capacity;
-
-
developing and acquiring content for our digital media and entertainment business; and
8
Table of Contents
-
-
incubating new innovation initiatives.
We
have made, and intend to continue to make, strategic investments and acquisitions to further strengthen our digital economy. We may make strategic investments and acquisitions in a range of areas
either directly related to one or more of our businesses, or related to the infrastructure, technology, services or products that support our businesses and digital economy. Our strategic investments
and acquisitions may adversely affect our financial results, at least in the short term. For example, acquisitions of, and continued investments in, businesses with lower margins or which are
loss-making, such as our acquisitions of a controlling stake in Lazada and Cainiao Network, and our newly integrated local consumer services business, have negatively affected our margins and net
income. Acquired businesses that are loss-making may continue to sustain losses and may not become profitable in the near future or at all. Investments made to expand our business, facilities and
workforce will also involve costs and risks, such as potential labor disputes and compliance costs and risks. The performance of our current and future equity investees and investment areas may also
adversely affect our net income. There can be no assurance that we will be able to grow our acquired or invested businesses, or realize returns, benefits of synergies and growth opportunities we
expect in connection with these investments and acquisitions. Also refer to " We face risks relating to our acquisitions, investments and alliances."
We may not be able to maintain or grow our revenue or our business.
We have experienced significant growth in revenue and in our business in recent years. Our ability to continue to grow our revenue depends on a number of
factors. See "Item 5. Operating and Financial Review and Prospects Operating Results Factors Affecting Our
Results of Operations Our Ability to Create Value for Our Users and Generate Revenue" and " Our Monetization Model."
Our
revenue growth also depends on our ability to continue to grow our core businesses as well as businesses we have acquired or which we consolidate. We are exploring and will continue to explore in
the future new business initiatives, including in industries and markets in which we have limited or no experience, as well as new business models, that may be untested. Developing new businesses,
initiatives and models requires significant investments of time and resources, and may present new and difficult technological, operational and compliance challenges. Particularly in the commerce
space, we expect to face various challenges while facilitating the convergence of online and offline retail and digitalization of offline business operations. Many of these challenges may be specific
to business areas we do not have sufficient experience with. We may encounter difficulties or setbacks in the execution of various growth strategies, including our New Retail initiatives, which
we expect to be an important driver of our future growth, and this and the other growth strategies may not generate the returns we expect within the timeframe we anticipate, or at all.
In
addition, our overall or segment revenue growth may slow or our revenues may decline for other reasons, including decreasing consumer spending, increasing competition and slowing growth of China's
retail industry, as well as changes in the geopolitical landscape, government policies or general economic conditions. As our revenue grows to a higher base level, our revenue growth rate may slow in
the future. Furthermore, due to the size and scale we have achieved, our user base may not continue to grow as quickly or at all.
If we are unable to compete effectively, our business, financial condition and results of operations would be
materially and adversely affected.
We face increasingly intense competition, principally from established Chinese Internet companies, such as Tencent, and their respective affiliates, as well
as global and regional e-commerce players, such as Amazon, other providers of local consumer services, and in the cloud computing and digital media and entertainment areas. These areas of our business
are subject to rapid market change, the introduction of new business models, and the entry of new and well-funded competitors. Increased investments made and lower prices offered by our competitors
may require
9
Table of Contents
us
to divert significant managerial, financial and human resources in order to remain competitive, and ultimately may reduce our market share and negatively impact the profitability of our business.
We mainly compete to:
-
-
attract, engage and retain consumers and increase their spending based on the variety, quality and value of products, services and content
offered within our digital economy, the overall user experience and the effectiveness of our consumer protection measures;
-
-
attract and retain merchants, brands and retailers based on the effectiveness of the various technologies, infrastructure, products and
services we offer to them;
-
-
attract and retain marketers, publishers and agency-operated demand-side platforms;
-
-
maintain and grow local delivery capabilities to provide convenient and efficient delivery services;
-
-
attract and retain a wide range of businesses as users of our cloud service offerings;
-
-
attract other participants to our digital economy based on access to business opportunities created by the large scale of economic activity,
infrastructure and technologies in our digital economy and on our platforms;
-
-
optimize the usefulness of the data and technologies we provide and maintain high-quality customer service;
-
-
identify, bid for, and execute strategic investments and thrive in new industries as we acquire new businesses and expand, bringing us into
competition with major players in these and other industries;
-
-
innovate and develop new growth initiatives and technologies; and
-
-
attract motivated and capable employees, including engineers and product developers.
Our
ability to compete depends on a number of other factors as well, some of which may be beyond our control, including alliances, acquisitions or consolidations within our industries that may result
in stronger competitors, and changes in the regulatory environment in the markets we operate. Existing and new competitors may leverage their established platforms or market positions, or introduce
innovative business models, to launch highly-engaging content, products or services that may attract a large user base and achieve rapid growth, which may materially and adversely affect our business
expansion and results of operations. We increasingly face competition from domestic and international players operating in these markets, as well as potential political measures, regulatory challenges
and protectionist policies that may support domestic players in those markets. As we develop our platforms and other businesses, such as our New Retail initiatives and other direct sales
businesses, we may also be perceived to compete with other participants in our digital economy, such as certain merchants and retailers, which may negatively affect our relationships with them.
If
we are not able to compete effectively, the level of economic activity and user engagement in our digital economy may decrease and our market share and profitability may be negatively affected,
which could materially and adversely affect our business, financial condition and results of operations, as well as our reputation and brand.
We may not be able to maintain and improve the network effects of our digital economy, which could negatively
affect our business and prospects.
Our ability to maintain a healthy and vibrant digital economy that creates strong network effects among consumers, merchants, brands, retailers and other
participants is critical to our success. The extent to which we are able to maintain and strengthen these network effects depends on our ability to:
-
-
offer secure and open platforms for all participants and balance the interests of these participants;
-
-
provide a wide range of high-quality product, service and content offerings to consumers;
-
-
attract and retain consumers, merchants, brands and retailers of all sizes;
10
Table of Contents
-
-
provide effective technologies, infrastructure and services that meet the evolving needs of consumers, merchants, brands and retailers;
-
-
arrange secure and trusted payment settlement and escrow services;
-
-
address user concerns with respect to data security and privacy measures;
-
-
improve our logistics data platform and coordinate fulfillment and delivery services with logistics service providers;
-
-
attract and retain third-party service providers that are able to provide quality services on commercially reasonable terms to our merchants,
brands and retailers;
-
-
maintain the quality of our customer service; and
-
-
continue adapting to the changing demands of the market.
In
addition, changes to current operations we may make to enhance and improve our digital economy or to comply with regulatory requirements may be viewed positively from one participant group's
perspective, such as consumers, but may have negative effects from another group's perspective, such as merchants. If we fail to balance the interests of all participants in our digital economy,
consumers, merchants, brands, retailers and other participants may spend less time, mind-share and resources on our platforms and may conduct fewer transactions or use alternative platforms, any of
which could result in a material decrease in our revenue and net income.
We may not be able to maintain our culture, which has been a key to our success.
Since our founding, our culture has been defined by our mission, vision and values, and we believe that our culture has been critical to our success. In
particular, our culture has helped us serve the long-term interests of our customers, attract, retain and motivate employees and create value for our shareholders. We face a number of challenges that
may affect our ability to sustain our corporate culture, including:
-
-
failure to identify, attract, promote and retain people who share our culture, mission, vision and values in leadership positions;
-
-
failure to execute an effective management succession plan;
-
-
challenges of effectively incentivizing and motivating employees, including members of senior management, and in particular those who have
gained a substantial amount of personal wealth related to share-based incentives;
-
-
the increasing size, complexity, geographic coverage and cultural diversity of our business and workforce;
-
-
challenges in managing a workforce that is expanding through organic growth and acquisitions, in providing effective training to this
workforce, and in promoting a culture of compliance with laws and regulations and preventing misconduct among our employees and participants in our digital economy;
-
-
competitive pressures to move in directions that may divert us from our mission, vision and values;
-
-
the pressure from the public markets to focus on short-term results instead of long-term value creation; and
-
-
the increasing need to develop expertise in new areas of business, such as New Retail, local consumer services and expansion of our
logistics network services, that affect us.
If
we are not able to maintain our culture or if our culture fails to deliver the long-term results we expect to achieve, our reputation, business, financial condition, results of operations and
prospects could be materially and adversely affected.
11
Table of Contents
If we are not able to continue to innovate or if we fail to adapt to changes in our industry, our business,
financial condition and results of operations would be materially and adversely affected.
Our industry is characterized by rapidly changing technology, evolving industry standards, new mobile apps and protocols, new products and services, new media
and entertainment content including user-generated content and changing user demands and trends. Furthermore, our
domestic and international competitors are continuously developing innovations in personalized search and recommendation, online shopping and marketing, communications, social networking,
entertainment, logistics and other services, to enhance user experience. As a result, we continue to invest significant resources in our infrastructure, research and development and other areas in
order to enhance our businesses and operations, as well as to explore new growth strategies and introduce new high-quality products and services. Our investments in innovations and new technologies,
which may be significant, may not increase our competitiveness or generate financial returns in the short term, or at all, and we may not be successful in adopting and implementing new technologies,
such as artificial intelligence, or AI. Our investments and projects to develop new growth initiatives and technologies may be hindered by political measures, regulatory scrutiny or other
protectionist policies, on national security grounds or for other reasons. The changes and developments taking place in our industry may also require us to re-evaluate our business model and adopt
significant changes to our long-term strategies and business plans. Our failure to innovate and adapt to these changes and developments would have a material adverse effect on our business, financial
condition and results of operations. Even if we timely innovate and adopt changes in our strategies and plans, we may nevertheless fail to realize the anticipated benefits of these changes or even
generate lower levels of revenue as a result.
Our failure to manage the significant challenges involved in growing our business and operations could
harm us.
Our business has become increasingly complex as the scale, diversity and geographic coverage of our business and our workforce continue to expand. This
expansion increases the complexity of our operations and places a significant strain on our management, operational and financial resources. The challenges involved in expanding our businesses require
our employees to handle new and expanded responsibilities and duties. If our employees fail to adapt to the expansion or if we are unsuccessful in hiring, training, managing and integrating new
employees or retraining and expanding the roles of our existing employees, our business, financial condition and results of operations may be materially harmed.
Moreover,
our current and planned staffing, systems, policies, procedures and controls may not be adequate to support our future operations. To effectively manage continuing expansion and growth of
our operations and
workforce, we will need to continue to improve our personnel management, transaction processing, operational and financial systems, policies, procedures and controls, which could be particularly
challenging as we acquire new operations with different and incompatible systems in new industries or geographic areas. These efforts will require significant managerial, financial and human
resources. There can be no assurance that we will be able to effectively manage our growth or to implement all these systems, policies, procedures and control measures successfully. If we are not able
to manage our growth effectively, our business and prospects may be materially and adversely affected.
We face risks relating to our acquisitions, investments and alliances.
We have acquired and invested in a large number and a diverse range of businesses, including those in different countries and regions, technologies, services
and products in recent years, including investments of varying sizes in equity investees and joint ventures, and, from time to time, we may have a number of pending investments and acquisitions that
are subject to closing conditions. See "Item 5. Operating and Financial Review and Prospects A. Operating
Results Recent Investment, Acquisition and Strategic Alliance Activities." We expect to continue to evaluate and consider a wide array of potential strategic
transactions as part of our overall business strategy, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets, as well as
strategic investments, joint ventures and alliances. At any given time we may be engaged in
12
Table of Contents
discussing
or negotiating a range of these types of transactions. These transactions involve significant challenges and risks, including:
-
-
difficulties in, and significant and unanticipated additional costs and expenses resulting from, integrating into our business the large number
of personnel, operations, products, services, technology, internal controls and financial reporting of the businesses we acquire;
-
-
disruption of our ongoing business, distraction of and significant time and attention required from our management and employees and increases
in our expenses;
-
-
departure of skilled professionals and proven management teams of acquired businesses, as well as the loss of established client relationships
of those businesses we invest in or acquire;
-
-
for investments over which we may not obtain management and operational control, we may lack influence over the controlling partners or
shareholders, or may not have aligned interests with these of our partners or other shareholders;
-
-
additional or conflicting regulatory requirements, heightened restrictions on and scrutiny of investments, acquisitions and foreign ownership
in other jurisdictions, on national security grounds or for other reasons, regulatory hurdles, such as filings and approvals under the anti-monopoly and competition laws, rules and regulations, the
risk that acquisitions or investments may fail to close, due to political and regulatory challenges or protectionist policies, as well as related compliance and publicity risks;
-
-
actual or alleged misconduct, unscrupulous business practices or non-compliance by us or any company we acquire or invest in (or by its
affiliates), whether before, during or after our acquisition or investments;
-
-
difficulties in identifying and selecting appropriate targets and strategic partners, including potential loss of opportunities for strategic
transactions with competitors of our investee companies and strategic partners;
-
-
difficulties in conducting sufficient and effective due diligence on potential targets and unforeseen or hidden liabilities or additional
incidences of non-compliance, operating losses, costs and expenses that may adversely affect us following our acquisitions or investments or other strategic transactions;
-
-
negative impact on our cash and credit profile from loans to or guarantees for the benefit of equity investees; and
-
-
actual or potential impairment charges or write-offs due to the changes in the fair value of our investments or acquired companies, including
companies and businesses that we have acquired or invested in for a long period of time, in the event that the fair value of our investment has been significantly lower than its carrying value for an
extended period of time.
These
and other risks could lead to negative publicity, litigation, government inquiries, investigations or actions against the companies we invest in or acquire, or even against our other businesses,
and may force us to incur significant additional expenses and allocate significant management and human resources to rectify or improve these companies' corporate governance standards or internal
controls and systems. As we continue to implement our New Retail strategy, among other initiatives, and further expand our digital economy, we expect that our acquisition and investment
activity will continue at a rapid pace, with a large number and diverse range of target companies, and we will continue to face significant challenges, including unanticipated ones, in integrating
these businesses into our existing businesses.
We may face challenges in expanding our international and cross-border businesses and operations.
In addition to risks that generally apply to our acquisitions and investments, we face risks associated with expanding into an increasing number of markets
where we have limited or no experience, we may be less well-known or have fewer local resources and we may need to localize our business practices, culture and operations. We may also face
protectionist policies that could, among other things, hinder our ability to execute our business strategies and put us at a competitive disadvantage relative to domestic companies in other
13
Table of Contents
jurisdictions.
The expansion of our international and cross-border businesses will also expose us to risks and challenges inherent in operating businesses globally,
including:
-
-
challenges in replicating or adapting our company policies and procedures to operating environments different from that of China, including
technology and logistics infrastructure;
-
-
challenges of maintaining efficient and consolidated internal systems, including information technology infrastructure, and of achieving
customization and integration of these systems with the other parts of our digital economy;
-
-
lack of acceptance of our product and service offerings, and challenges of localizing our offerings to appeal to local tastes;
-
-
protectionist or national security policies that restrict our ability to:
-
-
invest in or acquire companies;
-
-
develop, import or export certain technologies, such as the national AI initiative proposed by the
U.S. government; or
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utilize technologies that are deemed by local governmental regulators to pose a threat to their national security;
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the need for increased resources to manage regulatory compliance across our international businesses;
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failure to attract and retain capable talent with international perspectives who can effectively manage and operate local businesses;
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compliance with privacy laws and data security laws, including the European Union General Data Protection Regulation, or GDPR, and compliance
costs across different legal systems;
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-
heightened restrictions and barriers on the transfer of data between different jurisdictions;
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-
differing, complex and potentially adverse customs, import/export laws, tax rules and regulations or other trade barriers or restrictions which
may be applicable to transactions conducted through our international and cross-border platforms, related compliance obligations and consequences of non-compliance, and any new developments in
these areas;
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-
availability, reliability and security of international and cross-border payment systems and logistics infrastructure;
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exchange rate fluctuations; and
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political instability and general economic or political conditions in particular countries or regions, including territorial or trade disputes,
war and terrorism.
Failure
to manage these risks and challenges could negatively affect our ability to expand our international and cross-border businesses and operations as well as materially and adversely affect our
business, financial condition and results of operations.
Our business operations and financial position may be materially and adversely affected by any economic
slowdown in China as well as globally.
Our revenue and net income are impacted to a significant extent by economic conditions in China and globally, as well as economic conditions specific to our
business. The global economy, markets and levels of spending by businesses and consumers are influenced by many factors beyond our control.
The
growth of the PRC economy has slowed in recent years compared to prior years. According to the National Bureau of Statistics of China, China's real GDP growth rate was 6.7% in 2016, which
increased to 6.9% in 2017 and slowed to 6.6% in 2018. There have also been concerns about the relationships among China and other Asian
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countries,
the relationship between China and the United States, as well as the relationship between the United States and certain Asian countries such as North Korea, which may result
in or intensify potential conflicts in relation to territorial, regional security and trade disputes. See " Changes in international trade policies and barriers to trade, or the emergence
of a trade war, may have an adverse effect on our business and expansion plans." Any disruptions or continuing or worsening slowdown could significantly reduce domestic commerce activities in China,
which could lead to significant reduction in merchants' demand for and spending on the various services we offer, such as our marketing services and cloud computing services. An economic downturn,
whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we may operate could have a material adverse
effect on business and consumer spending and, as a result, adversely affect our business, financial condition and results of operations.
In
addition, because we hold a significant amount of cash and cash equivalents and short-term investments, if financial institutions and issuers of financial instruments that we hold become insolvent
or if the market for these financial instruments become illiquid as a result of a severe economic downturn, our business and financial condition could be materially and adversely affected.
Our results of operations fluctuate significantly from quarter to quarter which may make it difficult to
predict our future performance.
Our results of operations generally are characterized by seasonal fluctuations due to various reasons, including seasonal buying patterns and economic
cyclical changes, as well as promotions on our
marketplaces. Historically, the fourth quarter of each calendar year generally contributes the largest portion of our annual revenues due to a number of factors, such as merchants allocating a
significant portion of their online marketing budgets to the fourth calendar quarter, promotions, such as the 11.11 global shopping festival, and the impact of seasonal buying patterns in
respect of certain categories such as apparel. The first quarter of each calendar year generally contributes the smallest portion of our annual revenues, primarily due to a lower level of allocation
of marketing budgets by merchants at the beginning of the calendar year and the Chinese New Year holiday, during which time consumers generally spend less and businesses in China are generally
closed. We may also introduce new promotions or change the timing of our promotions in ways that further cause our quarterly results to fluctuate and differ from historical patterns. In addition,
seasonal weather patterns may affect the timing of buying decisions. The performance of our equity investees and of major businesses in which we have made investments may also result in fluctuations
in our results of operations. Fluctuations in our results of operations related to our investments may also result from the accounting implication of re-measurement of fair values of certain financial
instruments, share-based awards and previously held equity interests upon disposal or step acquisitions. Given that the fair value movements are beyond our control, the magnitude of the related
accounting impact is unpredictable and may significantly affect our results of operations.
Our
results of operations will likely fluctuate due to these and other factors, some of which are beyond our control. In addition, our growth in the past may have masked the seasonality that might
otherwise be apparent in our results of operations. As the rate of growth of our business declines in comparison to prior periods, we expect that the seasonality in our business may become more
pronounced. Moreover, as our business grows, we expect that our fixed costs and expenses will continue to increase, which will result in operating leverage in seasonally strong quarters but can
significantly pressure operating margins in seasonally weak quarters.
To
the extent our results of operations are below the expectations of public market analysts and investors in the future, or if there are significant fluctuations in our financial results, the market
price of our ADSs could fluctuate significantly.
Failure to maintain or improve our technology infrastructure could harm our business and prospects.
We are continuously upgrading our platforms to provide increased scale, improved performance, additional capacity and additional built-in functionality,
including functionality related to security. Adopting new products and maintaining and upgrading our technology infrastructure require significant investments of time and resources. Any
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failure
to maintain and improve our technology infrastructure could result in unanticipated system disruptions, slower response times, impaired user experience and delays in reporting accurate
operating and financial
information. The risks of these events occurring are even higher during certain periods of peak usage and activity, such as on or around the 11.11 global shopping festival or other promotional
events, when user activity and transactions are significantly higher on our marketplaces compared to other days of the year. In addition, much of the software and interfaces we use are internally
developed and proprietary technology. If we experience problems with the functionality and effectiveness of our software, interfaces or platforms, or are unable to maintain and continuously improve
our technology infrastructure to handle our business needs, our business, financial condition, results of operations and prospects, as well as our reputation and brand, could be materially and
adversely affected.
In
addition, our technology infrastructure and services, including our cloud product and service offerings, incorporate third-party-developed software, systems and technologies, as well as hardware
purchased or commissioned from outside and overseas suppliers. As our technology infrastructure and services expand and become increasingly complex, we face increasingly serious risks to the
performance and security of our technology infrastructure and services that may be caused by these third-party-developed components, including risks relating to incompatibilities among these
components, service failures or delays or back-end procedures on hardware and software. We also need to continuously enhance our existing technology. Otherwise, we face the risk of our technology
infrastructure becoming unstable and susceptible to security breaches. This instability or susceptibility could create serious challenges to the security and uninterrupted operation of our platforms
and services, which would materially and adversely affect our business and reputation.
Security breaches and attacks against our systems and network, and any potentially resulting breach or
failure to otherwise protect personal, confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our
financial condition and results of operations.
Our cybersecurity measures may not detect, prevent or control all attempts to compromise our systems, including distributed denial-of-service attacks,
viruses, Trojan horses, malicious software, break-ins, phishing attacks, third-party manipulation, security breaches, employee misconduct or negligence or other attacks, risks, data leakage and
similar disruptions that may jeopardize the security of data stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized
access to our systems, misappropriation of information or data, deletion or modification of user information, or a denial-of-service or other interruption to our business operations. As techniques
used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, there can be no assurance that we will
be able to anticipate, or implement adequate measures to protect against, these attacks.
We
have in the past and are likely again in the future to be subject to these types of attacks, breaches and data leakage, although to date no attack, breach or data leakage has resulted in any
material damage or remediation cost. In addition, we could be subject to an attack, breach or leakage which we do not discover at the time or the consequences of which are not apparent until a later
point in time, that could result in material damages or remediation costs. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial
liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to
anticipate or prevent rapidly-evolving cyber-attacks. Cyber-attacks may target us, our merchants, consumers, users, customers, key service providers or other participants in our digital economy, or
the communication infrastructure on which
we depend. We only carry limited cybersecurity insurance, and actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel
and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially
decrease our revenue and net income.
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The successful operation of our business depends upon the performance, reliability and security of the
Internet infrastructure in China and other countries in which we operate.
Our business depends on the performance, reliability and security of the telecommunications and Internet infrastructure in China and other countries in which
we operate. Substantially all of our computer hardware and a majority of our cloud computing services are currently located in China. Almost all access to the Internet in China is maintained through
state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. In addition, the national
networks in China are connected to the Internet through state- owned international gateways, which are the only channels through which a domestic user can connect to the Internet outside of China. We
may face similar or other limitations in other countries in which we operate. We may not have access to alternative networks in the event of disruptions, failures or other problems with the Internet
infrastructure in China or elsewhere. In addition, the Internet infrastructure in the countries in which we operate may not support the demands associated with continued growth in
Internet usage.
The
failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our websites and mobile apps. We have no control
over the costs of the services provided by the telecommunications operators. If the prices that we pay for telecommunications and Internet services rise significantly, our margins could be adversely
affected. In addition, if Internet access fees or other charges to Internet users increase, our user base may decrease, which in turn may significantly decrease our revenues.
Moreover,
if the security of domain names is compromised, we will be unable to use the domain names in our business operations, which could materially and adversely affect our business operations,
reputation and brand image. If we fail to implement adequate encryption of data transmitted through the networks of the telecommunications and Internet operators we rely upon, there is a risk that
telecommunications and Internet operators or their business partners may misappropriate our data, which could materially and adversely affect our business operations and reputation.
Our digital economy could be disrupted by network interruptions.
Our digital economy depends on the efficient and uninterrupted operation of our computer and communications systems. System interruptions and delays may
prevent us from efficiently processing the large volume of transactions on our marketplaces and other businesses we operate. In addition, a large number of merchants and customers maintain their
important systems, such as enterprise resource planning, or ERP, and customer relationship management, or CRM, systems on our cloud computing platform, which contain substantial quantities of data
that enables them to operate and manage their businesses. Increasing media and entertainment content on our platforms also requires additional network capacity and infrastructure to process. Consumers
expect our media and entertainment content to be readily available online, and any disruptions or delay to the delivery of content could affect the attractiveness and reputation of our media and
entertainment platforms.
We
and other participants in our digital economy, including Ant Financial, have experienced, and may experience in the future, system interruptions and delays that render websites, mobile apps and
services (such as cloud services and payment services) temporarily unavailable or slow to respond. Although we have prepared for contingencies through redundancy measures and disaster recovery plans
and also carry business interruption insurance, these preparations and insurance coverage may not be sufficient. Despite any precautions we may take, the occurrence of a natural disaster or other
unanticipated problems at our facilities or the facilities of Ant Financial and other participants in our digital economy, including power outages, system failures, telecommunications delays or
failures, construction accidents, break-ins to information technology systems, computer viruses or human errors, could result in delays in or temporary outages of our platforms or services, loss of
our, consumers' and customers' data and business interruption for us and our customers. Any of these events could damage our reputation, significantly disrupt our operations and the operations of the
participants in our digital economy and subject us to liability,
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heightened
regulatory scrutiny and increased costs, which could materially and adversely affect our business, financial condition and results of operations.
Changes in international trade policies and barriers to trade, or the emergence of a trade war, may have an
adverse effect on our business and expansion plans.
In recent years, international market conditions and the international regulatory environment have been increasingly affected by competition among countries
and geopolitical frictions. Changes to trade policies, treaties and tariffs in the jurisdictions in which we operate, or the perception that these changes could occur, could adversely affect the
financial and economic conditions in the jurisdictions in which we operate, as well
as our international and cross-border operations, our financial condition and results of operations. The U.S. administration under President Donald Trump has advocated greater restrictions on
international trade generally and significant increases on tariffs on certain goods imported into the United States, particularly from China, and has taken steps toward restricting trade in
certain goods. For example, in 2018 the United States announced three finalized tariffs that applied exclusively to products imported from China, totaling approximately US$250 billion,
and in May 2019 the United States increased from 10% to 25% the rate of certain tariffs previously levied on Chinese products. Trade tension between China and the United States may intensify,
and the United States may adopt even more drastic measures in the future.
Changes
to laws or policies in the U.S. and other markets may lead to adverse consequences for our businesses. For example, changes in laws and policy could negatively affect both export-focused
businesses on AliExpress and Alibaba.com, as well as import-focused businesses on Tmall and Tmall Global. In addition, if trade discussions lead to greater access to the China market, certain of our
businesses, such as our cloud business and digital media and entertainment businesses, could be subject to greater competition and pricing pressure, which could reduce our margins or otherwise
negatively affect our results of operations.
In
addition, China and other countries have retaliated and may further retaliate in response to new trade policies, treaties and tariffs implemented by the United States. This policy
retaliation could result in an escalation leading to a trade war, which would have an adverse effect on manufacturing levels, trade levels and industries, including logistics, retail sales and other
businesses and services that rely on trade, commerce and manufacturing, as well as on our marketplaces that rely upon imports.
Any
escalation in trade tensions or a trade war, or news and rumors of any escalation, could affect activity levels within our digital economy and have a material and adverse effect on our business,
results of operations and trading price of our ADSs.
Export control and economic or trade sanctions could subject us to regulatory investigations or other actions
and reputational harm, and could negatively affect our technology supply chain and ability to recruit talent and conduct technological collaboration, which could materially and adversely affect our
competitiveness and business operations, as well as lead to significant decrease in the trading price of our ADSs.
The United Nations and a number of countries and jurisdictions, including China, the United States and the European Union, or the EU, have adopted various
export control and economic or trade sanction regimes. The U.S. government imposes broad economic and trade restrictions on dealings with certain countries and regions, including the Crimea,
Cuba, Iran, North Korea and Syria, or the Sanctioned Countries, and numerous individuals and entities, including those designated as having engaged in activities relating to terrorism, drug
trafficking, cybercrime, the rough diamond trade, proliferation of weapons of mass destruction or human rights violations, or the Sanctioned Persons. The U.S. government also imposes more
targeted sanctions on certain dealings with countries such as Russia and Venezuela, among others. The U.S. government has recently expanded or suggested that it will expand economic sanctions
concerning Iran, North Korea, Russia and Venezuela, and there are risks of further enhanced economic sanctions concerning these countries, among others. It is not,
however, possible to predict with a reasonable degree of certainty how the regulatory environment concerning U.S. economic sanctions
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may
develop. The United Nations, the EU, the United Kingdom, or the UK, and other countries also impose economic and trade restrictions, including on certain Sanctioned Countries and Sanctioned
Persons.
As
a Cayman Islands company with the substantial majority of our subsidiaries and operations outside of the U.S., UK and EU, we are generally not required to comply with U.S., UK, and EU sanctions to
the same extent as U.S., UK or EU entities. However, for companies like us, their U.S., UK, and EU subsidiaries, employees who are U.S. persons or UK or EU nationals, activities in the U.S.,
UK, or EU, activities involving U.S.-origin goods, technology or services, and certain conduct or dealings involving Iran and North Korea, among other activities, are subject to applicable sanctions
requirements. We do not have employees or operations in any of the Sanctioned Countries, and, although our websites are open and available worldwide, we do not actively solicit business from the
Sanctioned Countries or Sanctioned Persons. In the case of Alibaba.com, our aggregate cash revenue from members in these Sanctioned Countries in fiscal year 2019 accounted for a negligible portion of
our total revenue. In the case of AliExpress and our China retail marketplaces, an insignificant percentage of orders have been placed by consumers from the Sanctioned Countries, with a negligible
amount of aggregate GMV in the twelve months ended March 31, 2019 through transactions conducted voluntarily among merchants and consumers on these marketplaces. As all transaction fees on
AliExpress and our China retail marketplaces are paid by merchants, primarily based in China, we do not earn any fees or commission from consumers in Sanctioned Countries in respect of transactions
conducted on these platforms.
Recent
economic and trade sanctions threatened and/or imposed by the U.S. government on a number of China-based technology companies, including ZTE Corporation, Huawei Technologies
Co., Ltd., or Huawei, and certain of their respective affiliates, as well as actions brought against Huawei and related persons by the U.S. and the Canadian governments, have raised further
concerns as to whether, in the future, there may be additional regulatory challenges or enhanced restrictions involving other China-based technology companies with global operations in areas such as
data security, import/export of technology or other business activities. For instance, the U.S. government recently announced an order effectively barring American firms from selling components and
software to Huawei and its affiliates. This restriction, and similar or more expansive restrictions that may be imposed by the U.S. or other jurisdictions in the future, may materially and adversely
affect our ability to acquire technologies, systems, devices or components that may be critical to our technology infrastructure, service offerings and business operations. These restrictions or
sanctions, even targeting specific entities unrelated to us, could nevertheless also negatively affect our ability to recruit research and development talent or conduct technological collaboration
with scientists and research institutes in the U.S., Europe or other countries, which could significantly harm our competitiveness. There can be no assurance that current or future export controls or
economic and trade sanctions regulations or developments will not have a negative impact on our business or reputation.
We
have established a compliance program that aims to ensure our compliance with these laws and regulations. However, these laws and regulations are complex and subject to frequent change, including
with respect to
jurisdictional reach and the lists of countries, entities, individuals and technologies subject to sanctions and other regulatory controls. Hence, we may incur significant costs related to current,
new or changing sanctions, embargoes or export controls programs, as well as investigations, fines, fees or settlements, which may be difficult to predict. We also could face increased compliance
costs and risks as we expand globally and into additional businesses, such as cloud computing. In addition, our expanding network of investee companies, global business partners, joint venture
partners or other parties that have collaborative relationships with us or our affiliates may engage in activities in or with Sanctioned Countries, Sanctioned Persons or persons targeted by export
control restrictions, which might result in significant negative publicity, governmental investigations and reputational harm. Media reports on alleged violation of export control or economic and
trade sanctions laws by our business partners or other companies, even on matters not involving us, could nevertheless damage our reputation and lead to regulatory investigations against us. If we are
investigated by any regulator on the basis of suspected or alleged violations of export control or economic and trade sanctions laws and rules, even in situations in which the potential amount or fine
involved may be relatively small, our reputation could be significantly harmed. Any of these circumstances may cause the price of our ADSs to decline significantly, and materially reduce the value of
your investment in our ADSs.
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Certain
institutional investors, including state and municipal governments in the United States and universities, as well as financial institutions, have proposed or adopted divestment or
similar initiatives regarding investments in companies that do business with Sanctioned Countries. Accordingly, as a result of activities on our marketplaces or in connection with other business we
operate that may involve users based in the Sanctioned Countries, certain investors may not wish to invest or may divest their investment in us, certain financial institutions may not wish to lend,
extend credit or offer ordinary banking services to us, or seek early repayment of loans made to us, and certain financial institutions and other businesses with which we partner or may partner may
seek to avoid business relationships with us. These divestment initiatives and terminations of business services may negatively impact our reputation, business and results of operations, and may
materially and adversely affect the trading price of our ADSs.
Our business generates and processes a large amount of data, including personal data, and the improper use or
disclosure of data could harm our reputation and have a material adverse effect on the trading price of our ADSs, our business and prospects.
Our business generates and processes a large quantity of personal, behavioral, transaction and demographic data. Our privacy policies concerning the
collection, use and disclosure of personal data are posted on our platforms. We face risks inherent in handling and protecting large volumes of data, especially consumer data. In particular, we face a
number of challenges relating to data from transactions and other activities on our platforms, including:
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protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior or improper
use by our employees;
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addressing concerns, challenges, negative publicity and litigation related to data privacy, collection, use and actual or perceived sharing
(including sharing among our own businesses, with business partners or regulators), safety, security and other factors that may arise from our existing businesses or new businesses and technology,
such as new forms of data (for example, biometric data, location information and other demographic information); and
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complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure and security of personal
information, including requests from data subjects and regulatory and government authorities.
These
challenges are heightened as we expand our business into jurisdictions with different legal and regulatory regimes, such as the GDPR and the Russian Data Localization Law. There have been
reports of a number of incidents relating to data security and unauthorized use of user data by high-profile Internet and technology companies and their business partners. If our user data is
improperly used or disclosed by any party, it could result in a loss of users, businesses and other participants from our digital economy, loss of confidence or trust in out platforms, litigation,
regulatory investigations, penalties or actions against us, significant damage to our reputation, and have a material adverse effect on the trading price of our ADSs, our business
and prospects.
Pursuant
to our data sharing agreement with Ant Financial and Alipay, which sets forth data security and confidentiality protocols, we have agreed to a broad sharing of depersonalized data through a
data sharing platform that we own and operate, subject to compliance with relevant law. As permitted by our privacy policies and user agreements, we also grant expressly limited access to specified
data on our data platform to certain other participants in our digital economy that provide services to consumers, merchants, brands and retailers. These participants in our digital economy face the
same challenges inherent in handling and protecting large volumes of data. Any systems failure or security breach or lapse on our or their part that results in the release of user data could harm our
reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability or regulatory actions. This could also attract negative publicity from media outlets,
privacy advocates, our competitors or others and could adversely affect the trading price of our ADSs.
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Our business is subject to complex and evolving domestic and international laws and regulation regarding
privacy and data protection. These laws and regulations can be complex and stringent, and many are subject to change and uncertain interpretation, which could result in claims, changes to our data and
other business practices, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise affect our business.
Regulatory authorities in China and around the world have implemented and are considering further legislative and regulatory proposals concerning data
protection, including measures to ensure that encryption of users' data does not hinder law enforcement agencies' access to that data. New laws and regulations that govern new areas of data protection
or impose more stringent requirements may be introduced in China and other jurisdictions where we conduct business or may expand into. In addition, the interpretation and application of consumer and
data protection laws in China and elsewhere are often uncertain and in flux. It is possible that existing or newly-introduced laws and regulations, or their interpretation or application, could
significantly affect the value of our data and force us to change our data and other business practices.
The
PRC regulatory and enforcement regime with regard to privacy and data security is evolving. According to the PRC Cybersecurity Law and relevant regulations, network operators, including us, are
obligated to provide assistance and support in accordance with the law for public security and national security authorities to protect national security or assist with criminal investigations. In
addition, the PRC Cybersecurity Law provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations
in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security and privacy protection obligations on operators of critical information infrastructure. The
PRC National Security Law covers various types of national security, including technology security and information security. See "Item 4. Information on the
Company B. Business Overview Regulation Regulation of Internet Security."
Compliance with the PRC Cybersecurity Law, the PRC National Security Law, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, may result in additional
expenses to us and subject us to negative publicity, which could harm our reputation among users and negatively affect the trading price of our ADSs. There are also uncertainties with respect to how
the PRC Cybersecurity Law and the PRC National Security Law will be implemented and interpreted in practice. PRC regulators, including the MIIT and the Cyberspace Administration of China, or the
Cyberspace Administration, have been increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater and continued attention and
scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we
are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could
be materially and adversely affected.
As
we further expand our operations into international markets, we will be subject to additional laws in other jurisdictions where we operate and where our consumers, users, merchants, customers and
other participants are located. The laws, rules and regulations of other jurisdictions may be more comprehensive, detailed and nuanced in their scope, and may impose requirements and penalties that
conflict with, or are more stringent than, those in China. In addition, these laws, rules and regulations may restrict the transfer of data across jurisdictions, which could impose additional and
substantial operational, administrative and compliance burdens on us, and may also restrict our business activities and expansion plans, as well as impede our data-driven business strategies.
Complying with laws and regulations for an increasing number of jurisdictions could require significant resources and costs. Our continued expansion into cloud computing services, both in China and
elsewhere, will also increase the amount of data hosted on our system, as well as increase the number of jurisdictions in which we have
information technology systems. This, as well as the increasing number of new legal requirements in various jurisdictions, such as the Russian Data Localization Law and the GDPR, present increased
challenges and risks in relation to policies and procedures relating to data collection, storage, transfer, disclosure, protection and privacy, and will impose significant penalties for
non-compliance, including for example, penalties calculated as a percentage of global revenue under the GDPR. The compliance requirements of the GDPR affect a number of our businesses, such as
AliExpress and Alibaba Cloud. Compliance with cross-border e-commerce tax laws that
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apply
to our businesses will also affect a number of our businesses, increase our compliance costs and subject us to additional risks.
Any
failure, or perceived failure, by us to comply with the above and other regulatory requirements or privacy protection-related laws, rules and regulations could result in reputational damages or
proceedings or actions against us by governmental entities, consumers or others. On the other hand, compliance with these laws and requirements in manners that are perceived as harming privacy could
also lead to significant damages to our reputation and similar proceedings and actions against us by regulators and private parties. These proceedings or actions could subject us to significant
penalties and negative publicity, require us to change our data and other business practices, increase our costs and severely disrupt our business, hinder our global expansion or negatively affect the
trading price of our ADSs.
We rely on Alipay to conduct substantially all of the payment processing and all of the escrow services on
our marketplaces. If Alipay's services are limited, restricted, curtailed or degraded in any way, or become unavailable to us or our users for any reason, our business may be materially and adversely
affected.
Given the significant transaction volume on our platforms, Alipay provides convenient payment processing and escrow services to us through contractual
arrangements on preferential terms. These services are critical to our marketplaces and the development of our digital economy. In the twelve months ended March 31, 2019, approximately 70% of
the GMV on our China retail marketplaces was settled through Alipay's escrow and payment processing services. We rely on the convenience and ease of use that Alipay provides to our users. If the
quality, utility, convenience or attractiveness of Alipay's services declines for any reason, the attractiveness of our marketplaces could be materially and adversely affected.
Alipay's
business is subject to a number of risks that could materially and adversely affect its ability to provide payment processing and escrow services to
us, including:
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dissatisfaction with Alipay's services or lower use of Alipay by consumers, merchants, brands and retailers;
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increasing competition, including from other established Chinese Internet companies, payment service providers and companies engaged in other
financial technology services;
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changes to rules or practices applicable to payment systems that link to Alipay;
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breach of users' privacy and concerns over the use and security of information collected from customers and any related negative publicity
relating thereto;
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service outages, system failures or failure to effectively scale the system to handle large and growing transaction volumes;
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increasing costs to Alipay, including fees charged by banks to process transactions through Alipay, which would also increase our cost
of revenues;
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negative news about and social media coverage on Alipay, its business, its products and service offerings or matters relating to Alipay's data
security and privacy; and
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failure to manage user funds accurately or loss of user funds, whether due to employee fraud, security breaches, technical errors
or otherwise.
In
addition, certain commercial banks in China impose limits on the amounts that may be transferred by automated payment from users' bank accounts to their linked accounts with third-party payment
services. Although we believe the impact of these restrictions has not been and will not be significant in terms of the overall volume of payments processed for our China retail marketplaces, and
automated payment services linked to bank accounts represent only one of many payment mechanisms that consumers may use to settle transactions, we cannot predict whether these and any additional
restrictions that could be put in place would have a material adverse effect on our marketplaces.
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Alipay's business is highly regulated and faces challenges in managing its regulatory risks. Alipay is required to comply with numerous complex and evolving laws, rules and
regulations. In particular, regulators and third parties in China have been increasing their focus on online and mobile payment services, and recent regulatory and other developments could reduce the
convenience or utility of Alipay users' accounts. In addition, as Alipay expands its businesses and operations into more international markets, it will become subject to additional legal and
regulatory risks and scrutiny. Furthermore, our commercial arrangements with Alipay may be subject to anti-competition challenges. See " We and Ant Financial are subject to a
broad range of laws and regulations, and future laws and regulations may impose additional requirements and other obligations on our business or otherwise that could materially and adversely affect
our business, financial condition and results of operations," and "Item 4. Information on the Company B. Business
Overview Regulation Regulation Applicable to Alipay."
If
we needed to migrate to another third-party payment service or significantly expand our relationship with other third-party payment services, the transition would require significant time and
management resources, and the third-party payment service may not be as effective, efficient or well-received by consumers, merchants, brands and retailers on our marketplaces. These third-party
payment services also may not provide escrow services, and we may not be able to receive commissions based on GMV settled through these systems. We would also receive less, or lose entirely, the
benefit of the commercial agreement with Ant Financial and Alipay, which provides us with preferential terms, and would possibly be required to pay more for payment processing and escrow services than
we currently pay. There can be no assurance that we would be able to reach an agreement with an alternative online payment service provider on acceptable terms or at all.
We do not control Alipay or its parent entity, Ant Financial, over which Jack Ma effectively controls a
majority of the voting interests. If conflicts that could arise between us and Alipay or Ant Financial are not resolved in our favor, our digital economy, business, financial condition, results of
operations and prospects may be materially and adversely affected.
Although we rely on Alipay to conduct substantially all of the payment processing and all of the escrow services on our marketplaces and we have agreed to
acquire a 33% equity interest in Alipay's parent, Ant Financial, we do not, and will not upon completion of the acquisition, have any control over Alipay. Alipay provides payment services to us on
preferential terms pursuant to our long-term commercial agreement with Ant Financial and Alipay. Following the 2011 divestment and subsequent equity holding restructuring related to Ant Financial, an
entity wholly owned by Jack Ma, our executive chairman, became the general partner of Hangzhou Junhan Equity Investment Partnership, or Junhan, and Hangzhou Junao Equity Investment Partnership, or
Junao, each a PRC limited partnership, which are two major equity holders of Ant Financial. Accordingly, Jack has an economic interest in Ant Financial and is able to exercise the voting power of the
equity interest in Ant Financial held by Junhan and Junao. We understand that through the exercise of this voting power, Jack continues to control a majority of the voting interests in
Ant Financial.
If
Alipay were not able to successfully manage the risks relating to its business, its ability to continue to deliver payment services to us on preferential terms may be undermined. Furthermore, if
for any reason, Alipay sought to amend the terms of its agreements and arrangements with us, there can be no assurance that Jack Ma, in light of his voting control over Alipay's parent, Ant Financial,
would act in our interest. If Alipay were required by regulators to modify the commercial agreement under certain circumstances, Alipay may not have sufficient funds to adequately compensate us for
the impact of the adjustment. If we were to lose the preferential terms with Alipay or if Alipay is unable to successfully manage its business, our digital economy could be negatively affected, and
our business, financial condition, results of operations and prospects could be materially and adversely affected.
Ant
Financial also provides other financial services to participants in our digital economy, including wealth management, financing (including consumer financing) and insurance, and may provide
additional services in the future. Other conflicts of interest between us, on the one hand, and Alipay and Ant Financial, on the other hand, may arise relating to commercial or strategic opportunities
or initiatives. Although we and Ant Financial have each agreed to certain non-competition undertakings, Ant Financial may provide services to our competitors from time to time and there can be no
assurance that Ant Financial would not pursue other opportunities that would conflict
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with
our interests. See "Item 7. Major Shareholders and Related Party Transactions B. Related Party
Transactions Agreements and Transactions Related to Ant Financial and its Subsidiaries 2014 Share and Asset Purchase
Agreement Non-competition Undertakings." Jack Ma may not resolve these conflicts in our favor. Furthermore, our ability to explore alternative payment services
other than Alipay for our marketplaces may be constrained due to Jack's relationship with Ant Financial.
In
addition, we grant share-based awards to employees of Ant Financial, and Junhan grants share-based awards tied to the value of Ant Financial to our employees, and a subsidiary of Ant Financial
grants restricted share unit awards to our employees. The provision of awards relating to Ant Financial to our employees is intended to enhance our strategic and financial relationship with Ant
Financial. See "Item 7. Major Shareholders and Related Party Transactions B. Related Party
Transactions Agreements and Transactions Related to Ant Financial and its Subsidiaries Equity-based Award Arrangements."
The share-based awards granted by Junhan and the Ant Financial subsidiary to our employees result in expenses that are recognized by our company. Subject to the approval of our audit committee, Jack
(through his role with us and his control over Junhan) and Ant Financial could be in a position to propose and promote further share-based grants that result in additional, and potentially
significant, expenses to our company. Accordingly, these and other potential conflicts of interest between us and Ant Financial or Alipay, and between us and Jack or Junhan or Junao, may not be
resolved in our favor, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Moreover,
because of our close association with Ant Financial and overlapping user bases, events that negatively affect Ant Financial could also negatively affect customers', regulators' and other
third parties' perception of us. In addition, any actual or perceived conflict of interest between us and Ant Financial, or any other company integral to the functioning of our digital economy, could
also materially harm our reputation as well as our business and prospects.
We may not be able to receive the equity ownership interest in Ant Financial.
Pursuant to the amendment to the 2014 SAPA that we entered into in February 2018 (as amended, the 2018 SAPA Amendment), we have agreed to
acquire a 33% equity interest in Ant Financial. The closing of this transaction is subject to the receipt of the necessary PRC regulatory approvals and the satisfaction of other conditions.
If
Ant Financial does not receive the required PRC regulatory approvals mentioned above, we will not be able to complete the acquisition of the equity ownership interest in Ant Financial, and we would
fail to benefit from any appreciation in its equity value beyond the date of a qualified IPO of Ant Financial or Alipay. Our inability to
reap the benefits of any appreciation in equity value of Ant Financial, including in connection with a qualified IPO of Ant Financial or Alipay, could represent a significant missed opportunity that
is beyond our control.
In
addition, the 2018 SAPA Amendment provides that if Ant Financial's intended equity issuance to us is not completed for any reason, we will unwind the 2018 SAPA Amendment and restore the 2014 SAPA
and other related agreements. As a result, we may incur additional costs to unwind the 2018 SAPA Amendment and be subject to significant negative publicity, which could have a material adverse effect
on our business, financial condition and results of operations, as well as the trading price of our ADSs. Pursuant to the 2014 SAPA, in the event of a qualified IPO of Ant Financial or Alipay, if the
equity issuance has not been completed or is subsequently unwound, we would be entitled, at our election, to receive a one-time payment equal to the 37.5% of the total equity value of Ant Financial
immediately prior to the qualified IPO. If we elect to receive this one-time payment, it is possible that Ant Financial will not have sufficient funds to make the payment in a timely manner or on a
schedule acceptable to us. See "Item 7. Major Shareholders and Related Party Transactions B. Related Party
Transactions Agreements and Transactions Related to Ant Financial and its Subsidiaries 2014 Restructuring of Our
Relationship with Ant Financial and Alipay and 2014 Amendments."
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We depend on key management as well as experienced and capable personnel generally, and any failure to
attract, motivate and retain our staff could severely hinder our ability to maintain and grow our business.
Our future success is significantly dependent upon the continued service of our key executives and other key employees, particularly in new business areas we
are expanding into, such as New Retail and local consumer services. If we lose the services of any member of management or key personnel, we may not be able to locate suitable or qualified
replacements, and may incur additional expenses to recruit and train new staff. Jack Ma, our lead founder, executive chairman and one of our principal shareholders, has been crucial to the development
of our vision, culture and strategic direction. Jack Ma announced that he will retire as our executive chairman in September 2019. Daniel Zhang, our current chief executive officer, has been
designated to succeed Jack in that role. This and similar retirements and successions could result in disruptions, or perceived disruptions, in our operations and the execution of our strategy.
As
our business develops and evolves, it may become difficult for us to continue to retain our employees. A number of our employees, including many members of management, may choose to pursue other
opportunities outside of our company. If we are unable to motivate or retain these employees, our business may be severely disrupted and our prospects could suffer.
The
size and scope of our digital economy also require us to hire and retain a wide range of capable and experienced personnel who can adapt to a dynamic, competitive and challenging business
environment. We will need to continue to attract and retain experienced and capable personnel at all levels, including members of management, as we expand our business and operations. Our various
incentive initiatives may not be sufficient to retain our management and employees. Competition for talent in our industry is intense, and the availability of suitable and qualified candidates in
China and elsewhere is limited. Competition for these individuals could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to offer higher
compensation and other benefits, there can be no assurance that these individuals will choose to join or continue to work for us. Any failure to attract or retain key management and personnel could
severely disrupt our business and growth.
Failure to deal effectively with fraudulent or illegal activities by our employees would harm
our business.
Illegal, fraudulent, corrupt or collusive activities by our employees could subject us to liability or negative publicity. We have discovered cases in which
certain of our employees had accepted payments from merchants or other service providers in order to receive preferential treatment on our marketplaces or in connection with other businesses we
operate. Although we dismissed the employees responsible for these incidents and other illegal activities, and have implemented internal controls and policies with regard to the review and approval of
merchant accounts, sales activities, interactions with business partners and government officials and other relevant matters, there can be no assurance that our controls and policies will prevent
fraud or illegal activity by our employees or that similar incidents will not occur in the future. Any illegal, fraudulent, corrupt or collusive activity could severely damage our brand and
reputation, which could drive users and consumers away from our digital economy, and materially and adversely affect our business, financial condition and results of operations.
If other third-party service providers in our digital economy fail to provide reliable or satisfactory
services, our reputation, business, financial condition and results of operations may be materially and adversely affected.
Ant Financial and a number of other third-party participants, including retail operating partners, logistics service providers, mobile app developers, ISVs,
cloud-based developers, marketing affiliates and various professional service providers, provide services to users on our platforms, including consumers, merchants, brands, retailers and users of our
cloud computing services. To the extent these service providers are unable to provide satisfactory services to our users on commercially acceptable terms, or at all, or if we fail to retain existing
or attract new quality service providers to our platforms, our ability to retain, attract or engage our users may be severely limited, which may have a material and adverse effect on our business,
financial condition and results of operations. In addition, we share our user data with certain of these third-party service providers in our digital economy in
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accordance
with our privacy policies, agreements and applicable laws. These third-party service providers also engage in a broad range of other business activities outside of our platforms. If these
third-party participants engage in activities that are negligent, fraudulent, illegal or otherwise harm the trustworthiness and security of our digital economy, including, for example, the leak or
negligent use of data, the handling, transport and delivery of prohibited or restricted content or items, or if these participants fail to perform their contractual obligations, or users are otherwise
dissatisfied with their service quality on or off our platforms, we could suffer reputational harm, even if these activities are not related to, attributable to or caused by us, or within
our control.
If logistics service providers used by our merchants fail to provide reliable logistics services, or the
logistics data platform operated by Cainiao Network were to malfunction, suffer an outage or otherwise fail, our business and prospects, as well as our financial condition and results of operations,
may be materially and adversely affected.
Our merchants use third-party logistics service providers to fulfill and deliver their orders. Cainiao Network cooperates with a number of third-party
logistics service providers to help merchants on our platforms fulfill orders and deliver their products to consumers. We operate Cainiao Network's logistics data platform that links our information
system and those of logistics service providers. Interruptions to or failures in these third parties' logistics services, or in Cainiao Network's logistics data platform, could prevent the timely or
proper delivery of products to consumers, which would harm the reputation of our digital economy and the businesses we operate. In addition, certain of our businesses, including Lazada, operate and
provide logistics services to merchants within our digital economy and may experience interruptions or failures to timely and properly deliver products to consumers. These interruptions or failures
may be due to events that are beyond the control of any of our companies, Cainiao Network or these logistics service providers, such as inclement weather, natural disasters, accidents, transportation
disruptions, including special or temporary restrictions or closings of facilities or transportation networks due to regulatory or political reasons, or labor unrest or shortages. These logistics
services could also be affected or interrupted by business disputes, industry consolidation, insolvency or government shut-downs. The merchants in our digital economy may not be able to find
alternative logistics service providers to provide logistics services in a timely and reliable manner, or at all. We do not have agreements with third-party logistics service providers that require
them to offer services to our merchants. If the logistics data platform operated by Cainiao Network were to fail for any reason, the logistics service providers would be severely hindered from or
unable to connect with our merchants, and their services and the functionality of our digital economy could be severely affected. If the products sold by merchants in our digital economy are not
delivered in proper condition, on a timely basis or at shipping rates that are commercially acceptable to marketplace participants, our business and prospects, as well as our financial condition and
results of operations could be materially and adversely affected.
We may be subject to liability for content available in our digital economy that is alleged to be socially
destabilizing, obscene, defamatory, libelous or otherwise unlawful.
Under PRC law and the laws of certain other jurisdictions in which we operate, we are required to monitor our websites and the websites hosted on our servers
and mobile interfaces, as well as our services and devices that generate or host content, for items or content deemed to be socially destabilizing, obscene, superstitious or defamatory, as well as for
items, content or services that are illegal to sell online or otherwise in other jurisdictions in which we operate our marketplaces and other businesses, and promptly take appropriate action with
respect to the relevant items, content or services. We may also be subject to potential liability in China or other jurisdictions for any unlawful actions of our merchants, marketing customers or
users of our websites or mobile interfaces, or for content we distribute or that is linked from our platforms that is deemed inappropriate. It may be difficult to determine the type of content that
may result in liability to us, our websites and platforms, such as our cloud computing services, which allow users to upload and save massive data on our cloud data centers, social communities on our
marketplaces and DingTalk, and Youku, which allow users to upload videos and other content to our websites and platforms, may make this even more difficult. If we are found to be liable, we may be
subject to negative publicity, fines, have our relevant business operation licenses revoked, or be prevented from operating our websites or mobile interfaces in China or other jurisdictions.
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In
addition, claims may be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement, tort (including personal injury), other unlawful activity or other
theories and claims based on the nature and content of information posted on our platforms, including user-generated content, product reviews and message boards, by our consumers, merchants and other
participants.
Regardless
of the outcome of any dispute or lawsuit, we may suffer from negative publicity and reputational damage as a result of these actions.
We have been and may continue to be subject to allegations, lawsuits and negative publicity claiming that
items listed and content available in our digital economy are pirated, counterfeit or illegal.
We have been the subject in the past, and may continue to be the subject in the future, of allegations that items offered, sold or made available through our
online marketplaces by third parties or that content we make available through other services, such as our online video and music platforms or through our smart devices, infringe third-party
copyrights, trademarks and patents or other intellectual property rights.
Although we have adopted measures to proactively verify the products sold on our marketplaces for infringement and to minimize potential infringement of third-party intellectual property rights
through our intellectual property infringement complaint and take-down procedures, these measures may not always be successful. In the event that alleged counterfeit or infringing products are listed
or sold on our marketplaces or allegedly infringing content are made available through our other services, we could face claims and negative publicity relating to these activities or for our alleged
failure to act in a timely or effective manner in response to infringement or to otherwise restrict or limit these activities. We may also choose to compensate consumers for any losses, although we
are currently not legally obligated to do so. If, as a result of regulatory developments, we are required to compensate consumers, we would incur additional expenses.
Measures
we take to protect against these potential liabilities could require us to spend substantial additional resources and/or experience reduced revenues. In addition, these measures may reduce
the attractiveness of our digital economy to consumers, merchants, brands, retailers and other participants. A merchant or online marketer whose content is removed or whose services are suspended or
terminated by us, regardless of our compliance with the applicable laws, rules and regulations, may dispute our actions and commence action against us for damages based on breach of contract or other
causes of action, make public complaints or allegations or organize group protests and publicity campaigns against us or seek compensation. Any costs incurred as a result of liability or asserted
liability relating to the sale of unlawful goods or other infringement could harm our business.
We
also have been and may continue to be subject to allegations of civil or criminal liability based on allegedly unlawful activities or unauthorized distribution of products or content carried out by
third parties through our online marketplaces. We have also acquired certain companies, such as Youku, Lazada and Ele.me, that from time to time are subject to allegations and lawsuits regarding
alleged infringement of third-party intellectual property or other rights, and we may continue to acquire other companies that are subject to similar disputes.
In
addition, we have been and may continue to be subject to significant negative publicity in China and other countries based on similar claims and allegations. For example, in December 2016,
January 2018 and April 2019, the Office of the U.S. Trade Representative, or USTR, identified Taobao Marketplace as a "notorious market." The USTR may continue to identify Taobao
Marketplace as a notorious market, and there can be no assurance that the USTR will not identify our other businesses as notorious markets in the future. In addition, government authorities have in
the past accused, and may in the future accuse, us of perceived problems and failures of our platforms, including alleged failures to crack down on the sale of counterfeit goods and other alleged
illegal activities on our China retail marketplaces. As a result of any claims or accusations by government authorities, by industry watchdog organizations, including the U.S. Commission on the Theft
of American Intellectual Property, by brand and intellectual property rights holders or by enterprises, there may be a public perception that counterfeit or pirated items are commonplace on our
marketplaces or that we delay the process of removing these items. This perception, even if factually incorrect, and existing or new litigation as well as regulatory pressure or action related
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to
intellectual property rights protection, could damage our reputation, harm our business, diminish the value of our brand name and negatively affect trading price of our ADSs.
Failure to deal effectively with any fraud perpetrated and fictitious transactions conducted in our digital
economy, and other sources of customer dissatisfaction, would harm our business.
We face risks with respect to fraudulent activities on our marketplaces and in connection with other businesses we operate, and we periodically receive
complaints from consumers who may not have received the goods that they had purchased, complaints from merchants who have not received payment for the goods that a consumer had contracted to purchase,
as well as other types of actual and alleged fraudulent activities. See "Item 4. Information on the Company B. Business
Overview Transaction Platform Safety Programs" for more details about the measures we have adopted against fraudulent activities. Although we have implemented
various measures to detect and reduce the occurrence of fraudulent activities on our marketplaces and in connection with other businesses we operate, there can be no assurance that these measures will
be effective in combating fraudulent transactions or improving overall satisfaction among our consumers, merchants and other participants. Additional measures that we take to address fraud could also
negatively affect the attractiveness of our marketplaces and other businesses we operate to consumers or merchants. In addition, merchants on our marketplaces contribute to a fund to provide consumer
protection guarantees. If our merchants do not perform their obligations under these programs, we may use funds that have been deposited by merchants in a consumer protection fund to compensate
consumers. If the amounts in the fund are not sufficient, we may choose to compensate consumers for losses, although currently we are not legally obligated to do so. If, as a result of regulatory
developments, we are required to compensate consumers, we would incur additional expenses. Although we have recourse against our merchants for any amounts we incur, there can be no assurance that we
would be able to collect these amounts from our merchants.
In
addition to fraudulent transactions with legitimate consumers, merchants may also engage in fictitious or "phantom" transactions with themselves or collaborators in order to artificially inflate
their own ratings on our marketplaces, reputation and search results rankings, an activity sometimes referred to as "brushing." This activity may harm other merchants by enabling the perpetrating
merchant to be favored over legitimate merchants, and may harm consumers by deceiving them into believing that a merchant is more reliable or trusted than the merchant actually is.
Government
authorities, industry watchdog organizations or other third parties may issue reports or engage in other forms of public communications concerning alleged fraudulent or deceptive conduct on
our platforms. Negative publicity and user sentiment generated as a result of these reports or allegations could severely diminish consumer confidence in and use of our services, reduce our ability to
attract new or retain current merchants, consumers and other participants, damage our reputation, result in shareholder or other litigation, diminish the value of our brand, and materially and
adversely affect our business, financial condition and results of operations.
We may be subject to claims under consumer protection laws, including health and safety claims and product
liability claims, if property or people are harmed by the products and services sold through our platforms.
Due to several high-profile incidents involving safety, including food safety, and consumer complaints that have occurred in China in recent years, the PRC
government, media outlets and public advocacy groups are increasingly focused on consumer protection. Government authorities in other countries where we operate also place high importance on consumer
protection. Moreover, as part of our growth strategy, we expect to increase our focus on food, food delivery, food supplements and beverages, mother care, baby care, pharmaceutical and healthcare
products and services, as well as electronics products, both as a platform operator and as part of our directly operated business. We have also invested in companies involved in these sectors. These
activities pose increasing challenges to our internal control and compliance systems and procedures, including our control over and management of third-party service personnel, and expose us to
substantial increasing liability, negative publicity and reputational damage arising from consumer complaints, harms to personal health or safety or accidents involving products or services offered
through our platforms or provided by us. Operators of e-commerce platforms
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are
subject to certain provisions of consumer protection laws even where the operator is not the merchant of the product or service purchased by the consumer. In addition, if we do not take
appropriate remedial action against merchants or service providers for actions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, we may be
held jointly liable for infringement alongside the merchant or service provider. We may also be held jointly liable with the merchants under the PRC E-commerce Law if we fail to take necessary actions
when we know or should have known that the products or services provided by the merchants on our platforms do not meet personal and property security requirements, or otherwise infringe upon
consumers' legitimate rights. Moreover, applicable consumer protection laws in China hold that trading platforms will be held liable for failing to meet any undertaking that the platforms make to
consumers with regard to products listed on their websites. Furthermore, we are required to report to the State Administration for Market Regulation, or the SAMR, formerly known as the State
Administration for Industry and Commerce, or the SAIC, or its local branches any violation of applicable laws, regulations or SAMR rules by merchants or service providers, such as sales of goods
without proper license or authorization, and we are required to take appropriate remedial measures, including ceasing to provide services to the relevant merchants or service providers. We may also be
held liable if we fail to verify the licenses or qualifications of merchants, or fail to safeguard consumers with respect to products or services affecting consumers' health or safety.
In
addition, we are facing increasing levels of activist litigation in China by plaintiffs claiming damages based on consumer protection laws. This type of activist litigation could increase in the
future, and if it does, we could face increased costs defending these suits and damages should we not prevail, which could materially and adversely affect our reputation and brand and our results
of operations.
We
may also face increasing scrutiny from consumer protection regulators and activists, as well as increasingly become a target for litigation, in the United States, Europe and other
jurisdictions. For example, recently, member groups of the European Consumer Organization's BEUC network expressed concerns about certain consumer rights related to product returns and dispute
resolution with respect to transactions conducted on our AliExpress platform, and requested a review of these consumer rights by their national consumer protection agencies. We only maintain product
liability insurance for certain businesses we operate, and do not maintain product liability insurance for products and services transacted on our marketplaces, and our rights of indemnity from the
merchants in our digital economy may not adequately cover us for any liability we may incur. Consumer complaints and associated negative publicity could materially and adversely harm our reputation
and affect our business expansion. Claims brought against us under consumer protection laws, even if unsuccessful, could result in significant expenditure of funds and diversion of management time and
resources, which could materially and adversely affect our business operations, net income and profitability.
We may be accused of infringing intellectual property rights of third parties or violating content
restrictions under relevant laws.
Third parties may claim that our product and service offerings, the content on our platforms, including content available through our digital media and
entertainment business, search business, online reading platform, online music platform, news feed features and Internet of Things, or IoT, devices or our technology infringe upon their intellectual
property rights or are provided beyond the authorized scope. Although we have not in the past faced material litigation involving direct claims of infringement by us, the possibility of intellectual
property claims against us, whether in China or other jurisdictions, increases as we continue to grow, particularly internationally. The establishment of, and issuance of reports by, the Commission on
the Theft of American Intellectual Property also highlights the current focus of the United States on investigating, preventing and taking action against alleged misappropriation of intellectual
property, that may result in increased scrutiny, investigations, enforcement actions and litigation relating to intellectual property infringement. In addition, in April 2019, the U.S.
administration issued an executive order instructing the U.S. Department of Homeland Security to coordinate with other federal agencies working to combat the counterfeiting of goods. This executive
order aims to hold intermediary online marketplaces, such as our company, accountable for the availability and sale of counterfeit goods on their marketplaces. We have also acquired businesses, such
as Youku, that have been, and may continue to be, subject to
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liabilities
for infringement of third-party intellectual property rights or other allegations based on the content available on their websites and mobile apps or the services they provide. In
addition, we expect our digital economy to involve more and more user-generated content, including the entertainment content on Youku and our smart speakers, the interactive media content displayed on
Taobao Marketplace and Tmall, including livestreams and short-form videos, as well as the data generated, uploaded and saved by users of our cloud computing services, over which we have limited
control and we may be subject to claims for infringement of third-party intellectual property rights, or subject us to additional scrutiny by the relevant government authorities. These claims or
scrutiny, whether or not having merit, may result in our expenditure of significant financial and management resources, injunctions against us or payment of damages. We may need to obtain licenses
from third parties who
allege that we have infringed their rights, but these licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in the number of third parties
whose sole or primary business is to assert these claims.
China
has enacted laws and regulations governing Internet access and the distribution of products, services, news, information, audio-video programs and other content through the Internet. The PRC
government has prohibited the distribution of information through the Internet that it deems to be in violation of PRC laws and regulations, impairs the national dignity of China or the public
interest, or is obscene, superstitious, fraudulent or defamatory. Users of certain of our websites and platforms, including Youku, can upload content to these websites, mobile apps and platforms,
which is generally referred to as user-generated content. Due to the significant amount of content uploaded by our users, we may not be able to identify all the videos or other content that may
violate relevant laws and regulations. If any of the information disseminated through our marketplaces, websites, mobile apps or other businesses we operate, including videos and other content
(including user-generated content) displayed on Youku's or our other websites, mobile apps or on our Tmall set-top boxes, smart speakers and smart televisions, or any content that we produce, were
deemed by the PRC government to violate any content restrictions, we would not be able to continue to display this content and could suffer losses or become subject to penalties, including
confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations. The
outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time-consuming, and could significantly divert
the efforts and resources of our management and other personnel. An adverse determination in any of these litigation matters or proceedings could cause us to pay damages, incur legal and other costs,
limit our ability to conduct business or require us to change the manner in which we operate and harm our reputation. As we expand our operations internationally, we expect that we will become subject
to similar laws and regulations in other jurisdictions.
We may not be able to protect our intellectual property rights.
We rely on a combination of trademark, fair trade practice, patent, copyright and trade secret protection laws in China and other jurisdictions, as well as
confidentiality procedures and contractual provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any third parties who may
access our proprietary information, and we rigorously control access to our proprietary technology and information. In addition, as our business expands and we increase our acquisition of and
management of content, we expect to incur greater costs to acquire, license and enforce our rights to content.
Intellectual
property protection may not be sufficient in the jurisdictions in which we operate. Confidentiality agreements may be breached by counterparties, and there may not be adequate remedies
available to us for these breaches. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China or elsewhere. In addition,
policing any unauthorized use of our intellectual property is difficult, time-consuming and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual
property. In the event that we resort to litigation to enforce our intellectual property rights, this litigation could result in substantial costs and a diversion of our managerial and financial
resources. There can be no assurance that we will prevail in any litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our
competitors. Any failure in
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protecting
or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We and Ant Financial are subject to a broad range of laws and regulations, and future laws and regulations
may impose additional requirements and other obligations that could materially and adversely affect our business, financial condition and results of operations.
The industries in which we and Ant Financial operate in the PRC and other countries, including online and mobile commerce and payments, financial services,
cloud computing and digital media and entertainment and other online content offerings, are highly regulated. Government authorities in the PRC and other countries are likely to continue to issue new
laws, rules and regulations governing the industries in which we and Ant Financial operate in the PRC and other countries and enhance enforcement of existing laws, rules and regulations. They have
imposed, and may continue to impose, requirements relating to, among other things, new and additional licenses, permits and approvals or governance or ownership structures on us or certain of our
businesses, Ant Financial and our users.
For
example, the recently promulgated E-commerce Law imposes a series of requirements on e-commerce operators including e-commerce platform operators, merchants operating on the platform and the
individuals and entities carrying out business online. See "Item 4. Information on the Company B. Business
Overview Regulation Regulation of Online and Mobile Commerce." Certain third-party platforms, although offering products
and services competing with our marketplaces, may not be deemed as e-commerce operators and may be subject to less stringent requirements with respect to merchant regulation and consumer protection.
The platform governance measures we adopt in response to the enhanced regulatory requirements may fail to meet these requirements and may lead to penalties or our loss of merchants to those platforms,
or to complaints or claims made against us by merchants on our platforms. New regulations governing various aspects of e-commerce platform operations, including those that may limit an e-commerce
platform operator's ability to provide consumers with personalized shopping recommendations, could materially and adversely affect our operating results.
We
have from time to time been subject, and are likely again in the future to be subject, to PRC and foreign government inquiries and investigations, including those relating to online content,
alleged third-party intellectual property infringement, cybersecurity and privacy laws, and securities laws and regulations. We also face scrutiny, and have been subject and continue to be subject to
inquiries and investigations, from PRC and foreign governmental bodies that focus on cross-border trade, tax, intellectual property protection, our investment activities, human rights, user privacy
and data protection matters and allegedly fraudulent or other criminal transactions. We may also face protectionist policies and regulatory scrutiny, on national security grounds or for other reasons,
in foreign countries in which we conduct business or investment activities. None of these inquiries
and investigations has resulted in significant restrictions on our business operations. However, as we continue to grow in scale and significance, we expect to face increased scrutiny, which will, at
a minimum, result in our having to continue to increase our investment in compliance and related capabilities and systems.
Ant
Financial, which through Alipay provides the substantial majority of the payment processing services on our marketplaces as well as other financial and value-added services, such as wealth
management, financing and insurance, is subject to various laws, rules and regulations in the PRC and other countries where it operates, including those governing banking, privacy, cross-border and
domestic money transmission, anti-money laundering, counter-terrorist financing and consumer protection laws, rules and regulations. In recent years, the PRC government has increasingly focused on
regulation of the financial industry, including laws, rules and regulations relating to the provision of payment services. See "Item 4. Information on the
Company B. Business Overview Regulation Regulation Applicable to Alipay." These
laws, rules and regulations are highly complex, constantly evolving and could change or be reinterpreted to be burdensome, difficult or impossible for Ant Financial to comply with.
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As we and Ant Financial further expand into international markets, we and Ant Financial will increasingly become subject to additional legal and regulatory compliance
requirements as well as political and regulatory challenges, including scrutiny on data privacy and security and anti-money laundering compliance, or on national security grounds or for other reasons,
to our business and investment activities in these markets. In addition, Alipay or its affiliates are required to maintain payment business licenses in the PRC and are also required to obtain and
maintain other applicable payment, money transmitter or other related licenses and approvals in other countries or regions where they operate. In certain jurisdictions where Alipay currently does not
have the required licenses, Alipay provides payment processing and escrow services through third-party service providers. If Alipay or its partners fail to obtain and maintain all required licenses
and approvals or otherwise fails to comply with applicable laws, rules and regulations, if new laws, rules or regulations come into effect that impact Alipay or its partners' businesses, or if any of
Alipay's partners cease to provide services to Alipay, its services could be suspended or severely disrupted, and our business, financial condition and results of operations would be materially and
adversely affected.
Tightening of tax compliance efforts that affect our merchants could materially and adversely affect our
business, financial condition and results of operations.
Tax legislation relating to the digital economy is still developing. Governments, both in China and in other jurisdictions, may promulgate or strengthen the
implementation of tax regulations that impose obligations on e-commerce companies, which could increase the costs to consumers and merchants and make our platforms less competitive in these
jurisdictions. Governments may require operators of marketplaces, such as our company, to assist in the enforcement of tax registration requirements and the collection of taxes with respect to the
revenue or profit generated by merchants from transactions conducted on their platforms. We may also be requested by tax authorities to supply information about our merchants, such as transaction
records and bank account information, and assist in the enforcement of other tax regulations, including the payment and withholding obligations against our merchants. As a result of more stringent tax
compliance requirements and liabilities, we may lose existing merchants and potential merchants might not be willing to open storefronts on our marketplaces, which could in turn negatively affect us.
Stricter tax enforcement by tax authorities may also reduce the activities by merchants on our platforms and result in liability to us.
Potential
heightened tax law enforcement against participants in our digital economy (including imposition of reporting or withholding obligations on operators of marketplaces with respect to
value-added tax of merchants and stricter tax enforcement against merchants generally) could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to material litigation and regulatory proceedings.
We have been involved in a high volume of litigation in China and a small volume of potentially high-value litigation outside China relating principally to
securities law class actions, third-party and principal intellectual property infringement claims, contract disputes involving merchants and consumers on our platforms, consumer protection claims,
claims relating to data and privacy protection, employment related cases and other matters in the ordinary course of our business. As our digital economy expands, including across jurisdictions and
through the addition of new businesses, we have encountered and may face an increasing number and a wider variety of these claims, including those brought against us pursuant to anti-monopoly or
unfair competitions laws or involving higher amounts of alleged damages. Laws, rules and regulations may vary in their scope and overseas laws and regulations may impose requirements that are more
stringent than, or which conflict with, those in China. We have acquired and may acquire companies that have been subject to or may become subject to litigation, as well as regulatory proceedings. In
addition, in connection with litigation or regulatory proceedings we may be subject to in various jurisdictions, we may be prohibited by laws, regulations or government authorities in one jurisdiction
from complying with subpoenas, orders or other requests from courts or regulators of other jurisdictions, including those relating to data held in or with respect to persons in these jurisdictions.
Our failure or inability to comply with the
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subpoenas,
orders or requests could subject us to fines, penalties or other legal liability, which could have a material adverse effect on our reputation, business, results of operations and the
trading price of our ADSs.
As
publicly-listed companies, we and certain of our subsidiaries face additional exposure to claims and lawsuits inside and outside China. We will need to defend against these lawsuits, including any
appeals should our initial defense be successful. The litigation process may utilize a material portion of our cash resources and divert management's attention away from the day-to-day operations of
our company, all of which could harm our business. There can be no assurance that we will prevail in any of these cases, and any adverse outcome of these cases could have a material adverse effect on
our reputation, business and results of operations. In addition, although we have obtained directors' and officers' liability insurance, the insurance coverage may not be adequate to cover our
obligations to indemnify our directors and officers, fund a settlement of litigation in excess of insurance coverage or pay an adverse judgment in litigation.
In
early 2016, the SEC informed us that it had initiated an investigation into whether there have been any violations of the federal securities laws. The SEC has requested that we voluntarily provide
it with documents and information relating to, among other things, our consolidation policies and practices (including our prior practice of accounting for Cainiao Network as an equity method
investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from the 11.11 global shopping festival. We are cooperating with
the SEC and, through our legal counsel, have been providing the SEC with requested documents and information. The SEC advised us that the initiation of a request for information should not be
construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred. This matter is ongoing, and, as with any regulatory proceeding, we cannot predict
when it will be concluded.
The
existence of litigation, claims, investigations and proceedings may harm our reputation, limit our ability to conduct our business in the affected areas and adversely affect the trading price of
our ADSs. The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time-consuming, and could
significantly divert the efforts and resources of our management and other personnel. An adverse determination in any litigation, investigation or proceeding could cause us to pay damages, incur legal
and other costs, limit our ability to conduct business or require us to change the manner in which we operate.
We may increasingly become a target for public scrutiny, including complaints to regulatory agencies,
negative media coverage, including social media and malicious reports, all of which could severely damage our reputation and brand and materially and adversely affect our business
and prospects.
We process an extremely large number of transactions on a daily basis on our marketplaces and other businesses we operate, and the high volume of transactions
taking place in our digital economy and
publicity about our business creates the possibility of heightened attention from the public, regulators, the media and participants in our digital economy. Changes in our services or policies have
resulted and could result in objections by members of the public, the media, including social media, participants in our digital economy or others. From time to time, these objections or allegations,
regardless of their veracity, may result in public protests or negative publicity, which could result in government inquiry or harm our reputation and brand.
Corporate
transactions we or related parties undertake, such as our partnership with the International Olympic Committee, our consolidation of Ele.me and Koubei, our agreement to acquire a 33% equity
interest in Ant Financial, and other initiatives to implement our New Retail strategy, grow our local consumer services business and expand into international markets, may also subject us to
increased media exposure and public scrutiny in Hong Kong, China and internationally. There can be no assurance that we would not become a target for regulatory or public scrutiny in the future or
that scrutiny and public exposure would not severely damage our reputation and brand as well as our business and prospects.
In
addition, our directors and management have been, and continue to be, subject to scrutiny by the media and the public regarding their activities in and outside Alibaba Group, which may result in
unverified, inaccurate or misleading information about them being reported by the press. Negative publicity about our executive chairman or other founders, directors or management, even if untrue or
inaccurate, may harm our reputation and brand.
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Our reputation, our brand and our business may be harmed by aggressive marketing and communications
strategies of our competitors.
Due to intense competition in our industry, we have been and may be the target of incomplete, inaccurate and false statements and complaints about our company
and our products and services that could damage our reputation and brand and materially deter consumers and customers from spending in our digital economy. In addition, competitors have used, and may
continue to use, methods such as lodging complaints with regulators, initiating frivolous and nuisance lawsuits, and other forms of attack litigation and "lawfare" that attempt to harm our reputation
and brand, hinder our operations, force us to expend resources on responding to and defending against these claims, and otherwise gain a competitive advantage over us by means of litigious and
accusatory behavior. Our ability to respond on share price-sensitive information to our competitors' misleading marketing efforts, including lawfare, may be limited during our self-imposed quiet
periods around quarter ends consistent with our internal policies or due to legal prohibitions on permissible public communications by us during certain other periods.
Failure to comply with the terms of our indebtedness or enforcement of our obligations as a guarantor of
other parties' indebtedness could have an adverse effect on our cash flow and liquidity.
As of March 31, 2019, we had US$13.7 billion in aggregate principal amount of unsecured senior notes and a US$4 billion term loan
outstanding, as well as a US$5.15 billion revolving credit facility that we have not yet drawn. Under the terms of our indebtedness and under any debt financing arrangement that we may enter
into in the future, we are, and may be in the future, subject to covenants that could, among other things, restrict our business and operations. If we breach any of these covenants, our lenders under
our credit facilities and holders of our unsecured senior notes will be entitled to accelerate our debt obligations. Any default under our credit facilities or unsecured senior notes could require
that we repay these debts prior to maturity as well as limit our ability to obtain additional financing, which in turn may have a material adverse effect on our cash flow and liquidity. In May
2019, we agreed to provide a guarantee for a loan facility of HK$7.7 billion (US$1.0 billion) in favor of an entity partially owned by Cainiao Network in connection with a logistics center
development project at the Hong Kong International Airport. As of the date of this annual report, this entity has not made any drawdown under this facility. In the event of default by this entity
under the loan facility, we may be required to repay the full amount or a portion of the outstanding loan and undertake the borrower's other obligations under the loan facility. Enforcement against us
under this guarantee and other similar arrangements we may enter into in the future could materially and adversely affect our cash flow and liquidity.
We may need additional capital but may not be able to obtain it on favorable terms or at all.
We may require additional cash resources due to future growth and development of our business, including any investments or acquisitions we may decide to
pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. Our ability to
obtain external financing in the future is subject to a variety of uncertainties. Offshore incorporated companies directly or indirectly controlled by individual PRC residents are required to complete
filings before the launch of any offshore debt issuance with a term of one year or more in accordance with applicable laws and regulations. The filing procedure takes time which may result in our
missing the best market windows for debt issuances in the future. In addition, incurring indebtedness would subject us to increased debt service obligations and could result in operating and financial
covenants that would restrict our operations. Our ability to access international capital and lending markets may be restricted at a time when we would like, or need, to do so, especially during times
of increased volatility and reduced liquidity in global financial markets and stock markets, including due to policy changes and regulatory restrictions, which could limit our ability to raise funds.
There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at all. Any failure to raise needed funds on terms favorable to us, or at
all, could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations. Moreover, any issuance of equity or equity-linked
securities could result in significant dilution to our existing shareholders.
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We are subject to interest rate risk in connection with our indebtedness.
We are exposed to interest rate risk related to our indebtedness. The interest rates under certain of our offshore credit facilities are based on a spread
over LIBOR. As a result, the interest expenses associated with this indebtedness will be subject to the potential impact of any fluctuation in LIBOR. Any increase in LIBOR could impact our financing
costs if not effectively hedged. Our Renminbi-denominated bank borrowings are also subject to interest rate risk. Although from time to time, we use hedging transactions in an effort to reduce our
exposure to interest rate risk, these hedges may not be effective.
In
addition, on July 27, 2017, the United Kingdom Financial Conduct Authority, or the FCA, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to
submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021 (the "FCA Announcement"). The FCA Announcement indicates that the continuation of LIBOR on the current basis
is not guaranteed after 2021. Uncertainties surrounding changes to the basis on which LIBOR is calculated or the phase-out of LIBOR, which may cause a sudden and prolonged increase or decrease in
LIBOR, could adversely affect our operating results and financial condition, as well as our cash flows. There can be no assurance that any hedging transactions we use will be effective in protecting
us against adverse changes in interest rates or that our bank counterparties will be able to perform their obligations. Once LIBOR is not available, the terms of certain of our offshore credit
facilities will require alternative determination procedures, which may result in an interest rate differing from our expectations and could materially affect the cost to us of these facilities.
We may not have sufficient insurance coverage to cover our business risks.
We have obtained insurance to cover certain potential risks and liabilities, such as property damage, business interruptions, public liabilities and product
liability insurance for certain businesses we operate. However, insurance companies in China and other jurisdictions in which we operate may offer limited business insurance products. As a result, we
may not be able to acquire any insurance for all types of risks we face in our operations in China and elsewhere, and our coverage may not be adequate to compensate for all losses that may occur,
particularly with respect to loss of business or operations. We do not maintain product liability insurance for products and services transacted on our marketplaces or other businesses we operate, and
our rights of indemnity from the merchants in our digital economy may not adequately cover us for any liability we may incur. We also do not maintain key-man life insurance. This potentially
insufficient coverage could expose us to potential claims and losses. Any business disruption, litigation, regulatory action, outbreak of epidemic disease or natural disaster could also expose us to
substantial costs and diversion of resources. There can be no assurance that our insurance
coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that
is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and
adversely affected.
An occurrence of a natural disaster, widespread health epidemic or other outbreaks could have a material
adverse effect on our business, financial condition and results of operations.
Our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of a widespread
health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola, Zika or other events, such as wars, acts of terrorism, environmental accidents, power shortage
or communication interruptions. The occurrence of a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could
materially disrupt our business and operations. These events could also significantly impact our industry and cause a temporary closure of the facilities we use for our operations, which would
severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. Our operations could be disrupted if any of our employees or
employees of our business partners were suspected of contracting an epidemic disease, since this could require us or our business partners to quarantine some or all of these employees or disinfect the
facilities used for our operations. In addition, our revenue and profitability could be materially reduced to the extent that a
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natural
disaster, health epidemic or other outbreak harms the global or PRC economy in general. Our operations could also be severely disrupted if our consumers, merchants or other participants were
affected by natural disasters, health epidemics or other outbreaks.
Risks Related to our Corporate Structure
The Alibaba Partnership and related voting agreements limit the ability of our shareholders to nominate and
elect directors.
Our articles of association allow the Alibaba Partnership to nominate or, in limited situations, appoint a simple majority of our board of directors. If at
any time our board of directors consists of less than a simple majority of directors nominated or appointed by the Alibaba Partnership for any reason, including because a director previously nominated
by the Alibaba Partnership ceases to be a member of our board of directors or because the Alibaba Partnership had previously not exercised its right to nominate or appoint a simple majority of our
board of directors, the Alibaba Partnership will be entitled (in its sole discretion) to nominate or appoint such number of additional directors to the board as necessary to ensure that the
directors nominated or appointed by the Alibaba Partnership comprise a simple majority of our board of directors.
In
addition, we have entered into a voting agreement pursuant to which SoftBank, Altaba, Jack Ma and Joe Tsai have agreed to vote their shares in favor of the Alibaba Partnership director nominees at
each annual general shareholders meeting for so long as SoftBank owns at least 15% of our outstanding ordinary shares. Furthermore, the voting agreement provides that SoftBank has the right to
nominate one director to our board until SoftBank owns less than 15% of our outstanding ordinary shares, and that right is also reflected in our articles of association. In addition, pursuant to the
voting agreement, Altaba, Jack Ma and Joe Tsai have agreed to vote their shares (including shares for which they have voting power) in favor of the election of the SoftBank director nominee at each
annual general shareholders meeting in which the SoftBank nominee stands for election.
Moreover,
subject to certain exceptions, pursuant to the voting agreement SoftBank and Altaba have agreed to give Jack and Joe a proxy over, with respect to SoftBank, any portion of its shareholdings
exceeding 30% of our outstanding shares and, with respect to Altaba, all of its shareholdings up to a maximum of 121.5 million of our ordinary shares. These proxies will remain in effect until
Jack Ma owns less than 1% of our ordinary shares on a fully diluted basis or we materially breach the voting agreement.
This
governance structure and contractual arrangement limit the ability of our shareholders to influence corporate matters, including any matters determined at the board level. In addition, the
nomination right granted to the Alibaba Partnership will remain in place for the life of the Alibaba Partnership unless our articles of association are amended to provide otherwise by a vote of
shareholders representing at least 95% of shares that vote at a shareholders meeting. The nomination rights of the Alibaba Partnership will remain in place notwithstanding a change of control or
merger of our company. These provisions and agreements could have the effect of delaying, preventing or deterring a change in control and could limit the opportunity of our shareholders to receive a
premium for their ADSs, and could also materially decrease the price that some investors are willing to pay for our ADSs. As of the date of this annual report, the parties to the voting agreement and
the partners of the Alibaba Partnership held in the aggregate more than 40% of our outstanding ordinary shares (including shares underlying vested and unvested awards). See "Item 6. Directors,
Senior Management and Employees A. Directors and Senior Management Alibaba Partnership."
The interests of the Alibaba Partnership may conflict with the interests our shareholders.
The nomination and appointment rights of the Alibaba Partnership limit the ability of our shareholders to influence corporate matters, including any matters
to be determined by our board of directors. The interests of the Alibaba Partnership may not coincide with the interests of our shareholders, and the Alibaba Partnership or its director nominees may
make decisions with which they disagree, including decisions on important topics such as compensation, management succession, acquisition strategy and our business and financial strategy. Since the
Alibaba Partnership will continue to be largely comprised of members of our management team, the Alibaba
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Partnership
and its director nominees, consistent with our operating philosophy, may focus on the long-term interests of participants in our digital economy at the expense of our short-term financial
results, which may differ from the expectations and desires of shareholders unaffiliated with the Alibaba Partnership. To the extent that the interests of the Alibaba Partnership differ from the
interests of any of our shareholders, our shareholders may be disadvantaged by any action that the Alibaba Partnership may seek to pursue.
Our articles of association contain anti-takeover provisions that could adversely affect the rights of
holders of our ordinary shares and ADSs.
Our articles of association contain certain provisions that could limit the ability of third parties to acquire control of our company,
including:
-
-
a provision that grants authority to our board of directors to establish from time to time one or more series of preferred shares without
action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series;
-
-
a provision that a business combination, if it may adversely affect the right of the Alibaba Partnership to nominate or appoint a simple
majority of our board of directors, including the protective provisions for this right under our articles of association, shall be approved upon vote of shareholders representing at least 95% of the
votes in person or by proxy present at a shareholders meeting; and
-
-
a classified board with staggered terms that will prevent the replacement of a majority of directors at one time.
These
provisions could have the effect of delaying, preventing or deterring a change in control, and could limit the opportunity for our shareholders to receive a premium for their ADSs, and could
also materially decrease the price that some investors are willing to pay for our ADSs.
SoftBank owns approximately 25.9% of our outstanding ordinary shares and its interests may differ from those
of our other shareholders.
As of June 3, 2019, SoftBank beneficially owned approximately 25.9% of our outstanding ordinary shares. Subject to certain exceptions, SoftBank has
agreed to grant the voting power of any portion of its shareholding exceeding 30% of our outstanding ordinary shares to Jack Ma and Joe Tsai by proxy. Under the terms of the voting agreement we
entered into with SoftBank, SoftBank also has the right to nominate one member of our board of directors, and Altaba, Jack and Joe have agreed to vote their shares (including shares for which they
have voting power) in favor of the SoftBank director nominees at each annual general shareholders meeting in which the SoftBank nominee stands for election until such time as SoftBank holds less than
15% of our outstanding ordinary shares. SoftBank's director nomination right is also reflected in our articles of association. Except with regard to shareholder votes relating to the Alibaba
Partnership director nominees, SoftBank will have significant influence over the outcome of matters that require shareholder votes and accordingly over our business and corporate matters. SoftBank may
exercise its shareholder rights in a way that it believes is in its own best interest, which may conflict with the interest of our other shareholders. These actions may be taken even if SoftBank is
opposed by our other shareholders.
For
more information, see "Item 7. Major Shareholders and Related Party Transactions B. Related Party
Transactions Transactions and Agreements with SoftBank and Altaba Voting Agreement."
If the PRC government deems that the contractual arrangements in relation to our variable interest entities
do not comply with PRC governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties,
or be forced to relinquish our interests in those operations, which would materially and adversely affect our business, financial results and the trading price of our ADSs.
Foreign ownership of certain types of Internet businesses, such as Internet information services, is subject to restrictions under applicable PRC laws, rules
and regulations. Under these laws and regulations, foreign investors
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are
generally not permitted to own more than 50% of the equity interests in a value-added telecommunication service provider. Any foreign investor must also have experience and a good track record in
providing value-added telecommunications services overseas. Although foreign investors are allowed to hold up to 100% of all equity interests in the online data processing and transaction processing
business (operational e-commerce) in China, other requirements provided by the relevant rules (such as the track record and experience requirement for a major foreign investor) still apply. See
"Item 4. Information on the Company B. Business
Overview Regulation Regulation of Telecommunications and Internet Information
Services Regulation of Telecommunication Services" and "Item 4. Information on the Company B. Business
Overview Regulation Regulation of Foreign Investment."
While
the significant majority of our revenue was generated by our wholly-owned entities in fiscal year 2019, we provide Internet information services in China, which are critical to our business,
through a number of PRC incorporated variable interest entities. Contractual arrangements between us and the variable interest entities and their equity holders give us effective control over each of
the variable interest entities and enable us to obtain substantially all of the economic benefits arising from the variable interest entities as well as to consolidate the financial results of the
variable interest entities in our results of operations. Although the structure we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable companies in
China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that
may be adopted in the future. We are in the process of enhancing the structure of our variable interest entities. See " We are in the process of enhancing the structure of
some of our variable interest entities, and its completion is subject to uncertainties."
In
the opinion of Fangda Partners, our PRC counsel, the ownership structures of our material wholly-owned entities and our material variable interest entities in China do not and will not violate any
applicable PRC law, regulation or rule currently in effect; and the contractual arrangements between our material wholly-owned entities, our material variable interest entities and their respective
equity holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect
and will not violate any applicable PRC law, rule or regulation currently in effect. However, Fangda Partners has also advised us that there are substantial uncertainties regarding the interpretation
and application of current PRC laws, rules and regulations. Accordingly, the possibility that the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the
opinion of our PRC legal counsel cannot be ruled out.
It
is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. Please also see
" Substantial uncertainties exist with respect to the interpretation and implementation of the recently adopted PRC Foreign Investment Law and how it may impact the viability
of our current corporate structure, business, financial condition and results of operations."
If
we or any of our variable interest entities are found to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with these violations or failures, including revoking the business and operating licenses of
our PRC subsidiaries or the variable interest entities, requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our websites,
requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our
ability to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial
results of any of our variable interest entities in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in
violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of any of our material variable interest
entities or otherwise separate from any of these entities and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to
consolidate the financial results
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of
our variable interest entities in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results
of operations.
We are in the process of enhancing the structure of some of our variable interest entities, and its
completion is subject to uncertainties.
In order to further improve our control over our material variable interest entities, reduce key man risks associated with having certain individuals be the
equity holders of the material variable interest entities, and address the uncertainty resulting from any potential disputes between us and the individual equity holders of the material variable
interest entities that may arise, we are in the process of enhancing the structure of
our material variable interest entities and certain other variable interest entities, or the VIE Structure Enhancement.
Prior
to the completion of the VIE Structure Enhancement, the variable interest entities were owned, or are owned, by a few PRC citizens who are our founders or employees or by PRC entities owned by
these PRC citizens. After completion of the VIE Structure Enhancement, those variable interest entities will be directly owned by PRC limited liability companies that are indirectly held by selected
members of the Alibaba Partnership or our management who are PRC citizens through PRC limited partnerships jointly established by these individuals. We enter into contractual arrangements, which are
substantially similar to the contractual arrangements we have historically used for our VIEs, with the above-mentioned multiple layers of legal entities and variable interest entity interest holders.
The contractual arrangements, both before and after the VIE Structure Enhancement, give us effective control over each of those variable interest entities and enable us to obtain substantially all of
the economic benefits arising from those variable interest entities as well as to consolidate the financial results of those variable interest entities in our results of operations. Please also see
"Item 4. Information on the Company Organizational Structure."
While
we believe the new structure following completion of the VIE Structure Enhancement is consistent with longstanding industry practice, the PRC government may not agree that these arrangements
comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. The VIE Structure Enhancement
process is subject to a number of uncertainties, including registration of the transfer of the equity interests, registration of the new equity pledges, and the receipt of required approvals of
amendments to certain operating permits, including the Value-added Telecommunication Business Operation Permit, Network Culture Permit and the License for Transmission of Audio-Visual Programs through
Information Network. If we are unable to successfully complete these processes involved in the VIE Structure Enhancement, we will be unable to enjoy the benefits we expect, including the anticipated
enhanced control over those variable interest entities, or reduced key man risks or the uncertainty resulting from any potential disputes among us and the individual equity holders of those variable
interest entities as discussed above.
For
further information, See " If the PRC government deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental
restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties or be forced to relinquish our
interests in those operations, which would materially and adversely affect our business, financial results and the trading price of our ADSs" and "Item 4. Information on the
Company C. Organizational Structure."
Substantial uncertainties exist with respect to the interpretation and implementation of the recently adopted
PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, business, financial condition and results of operations.
The "variable interest entity" structure, or the VIE structure, has been adopted by many China-based companies, including us and certain of our equity
investees, to obtain licenses and permits necessary to operate in industries that currently are subject to restrictions on or prohibitions for foreign investment in China.
The Ministry of Commerce, or the MOFCOM, published a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft PRC Foreign Investment Law, according to which,
variable interest entities that
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are
controlled via contractual arrangements would be deemed as foreign-invested enterprises, if they are ultimately "controlled" by foreign investors. In March 2019, the National People's
Congress promulgated the Foreign Investment Law, or the 2019 PRC Foreign Investment Law, which will become effective on January 1, 2020 and will replace major existing laws and regulations
governing foreign investment in the PRC. See "Item 4. Information on the Company B. Business
Overview Regulation Regulation of Foreign Investment." The 2019 PRC Foreign Investment Law does not use the concept of
"control" in determining whether a company should be considered as a foreign-invested enterprise, nor does it explicitly classify the VIE structure as a method of foreign investment. Since the 2019
PRC Foreign Investment Law has only recently been adopted and relevant government authorities may promulgate rules and regulations as to the interpretation and implementation of the 2019 PRC Foreign
Investment Law, there can be no assurance that the concept of "control" as reflected in the 2015 Draft PRC Foreign Investment Law, will not be reintroduced, or that the VIE structure adopted by us
will not be deemed as a method of foreign investment by other laws, regulations and rules. Accordingly, there are substantial uncertainties as to whether our VIE structure may be deemed as a method of
foreign investment in the future. If our VIE structure were to be deemed as a method of foreign investment under any future laws, regulations and rules, and if any of our business operations were to
fall under the "negative list" for foreign investment, we would need to take further actions in order to comply with these laws, regulations and rules, which may materially and adversely affect our
current corporate structure, business, financial condition and results of operations.
Our contractual arrangements may not be as effective in providing control over the variable interest entities
as direct ownership.
We rely on contractual arrangements with our variable interest entities to operate part of our Internet businesses in China and other businesses in which
foreign investment is restricted or prohibited. For a description of these contractual arrangements, see "Item 4. Information on the Company C.
Organizational Structure Contractual Arrangements among Our Wholly-Owned Entities, Variable Interest Entities and the Variable Interest Entity Equity Holders."
These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entities.
If
we had direct ownership of the variable interest entities, we would be able to exercise our rights as an equity holder directly to effect changes in the boards of directors of those entities, which
could effect changes at the management and operational level. Under our contractual arrangements, we may not be able to directly change the members of the boards of directors of these entities and
would have to rely on the variable interest entities and the variable interest entity equity holders to perform their obligations in order to exercise our control over the
variable interest entities. The variable interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our company or may not
perform their obligations under these contracts. Pursuant to the call options, we may replace the equity holders of the variable interest entities at any time pursuant to the contractual arrangements.
However, if any equity holder is uncooperative in the replacement of the equity holders or there is any dispute relating to these contracts that remains unresolved, we will have to enforce our rights
under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal
system. See " Any failure by our variable interest entities or their equity holders to perform their obligations under the contractual arrangements would have a material
adverse effect on our business, financial condition and results of operations." Consequently, the contractual arrangements may not be as effective in ensuring our control over the relevant portion of
our business operations as direct ownership.
Any failure by our variable interest entities or their equity holders to perform their obligations under the
contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.
If our variable interest entities or their equity holders fail to perform their respective obligations under the contractual arrangements, we may have to
incur substantial costs and expend additional resources to enforce the arrangements. Although we have entered into call option agreements in relation to each variable interest entity, which provide
that we may exercise an option to acquire, or nominate a person to acquire, ownership of the equity
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in
that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules and regulations, the exercise of these call options is subject to the review and approval of the
relevant PRC governmental authorities. We have also entered into equity pledge agreements with the equity shareholders and, in the case of VIEs that have started, or will start, the VIE Structure
Enhancement, the limited partnerships with respect to each variable interest entity to secure certain obligations of the variable interest entity or its equity holders to us under the contractual
arrangements. We have not been able to register certain of the pledges in Zhejiang Province where we incorporated those limited partnerships, because the Zhejiang rules for the registration of pledges
of partnership interests were relatively new and we are still discussing with the local SAMR about the detailed procedures. In addition, the enforcement of these agreements through arbitral or
judicial agencies, if any, may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the equity pledge agreements are primarily
intended to help us collect debts owed to us by the variable interest entities or the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the
assets or equity of the variable interest entities.
In
addition, with respect to the VIEs that have not completed the VIE Structure Enhancement, although the terms of the contractual arrangements provide that they will be binding on the successors of
the variable interest entity equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case
of the death, bankruptcy or divorce of a variable interest entity equity holder will be subject to or will be willing to honor the obligations of the variable interest entity equity holder under the
contractual arrangements. If the relevant variable interest entity or its equity holder (or its successor), as applicable, fails to transfer the shares of the variable interest entity according
to the respective call option agreement or equity pledge agreement, we would need to enforce our rights under the call option agreement or equity pledge agreement, which may be costly and
time-consuming and may not be successful.
The
contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly, these contracts would be interpreted in
accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. Uncertainties in the PRC legal system could limit our ability to enforce the contractual
arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration
awards or court judgments in PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements, we may not be able to exert effective
control over the variable interest entities, and our ability to conduct our business, as well as our financial condition and results of operations, may be materially and adversely affected.
We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our
variable interest entities, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.
Although the significant majority of our revenues are generated, and the significant majority of our operational assets are held, by our wholly-owned
entities, which are our subsidiaries, our variable interest entities hold licenses and approvals and assets that are necessary for our business operations, as well as equity interests in a series of
our portfolio companies, to which foreign investments are typically restricted or prohibited under applicable PRC law. The contractual arrangements contain terms that specifically obligate variable
interest entity equity holders to ensure the valid existence of the variable interest entities and restrict the disposal of material assets of the variable interest entities. However, in the event the
variable interest entity equity holders breach the terms of these contractual arrangements and voluntarily liquidate our variable interest entities, or any of our variable interest entities declares
bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our
business operations or otherwise benefit from the assets held by the variable interest entities, which could have a material adverse effect on our business, financial condition and results of
operations. Furthermore, if any of our variable interest entities undergoes a voluntary or involuntary liquidation proceeding, its equity holder or unrelated third-
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party
creditors may claim rights to some or all of the assets of the variable interest entity, thereby hindering our ability to operate our business as well as constrain our growth.
The equity holders, directors and executive officers of the variable interest entities may have potential
conflicts of interest with our company.
PRC laws provide that a director and an executive officer owes a fiduciary duty to the company he or she directs or manages. The directors and executive
officers of the variable interest entities, including the relevant members of the Alibaba Partnership or our management, must act in good faith and in the best interests of the variable interest
entities and must not use their respective positions for personal gain. On the other hand, as a director of our company, the relevant individuals have a duty of care and loyalty to our company and to
our shareholders as a whole under Cayman Islands law. We control our variable interest entities through contractual arrangements and the business and operations of our variable interest entities are
closely integrated with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these individuals may arise due to dual roles both as equity holders, directors and
executive officers of the variable interest entities and as directors or employees of our company.
There
can be no assurance that these individual shareholders of our variable interest entities will always act in the best interests of our company should any conflicts of interest arise, or that any
conflicts of interest will always be resolved in our favor. There also can be no assurance that these individuals will ensure that the variable interest entities will not breach the existing
contractual arrangements. If we cannot resolve any of these conflicts of interest or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement
action under the contractual arrangements. There is substantial uncertainty as to the outcome of any of these legal proceedings. See " Any failure by our variable interest
entities or their equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results
of operations."
Furthermore,
a company controlled by Jack serves as one of the general partners of a PRC limited partnership that made a minority investment in Wasu. Yuzhu Shi, the founder, chairman and a principal
shareholder of Giant Interactive, a China-based online game company that was previously listed on the New York Stock Exchange, and an entrepreneur with significant experience in and knowledge
of the media industry in China, serves as the other general partner and the executive partner. The interest of the general partner controlled by Jack in the limited partnership is limited to a return
of its RMB10,000 capital contribution. In addition, Simon Xie, a former employee who is one of our founders and an equity holder in certain of our variable interest entities, is a limited
partner in this PRC limited partnership. To fund this investment, in April 2015 Simon was granted a financing with an aggregate principal of up to RMB6.9 billion by a major financial
institution in the PRC. The financing is secured by a pledge of the Wasu shares acquired by the PRC limited partnership, and a pledge of certain wealth management products we purchased. In addition,
we entered into a loan agreement for a principal amount of up to RMB2.0 billion with Simon in April 2015 to finance the repayment by Simon of the principal and interest under the above
financing. We entered into these arrangements to strengthen our strategic business arrangements with Wasu to pursue our strategy of expanding entertainment offerings to consumers. See "Item 7.
Major Shareholders and Related Party Transactions B. Related Party Transactions Pledge for the Benefit of and Loan
Arrangement with a Related Party."
There
can be no assurance that Jack Ma will act in our interest given his ability to control one of the general partners of the PRC limited partnership that invested in Wasu, nor can we assure you
that he will not breach his obligations to us as our director, including obligations not to compete with us. In addition, the interests of Mr. Shi, as an independent third party, may not
coincide with those of Jack, or with our interests in pursuing our entertainment strategy. If any conflicts of this kind arise between Jack and Mr. Shi in conducting the business of the PRC
limited partnership, it could potentially have a material adverse effect on our relationship with the shareholder of Wasu and, consequently, on our ability to benefit from our alliance with Wasu.
Furthermore, there can be no assurance that Simon will have sufficient resources to repay the loans in a timely manner or at all. The loan that we provided to Simon is secured by a pledge of Simon's
limited partnership interest in the PRC limited
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partnership.
However, if Simon fails to repay the loan, our enforcement of our secured interests could be costly and time-consuming and would be subject to the uncertainties in the PRC
legal system.
The contractual arrangements with our variable interest entities may be subject to scrutiny by the PRC tax
authorities. Any pricing adjustment of a related party transaction could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly
different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entities or their equity holders are required to pay additional taxes on previous or future
revenue or income. In particular, under applicable PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our variable interest
entities, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine that any contractual arrangements were not entered into on an arm's length basis and
therefore constitute a favorable transfer pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entities and/or variable interest entity equity holders could be
increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late payment interest. Our net income may be materially reduced if our tax liabilities
increase.
Risks Related to Doing Business in the People's Republic of China
Changes in the political and economic policies of the PRC government may materially and adversely affect our
business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.
Although we have operating subsidiaries located in various countries and regions, our operations in China currently contribute the large majority of our
revenue. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.
The
PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange
and allocation of resources. A substantial portion of productive assets in China is still owned by the government. In addition, the PRC government regulates industry development by imposing industrial
policies. The PRC government also plays a significant role in China's economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy,
regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While
the PRC economy has experienced significant growth in the past four decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has
implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us.
Our financial condition and results of operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In
addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic
activity. Any prolonged slowdown in the Chinese economy could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and
results of operations.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Most of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules and
regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for
reference but have limited precedential value.
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China
has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to a
significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published
decisions and the non-precedential nature of these decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the
interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. Therefore, it is possible that our existing operations may be found
not to be in full compliance with relevant laws and regulations in the future. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not
published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of
the violation.
Any
administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities
have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our
business, financial condition and results of operations.
PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which
could make it more difficult for us to pursue growth through acquisitions.
Under the PRC Anti-monopoly Law, companies undertaking certain investments and acquisitions relating to businesses in China must notify the anti-monopoly
enforcement agency, in advance of any transaction where the parties' revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the other
party. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation,
the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be
obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with PRC enterprises or residents. Applicable PRC
laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review.
Due
to the level of our revenues, our proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million in the year prior to any
proposed acquisition would be subject to the SAMR merger control review. As a result of our size, many of the transactions we may undertake could be subject to SAMR merger review. Complying with the
requirements of the relevant regulations to complete these transactions could be time-consuming, and any required approval processes, including approval from SAMR, may be uncertain and could delay or
inhibit our ability to complete these transactions, which could affect our ability to expand our business, maintain our market share or otherwise achieve the goals of our acquisition strategy.
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According to the Regulations on Enterprise Outbound Investment issued by the National Development and Reform Commission, or the NDRC, in December 2017 which came into
effect on March 1, 2018, we may also need to report to the NDRC relevant information on overseas investments with an amount of US$300 million or more in non-sensitive areas, and obtain
the NDRC's approval for our overseas investments in sensitive areas, if any, before the closing of the investments. Accordingly, these new regulations may restrict our ability to make investments in
some regions and industries overseas, and may subject any proposed investments to additional delays and increased uncertainty, as well as heightened scrutiny, including after the investments have
been made.
Our
ability to carry out our investment and acquisition strategy may be materially and adversely affected by the regulatory authorities' current practice, which creates significant uncertainty as to
whether transactions that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete investments and acquisitions in
the future in a timely manner or at all.
Anti-monopoly and unfair competition claims or regulatory actions against us may result in our being subject
to fines as well as constraints on our business.
The PRC anti-monopoly enforcement agencies have in recent years strengthened enforcement under the PRC Anti-monopoly Law, including levying significant fines,
with respect to concentration of undertakings and cartel activity, mergers and acquisitions, as well as abusive behavior by companies with market dominance. In March 2018, the SAMR was formed
as a new governmental agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the NDRC, and the SAIC, respectively. Since its
inception, the SAMR has continued to strengthen its anti-monopoly enforcement. The SAMR issued a new set of guidelines with respect to merger control review in September 2018, and issued the
Notice on Anti-monopoly Enforcement Authorization on December 28, 2018, which grants authorizations to the SAMR's province-level branches for anti-monopoly enforcement within their respective
jurisdictions. The SAMR recently has also imposed several administrative penalties on various companies for failing to duly make filings as to their transactions subject to merger control review by
the SAMR. The scope of the companies that were penalized is broad, and covers a variety of different industries.
The
PRC Anti-monopoly Law also provides a private right of action for competitors, business partners or customers to bring anti-monopoly claims against companies. In recent years, an increased number
of companies have been exercising their right to seek relief under the PRC Anti-monopoly Law. As public awareness of the rights under the PRC Anti-monopoly Law increases, more companies, including our
competitors, business partners and customers have resorted to and may continue seeking the remedies available under the PRC Anti-monopoly Law, such as through complaints to regulators or as plaintiffs
in private ligation, to hinder our business operations and improve their competitive position, regardless of the merits of their claims. Any of the above actions against us could materially and
adversely affect our business, operations, reputation, brand and the trading price of our ADSs.
From
time to time, we have received and expect to continue to receive close scrutiny from government agencies under the PRC Anti-monopoly Law in connection with our business practices, investments and
acquisitions. Any anti-monopoly lawsuit, regulatory investigations or administrative proceeding initiated against us could result in our being subject to profit disgorgement, heavy fines and various
constraints on our business, or result in negative publicity that could harm our reputation and negatively affect the trading prices of our ADSs. These constraints could include forced termination of
any agreements or arrangements that are determined by governmental authorities to be in violation of anti-monopoly laws, required divestitures and limitations on certain pricing and business
practices, which may limit our ability to continue to innovate, diminish the appeal of our services, increase our operating costs and prevent us from pursuing our investment and acquisition strategy.
These constraints could also encourage our competitors to develop platforms, websites, products and services that mimic the functionality of our services, which could decrease the popularity of our
marketplaces or other businesses we operate, products and services among merchants, consumers and other participants, and cause our revenue and net income to decrease materially. Given the scale and
rapid expansion of our business, we may be subject to greater scrutiny, which could in turn increase the likelihood that we will face regulatory action, which could result in fines or
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restrictions
on our business as well as negative publicity and adversely affect our reputation and the trading price of our ADSs.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident
beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries' ability to increase their registered
capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as "SAFE Circular 75" promulgated by SAFE on
October 21, 2005. See also "Item 4. Information on the Company B. Business
Overview Regulation Regulation of Foreign Exchange and Dividend
Distribution Foreign Exchange Regulation SAFE Circular 37." SAFE Circular 37 and its implementing
rules require PRC residents to register with banks designated by local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of
overseas investment and financing, with the PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a
"special purpose vehicle."
We
have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and pursuant to SAFE Circular 37, we have periodically filed and
updated the above-mentioned foreign exchange registration on behalf of certain employee shareholders who we know are PRC residents. However, we may not be aware of the identities of all of our
beneficial owners who are PRC residents. We do not have control over our beneficial owners, and there can be no assurance that all of our PRC-resident beneficial owners will comply with SAFE
Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to
SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth
in SAFE Circular 37 and subsequent implementation rules, may subject the beneficial owners or our PRC subsidiaries to fines and legal sanctions.
Furthermore,
since it is unclear how those SAFE regulations, and any future regulation concerning offshore or cross-border transactions, will be further interpreted, amended and implemented by the
relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also
limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries' ability to distribute dividends to our company. These risks may have a material adverse
effect on our business, financial condition and results of operations.
Any failure to comply with PRC regulations regarding our employee equity incentive plans may subject the PRC
participants in the plans, us or our overseas and PRC subsidiaries to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may, prior to the
exercise of an option, submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors,
executive officers and other employees who are PRC citizens or who are non-PRC citizens residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who
have been granted restricted share units, or RSUs, options or restricted shares, by us or our overseas listed subsidiaries may follow the Notice on Issues Concerning the Foreign Exchange
Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, to apply for the foreign exchange
registration. According to those regulations, employees, directors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC citizens or
who are non-PRC citizens residing in China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through a domestic qualified agent,
which may be a PRC subsidiary of the overseas listed company, and complete certain other procedures. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may
also limit their ability to make payment under the relevant
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equity
incentive plans or receive dividends or sales proceeds related thereto in foreign currencies, or our ability to contribute additional capital into our domestic subsidiaries in China and limit
our domestic subsidiaries' ability to distribute dividends to us. We also face regulatory uncertainties under PRC law that could restrict our ability or the ability of our overseas listed subsidiaries
to adopt additional equity incentive plans for our directors and employees who are PRC citizens or who are non-PRC citizens residing in the PRC for a continuous period of not less than one year,
subject to limited exceptions.
In
addition, the State Administration of Taxation has issued circulars concerning employee RSUs, share options or restricted shares. Under these circulars, employees working in the PRC whose RSUs or
restricted shares vest, or who exercise share options, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to
employee RSUs, share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related to their RSUs, share options or restricted shares.
Although we and our overseas listed subsidiaries currently withhold income tax from our PRC employees in connection with the vesting of their RSUs and restricted shares and their exercise of options,
if the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax
authorities.
We rely to a significant extent on dividends, loans and other distributions on equity paid by our principal
operating subsidiaries in China.
We are a holding company and rely to a significant extent on dividends, loans and other distributions on equity paid by our principal operating subsidiaries
for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may
incur outside of China and pay our expenses. When our principal operating subsidiaries incur additional debt, the instruments governing the debt may restrict their ability to pay dividends or make
other distributions or remittances, including loans, to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries and certain other subsidiaries permit payments of dividends
only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
Under
PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside a portion of its net income each year to fund certain statutory reserves. These reserves,
together with the registered equity, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability
to transfer a portion of their respective net assets to their shareholders as dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the
PRC, up to the amount of net assets held in each operating subsidiary. As of March 31, 2019, these restricted net assets totaled RMB112.5 billion (US$16.8 billion).
Pay-for-performance services are considered, in part, to involve Internet advertisement, which subjects us to
other laws, rules and regulations as well as additional obligations.
On July 4, 2016, the SAIC promulgated the Interim Measures for Administration of Internet Advertising, or the Internet Advertising Measures, which came
into effect as of September 1, 2016 and defined Internet advertisements as any commercial advertising that directly or indirectly promotes goods or services through Internet media in any form
including paid-for search results. See "Item 4. Information on the Company B. Business
Overview Regulation Regulation of Advertising Services."
There
exist substantial uncertainties with respect to the interpretation and implementation in practice of the Internet Advertising Measures by various government authorities. We derive a significant
amount of our revenue from pay-for-performance, or P4P, services and other related services. Our P4P services and other related services may be considered to, in part, involve Internet advertisement.
We may incur additional taxes in connection with our P4P and other related services. Moreover, PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising
distributors to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws, rules or
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regulations
may result in penalties, including fines, confiscation of advertising fees and orders to cease dissemination of the advertisements. In circumstances involving serious violations, the PRC
government may suspend or revoke a violator's business license or license for operating an advertising business. In addition, the Internet Advertising Measures require paid-for search results to be
clearly distinguished from organic search results so that consumers will not misunderstand the nature of these search results. Therefore, we are obligated to distinguish from others the merchants who
purchase the above-mentioned P4P and related services or the relevant listings by these merchants. Complying with these requirements, including any penalties or fines for any failure to comply, may
significantly reduce the attractiveness of our platforms and increase our costs, and could have a material adverse effect on our business, financial condition and results of operations.
In
addition, for advertising content related to specific types of products and services, advertisers, advertising operators and advertising distributors must confirm that the advertisers have obtained
requisite government approvals, including the advertiser's operating qualifications, proof of quality inspection of the advertised products, and, with respect to certain industries, government
approval of the content of the advertisement and filing with the local authorities. Pursuant to the Internet Advertising Measures, we are required to take steps to monitor the content of
advertisements displayed on our platforms. This requires considerable resources and time, and could significantly affect the operation of our business, while also subjecting us to increased liability
under the relevant laws, rules and regulations. The costs associated with complying with these laws, rules and regulations, including fines or any other penalties for our failure to so comply if
required, could have a material adverse effect on our business, financial condition and results of operations. Any further change in the classification of our P4P and other related services by the PRC
government may also significantly disrupt our operations and materially and adversely affect our business and prospects.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and
we may therefore be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under
the laws of jurisdictions outside of China with "de facto management bodies" located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise
income tax at the rate of 25% on their global income. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC
Tax Resident Enterprises on the basis of de facto management bodies, or Circular 82, on April 22, 2009. See "Item 4. Information on the
Company B. Business Overview Regulation Tax
Regulations PRC Enterprise Income Tax." If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of
25% on our global income. In this case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none
of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and
uncertainties remain with respect to the interpretation of the term "de facto management body."
Dividends payable to foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign
investors may become subject to PRC taxation.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends
payable by a resident enterprise to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have an establishment or place of business
but the dividends are not effectively connected with the establishment or place of business, to the extent these dividends are derived from sources within the PRC, subject to any reduction set forth
in applicable tax treaties. Similarly, any gain realized on the transfer of shares of a resident enterprise by these investors is also subject to PRC tax at a current rate of 10%, subject to any
exemption set forth in relevant tax treaties, if the gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares
or ADSs, and any gain realized by the investors from the transfer of our
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ordinary
shares or ADSs, may be treated as income derived from sources within the PRC and as a result be subject to PRC taxation. See "Item 4. Information on the
Company B. Business Overview Regulation Tax Regulations." Furthermore, if
we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by these investors may be
subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear if we or any of our subsidiaries established outside China are
considered a PRC resident enterprise, whether holders of our ADSs or ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other
countries or areas and claim foreign tax credit if applicable. If dividends payable to our non-PRC investors, or gains from the transfer of our ADSs or ordinary shares by these investors are subject
to PRC tax, the value of your investment in our ADSs or ordinary shares may decline significantly.
Discontinuation of preferential tax treatments we currently enjoy or other unfavorable changes in tax law
could result in additional compliance obligations and costs.
Chinese companies operating in the high-technology and software industry that meet relevant requirements may qualify for three main types of preferential
treatment, which are high and new technology enterprises, software enterprises and key software enterprises within the scope of the PRC national plan. For a qualified high and new technology
enterprise, the applicable enterprise income tax rate is 15%. The high and new technology enterprise qualification is re-assessed by the relevant authorities every three years. Moreover, a qualified
software enterprise is entitled to a tax holiday consisting of a two-year tax exemption beginning from the
first profit-making calendar year and a 50% tax reduction for the subsequent three calendar years. The software enterprise qualification is subject to an annual assessment. For a qualified key
software enterprise within the scope of the PRC national plan, the applicable enterprise tax rate for a calendar year is 10%. The key software enterprise qualification is subject to an annual
assessment.
A
number of our China operating entities enjoy these preferential tax treatments. The discontinuation of any of the various types of preferential tax treatment we enjoy could materially and adversely
affect our results of operations. See "Item 5. Operating and Financial Review and Prospects A. Operating
Results Taxation PRC Income Tax."
We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC
resident enterprises or other assets attributed to a PRC establishment of a non-PRC company.
On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by
Non-PRC Resident Enterprises, or Bulletin 7, which has been further amended by the Announcement on Issues Concerning the Withholding of Enterprise Income Tax at Source on Non-PRC Resident Enterprises,
or Bulletin 37, issued by the State Administration of Taxation on October 17, 2017 and amended on June 15, 2018. Pursuant to these bulletins, an "indirect transfer" of assets, including
equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if the arrangement does not have a
reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from this indirect transfer may be subject to PRC
enterprise income tax. See also "Item 4. Information on the Company B. Business
Overview Regulation Tax Regulations PRC Enterprise Income Tax."
There
are uncertainties as to the application of Bulletin 7 and Bulletin 37. Bulletin 7 may be determined by the tax authorities to be applicable to some of our offshore restructuring
transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and the
transferees may be subject to withholding or tax payment obligation, while our PRC subsidiaries may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and PRC
subsidiaries may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and
future restructuring or disposal
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of
shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
The
PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the
cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Bulletin 7, our income tax costs associated with potential acquisitions or disposals
will increase, which may have an adverse effect on our financial condition and results of operations.
Restrictions on currency exchange or outbound capital flows may limit our ability to utilize our PRC revenue
effectively.
Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the "current account," which includes dividends,
trade and service-related foreign exchange transactions, but requires approval from or registration with appropriate government authorities or designated banks under the "capital account," which
includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, that are foreign invested
enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of SAFE by complying with certain procedural
requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions.
Since
2016, PRC governmental authorities have imposed more stringent restrictions on outbound capital flows, including heightened scrutiny over "irrational" overseas investments for certain
industries, as well as over four kinds of "abnormal" offshore investments, which are:
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investments through enterprises established for only a few months without substantive operation;
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investments with amounts far exceeding the registered capital of onshore parent and not supported by its business performance shown on
financial statements;
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investments in targets that are unrelated to onshore parent's main business; and
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investments with abnormal sources of Renminbi funding suspected to be involved in illegal transfer of assets or illegal operation of
underground banking.
On
January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, which tightened the
authenticity and compliance verification of cross-border transactions and cross-border capital flow. See "Item 4. Information on the Company B. Business
Overview Regulation Regulation of Foreign Exchange and Dividend
Distribution Foreign Exchange Regulation." In addition, the Outbound Investment Sensitive Industry Catalogue (2018) lists certain sensitive industries that are
subject to NDRC pre-approval requirements prior to remitting investment funds offshore, which subjects us to increased approval requirements and restrictions with respect to our overseas investment
activity. Since a significant amount of our PRC revenue is denominated in Renminbi, any existing and future restrictions on currency exchange or outbound capital flows may limit our ability to utilize
revenue generated in Renminbi to fund our business activities outside of the PRC, make investments, service any debt we may incur outside of China or pay dividends in foreign currencies to our
shareholders, including holders of our ADSs.
Fluctuations in exchange rates could result in foreign currency exchange losses to us.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and
economic conditions and the foreign exchange policy adopted by the PRC government. In August 2015, the People's Bank of China, or PBOC, changed the way it calculates the mid-point price of
Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day's closing spot rate, foreign-exchange demand and supply as well as
changes in major currency
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rates.
In 2017, the value of the Renminbi appreciated by approximately 6.3% against the U.S. dollar; and in 2018, the Renminbi depreciated by approximately 5.7% against the U.S. dollar.
From the end of 2018 through the end of April 2019, the value of the Renminbi appreciated by approximately 2.0% against the U.S. dollar. It is difficult to predict how market forces or
PRC or U.S. government policy, including any interest rate increases by the Federal Reserve, may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There
remains significant international pressure on the PRC government to adopt a more flexible currency policy, including from the U.S. government, which has threatened to label China as a "currency
manipulator," which could result in greater fluctuation of the Renminbi against the U.S. dollar.
A
substantial percentage of our revenues and costs are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while the majority of our debt is
denominated in dollars. We are a holding company and we rely on dividends, loans and other distributions on equity paid by our operating subsidiaries in China. Any significant fluctuations in the
value of the Renminbi may materially and adversely affect our liquidity and cash flows. If we decide to convert our Renminbi into U.S. dollars for the purpose of repaying principal or interest
expense on our outstanding U.S. dollar-denominated debt, making payments for dividends on our ordinary shares or ADSs or other business purposes, appreciation of the U.S. dollar against
the Renminbi would have a negative effect on the U.S. dollar amount we would receive. Conversely, to the extent that we need to convert U.S. dollars into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. From time to time we enter into hedging activities with regard to
exchange rate risk. There can be no assurance that our hedging activities will successfully mitigate these risks adequately or at all, and in addition hedging activities may result in greater
volatility in our financial results.
The audit report included in this annual report is prepared by auditors who are not inspected fully by the
Public Company Accounting Oversight Board and, accordingly, our shareholders are deprived of the benefits of this inspection.
As an auditor of companies that are publicly traded in the United States and a firm registered with the Public Company Accounting Oversight Board, or
PCAOB, PricewaterhouseCoopers is required under the laws of the United States to undergo regular inspections by the PCAOB. However, because we have substantial operations within the People's
Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese government authorities, our auditor and its audit work are not
currently inspected fully by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their
oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has concerned
U.S. regulators in recent years. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.
Inspections
of other auditors conducted by the PCAOB outside of China have at times identified deficiencies in those auditors' audit procedures and quality control procedures, which may be addressed
as part of the inspection process to improve future audit quality.
The
inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared
to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
Restrictions on the direct production of audit work papers to foreign regulators could result in our
financial statements being determined to not be in compliance with the requirements of the Exchange Act.
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002
against the mainland Chinese affiliates of the "big four" accounting firms, including the affiliate of our auditor, and also against Dahua, the former BDO affiliate in China. The Rule 102(e)
proceedings initiated by the SEC related to the failure of these firms to produce documents, including audit work
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papers,
in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in China are not in a position lawfully to produce documents
directly to the SEC because of restrictions under PRC law and specific directives issued by the CSRC. The issues raised by the proceedings are not specific to the Chinese affiliate of our auditor or
to us, but potentially affect equally all PCAOB-registered audit firms based in China and all businesses based in China (or with substantial operations in China) with securities listed in the
United States. In addition, auditors based outside of China are subject to similar restrictions under PRC law and CSRC directives in respect of audit work that is carried out in China that
supports the audit opinions issued on financial statements of entities with substantial China operations.
In
February 2015, each of the "big four" accounting firms in China agreed to a censure and to pay a fine to the SEC to settle the dispute with the SEC. The settlement stayed the current
proceeding for four years, during which time the firms were required to follow detailed procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If a firm were
not to follow the procedures, the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the
administrative proceeding against all four firms. In addition, the limitations imposed by the PRC on the production of workpapers reflecting audit work performed in the PRC could likewise result in
the imposition of penalties on our independent registered public accounting firm by the PCAOB or the SEC, such as suspensions of our audit firm's ability to practice before the SEC. Under the
terms of the settlement, the underlying proceeding against the "big four" accounting firms in China was deemed dismissed with prejudice four years after entry of the settlement. The fourth anniversary
of the settlement was on February 6, 2019. We cannot predict if the SEC will further challenge the four firms as to their compliance with U.S. law in connection with U.S. regulatory requests
for audit work papers, or if the results of the challenge would result in the SEC imposing penalties, such as suspensions. If any additional remedial measures are imposed on the Chinese affiliates of
the "big four" accounting firms, including our independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the requirements of the
U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act.
If
our independent registered public accounting firm, or the affiliate of our independent registered public accounting firm, were denied, even temporarily, the ability to practice before the SEC, we
would need to consider
alternate support arrangements for the audit of our operations in China. If our auditor, or an affiliate of that firm, were unable to address issues related to the production of documents, and we were
unable to timely find another independent registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in
compliance with the requirements of the Exchange Act. A determination of this type could ultimately lead to delisting of our ADSs from the New York Stock Exchange or deregistration from the
SEC, or both. This would materially and adversely affect the market price of our ADSs and substantially reduce or effectively terminate the trading of our ADSs in the United States.
Risks Related to Our ADSs
The trading price of our ADSs has been and is likely to continue to be volatile, which could result in
substantial losses to holders of our ADSs.
The trading price of our ADSs has been and is likely to continue to be volatile and could fluctuate widely in response to a variety of factors, many of which
are beyond our control. For example, the high and low sale prices of our ADSs in fiscal year 2019 were US$211.70 and US$129.77, respectively. In addition, the performance and fluctuation of the market
prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes
for our ADSs. Some of these companies have experienced significant volatility, including significant price declines after their initial public offerings. The trading performances of these PRC
companies' securities at the time of or after their offerings may affect the overall investor sentiment towards other PRC companies listed in the United States
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and
consequently may impact the trading performance of our ADSs. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific business
reasons, including:
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variations in our results of operations or earnings that are not in line with market or research analyst expectations or changes in financial
estimates by securities research analysts;
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publication of operating or industry metrics by third parties, including government statistical agencies, that differ from expectations of
industry or financial analysts;
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announcements made by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or
capital commitments;
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press and other reports, whether or not true, about our business, including negative reports published by short sellers, regardless of their
veracity or materiality to our company;
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litigation and regulatory allegations or proceedings that involve us;
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changes in pricing we or our competitors adopt;
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additions to or departures of our management;
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actual or perceived general industry, regulatory, economic and business conditions and trends in China and globally, due to various reasons,
including changes in geopolitical landscape, as some investors or analysts may invest in or value our ADSs based on the economic performance of the Chinese economy, which may not be correlated to our
financial performance;
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fluctuations of exchange rates between the Renminbi and the U.S. dollar;
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sales or perceived potential sales or other dispositions of existing or additional ordinary shares or ADSs or other equity or equity-linked
securities; and
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the creation by our major shareholders of vehicles that hold our ordinary shares.
Any
of these factors may result in large and sudden changes in the volume and trading price of our ADSs. In addition, the stock market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular companies and industries. These fluctuations may include a so-called "bubble market" in which investors temporarily raise the
price of the stocks of companies in certain industries, such as the e-commerce industry, to unsustainable levels. These market fluctuations may significantly affect the trading price of our ADSs. In
the past, following periods of volatility in the market price of a company's securities, shareholders have often instituted securities class action litigation against that company. We were named as a
defendant in certain purported shareholder class action lawsuits described in "Item 8. Financial Information A. Consolidated Statements and Other
Financial Information Legal and Administrative Proceedings." The litigation process may utilize a material portion of our cash resources and divert management's
attention from the day-to-day operations of our company, all of which could harm our business. If adversely determined, the class action suits may have a material adverse effect on our financial
condition and results of operations.
Substantial future sales or perceived potential sales of our ADSs, ordinary shares or other equity or
equity-linked securities in the public market could cause the price of our ADSs to decline significantly.
Sales of our ADSs, ordinary shares or other equity or equity-linked securities in the public market, or the perception that these sales could occur, could
cause the market price of our ADSs to decline significantly. As of March 31, 2019, we had 2,587,059,572 ordinary shares outstanding, and 1,713,232,408 of our ordinary shares were
represented by ADSs. All of our ordinary shares represented by ADSs were freely transferable by persons other than our affiliates without restriction or additional registration under the Securities
Act of 1933, or the Securities Act. The ordinary shares held by our affiliates and other shareholders are also available for sale, subject to volume and other restrictions as applicable under
Rules 144 and 701 under the Securities Act, under sales plans adopted pursuant to Rule 10b5-1 or otherwise.
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On May 15, 2019, Altaba, one of our principal shareholders, announced that it intends to commence sales of our shares on May 20, 2019. Altaba stated that it
intends to sell no more than 50% of the Company's shares it holds prior to receiving stockholder approval of its previously announced plan to liquidate and dissolve the Altaba entity pursuant to
voluntary liquidation and dissolution. Altaba's stockholder meeting to vote on the plan is scheduled to be held on June 27, 2019. In addition, Altaba expects to file its certificate of
dissolution during the third or fourth quarter of 2019, although this filing may be delayed by Altaba's board in its sole discretion. Altaba stated that it intends to sell all of its shares in us if
the plan is approved at the stockholder meeting, although Altaba has stated that the timing and method of sales, and other related transaction considerations will be determined at its discretion, and
the plan is subject to change based on prevailing market conditions and other factors. If Altaba, or any vehicles that have been created or may be created to hold our shares, among other assets, takes
any further steps to divest itself of all or a portion of its holdings in our ordinary shares in the form of ADSs in the public market, including through its announced plan of liquidation and
dissolution and through periodic small-scale sales, this could cause the price of our ADSs to decline significantly.
Certain
major holders of our ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares. Registration of these shares under the Securities Act would
result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares
in the form of ADSs in the public market could cause the price of our ADSs to decline significantly.
As a foreign private issuer, we are permitted to and we will, rely on exemptions from certain New York
Stock Exchange corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ADSs.
We are exempted from certain corporate governance requirements of the New York Stock Exchange by virtue of being a foreign private issuer. We are
required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic
U.S. companies listed on the New York Stock Exchange. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance,
we are not required to:
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have a majority of the board be independent (although all of the members of the audit committee must be independent under the
Exchange Act);
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have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors;
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have regularly scheduled executive sessions for non-management directors; or
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have executive sessions of solely independent directors each year.
We
have relied on and intend to continue to rely on some of these exemptions. As a result, holders of our ADSs may not be provided with the benefits of certain corporate governance requirements of the
New York Stock Exchange.
As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which
may afford less protection to holders of our ADSs than they would enjoy if we were a domestic U.S. company.
As a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange
Act and the rules relating to selective disclosure of material nonpublic information under Regulation FD. In addition, our executive officers, directors and principal shareholders are exempt
from the reporting and short-swing profit and recovery provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and
financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act. As a result, holders of our ADSs may be afforded
less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.
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We may in the future conduct a public offering and listing of our shares in China, which may result in
increased regulatory scrutiny and compliance costs as well as increased fluctuations in the prices of our ordinary shares and ADSs listed in overseas markets.
We may conduct a public offering and/or listing of our shares on a stock exchange in China in the future. We have not set a specific timetable or decided on
any specific form for an offering in China and may not ultimately conduct an offering and listing. The precise timing of the offering and/or listing of our shares in China would depend on a number of
factors, including relevant regulatory developments and market conditions. If we complete a public offering or listing in China, we would become subject to the applicable laws, rules and regulations
governing public companies listed in China, in addition to the various laws, rules and regulations that we are subject to in the United States as a reporting company. The listing and trading of
our shares in multiple jurisdictions and multiple markets may lead to increased compliance costs for us, and we may face the risk of significant intervention by regulatory authorities in these
jurisdictions and markets.
In
addition, under current PRC laws, rules and regulations, our ordinary shares will not be interchangeable or fungible with any shares we may decide to list on a PRC stock exchange, and there is no
trading or settlement between these markets in the United States and mainland China. Furthermore, these two markets have different trading characteristics and investor bases, including
different levels of retail and institutional participation. As a result of these differences, the trading prices of our ADSs, accounting for the share-to-ADS ratio, may not be the same as the trading
prices of any shares we may decide to list on a PRC stock exchange. The issuance of a separate class of shares and fluctuations in its trading price may also lead to increased volatility in, and may
otherwise materially decrease, the prices of our ordinary shares and ADSs.
Our shareholders may face difficulties in protecting their interests, and their ability to protect their
rights through the federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and most of our directors and
substantially all of our executive officers reside outside the United States.
We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our wholly-owned entities and variable interest
entities. Most of our directors and substantially all of our executive officers reside outside the United States and a substantial portion of their assets are located outside of the
United States. As a result, it may be difficult or impossible for our shareholders (including holders of ADSs) to bring an action against us or against these individuals in the Cayman Islands
or in China in the event that they believe that their rights have been infringed under the securities laws of the United States or otherwise. Even if shareholders are successful in bringing an
action of this kind, the laws of the Cayman Islands and China may render them unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory
recognition in the Cayman Islands of judgments obtained in the United States or China, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a
foreign court of competent jurisdiction without retrial on the merits.
Our
corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2018 Revision) and common law of the Cayman
Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary duties of our directors are to a large extent governed by the
common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which
provides persuasive, but not binding, authority in a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the
United States and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in
U.S. federal courts.
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In
addition, our articles of association provide that in the event that any shareholder initiates or asserts any claim or counterclaim against us, or joins, offers substantial assistance to or has a
direct financial interest in any claim or counterclaim against us, and does not obtain a judgment on the merits in which the initiating or asserting party prevails, then the shareholder will be
obligated to reimburse us for all fees, costs and expenses (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) that we may incur in connection with a claim or
counterclaim. These fees, costs and expenses that may be shifted to a shareholder under this provision are potentially significant and this fee-shifting provision is not limited to specific types of
actions, but is rather potentially applicable to the fullest extent permitted by law.
Our
fee-shifting provision may dissuade or discourage our shareholders (and their attorneys) from initiating lawsuits or claims against us or may impact the fees, contingency or otherwise,
required by attorneys to represent our shareholders. Fee-shifting provisions such as ours are relatively new and untested. There can be no assurance that we will or will not invoke our fee-shifting
provision in any particular dispute, or that we will be successful in obtaining fees if we choose to invoke the provision.
As
a result of the foregoing, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than
would shareholders of a corporation incorporated in a jurisdiction in the United States.
The voting rights of holders of our ADSs are limited by the terms of the deposit agreement.
Holders of our ADSs may exercise their voting rights with respect to the ordinary shares underlying their ADSs only in accordance with the provisions of the
deposit agreement. Upon receipt of voting instructions from them in the manner set forth in the deposit agreement, the depositary for our ADSs will endeavor to vote their underlying ordinary shares in
accordance with these instructions. Under our articles of association, the minimum notice period required for convening a general meeting is ten days. When a general meeting is convened, holders of
our ADSs may not receive sufficient notice of a shareholders' meeting to permit them to withdraw their ordinary shares to allow them to cast their votes with respect to any specific matter at the
meeting. In addition, the depositary and its agents may not be able to send voting instructions to holders of our ADSs or carry out their voting instructions in a timely manner. We will make all
reasonable efforts to cause the depositary to extend voting rights to holders of our ADSs in a timely manner, but they may not receive the voting materials in time to ensure that they can instruct the
depositary to vote the ordinary shares underlying their ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner
in which any vote is cast or for the effect of any vote. As a result, holders of our ADSs may not be able to exercise their rights to vote and they may lack recourse if the ordinary shares underlying
their ADSs are not voted as they requested.
The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying the
ADSs if holders of these ADSs do not give voting instructions to the depositary, except in limited circumstances, which could adversely affect the interests of holders of our ADSs.
Under the deposit agreement for our ADSs, the depositary will give us a discretionary proxy to vote the ordinary shares underlying the ADSs at shareholders'
meetings if holders of these ADSs do not give voting instructions to the depositary, unless:
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we have failed to timely provide the depositary with our notice of meeting and related voting materials;
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we have instructed the depositary that we do not wish a discretionary proxy to be given;
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we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
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a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
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voting at the meeting is made on a show of hands.
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The
effect of this discretionary proxy is that, if holders of our ADSs fail to give voting instructions to the depositary, they cannot prevent our ordinary shares underlying their ADSs from being
voted, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary
proxy.
Holders of our ADSs may be subject to limitations on transfer of their ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its
duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the
depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Holders of our ADSs may not receive distributions on our ordinary shares or any value for them if it is
illegal or impractical to make them available to them.
The depositary of our ADSs has agreed to pay holders of our ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our
ordinary shares or other deposited securities after deducting its fees and expenses. Holders of our ADSs will receive these distributions in proportion to the number of our ordinary shares that their
ADSs represent. However, the depositary is not responsible for making these payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For
example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or
distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or
registration required for the distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs,
ordinary shares, rights or anything else to holders of our ADSs. This means that holders of our ADSs may not receive the distributions we make on our ordinary shares or any value for them if it is
illegal or impractical for us to make them available. These restrictions may materially reduce the value of the ADSs.
There could be adverse United States federal income tax consequences to United States investors
if we were or were to become a passive foreign investment company.
While we do not believe we are or will become a passive foreign investment company, or PFIC, there can be no assurance that we were not a PFIC in the past and
will not become a PFIC in the future. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time.
Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or
(ii) the average percentage of our assets by value in a taxable year that produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the
value of our assets will be based, in part, on the quarterly market value of our ADSs, which is subject to change. See "Item 10. Additional
Information E. Taxation Material United States Federal Income Tax
Considerations Passive Foreign Investment Company."
Although
we do not believe we were or will become a PFIC, it is not entirely clear how the contractual arrangements between us and our variable interest entities will be treated for purposes of the
PFIC rules. If it were determined that we do not own the stock of our variable interest entities for United States federal income tax purposes (for example, because the relevant PRC
authorities do not respect these arrangements), we may be
treated as a PFIC. See "Item 10. Additional Information E. Taxation Material United States Federal
Income Tax Considerations Passive Foreign Investment Company."
If
we were or were to become a PFIC, adverse United States federal income tax consequences to our shareholders that are United States investors could result. For example, if we are a
PFIC, our United States investors will
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become
subject to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome reporting requirements. There can be no assurance
that we were not or will not become a PFIC for any taxable year. You are urged to consult your own tax advisors concerning United States federal income tax consequence on the application of the
PFIC rules. See "Item 10. Additional Information E. Taxation Material United States Federal Income Tax
Considerations Passive Foreign Investment Company."