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TABLE OF CONTENTS
ALIBABA GROUP HOLDING LIMITED INDEX TO FINANCIAL STATEMENTS
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o
ý
o
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report……………
Commission file number 001-36614
For the transition period from to
Alibaba Group Holding Limited
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
c/o Alibaba Group Services Limited
26/F Tower One, Times Square
1 Matheson Street, Causeway Bay
Hong Kong
(Address of principal executive offices)
Timothy A. Steinert, Esq., General Counsel and Secretary
Telephone: +852-2215-5100
Facsimile: +852-2215-5200
Alibaba Group Holding Limited
c/o Alibaba Group Services Limited
26/F Tower One, Times Square
1 Matheson Street, Causeway Bay
Hong Kong
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, par value US$0.000025 per share
American Depositary Shares, each representing
one Ordinary Share
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Name of each exchange on which registered
New York Stock Exchange
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 2,473,927,859 Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
ý
Yes o
No
o
Yes ý
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ý
International Financial Reporting Standards as issued
by the International Accounting Standards Board o
Other o
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
ý
Yes o
No
ý
Yes o
No
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
o
Item 17 o
Item 18
o
Yes ý
No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
o
Yes o
No
Table of Contents
TABLE OF CONTENTS
PART I
ITEM 1
ITEM 2
ITEM 3
ITEM 4
ITEM 4A.
ITEM 5
ITEM 6
ITEM 7
ITEM 8
ITEM 9
ITEM 10
ITEM 11
ITEM 12
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13
ITEM 14
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
ITEM 15
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
CONTROLS AND PROCEDURES
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
CORPORATE GOVERNANCE
MINE SAFETY DISCLOSURE
ITEM 17
ITEM 18
ITEM 19
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
PART III
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Unless the context otherwise requires, references in this annual report on Form 20-F to:
CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F
•
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•
•
•
•
•
•
•
•
•
•
"active buyers" in a given period are to user accounts that confirmed one or more orders on the relevant marketplace in that period, regardless of
whether or not the buyer and seller settle the transaction;
"active sellers" in a given period are to seller accounts (representing storefronts) that had one or more orders confirmed by a buyer on the relevant
marketplace in that period and that were active at the end of the period, regardless of whether the buyer or seller settle the transaction;
"ADSs" are to the American depositary shares, each of which represents one ordinary share;
"Alipay" are to Alipay.com Co., Ltd., a company with which we have a long-term contractual relationship and is a wholly-owned subsidiary of Ant
Financial Services or, where the context requires, its predecessor entities. We do not have any interest or control over either Ant Financial Services
or Alipay;
"Alipay annual active users" are to Alipay user accounts with one or more successful transactions during the past twelve months;
"Ant Financial Services" are to Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. (formerly referred to as Small and Micro
Financial Services Company), a company organized under the laws of the PRC;
"Cainiao Network" are to Cainiao Smart Logistics Network Limited, an affiliate in which we own approximately 47% equity interest as of
March 31, 2016, together with its subsidiaries, including Cainiao Network Technology Co., Ltd.;
"China" and the "PRC" are to the People's Republic of China, excluding, for the purposes of this annual report only, Taiwan and the special
administrative regions of Hong Kong and Macau;
"China retail marketplaces" are to Taobao Marketplace, Tmall and Juhuasuan, collectively. Promotional slots on Juhuasuan may only be purchased
by Taobao Marketplace and Tmall merchants, and transactions from traffic originating on Juhuasuan are completed on the merchants' storefronts on
Taobao Marketplace or Tmall. For this reason, depending on the context, we may refer only to Taobao Marketplace and Tmall when discussing
certain aspects of our China retail marketplaces business;
"GMV" are to the value of confirmed orders of products and services on our marketplaces, regardless of how, or whether, the buyer and seller settle
the transaction. Unless otherwise stated, GMV in reference to our marketplaces includes only GMV transacted on our China retail marketplaces.
GMV generated from traffic through Juhuasuan is recorded as either Taobao Marketplace GMV or Tmall GMV depending on which of these two
marketplaces the transaction is completed. Our calculation of GMV for our China retail marketplaces includes shipping charges paid by buyers to
sellers. As a prudential matter aimed at eliminating any influence on our GMV of potentially fraudulent transactions, we exclude from our
calculation of GMV transactions in certain product categories over certain amounts and transactions by buyers in certain product categories over a
certain amount per day. The translation of annual GMV in RMB for the year ended March 31, 2016 into U.S. dollar amount represents the sum of
GMV in U.S. dollars reported for the quarters ended June 30, September 30, and December 31, 2015 and March 31, 2016, each converted from the
RMB amounts at the exchange rate as of the end of each relevant quarter;
"ISVs" are to independent software vendors;
"mobile GMV" are to that portion of GMV generated by orders that were confirmed using a mobile app or mobile browser;
"mobile MAUs" in a given month are to the number of unique mobile devices that were used to visit or access certain of our mobile applications at
least once during that month;
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
"mobile monetization rate" are to mobile revenue from China commerce retail expressed as a percentage of mobile GMV for a given period;
"mobile revenue" are to that portion of revenue generated by online marketing services delivered on a mobile app or mobile browser, and
commissions on mobile GMV settled through Alipay with merchants, as captured by our online auction system, real-time bidding system and other
settlement systems;
"monetization rate" are to revenue from China commerce retail expressed as a percentage of GMV for a given period;
"orders" are to each confirmed order from a transaction between a buyer and a seller for products and services on our China retail marketplaces,
even if such order includes multiple items, during the specified period, whether or not the transaction is settled;
"retail marketplaces" are to Taobao Marketplace, Tmall, Juhuasuan and AliExpress, collectively;
"RMB" and "Renminbi" are to the legal currency of China;
"SMEs" are to small and medium-sized enterprises;
"SoftBank" are to SoftBank Group Corp. (formerly known as SoftBank Corp. before July 2, 2015), SBBM Corporation and SB China Holdings
Pte Ltd., collectively;
"tier 1 and tier 2 cities" are to 28 cities in China, as categorized by AliResearch, our research division. Based on national divisions of administrative
areas in China as of the end of 2014, AliResearch categorizes over 2,200 cities, city-level regions and counties in China into six tiers, based on
online shopping potential composite index, which takes into account GDP, population, retail sales of consumer goods, household disposable
income, and number of Internet users;
"variable interest entities" are to our variable interest entities that are 100% owned by PRC citizens or by PRC entities owned by PRC citizens,
where applicable, that hold the Internet content provider licenses, or ICP licenses, or other business operation licenses or approvals, and generally
operate the various websites for our Internet businesses or other businesses in which foreign investment is restricted or prohibited, and are
consolidated into our consolidated financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries;
"we," "us," "our company" and "our" are to Alibaba Group Holding Limited and its consolidated subsidiaries and its affiliated consolidated entities,
including our variable interest entities and their subsidiaries;
"wholesale marketplaces" are to 1688.com and Alibaba.com, collectively;
"Yahoo" are to Yahoo! Inc. and Aabaco Holdings Hong Kong Limited (formerly known as Yahoo! Hong Kong Holdings Limited), collectively; and
"US$," "dollars" and "U.S. dollars" are to the legal currency of the United States.
Our reporting currency is the Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars for the convenience of the reader.
Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.4480 to US$1.00, the exchange rate set forth in the H.10 statistical
release of the Federal Reserve Board on March 31, 2016. We make no representation that the Renminbi 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. On May 20, 2016, the noon buying rate for
Renminbi was RMB6.5485 to US$1.00.
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FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties, including statements based on our current
expectations, assumptions, estimates and projections about us, our industry and the regulatory environment in which we and companies integral to our ecosystem
operate. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the "safe harbor"
provision under Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These
statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially
different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases
such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "potential," "continue," "is/are likely to" or other similar expressions.
The forward-looking statements included in this annual report relate to, among others:
•
•
•
•
•
•
•
•
our growth strategies;
our future business development, results of operations and financial condition;
trends in online and mobile commerce, both globally and in the PRC;
competition in our industry;
fluctuations in general economic and business conditions in China and globally;
expected changes in our revenues and certain cost and expense items and our operating margins;
the regulatory environment in which we and companies integral to our ecosystem operate; and
assumptions underlying or related to any of the foregoing.
The global and PRC Internet, retail, wholesale, online and mobile commerce, media and entertainment, cloud computing and data industries market may not
grow at the rates projected by market data, or at all. The failure of these industries or markets to grow at the projected rates may have a material adverse effect on
our business, financial condition and results of operations and the market price of our ADSs. If any one or more of the assumptions underlying the market data
turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking
statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual
report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or
to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we have referred to in this annual report completely
and with the understanding that our actual future results may be materially different from what we expect.
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ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not Applicable.
ITEM 3 KEY INFORMATION
A. Selected Financial Data
The selected consolidated statements of operations data for the years ended March 31, 2014, 2015 and 2016, and the selected consolidated balance sheet data as
of March 31, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected
consolidated statements of operations data for the years ended March 31, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2012,
2013 and 2014 have been derived from our audited consolidated financial statements not included in this annual report. Our financial statements have been
prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.
The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction
with our consolidated financial statements and related notes and "Item 5. Operating and Financial Review and Prospects," both of which are included elsewhere in
this annual report.
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
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Table of Contents
Consolidated Statements of Operations Data:
2012
RMB
2013
RMB
Year ended March 31,
2014
RMB
2015
RMB
2016
RMB
US$
(in millions, except per share data)
Revenue
China commerce
International commerce
Cloud computing
Others
Total
Cost of revenue
Product development expenses
Sales and marketing expenses
General and administrative expenses (1)
Amortization of intangible assets
Impairment of goodwill and intangible assets
Yahoo TIPLA amendment payment (2)
Income from operations
Interest and investment income, net
Interest expense
Other income, net
Income before income tax and share of results of equity
29,167
4,160
650
540
34,517
45,132
4,851
773
1,748
52,504
62,937
6,486
1,271
5,510
76,204
84,321
7,629
3,019
6,174
101,143
13,077
15,637
1,183
3,765
468
515
958
108
20,025
15,686
(6,554) (9,719) (13,369) (23,834) (34,355) (5,328)
(5,093) (10,658) (13,788) (2,138)
(2,897) (3,753)
(8,513) (11,307) (1,753)
(4,545)
(3,058) (3,613)
(9,205) (1,428)
(7,800)
(4,218)
(2,211) (2,889)
(455)
(2,931)
(2,089)
(315)
(130)
(71)
(455)
(175)
(44)
(175)
(155)
(135)
—
5,015
258
(68) (1,572)
327
(3,487) —
24,920
10,751
1,648
39
(2,195)
2,429
894
—
23,135
9,455
(2,750)
2,486
—
29,102
52,254
(1,946)
2,058
—
4,513
8,104
(301)
319
investees
5,532
10,112
26,802
32,326
Income tax expenses
Share of results of equity investees
Net income
Net (income) loss attributable to noncontrolling interests
Net income attributable to Alibaba Group Holding Limited
Accretion of convertible preference shares (3)
Dividends accrued on convertible preference shares (3)
Net income attributable to ordinary shareholders
Earnings per share/ADS attributable to ordinary
shareholders:
Basic
Diluted
Weighted average number of shares used in computing
earnings per share:
Basic
Diluted
Supplemental information: (4)
Non-GAAP EBITDA
Non-GAAP net income
Non-GAAP diluted EPS
Free cash flow
(842) (1,457)
(6)
(25)
(3,196)
(203)
(6,416)
(1,590)
4,665
8,649
23,403
24,320
(437)
(117)
(88)
8,532
23,315
24,261
4,228
—
—
4,228
(17)
(111)
(31)
(208)
8,404
23,076
24,149
(59)
81,468
12,635
(8,449) (1,310)
(269)
(1,730)
11,056
27
11,083
—
—
11,083
71,289
171
71,460
(15) —
(97) —
71,460
1.71
1.67
3.66
3.57
10.61
10.00
10.33
9.70
29.07
27.89
4.51
4.33
2,479
2,522
2,294
2,389
2,175
2,332
2,337
2,500
2,458
2,562
7,274
6,452
2.38
8,752
16,607
13,869
5.76
19,745
30,731
28,274
12.09
32,269
40,753
34,981
13.97
48,121
52,340
42,741
16.75
51,279
8,117
6,629
2.60
7,953
(1)
(2)
In fiscal year 2014, these expenses included an equity-settled donation expense of RMB1,269 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to
a non-profit organization designated by Jack Ma and Joe Tsai.
We entered into the Yahoo TIPLA in October 2005, pursuant to which we paid royalty fees to Yahoo. We and Yahoo amended the existing TIPLA in September 2012, pursuant to
which we made a lump sum payment in the amount of US$550 million.
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(3)
(4)
Upon the completion of our initial public offering in September 2014, all of our then outstanding convertible preference shares were converted into ordinary shares.
See "Non-GAAP Measures" below.
Non-GAAP Measures
We use non-GAAP EBITDA, non-GAAP net income, non-GAAP diluted EPS and free cash flow, each a non-GAAP financial measure, in evaluating our
operating results and for financial and operational decision-making purposes.
We believe that non-GAAP EBITDA, non-GAAP net income and non-GAAP diluted EPS help identify underlying trends in our business that could otherwise
be distorted by the effect of certain income or expenses that we include in income from operations, net income and diluted EPS. We believe that non-GAAP
EBITDA, non-GAAP net income and non-GAAP diluted EPS provide useful information about our core operating results, enhance the overall understanding of our
past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-
making.
We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our
business that can be used for strategic corporate transactions, including investing in our new business initiatives, making strategic investments and acquisitions and
strengthening our balance sheet.
Non-GAAP EBITDA, non-GAAP net income, non-GAAP diluted EPS and free cash flow should not be considered in isolation or construed as an alternative
to income from operations, net income, diluted EPS, cash flows or any other measure of performance or as an indicator of our operating performance. These non-
GAAP financial measures presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate
similarly titled measures differently, limiting their usefulness as comparative measures to our data.
Non-GAAP EBITDA represents net income before (i) interest and investment income, net, interest expense, other income, net, income tax expenses and share
of results of equity investees, (ii) certain non-cash expenses, consisting of share-based compensation expense, amortization, depreciation, impairment of goodwill
and intangible assets as well as (iii) one-time expense items consisting of the Yahoo TIPLA amendment payment and an equity-settled donation expense that we do
not believe are reflective of our core operating performance during the periods presented.
Non-GAAP net income represents net income before share-based compensation expense, amortization, impairment of goodwill, intangible assets and
investments, gain on deemed disposals/disposals/revaluation of investments, amortization of excess value receivable arising from the restructuring of commercial
arrangements with Ant Financial Services, and one-time expense items relating to the Yahoo TIPLA amendment payment, an equity-settled donation expense, the
expenses relating to the sale of shares by existing shareholders in our initial public offering, charge for financing-related fees as a result of early repayment of bank
borrowings and others.
Non-GAAP diluted EPS represents non-GAAP net income attributable to ordinary shareholders divided by the weighted average number of shares outstanding
during the periods on a diluted basis, including accounting for the effects of the assumed conversion of convertible preference shares prior to our initial public
offering in September 2014.
Free cash flow represents net cash provided by operating activities as presented in our consolidated cash flow statement less purchases of property and
equipment and intangible assets (excluding acquisition of land use rights and construction in progress), and adjusted for changes in loan receivables relating to
micro loans of our SME loan business (which we transferred to Ant Financial Services in February 2015), the Yahoo TIPLA amendment payment and others. We
present the adjustment for changes in loan receivables because such receivables are reflected under cash flow from operating activities, whereas the secured
borrowings and other bank borrowings used to finance them are reflected under cash flows from financing activities, and accordingly, the adjustment is made to
show cash flows from operating activities net of the effect of changes in loan receivables.
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The following table sets forth a reconciliation of our net income to non-GAAP EBITDA for the periods indicated:
2012
2013
RMB RMB
2014
RMB
2015
RMB
2016
RMB
US$
Year ended March 31,
(in millions)
Net income
Less: Interest and investment income, net
Add: Interest expense
Less: Other income, net
Add: Income tax expenses
Add: Share of results of equity investees
Income from operations
Add: Share-based compensation expense
Add: Amortization of intangible assets
Add: Depreciation and amortization of property and equipment
4,665
(258)
68
(327)
842
25
5,015
1,254
155
8,649
1,572
23,403
24,320
2,195
2,750
71,289
(894) (2,429) (2,486)
11,056
(39) (1,648) (9,455) (52,254) (8,104)
301
(319)
1,310
269
4,513
2,494
455
1,946
(2,058)
8,449
1,730
29,102
16,082
2,931
3,196
203
24,920
2,844
315
6,416
1,590
23,135
13,028
2,089
1,457
6
10,751
1,259
130
and land use rights
Add: Impairment of goodwill and intangible assets
Add: Yahoo TIPLA amendment payment
Add: Equity-settled donation expense
Non-GAAP EBITDA
715
135
—
—
7,274
805
175
3,487
—
16,607
1,339
44
—
1,269
30,731
2,326
175
—
—
40,753
3,770
455
—
—
52,340
584
71
—
—
8,117
The following table sets forth a reconciliation of our net income to non-GAAP net income for the periods indicated:
Net income
Add: Share-based compensation expense
Add: Amortization of intangible assets
Add: Impairment of goodwill, intangible assets and investments
Less: Gain on deemed disposals/disposals/ revaluation of
2012
2013
RMB RMB
2014
RMB
2015
RMB
2016
RMB
US$
Year ended March 31,
(in millions)
4,665
1,254
155
399
8,649
1,259
130
420
23,403
2,844
315
163
24,320
13,028
2,089
1,032
71,289
16,082
2,931
2,319
11,056
2,494
455
360
investments and others
(21)
(76)
(384) (6,715) (50,144) (7,777)
Add: Amortization of excess value receivable arising from the
restructuring of commercial arrangements with Ant Financial
Services
Add: Yahoo TIPLA amendment payment
Add: Equity-settled donation expense
Add: Expenses relating to the sale of shares by existing
—
—
—
—
3,487
—
—
—
1,269
166
—
—
264
—
—
41
—
—
shareholders at initial public offering
—
—
—
231
—
—
Add: One-time charge for financing-related fees as a result of
early repayment of bank borrowings
Non-GAAP net income
—
6,452
—
13,869
664
28,274
830
34,981
—
42,741
—
6,629
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The following table sets forth a reconciliation of our diluted EPS to non-GAAP diluted EPS for the periods indicated:
Year ended March 31,
2012
2013
RMB RMB
2014
RMB
2015
RMB
2016
RMB
US$
(in millions, except per share data)
Net income attributable to ordinary shareholders
4,228
8,404
23,076
24,149
71,460
11,083
Add: Reversal of accretion upon assumed conversion of
convertible preference shares
—
17
31
15
—
—
Add: Dividend eliminated upon assumed conversion of
convertible preference shares
—
111
208
97
—
—
Less: Dilution effect on earnings arising from option plans
operated by a subsidiary
(7) —
—
—
—
—
Net income attributable to ordinary shareholders for computing
diluted EPS
Add: Non-GAAP adjustments to net income (1)
Non-GAAP net income attributable to ordinary shareholders for
computing non-GAAP diluted EPS
Weighted average number of shares on a diluted basis
Diluted EPS (2)
Add: Non-GAAP adjustments to net income per share (3)
Non-GAAP diluted EPS (4)
4,221
1,787
8,532
5,220
23,315
4,871
24,261
10,661
11,083
71,460
(28,548) (4,427)
6,008
2,522
1.67
0.71
2.38
13,752
2,389
3.57
2.19
28,186
2,332
10.00
2.09
34,922
2,500
9.70
4.27
42,912
2,562
27.89
(11.14)
5.76
12.09
13.97
16.75
6,656
4.33
(1.73)
2.60
(1)
(2)
(3)
(4)
See the table above regarding the reconciliation of net income to non-GAAP net income for more information of these non-GAAP adjustments.
Diluted EPS is derived from net income attributable to ordinary shareholders for computing diluted EPS divided by weighted average number of shares on a diluted basis.
Non-GAAP adjustments to net income per share is derived from non-GAAP adjustments to net income divided by weighted average number of shares on a diluted basis.
Non-GAAP diluted EPS is derived from non-GAAP net income attributable to ordinary shareholders for computing non-GAAP diluted EPS divided by weighted average number of
shares on a diluted basis.
The following table sets forth a reconciliation of net cash provided by operating activities to free cash flow for the periods indicated:
Net cash provided by operating activities
Less: Purchase of property and equipment and intangible assets
(excluding land use rights and construction in progress)
Add: Changes in loan receivables, net and others
Add: Yahoo TIPLA amendment payment
Free cash flow
5
Year ended March 31,
2012
2013
RMB RMB
2014
RMB
2015
RMB
2016
RMB
US$
(in millions)
9,275
14,476
26,379
41,217
56,836
8,815
(749) (1,046) (3,285) (4,770) (5,438)
226
(119)
—
8,752
11,674
—
48,121
9,175
—
32,269
2,828
3,487
19,745
—
51,279
(843)
(19)
—
7,953
Table of Contents
Consolidated Balance Sheet Data:
2012
RMB
2013
RMB
Cash and cash equivalents and short-term investments
Investment securities and investment in equity investees (1)
Property and equipment, net
Goodwill and intangible assets
Total assets
Current bank borrowings
Secured borrowings
Non-current bank borrowings
Unsecured senior notes
Redeemable preference shares
Total liabilities
Convertible preference shares (2)
Total Alibaba Group Holding Limited shareholders' equity
(deficits)
Total equity (3)
21,744
2,483
2,463
11,791
47,210
1,283
—
—
—
—
12,797
—
31,488
34,383
As of March 31,
2015
RMB
2014
RMB
(in millions)
43,632
22,131
5,581
13,699
111,549
1,100
9,264
30,711
—
—
70,731
10,284
122,341
52,146
9,139
48,508
255,434
1,990
—
1,609
48,994
—
97,363
—
2016
RMB
US$
111,518
125,031
13,629
87,015
364,450
4,304
—
1,871
51,596
—
114,561
—
17,295
19,390
2,114
13,495
56,521
667
—
290
8,002
—
17,767
—
32,686
2,426
3,808
11,628
63,786
3,350
2,098
22,462
—
5,191
52,740
10,447
(24) 29,338
30,417
513
145,439
157,413
216,987
249,539
33,652
38,700
(1)
(2)
(3)
Includes both current and non-current investment securities and investment in equity investees.
Upon the completion of our initial public offering in September 2014, all of our then outstanding convertible preference shares were converted into ordinary shares.
The decrease from March 31, 2012 to March 31, 2013 was primarily due to the repurchase of our ordinary shares from Yahoo in September 2012 and the privatization of
Alibaba.com, partially offset by the issuance of ordinary shares to finance the repurchase. The increase from March 31, 2014 to March 31, 2015 was primarily due to the issuance of
our ordinary shares in connection with our initial public offering in September 2014 and net income for fiscal year 2015.
Selected Operating Data
GMV
The following chart sets forth the GMV transacted on our China retail marketplaces and mobile GMV as a percentage of GMV for the periods indicated:
GMV (1)
Taobao Marketplace GMV
Tmall GMV
Total GMV
Mobile GMV (as a percentage of total GMV)
Jun. 30,
2014
Sep. 30,
2014
Three months ended
Jun. 30,
Mar. 31,
2015
2015
Sep. 30,
Dec. 31,
2014
2015
(in billions of RMB, except percentages)
Dec. 31,
2015
Mar. 31,
2016
342
159
501
33%
380
176
556
36%
494
293
787
42%
381
219
600
51%
427
246
673
55%
438
275
713
62%
563
401
964
68%
449
293
742
73%
(1)
GMV generated from traffic through Juhuasuan is recorded as either Taobao Marketplace GMV or Tmall GMV depending on which of these two marketplaces the transaction
is completed.
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Annual Active Buyers
The following chart sets forth the number of active buyers on our China retail marketplaces for the periods indicated:
Annual active buyers
279
307
334
Jun. 30,
2014
Sep. 30,
2014
Dec. 31,
2014
Twelve months ended
Jun. 30,
Mar. 31,
2015
2015
(in millions)
350
367
Sep. 30,
2015
Dec. 31,
2015
Mar. 31,
2016
386
407
423
Mobile
The following charts set forth the mobile GMV, mobile revenue, mobile monetization rates realized and mobile MAUs in respect of our China retail
marketplaces for the periods indicated:
China retail marketplaces:
GMV
Mobile GMV
as a percentage of GMV
Revenue
Mobile revenue
as a percentage of revenue
Monetization rate
Mobile monetization rate
Jun 30,
2014
Sep 30,
2014
Dec 31,
2014
Three months ended
Jun 30,
2015
Mar 31,
2015
Sep 30,
2015
Dec 31,
2015
Mar 31,
2016
(in millions of RMB, except percentages)
500,916
164,428
33%
12,639
2,454
19%
2.52%
1.49%
555,666
199,054
36%
12,769
3,719
29%
2.30%
1.87%
787,047
326,889
42%
21,275
6,420
30%
2.70%
1.96%
600,092
303,772
51%
13,049
5,247
40%
2.17%
1.73%
673,198
370,578
55%
15,712
7,987
51%
2.33%
2.16%
712,933
440,113
62%
17,267
10,520
61%
2.42%
2.39%
964,317
651,139
68%
28,714
18,746
65%
2.98%
2.88%
741,937
541,024
73%
18,340
13,084
71%
2.47%
2.42%
Mobile MAUs
Revenue per Active Buyer / Mobile Revenue per Mobile MAU
Month ended
Jun 30,
2014
Sep 30,
2014
Dec 31,
2014
Mar 31,
2015
Jun 30,
2015
Sep 30,
2015
Dec 31,
2015
Mar 31,
2016
188
217
265
(in millions)
289
307
346
393
410
The following chart sets forth annual China commerce retail revenue per annual active buyer and annualized mobile revenue per mobile MAU from China
commerce retail for the periods indicated:
Annual China commerce retail revenue per annual
active buyer (1)
Mobile revenue per mobile MAU from China
commerce retail — annualized (2)
Jun 30,
2014
Sep 30,
2014
Dec 31,
2014
Twelve months ended
Jun 30,
Mar 31,
2015
2015
(in RMB)
Sep 30,
2015
Dec 31,
2015
Mar 31,
2016
168
166
168
171
171
174
184
189
27
39
52
62
76
87
108
123
(1)
(2)
Annual China commerce retail revenue per annual active buyer for each of the above periods is calculated by dividing the China commerce retail revenue for the previous twelve
months by the annual active buyers for the same period.
Mobile revenue per mobile MAU from China commerce retail, annualized is calculated by dividing mobile revenue from China commerce retail for the previous twelve months by
the mobile MAUs at the end of the same period.
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Exchange Rate Information
Most of our revenues and expenses are denominated in Renminbi. This annual report contains translations of RMB amounts into U.S. dollars at specific rates
solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were
made at a rate of RMB6.4480 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2016. We make no
representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at
the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB
into foreign exchange and through restrictions on foreign trade. On May 20, 2016, the noon buying rate was RMB6.5485 to US$1.00.
The following table sets forth, for the periods indicated, information concerning exchange rates between the RMB and the U.S. dollar based on the exchange
rates set forth in the H.10 statistical release of the Federal Reserve Board.
Period
2011
2012
2013
2014
2015
November
December
2016
January
February
March
April
May (through May 20)
Period end
Noon buying rate
Average (1)
Low
(RMB per US$1.00)
High
6.2939
6.2301
6.0537
6.2046
6.4778
6.3883
6.4778
6.5752
6.5525
6.4480
6.4738
6.5485
6.4475
6.2990
6.1412
6.1704
6.2869
6.3640
6.4491
6.5726
6.5501
6.5027
6.4754
6.5124
6.6364
6.3879
6.2438
6.2591
6.4896
6.3945
6.4896
6.5932
6.5795
6.5500
6.5004
6.5485
6.2939
6.2221
6.0537
6.0402
6.1870
6.3180
6.3883
6.5219
6.5154
6.4480
6.4571
6.4738
(1)
Annual averages are calculated using the average of the rates on the last business day of each month during the relevant year. Monthly averages are calculated using the average of
the daily rates during the relevant month.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business and Industry
Maintaining the trusted status of our ecosystem is critical to our success, 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 and results of operations.
We have established a strong brand name and reputation for our ecosystem in China. Any loss of trust in our ecosystem or platforms could harm the value of
our brand and result in consumers, merchants and other participants reducing their activity level in our ecosystem, which could materially reduce our revenue and
8
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profitability. Our ability to maintain our position as a trusted platform for online and mobile commerce is based in large part upon:
•
•
•
•
•
the reliability and security of our platforms (including the reliability and security of the various service providers on our platforms), as well as the
commitment to high levels of service and data protection by the merchants, developers, logistics providers, service providers and other participants
in our ecosystem;
the quality, breadth and functionality of products, services and functions and the quality, variety and appeal of content available through
our platforms;
the effectiveness and perceived fairness of rules governing our marketplaces and other platforms and overall ecosystem;
the strength of our consumer protection measures; and
our ability to provide reliable and trusted payment and escrow services through our arrangements with Alipay.
Increased investments in our business, strategic acquisitions and investments as well as our focus on long-term performance and maintaining the health of our
ecosystem may negatively affect our margins and our net income.
We have experienced significant growth in our profit margins and net income. Our operating profit and net income grew 26% and 193%, respectively, from
fiscal year 2015 to fiscal year 2016. However, we cannot assure you that we will be able to maintain our growth at these levels, or at all. Our operating profit
declined by 7% and net income only grew 4% from fiscal year 2014 to fiscal year 2015. Consistent with our focus on the long-term interests of our ecosystem
participants, we may take actions that fail to generate positive short-term financial results, and we cannot assure you that these actions will produce long-term
benefits.
We continue to increase our spending and investment in our business to support our future growth, including in improving our technological infrastructure and
cloud computing capacities. All of these initiatives are crucial to the success of our business but will have the effect of increasing our costs and lowering our
margins and profit, and such effect may be significant, at least in the short-term. Moreover, many of our business initiatives emphasize expanding our user base and
enhancing user experience, rather than initially prioritizing monetization.
Furthermore, we have made, and intend to continue to make, strategic investments and acquisitions to expand our user base and geographic coverage and add
complementary offerings and technologies to further strengthen our ecosystem. For example, we expect to continue to make strategic investments and acquisitions
relating to entertainment, international expansion, cloud computing and big data, logistics services, local commerce, category expansion, e-commerce
marketplaces, healthcare and new technologies. Our strategic investments and acquisitions may adversely affect our future financial results, including by
decreasing our margins and net income. For example, our acquisitions, including those of UCWeb and AutoNavi, have negatively impacted our financial results
historically. We also believe that our expansion into the mobile media and entertainment sectors, including our recent acquisition of Youku Tudou and our
international expansion through our recent acquisition of a controlling stake in Lazada, are important to our overall business but will have a negative effect on our
financial results, at least in the short-term. In addition, the performance of minority investments we make that are accounted for under the equity method
investments may also adversely affect our net income. There can be no assurance that we will be able to sustain our net income growth rates or our margins.
9
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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, mainly from Chinese and global Internet companies as well as certain offline retailers and e-commerce players,
including those that specialize in a limited number of product categories. We compete to:
•
•
•
•
•
•
•
attract, engage and retain consumers based on the variety and value of products and services listed on our marketplaces, the engagement of media
and entertainment content available on our platforms and the overall user experience of our products and services;
attract and retain merchants based on our size and on the size and the engagement of consumers on our platforms and the effectiveness of our
products and services to help them build brand awareness and engagement, acquire and retain customers, complete transactions and enhance
operating efficiency;
compete to attract and retain marketers, publishers and demand side platforms operated by agencies based on the reach and engagement of our
properties, the depth of our consumer data insights and the effectiveness of our branding and marketing solutions;
attract other participants of our ecosystems based on access to business opportunities created by the large scale of economic activity on our
platforms, as well as tools and technologies that help them operate and grow their businesses;
optimize the usefulness of the data and technologies we provide, including data-enabled customer relationship management tools, marketing data
and data science, media ecosystem for branding, cloud computing services, omni-channel solutions, the availability of supporting services, including
payment settlement and logistics services, and the quality of our customer service;
thrive in new industries and sectors as we acquire new businesses and expand, bringing us into competition with major players in these and other
industries and sectors, such as e-commerce service providers in China's healthcare industry and media and entertainment providers; and
attract motivated and effective employees, including engineers and product developers who serve critical functions in the development of our
products and our ecosystem.
In addition, we face increasing competition in the diversified mobile commerce industry for mobile users in China from established as well as emerging mobile
commerce platforms.
Our ability to compete depends on a number of other factors as well, some of which may be out of our control, including:
•
•
•
•
•
the timely introduction and market acceptance of the services we offer, compared to those of our competitors;
our ability to innovate and develop new technologies;
our ability to maintain and enhance our leading position in retail commerce in China;
our ability to benefit from new business initiatives; and
alliances, acquisitions or consolidations within the Internet industry that may result in stronger competitors.
We face uncertainties and may fail to anticipate competitive conditions as we expand our operations in overseas markets, including, for example, through our
recent acquisition of a controlling stake in Lazada. If we are not able to compete effectively, the GMV transacted on our marketplaces and the user engagement
level and activity level on our platforms may decrease significantly, which could materially and adversely affect our business, financial condition and results of
operations as well as our brand.
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We may not be able to maintain and improve the network effects of our ecosystem, which could negatively affect our business and prospects.
Our ability to maintain a healthy and vibrant ecosystem that creates strong network effects among consumers, merchants 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, including consumers, merchants, brands, service
providers and others;
provide tools and services that meet the evolving needs of consumers and merchants;
provide a wide range of high-quality product, service and content offerings to consumers;
provide merchants with a high level of traffic flow with strong commercial intent and effective online marketing services;
further enhance the attractiveness of our mobile platform;
arrange secure and trusted payment settlement and escrow services;
coordinate fulfillment and delivery services with third-party logistics and delivery companies;
attract and retain third-party service providers who are able to provide quality services on commercially reasonable terms to our merchants;
maintain the quality of our customer service; and
continue adapting to the changing demands of the market.
In addition, changes we may make to enhance and improve our ecosystem and balance the needs and interests of the various participants on our ecosystem 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 ecosystem, fewer consumers, merchants and other participants may visit our marketplaces, or
they may spend less time, mind share and resources on our websites and 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, promote and retain people in leadership positions in our organization who share our culture, values and mission;
failure to execute a management succession plan to replace our current generation of management leaders;
the increasing size, geographic coverage and cultural diversity of our business and workforce;
challenges of effectively incentivizing and motivating employees, including those who have gained a substantial amount of personal wealth related
to share-based incentives;
competitive pressures to move in directions that may divert us from our mission, vision and values;
the continued challenges of an ever-changing business environment;
the pressure from the public markets to focus on short-term results instead of long-term value creation;
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•
•
the increasing need to develop expertise in new areas of business that affect us; and
the integration of new personnel and businesses from acquisitions.
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 business, financial condition, results of
operations and prospects could be materially and adversely affected.
We may not be able to maintain or grow our revenue or our business.
We primarily derive our revenue from online marketing services, commissions based on transaction value derived from certain of our marketplaces, fees from
the sale of memberships on our wholesale marketplaces and cloud service fees, and we have experienced significant growth in revenue in recent years. In
particular, our revenue grew 45% from fiscal year 2014 to fiscal year 2015 and 33% from fiscal year 2015 to fiscal year 2016. Our ability to continue to generate
and grow our revenue depends on a number of factors. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting
Our Results of Operations — Our Ability to Create Value for Our Users and Generate Revenue" and "— Our Monetization Model."
Our future revenue growth also depends on our ability to expand into new geographic regions, including our expansion into international markets, and grow
our other businesses, including our cloud computing business and the businesses we have acquired or invested in and new business initiatives we may explore in
the future. In particular, we face risks associated with expanding into sectors or geographies in which we have limited or no experience. For example, as we expand
our entertainment business, we may be unable to produce or license quality content on commercially reasonable terms or at all, fail to anticipate or keep up with
changes in user preferences, user behavior and technological developments or fail to gain access to content distribution channels. In addition, as we expand into the
online video industry following the acquisition of Youku Tudou, we may not be able to acquire and retain users, attract marketers to purchase online marketing
services on our video websites, obtain professionally produced content at competitive prices or at all, encourage more user-generated content, or grow user
acceptance and the popularity of our online video content. Our expansion into new sectors and geographic regions will subject us to additional regulatory risks,
such as permit requirements and regulations over content in the PRC. If we are unable to successfully monetize and expand these businesses in our target markets,
our future revenue growth may be adversely affected.
In addition, our revenue growth may slow or our revenues may decline for other reasons, including decreasing consumer spending, increasing competition and
slowing growth of the China retail or China online retail industry and changes in government policies or general economic conditions. In addition, as our revenue
grows to a higher base level, that rate of growth of our revenue has slowed and may further slow in the future.
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.
Through contractual arrangements with us, Alipay provides convenient payment processing and escrow services to us on preferential terms. These services are
critical to our platforms and the development of our ecosystem. In the twelve months ended March 31, 2016, approximately 75% of GMV on our China retail
marketplaces were 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:
•
increasing costs to Alipay, including fees charged by banks to process funds through Alipay, which would also increase our cost of revenues;
12
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•
•
•
•
•
dissatisfaction with Alipay's services or lower use of Alipay by consumers and merchants;
changes to rules or practices applicable to payment card systems that link to Alipay;
breach of customers' personal information and concerns over the use and security of any collected information;
service outages, system failures or failure to effectively scale the system to handle large and growing transaction volumes; and
failure to manage funds accurately or loss of 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 automatic payment from customers' 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 automatic 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.
In addition, Alipay's business is highly regulated. Alipay is required to comply with numerous complex and evolving laws, rules and regulations and faces the
risk of failure to manage its regulatory risks. 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. See "— We and Ant Financial Services
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, 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 and merchants 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 transacted through these systems. We would also no longer have the
benefit of the commercial agreement with Ant Financial Services and Alipay and would likely 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 payments service on acceptable terms or
at all.
We do not control Alipay or its parent entity, Ant Financial Services, over which Jack Ma effectively controls a majority of the voting interests. If conflicts that
could arise between us and Alipay or Ant Financial Services are not resolved in our favor, they could have a negative effect on our ecosystem and materially
and adversely affect our business, financial condition, results of operations and prospects.
Although we rely on Alipay to conduct substantially all of the payment processing and all of the escrow services on our marketplaces, we do not have any
control over Alipay. Alipay provides payment services to us on preferential terms pursuant to our long-term commercial agreement with Ant Financial Services and
Alipay. Following the divestment and subsequent equity holding restructuring related to Ant Financial Services, an entity controlled by Jack Ma, our executive
chairman, became the general partner of Hangzhou Junhan Equity Investment Partnership, or Junhan, a PRC limited partnership, and Junao Equity Investment
Partnership, or Junao, a PRC limited partnership, which are two major equity holders of Alipay's parent, Ant Financial Services. Accordingly, Jack has an
economic interest in Ant Financial Services and is able to exercise the voting power of the major shareholders of Ant Financial Services. We understand that
through the exercise of this voting power, Jack continues to control a substantial majority of the voting interests in Ant Financial Services.
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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 is no assurance that Jack
Ma, in light of his voting control over Alipay's parent, Ant Financial Services, would act in our interest. If we were to lose the preferential terms with Alipay or if
Alipay is unable to successfully manage its business, our ecosystem could be negatively affected, and our business, financial condition, results of operations and
prospects could be materially and adversely affected.
Ant Financial Services also provides other financial services to participants in our ecosystem, including micro-finance services, wealth management, insurance
and credit referencing services, and may provide additional services in the future. Other conflicts of interest between us, on the one hand, and Alipay and Ant
Financial Services, on the other hand, may arise relating to commercial or strategic opportunities or initiatives. Although we and Ant Financial Services have each
agreed to certain non-competition undertakings, we cannot assure you that Ant Financial Services would not pursue opportunities to provide services to our
competitors or other opportunities that would conflict with our interests. Jack Ma may not resolve such 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 Services.
In addition, we grant share-based awards to employees of Ant Financial Services, and Junhan grants share-based awards tied to the value of Ant Financial
Services to our employees. The provision of awards to our employees tied to the value of Ant Financial Services is intended to enhance our strategic and financial
relationship with Ant Financial Services. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and
Transactions Related to Ant Financial Services and its Subsidiaries — Equity-based Award Arrangements." The share-based awards granted by Junhan 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, 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 Services or Alipay, and between us and Jack or Junhan, 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 Services and overlapping user base, events that negatively affect Ant Financial Services 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 Services or any other company integral to the functioning of our ecosystem could also materially harm our reputation as well as our business
and prospects.
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.
The Internet industry is characterized by rapidly changing technology, evolving industry standards, new mobile apps, protocols and technologies, new service
and product introductions, new media and entertainment content — including user-generated content — and changing customer demands. Furthermore, our
competitors are constantly developing innovations in Internet search, online marketing, communications, social networking, entertainment and other services, on
both mobile devices and personal computers, to enhance users' online experience. We continue to invest significant resources in our infrastructure, research and
development and other areas in order to enhance our technology and our existing products, services and content as well as to introduce new high quality products,
services and content that will attract more participants to our platforms. 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 plan. Our failure to innovate and adapt to these changes would
have a material adverse effect on our business, financial condition and results of operations.
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For example, the use of mobile devices to access content and transact on our platforms is developing rapidly, and we may fail to continue to offer superior user
experience in order to increase or maintain the level of mobile engagement on our platforms, or to successfully develop the mobile community. The variety of
technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. If we are unable to
continue to attract significant numbers of new mobile consumers and increase or maintain levels of mobile engagement, our ability to maintain or grow our
business would be materially and adversely affected.
Our business generates and processes a large amount of data, and the improper use or disclosure of such data could harm our reputation as well as have a
material adverse effect on our business and prospects.
Our business, including our cloud computing business, generates and processes a large quantity of personal, transaction, demographic and behavioral data. We
face risks inherent in handling and protecting large volumes of 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;
addressing concerns related to privacy and sharing, safety, security and other factors; and
complying with applicable laws, rules and regulations relating to the collection, use, disclosure or security of personal information, including any
requests from regulatory and government authorities relating to such data.
The PRC regulatory and enforcement regime with regard to data security and data protection is evolving. On July 1, 2015, the National People's Congress
Standing Committee promulgated the National Security Law, or the New National Security Law, which took effect on the same date and replaced the former
National Security Law promulgated in 1993. The New National Security Law covers various types of national security including technology security and
information security. According to the New National Security Law, the state shall ensure that the information system and data in important areas are secure and
controllable. In addition, according to the New National Security Law, the state shall establish national security review and supervision institutions and
mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect national security. In particular, we are
obligated under the New National Security Law to safeguard national security by, for example, providing evidence related to activities endangering national
security, providing convenience and assistance for national security work, and providing necessary support and assistance for national security institutions, public
security institutions as well as military institutions. As such, we may have to provide data to PRC government authorities and military institutions for compliance
with the New National Security Law, which may result in additional expenses to us and subject us to negative publicity which could harm our reputation with users
and negatively affect the trading price of our ADSs. There are uncertainties on how the New National Security Law will be implemented in practice. PRC
regulators, including the MIIT and 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 attention and focus from regulators, as well as attract public scrutiny and attention going forward. This greater
attention, scrutiny and enforcement, including more frequent inspections, 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, our reputation and results of operations could be materially and adversely
affected.
In addition, pursuant to our data sharing agreement with Ant Financial Services and Alipay, which sets forth data security and confidentiality protocols, and
subject to relevant legal requirements and limitations, we have agreed to a broad sharing of data with Ant Financial Services through a data sharing platform that
we own and operate. Cainiao Network, Koubei and Alibaba Pictures have also entered into agreements with us to participate in the data sharing platform. We also
grant expressly limited access to specified data on our data platform to certain other participants in our ecosystem that provide services to merchants and
consumers, such as retail operating
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partners, logistics service providers, mobile app developers, independent software vendors, or ISVs, cloud developers, marketing affiliates and various professional
service providers. These ecosystem participants face the same challenges inherent in handling and protecting large volumes of data. Any systems failure or security
breach or lapse on our part or on the part of any of our ecosystem participants 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.
As we expand our operations, we will be subject to additional laws in other jurisdictions where our merchants, consumers, users, customers and other
participants are located. The laws, rules and regulations of other jurisdictions, such as the United States and Europe, may be at a more mature stage of development,
be more comprehensive and nuanced in their scope, and impose more stringent or conflicting requirements and penalties than those in China, compliance with
which could require significant resources and costs. Our continued expansion into cloud computing services, both within China and overseas, will also increase the
amount of data hosted on our system and increase the number of parties who host data on our system, which will present increased challenges and risks in relation
to data protection and data privacy. Our privacy policies and practices concerning the collection, use and disclosure of user data are posted on our websites. Any
failure, or perceived failure, by us to comply with our posted privacy policies or with any regulatory requirements or privacy protection-related laws, rules and
regulations could result in proceedings or actions against us by governmental entities or others. These proceedings or actions could subject us to significant
penalties and negative publicity, require us to change our business practices, increase our costs and severely disrupt our business.
Our failure to manage the growth of our business and operations could harm us.
Our business has become increasingly complex as its scale, diversity and geographic coverage, as well as that of our workforce, continue to grow. We have
also significantly expanded our headcount, office facilities and infrastructure, and we anticipate that further expansion in certain areas and geographies will be
required. This expansion increases the complexity of our operations and places a significant strain on our management, operational and financial resources. We
must continue to effectively hire, train and manage new employees. If our new hires perform poorly or if we are unsuccessful in hiring, training, managing and
integrating new employees, our business, financial condition and results of operations may be materially harmed.
Moreover, our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. To effectively manage
the expected growth of our operations and personnel, we will need to continue to improve our transaction processing, operational and financial systems, 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. We cannot assure you that we will be able to effectively manage our growth or to
implement all these systems, 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 diverse range of businesses, technologies, services and products in recent years, including investments of
varying sizes in equity investees and joint ventures, and we 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 and alliances. At any given time
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we may be engaged in discussing or negotiating a range of these types of transactions. These transactions involve significant challenges and risks, including:
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difficulties in integrating into our operations the diverse and large number of personnel, operations, products, services, technology, internal controls
and financial reporting of companies we acquire;
disruption of our ongoing business, distraction of our management and employees and increase of our expenses;
loss of skilled professionals as well as established client relationships of the 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 partner or
shareholder, which may prevent us from achieving our strategic goals in such investment;
regulatory requirements and compliance risks as well as publicity risks that we become subject to as a result of acquisitions of businesses in new
industries or geographic areas or otherwise, especially for acquisitions of public companies which are subject to heightened regulatory requirements
and scrutiny;
actual or alleged misconduct 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 investment, which may lead to negative publicity, litigation, government inquiry or investigations against such company or
against us;
unforeseen or hidden liabilities or costs that may adversely affect us following our acquisition of or our investment in such companies;
potential impairment charges or write-offs due to the changes in the fair value of our investments or acquired companies as a result of market
volatility or other reasons that we may or may not control;
regulatory hurdles including in relation to the anti-monopoly and competition laws, rules and regulations of China and other jurisdictions in
connection with any proposed investments and acquisitions, including, in the case of our potential future acquisition of an equity interest in Ant
Financial Services, PRC regulations pertaining to non-bank payment companies;
negative publicity regarding our acquisition and investment activities;
the risk that any of our pending or other future proposed acquisitions does not close; and
challenges in achieving the expected benefits of synergies and growth opportunities in connection with these acquisitions and investments, such as
the inability to realize the expected benefits of the restructuring in August 2014 of our relationship with Alipay and Ant Financial Services.
Our significant acquisition activity has occurred recently, and we have limited experience in integrating major acquisitions. As our acquisition and investment
activity continues at a rapid pace, with a large number and diverse range of target companies, we and our management will continue to face significant challenges,
including unanticipated ones, in integrating these businesses into our existing businesses.
Failure to maintain or improve our technology infrastructure could harm our business and prospects.
We are constantly upgrading our platforms to provide increased scale, improved performance and additional built-in functionality and additional capacity.
Adopting new products and upgrading our ecosystem infrastructure require significant investments of time and resources, including adding new hardware, updating
software and recruiting and training new engineering personnel. Maintaining and improving our technology infrastructure require significant levels of investment.
Any failure to maintain and improve our technology infrastructure could result in unanticipated system disruptions, slower response times, impaired quality of
users' experiences and delays in reporting accurate operating and financial information. For example, on Singles Day, there is significantly higher than normal
activity on our marketplaces that our systems must handle. 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 or platforms, or are unable to maintain and constantly improve our
technology infrastructure to handle our business needs, our business, financial condition, results of operation and prospects, as well as our reputation, could be
materially and adversely affected.
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The successful operation of our business depends upon the performance and reliability of the Internet infrastructure in China and other countries in which
we operate.
Our business depends on the performance and reliability of the Internet infrastructure in China and other countries in which we operate. 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 of China. 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 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. 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 gross margins could be adversely affected. In addition, if Internet access fees or other charges to Internet users increase, our
user traffic may decrease, which in turn may significantly decrease our revenues.
Our ecosystem could be disrupted by network interruptions.
Our ecosystem depends on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer hardware
and our cloud computing services are currently located in China. In addition, a large number of merchants maintain their enterprise resource planning, or ERP, and
customer relationship management, or CRM, systems on our cloud computing platform, which contains substantial quantities of data relating to their accounts,
transaction data, consumer information and other data that enables merchants to operate and manage their businesses. Increasing media and entertainment content
on our marketplaces and website also require additional network capacity and infrastructures 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
content platform. 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, such as an
earthquake, flood or fire, or other unanticipated problems at our facilities or the facilities of Ant Financial Services, Cainiao Network and other participants in our
ecosystem, including power outages, system failures, telecommunications delays or failures, construction accidents, break-ins to information technology systems or
computer viruses, could result in delays or interruptions to our platforms, 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 merchants and other participants in our
ecosystem and subject us to liability, which could materially and adversely affect our business, financial condition and results of operations.
If third-party 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. Cainiao Network operates a 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 marketplaces and our
ecosystem. These interruptions may be due to events that are beyond our control or the control of Cainiao Network or these
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logistics service providers, such as inclement weather, natural disasters, transportation disruptions or labor unrest. These logistics services could also be affected or
interrupted by industry consolidation, insolvency or government shut-downs. The merchants on our marketplaces 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 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 ecosystem could be severely affected. If the
products sold on our marketplaces are not delivered in proper condition, on a timely basis or at shipping rates that marketplace participants are willing to bear, our
business and prospects, as well as our financial condition and results of operations could be materially and adversely affected.
If other third-party service providers on our ecosystem fail to provide reliable or satisfactory services, our business, financial condition and results of
operations may be materially and adversely affected.
In addition to the services provided to our ecosystem by Ant Financial Services, Cainiao Network and logistics service providers, a number of other third-party
participants, including retail operating partners, logistics service providers, mobile app developers, ISVs, cloud developers, marketing affiliates and various
professional service providers, also provide services to users on our platforms, including merchants, brands, consumers and users of our cloud computing services.
To the extent these third-party 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, certain of these third-party services providers on our
ecosystem have access to our user data to a limited extent in order to provide their services. If such third-party participants engage in activities that are negligent,
illegal or otherwise harm the trustworthiness and security of our ecosystem, including the leak or negligent use of data, or users are otherwise dissatisfied with their
service quality, we could suffer reputational harm, even if these activities are not related to, attributable to or caused by us.
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. 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,
which could severely disrupt our business and growth. In particular, Jack Ma, our lead founder, executive chairman and one of our principal shareholders, has been
crucial to the development of our culture and strategic direction.
As our business develops and evolves, it may become difficult for us to continue to retain such 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 ecosystem also require us to hire and retain a wide range of effective 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 as we expand our
business and operations. Competition for talent in the PRC Internet industry is intense, and the availability of suitable and qualified candidates in China 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 is 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.
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Our revenue and net income may be materially and adversely affected by any economic slowdown in China as well as globally.
The success of our business ultimately depends on consumer spending. We currently derive substantially all of our revenue from China and are also expanding
into the international market. As a result, 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 online and mobile commerce. The global economy, markets and levels of consumer spending are influenced by many factors
beyond our control, including consumer perception of current and future economic conditions, political uncertainty, levels of employment, inflation or deflation,
real disposable income, interest rates, taxation and currency exchange rates.
The PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising interest rates and
adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to tighten credit and liquidity. These measures have
contributed to a slowdown of the PRC economy. While the PRC government started easing its monetary policy in 2015, there have been signs of continuing
economic slowdown in China. According to the National Bureau of Statistics of China, China's GDP growth rate was 6.9% in 2015, down from 7.4% in 2014. Any
continuing or worsening slowdown could significantly reduce domestic commerce in China, including through the Internet generally and within our ecosystem.
Although our financial performance is mainly affected by consumer spending, which may not be as adversely affected as other sectors of the economy, 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 consumer spending and therefore adversely affect our business, financial condition and
results of operations.
Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect 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.
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all
attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering,
security breaches or other attacks and similar disruptions that may jeopardize the security of information 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, we may be unable 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, although to date no such attack has resulted in any 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 types of cyber-attacks. Cyber-attacks may target us, our merchants, consumers, users, customers or other
participants, or the communication infrastructure on which we depend. 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. We do not carry cybersecurity
insurance.
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We may not be able to acquire a direct equity ownership interest in Ant Financial Services.
In August 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, to restructure the economic terms of our relationship with Alipay
and Ant Financial Services. The 2014 SAPA provides for future potential equity issuances of up to 33% of equity interest in Ant Financial Services to us in the
event that Ant Financial Services applies for and receives certain PRC regulatory approvals in the future. In addition, in the event of a qualified IPO of Ant
Financial Services or Alipay, if our total ownership of equity interests in Ant Financial Services, if any, has not reached 33%, we would be entitled, at our election,
to receive a one-time payment equal to 37.5% of the equity value, immediately prior to such qualified IPO of Ant Financial Services, as a whole and not just of its
subsidiary Alipay. If we acquire equity interests in Ant Financial Services in an aggregate amount less than the full 33% equity interest, then the percentage of Ant
Financial Services' equity value used to calculate the liquidity event payment will be reduced proportionately. If Ant Financial Services does not receive the
required PRC regulatory approvals mentioned above, we will not be able to acquire a direct equity ownership interest in Ant Financial Services, and we would fail
to benefit from any appreciation in its equity value beyond the date of a qualified IPO of Ant Financial Services or Alipay. Our inability to reap the benefits of any
appreciation in equity value of Ant Financial Services, including in connection with a qualified IPO of Ant Financial Services or Alipay, could represent a
significant missed opportunity that is beyond our control. In addition, if we elect to receive a one-time payment equal to 37.5% of the equity value, immediately
prior to such qualified IPO of Ant Financial Services, it is possible that Ant Financial Services 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 Services and its Subsidiaries — 2014 Restructuring of Our Relationship with Ant Financial Services and Alipay."
Tightening of tax compliance efforts with respect to the revenue or profit generated by our merchants could materially and adversely affect our business,
financial condition and results of operations.
E-commerce in China is still developing, and the PRC government may require operators of marketplaces, such as our company, to assist in the collection of
taxes with respect to the revenue or profit generated by merchants from transactions conducted on their platforms. A significant number of small businesses and
sole proprietors operating businesses through storefronts on Taobao Marketplace may not have completed the required tax registration. PRC tax authorities may
enforce registration requirements that target small businesses or sole proprietors on Taobao Marketplace and may request our assistance in these efforts. As a result,
these merchants may be subject to more stringent tax compliance requirements and liabilities and their business on our marketplaces could suffer or they could
decide to remove their storefronts from our marketplace rather than comply, which could in turn negatively affect us. We may also be requested by tax authorities
to supply information on our merchants, such as transaction records and bank account information, and assist in the enforcement of tax regulations, including the
payment and withholding obligations against our merchants, in which case, we may lose existing merchants and potential merchants might not be willing to open
storefronts on our marketplaces.
Potential heightened enforcement against participants in e-commerce transactions (including imposition of reporting or withholding obligations on operators of
marketplaces with respect to value-added tax of merchants) could have a material adverse effect on our business, financial condition and results of operations.
We have been and may continue to be subject to allegations and lawsuits claiming that items listed and content available on our marketplaces and websites are
pirated, counterfeit or illegal.
We have received in the past, and we anticipate we will receive in the future, communications alleging that items offered, sold or made available through our
online marketplaces and websites by third parties or that we make available through other services, such as our online music platform, infringe third-party
copyrights, trademarks and patents or other intellectual property rights. Although we have adopted measures to verify the authenticity of products sold on our
marketplaces and to minimize potential infringement of third-party intellectual property rights through our intellectual property infringement complaint and take-
down procedures, these
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measures may not always be successful. We have been and may continue to be subject to allegations of civil or criminal liability based on allegedly unlawful
activities carried out by third parties through our online marketplaces. We also have been and may continue to be subject to allegations that we were participants in
or facilitators of such allegedly unlawful activities. For example, in May 2015 we were named as a defendant in a lawsuit filed in the Southern District of
New York by Kering S.A and other plaintiffs, which asserts various claims based on, among other things, the sales of allegedly counterfeit or otherwise trademark
infringing merchandise by merchants on certain of our marketplaces. We have acquired certain companies, such as Youku Tudou and a controlling stake in Lazada,
and may continue to acquire other companies that are or may be subject to allegations and lawsuits regarding infringement of third-party intellectual property or
other rights.
When we receive complaints or allegations regarding infringement or counterfeit goods, we follow procedures we have developed to verify the nature of the
complaint and the relevant facts. We believe these procedures are important for purposes of investigating the allegations in question so that we can ensure
confidence in our marketplace among consumers and merchants; however, these procedures could result in delays in delistings of allegedly infringing product
listings. In the event that alleged counterfeit or infringing products are listed or sold on our marketplaces or our other services, we could face claims relating to such
listings or sales or for our alleged failure to act in a timely or effective manner in response to infringement or to otherwise restrict or limit such sales or
infringement.
We may implement further measures in an effort to strengthen our protection against these potential liabilities that could require us to spend substantial
additional resources and/or experience reduced revenues. In addition, these changes may reduce the attractiveness of our marketplaces and other services to
consumers, merchants and other participants. A customer 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. 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. Moreover, we have received in the past, and may
continue to receive in the future, negative publicity regarding the sales of counterfeit and pirated items on our marketplaces. Each year, in its annual Special
301 Report or Special 301 Out-of-Cycle Review Report, the Office of the U.S. Trade Representative, or USTR, identifies "notorious markets" that reportedly
engage in and facilitate substantial copyright piracy and trademark counterfeiting. In 2008, 2009 and 2010, Alibaba.com, and in 2008, 2009, 2010 and 2011,
Taobao Marketplace, were named as notorious markets. The USTR subsequently removed these marketplaces from its list. However, there is no assurance that the
USTR will not identify these marketplaces or our other businesses as notorious markets in the future. In its December 2015 Out-of-Cycle Review, the USTR
expressed concern about our procedures, citing complaints by rights holders. The USTR did not name any of our marketplaces as notorious markets, but
encouraged us to continue to enhance cooperation with rights holders to address concerns.
In January 2015, the State Administration for Industry and Commerce in China, or SAIC, released a report stating that Taobao Marketplace had the highest
percentage of counterfeit goods among the online marketplaces that it surveyed. Subsequently, in the same month, the SAIC released a self-described "white paper"
discussing perceived failures of our platforms, including an alleged failure to crack down on the sale of counterfeit goods and other alleged illegal activities on our
China retail marketplaces. Although the SAIC withdrew the so-called "white paper" the same day it was released, and later clarified that the document carried no
legal force, continued public perception that counterfeit or pirated items are commonplace on our marketplaces or that we delay the process of removing such
items, even if factually incorrect, could damage our reputation with consumers, harm our business, result in litigation and regulatory pressure or action against us
and diminish the value of our brand name.
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Failure to deal effectively with any fraud perpetrated and fictitious transactions conducted on our marketplaces and other sources of customer dissatisfaction
would harm our business.
We face risks with respect to fraudulent activities on our marketplaces and periodically receive complaints from consumers who may not have received the
goods that they had purchased, as well as complaints from merchants who have not received payment for the goods that a consumer had contracted to purchase.
Although we have implemented various measures to detect and reduce the occurrence of fraudulent activities on our marketplaces, there can be no assurance that
such measures will be effective in combating fraudulent transactions or improving overall satisfaction among our merchants, consumers and other participants.
Additional measures that we take to address fraud could also negatively affect the attractiveness of our marketplaces 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, then 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 such losses although we are not legally obligated to do so. Although we have recourse against our
merchants for any amounts we incur, there is no assurance that we would be able to collect 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.
Moreover, illegal, fraudulent or collusive activities by our employees could also subject us to liability or negative publicity. In the past, 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. Although we dismiss the employees responsible for any such incidents and have implemented internal controls and policies with regard to the review
and approval of merchant accounts, sales activities and other relevant matters, we cannot assure you that such controls and policies will prevent fraud or illegal
activity by our employees or that similar incidents will not occur in the future. Any such illegal, fraudulent or collusive activity could severely damage our brand
and reputation as an operator of trusted marketplaces, which could drive users and consumers away from our marketplaces, and materially and adversely affect our
business, financial condition and results of operations.
In January 2015, the SAIC discussed alleged fraudulent and fictitious transactions on our China retail marketplaces in its self-described "white paper."
Although the SAIC withdrew the so-called "white paper" the same day it was released and later clarified that the document carried no legal force, the negative
publicity and user sentiment generated as a result of this document or other allegations of fraudulent or deceptive conduct on our platforms 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 and diminish the value of our brand names, and materially and adversely affect our business, financial condition
and results of operations.
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 materially and adversely affect our business and prospects.
We process an extremely large number of transactions on a daily basis on our marketplaces, and the high volume of transactions taking place on our
marketplaces and publicity about our business creates the possibility of heightened attention from the public, regulators, the media and our participants. Heightened
regulatory and public concern over consumer protection and consumer safety issues may subject us to additional legal and social
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responsibilities, and may also expose us to increased scrutiny and negative publicity over such issues, due to the large number of transactions that take place on our
platforms and the increasing scope of our overall business operations. In addition, 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 ecosystem 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. Corporate transactions we or
related parties undertake, such as our recent acquisition of the media business of SCMP Group Limited, which includes the South China Morning Post newspaper,
may also subject us to increased media exposure and public scrutiny in Hong Kong, China and internationally. Moreover, as our business expands and grows, both
organically and through acquisitions of and investments in other businesses, domestically and internationally, we will be exposed to heightened regulatory scrutiny
in jurisdictions where we already operate as well as in new jurisdictions in areas including consumer safety, public health and public trust. There is no assurance
that we would not become a target for regulatory or public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation 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.
We and Ant Financial Services 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.
The industries in which we and Ant Financial Services operate in the PRC, including online and mobile commerce and payments, online content offerings,
financial services, cloud computing and entertainment, are highly regulated. The PRC government authorities are likely to continue to issue new laws, rules and
regulations governing these industries, enhance enforcement of existing laws, rules and regulations and impose requirements relating to, among other things, new
and additional licenses, permits and approvals or governance or ownership structures on us, Ant Financial Services and our users. These laws, rules and regulations
and their application to us could take a direction that is adverse to our or Ant Financial Services' business at any time. In addition, there is no assurance that any
required licenses, permits and approvals could be obtained or such new requirements can be satisfied in a timely or cost-effective manner, and failure to obtain
them could have a material adverse effect on our business, financial condition and results of operations. Changes in regulatory enforcement as well as tax policy in
the PRC could also result in additional compliance obligations and increased costs or place restrictions upon our current or future operations. Any such legislation
or regulation could also severely disrupt and constrain our business and the payment services used on our marketplaces.
We have from time to time been subject to PRC and foreign government inquiries and investigations, including those relating to website content and alleged
third-party intellectual property infringement. We also face scrutiny, and have been subject to inquiries and investigations, from foreign governmental bodies that
focus on cross-border trade, intellectual property protection, our investment activities, human rights, user privacy matters and fraudulent or other criminal
transactions. 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 increase our investment in compliance and related
capabilities and systems.
The increasing sophistication and development of our user base and our expansion into the mobile and entertainment business will also increase the need for
higher standards of user protection, privacy protection and dispute management. Any increased involvement in inquiries or investigations could result in
significantly higher legal and other costs, restraints on our ability to enforce the contracts we have entered into, loss of business and revenue, liability for breach of
contracts with third parties, diversion of management and other resources, as well
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as negative publicity, which could harm our business and reputation and materially reduce our revenue and net income.
Ant Financial Services, which through Alipay provides the substantial majority of the payment processing services on our marketplaces as well as other
financial services such as wealth management, insurance and credit referencing services, 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. For example, the laws, rules and regulations governing account verification are evolving rapidly.
The Administrative Measures for the Online Payment Business of Non-bank Payment Institutions, or the Online Payment Measures, which will come into effect on
July 1, 2016, include provisions relating to account management, security measures and other matters and require third-party payment providers to open real-name
payment accounts for clients after verifying clients' valid identification documents. Different identification verification procedures are required for the opening of
different types and tiers of payment accounts, which are subject to a range of purchasing and account transfer limits. After the effectiveness of the Online Payment
Measures, the ability of consumers to pay for purchases on our marketplaces using deposits in their Alipay payment accounts may be materially limited, although
the Online Payment Measures do not affect Alipay's escrow services. In April 2014, the China Banking Regulatory Commission, or the CBRC, and the PBOC
issued Joint Circular 10, which requires commercial banks and other financial institutions in China to conduct additional customer verification procedures prior to
establishing an automatic payment link between customers' bank accounts and their accounts with third-party payment services, such as Alipay. These laws, rules
and regulations are highly complex and could change or be reinterpreted to make it difficult or impossible for Ant Financial Services to comply. 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. In addition, Alipay is required to maintain a payment business license in the PRC.
Ant Financial Services is also required to maintain other applicable money transmitter or other licenses and approvals from regulatory authorities in other
jurisdictions outside China in which it operates, and the expansion by Ant Financial Services of its business may require additional licenses and approvals. In
addition, in certain jurisdictions outside China where Alipay currently does not have the required money transmitter or other licenses, Alipay provides payment
processing and escrow services through third-party service providers. If these providers were to terminate their relationship with Alipay or otherwise cease
providing services to Alipay, cross-border transactions on our marketplaces would be negatively affected. 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, its services could be suspended or severely disrupted, and our business, financial condition and results of operations
would be materially and adversely affected.
We may be accused of infringing intellectual property rights of third parties and content restrictions of relevant laws.
Third parties may claim that the technology used in the operation of our platforms or our service offerings or the content on our platforms, including content
available through our search business, online reading platform and news feed features, infringe upon their intellectual property rights. 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. We have also acquired businesses, such as Youku Tudou, that have been, and may
continue to be, subject to liabilities for infringement of third-party intellectual property rights or other allegations based on the content available on their websites or
the services they provide. In addition, we expect our ecosystem to involve more and more user-generated content, including the entertainment content on Youku
Tudou, the interactive media content displayed on Tmall and Taobao Marketplace, 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. Such claims or scrutiny, whether or not having merit, may result in our expenditure of significant
financial and
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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 such 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 such 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 Tudou, can upload content, to such websites 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 and websites, including videos and other content (including user-generated content) displayed on
Youku Tudou's or other of our websites or on our Tmall set-top-boxes and smart televisions powered by our YunOS that provide access to entertainment and e-
commerce content, were deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could
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 such litigation or proceedings could cause us to pay damages, as well as 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.
We may become the target of anti-monopoly and unfair competition claims, which may result in our being subject to fines as well as constraints on
our business.
Although the PRC Anti-Monopoly Law is relatively recent, having taken effect on August 1, 2008, PRC anti-monopoly enforcement agencies, namely the
Ministry of Commerce, or the MOFCOM, the National Development and Reform Commission, or the NDRC, and the SAIC, have in recent years strengthened
enforcement actions, including levying significant fines, with respect to concentration of undertakings and cartel activity, mergers and acquisitions, as well as
abusive behavior of companies having market dominance. The PRC Anti-Monopoly Law also provides a private right of action for competitors or users 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 may resort to seeking the remedies available under the law, such as through complaints to regulators or as plaintiffs in private ligation, to improve their
competition position, regardless of the merits of their claims.
From time to time, we may 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 or administrative proceeding initiated against us may result in our being subject to profit disgorgement,
heavy fines and various constraints on our business, or result in negative publicity which could harm our reputation and negatively affect the trading price of our
ADSs. These constraints could include forced termination of any agreements or arrangements that are determined to be in violation of anti-monopoly laws, required
divestitures and limitations on certain business practices, which may limit our ability to continue to innovate, diminish the appeal of our services and increase our
operating costs. These constraints could also enable our competitors to develop websites, products and services that mimic the functionality of our services, which
could decrease the popularity of our marketplaces, products and services among merchants, consumers and other participants, and cause our revenue and net
income to decrease materially.
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We may face challenges in expanding our international and cross-border operations.
As we plan to continue expanding our operations into existing and other markets, we will face risks associated with expanding into markets in which we have
limited or no experience and in which our company may be less well-known. We may be unable to attract a sufficient number of customers and other participants,
fail to anticipate competitive conditions or face difficulties in operating effectively in these new markets. The expansion of our international and cross-border
business will also expose us to risks inherent in transacting business globally, including:
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inability to recruit international talent and challenges in replicating or adapting our company policies and procedures to operating environments
different than that of China;
lack of acceptance of our service offerings;
challenges and increased expenses associated with staffing and managing international and cross-border operations and managing an organization
spread over various jurisdictions;
trade barriers such as import and export restrictions, high custom duties and other taxes, competition law regimes and other trade restrictions;
differing and potentially adverse tax consequences;
increased and conflicting regulatory compliance requirements;
challenges caused by distance, language and cultural differences;
increased costs to protect intellectual property and personal data security;
availability and reliability of international and cross-border payment systems;
exchange rate fluctuations; and
political instability and general economic or political conditions in particular countries or regions.
As we expand further into new regions and markets, these risks could intensify. One or more of these factors could adversely impact our international and cross-
border operations. Accordingly, any efforts we make to expand our international and cross-border operations may not be successful. Failure to expand our
international and cross-border operations could materially and adversely affect our business, financial condition and results of operations.
Transactions conducted through our international and cross-border marketplaces may be subject to different customs, taxes and import/export rules and
regulations. For example, the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation effective as of April 8, 2016, or the New Cross-Border E-
commerce Tax Notice, replaced the previous system for taxing imported consumer goods into the PRC and introduced a 17% VAT on most products sold through
e-commerce platforms and a 30% consumption tax on cosmetics and perfumes, but no consumption taxes on skin care products, maternity and baby care products,
in the event that the prescribed quotas are exceeded. See "Item 4. Information on the Company — B. Business Overview — Regulation — Tax Regulations." The
change of regulation pattern regarding the import tax on consumer goods imported through cross-border e-commerce platforms, as well as limitation on the import
categories, may substantially increase import tax imposed on buyers and thus raise the price of goods sold on our cross-border platforms, which may impair our
competitive advantage and could adversely affect the growth of our cross-border e-commerce operation, our financial condition and results of operations.
These customs and import/export rules and regulations are complex, and customs and tax authorities in the relevant jurisdictions may challenge our
interpretation of applicable customs and import/export rules relating to product shipments under their respective customs and import/export laws and treaties. In
addition, we will also face the challenge of complying concurrently with the compliance rules and regulations of multiple jurisdictions,
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and such rules or regulations could conflict or interact with each other in complex ways. Our globalization strategy may be adversely affected by the complexity
and development of customs and import/export laws, rules and regulations, including the change of PRC regulation pattern regarding the import tax on consumer
goods imported through cross-border e-commerce platforms.
Our brand name 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 about our company and our
products and services that could damage our and our management's reputation and our brand and materially deter consumers from making purchases on our
marketplaces. Our ability to respond to our competitors' misleading marketing efforts may be limited during our self-imposed quiet periods around quarter ends or
due to legal prohibitions on permissible public communications by us during certain other periods.
Our results of operations fluctuate significantly from quarter to quarter which may make it difficult to predict our future performance.
Our results of operations fluctuate significantly from quarter to quarter. In addition, our business is characterized by seasonal fluctuations, which may cause
further fluctuations. 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 Singles Day on November 11 of
each year 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 online 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. For example, unexpectedly long periods of warm weather could delay the purchase of heavier
clothing items that have higher average selling prices. The performance of our equity investees and of 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 of the underlying equities of financial instruments, share-based awards or equity interests are beyond the control of our management,
the magnitude of the related accounting impact is unpredictable and may affect our results of operations significantly. 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, such as payroll and benefits, bandwidth and co-
location fees, will continue to increase, which will result in operating leverage in seasonally strong quarters but can significantly pressure operating margins in
seasonally weak quarters.
Our quarterly and annual financial results will likely differ from our historical performance. 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 decline
materially.
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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.
Intellectual property protection may not be sufficient in China or other countries 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, the litigation could result in substantial costs and a diversion of our managerial and financial resources. We can
provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently
discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on 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 on our marketplaces.
Due to several high-profile incidents involving 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. Moreover, as part of our growth strategy, we expect to increase our focus on
food, food supplements and beverages, mother care, baby care and healthcare products and services, and electronics products, and have also invested in companies
involved in these sectors, which could expose us to increasing liability associated with consumer protection laws in those areas. Operators of commerce
marketplaces and platforms 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. For example, under applicable consumer protection laws in China, e-commerce platform operators may be held liable for consumer
claims relating to damage if they are unable to provide consumers with the true name, address and contact details of merchants or service providers. 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 with the merchant or service provider for such infringement. Moreover, applicable
consumer protection laws in China hold that trading platforms will be held liable for failing to meet any undertakings that the platforms make to consumers with
regard to products listed on their websites. Furthermore, we are required to report to SAIC or its local branches any violation of applicable laws, regulations or
SAIC rules by merchants or service providers, such as sales of goods without proper license or authorization, and to take appropriate remedial measures, including
ceasing to provide services to the relevant merchants or service providers. We may also be held jointly liable with merchants who do not possess the proper licenses
or authorizations to sell goods or sell goods that do not meet product standards. 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 such suits and damages should we not prevail, which could materially and adversely affect our reputation and brand and our results of operations.
As our business expands outside of China, we may also face increasing scrutiny from consumer protection regulators in the United States, Europe and other
jurisdictions. If claims are brought against us under any of these laws, we could be subject to damages and reputational damage as well as action by regulators,
which could have a material adverse effect on our business, financial condition and results of operations. We do not maintain product liability insurance for
products and services transacted on our marketplaces, and our rights of indemnity from the merchants on our marketplaces may not adequately cover us for any
liability we may incur. Even unsuccessful
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claims could result in the expenditure of funds and management time and resources and could materially reduce our net income and profitability.
We may be subject to material litigation and regulatory proceedings.
We have been involved in litigation relating principally to third-party and principal intellectual property infringement claims, contract disputes involving
merchants and consumers on our platform, consumer protection claims, employment related cases and other matters in the ordinary course of our business. As our
ecosystem expands, including across jurisdictions and through the addition of new businesses, and as litigation becomes more common in China, we may face an
increasing number of such claims, including those involving higher amounts of alleged damages. We have acquired and may acquire companies, such as Youku
Tudou, that are subject to or may become subject to litigation, including shareholder class action lawsuits in the case of companies we acquire that are or were
publicly-listed companies.
As a publicly-listed company, we may face additional exposure to claims and lawsuits inside and outside China. We will need to defend against such 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 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 such cases,
and any adverse outcome of these cases could have a material adverse effect on our reputation, business and results of operations. In particular, we have been
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." We are currently unable to estimate the possible loss or possible range of loss, if any, associated
with the resolution of these lawsuits. An unfavorable outcome from the lawsuits, including any plaintiff's appeal of the judgment in these lawsuits, could have a
material adverse effect on our consolidated financial position, results of operations, or cash flows in the future. In addition, although we have obtained directors and
officers liability insurance, the insurance coverage may not be adequate to cover our indemnification obligations.
Earlier this year, the U.S. Securities and Exchange Commission, or SEC, informed us that it was initiating 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 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 Singles Day. We are voluntarily disclosing this SEC request for information and 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 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 as well as legal and other costs, limit our ability to conduct business or require us to change the manner in which we operate.
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We may suffer reputational harm and the price of our ADSs may decrease significantly due to business dealings or connections of merchants or consumers on
our marketplaces with sanctioned countries or persons.
The U.S. government imposes broad economic and trade restrictions on certain countries and regions, or the Sanctioned Countries, including Cuba, Iran, North
Korea, Sudan and Syria, and numerous individuals and entities, including those designated as having engaged in activities relating to terrorism, drug trafficking,
proliferation of weapons of mass destruction or human rights violations, or the Sanctioned Persons. The United Nations, the European Union, or the EU, the
United Kingdom, or the UK, and other countries also impose economic and trade restrictions, including on certain of the Sanctioned Countries and Sanctioned
Persons. We do not have employees or operations in 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.
As a Cayman Islands company, 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, our U.S., UK, and EU subsidiaries, our 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 or services, and certain Iran-related activities, may be subject to applicable sanctions requirements. In the case of Alibaba.com, our aggregate
cash revenue from members in these Sanctioned Countries in fiscal year 2016 accounted for less than 0.04% of our international wholesale commerce cash
revenue. In the case of AliExpress and Taobao Marketplace, an insignificant percentage of orders have been placed by consumers from the Sanctioned Counties,
with an aggregate GMV settled of approximately US$10.2 million in the twelve months ended March 31, 2016. As all transaction fees on AliExpress and Taobao
Marketplace 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.
We cannot assure you that current or future economic and trade sanctions regulations or developments will not have a negative impact on our business or
reputation. International economic and trade sanctions are complex and subject to frequent change, including jurisdictional reach and the lists of countries, entities,
and individuals subject to the sanctions. Hence, we may incur significant costs related to current, new, or changing sanctions programs, as well as investigations,
fines, fees or settlements, which may be difficult to predict. We also could face increased sanctions-related compliance costs and risks as we expand globally and
into additional businesses, such as cloud computing and data hosting. In addition, our expanding network of 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 or Sanctioned Persons, which might
result in negative publicity, governmental investigations and reputational harm. Any of the above may cause the price of our ADSs to decline significantly, and thus
materially reduce the value of your investment in our ADSs.
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 involving users based in the Sanctioned Countries, certain investors may not wish to invest, and certain financial institutions may not wish to lend
or extend credit and may divest their investment in, or seek early repayment of loans to us. These divestment initiatives may negatively impact our reputation and
investor sentiment with respect to our ADSs may be materially and adversely affected.
We may be subject to liability for content available in our ecosystem 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 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 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 customers or users of our
websites or mobile
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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 Youku Tudou, which allow users to upload videos and other content to our websites, or our cloud
computing services, which allow users to upload and save massive data on our cloud data centers, 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.
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 such a dispute or lawsuit, we may suffer from negative publicity and reputational damage as a result of these actions.
Failure to comply with the terms of our indebtedness could result in acceleration of indebtedness, which could have an adverse effect on our cash flow
and liquidity.
We have issued an aggregate of US$8.0 billion unsecured senior notes. We have also entered into a US$3.0 billion revolving credit facility and a five-year term
loan facility of US$4.0 billion. Under the terms of our unsecured senior notes and credit facilities 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 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.
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, including our future financial condition, results of
operations, cash flows, trading price of our ADSs, liquidity of international capital and lending markets and PRC governmental regulations over foreign investment
and the Internet industry in the PRC. In addition, incurring indebtedness would subject us to increased debt service obligations and could result in operating and
financing covenants that would restrict our operations. 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.
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 our credit facilities and one tranche of our unsecured senior notes with
an aggregate principal amount of US$300 million are based on a spread over LIBOR. As a result, the interest expenses associated with our 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 RMB
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.
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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 and public liabilities. However,
insurance companies in China 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 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, nor do we maintain key-man life insurance. This could leave us exposed 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. We cannot assure you 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 or other events, such as wars, acts of terrorism,
environmental accidents, power shortage or communication interruptions. The occurrence of such 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 having the swine flu, avian influenza, SARS, Ebola, or other epidemical diseases, 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 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, Yahoo, 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, Yahoo, Jack Ma and Joe Tsai have
agreed to vote their
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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 Yahoo 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 Yahoo, 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 and, for so long as SoftBank and Yahoo
remain substantial shareholders, we expect the Alibaba Partnership nominees will receive a majority of votes cast at any meeting for the election of directors and
will be elected as directors. 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 aggregate more than 50% of our
outstanding ordinary shares (including unvested shares and 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 of our shareholders.
The nomination and appointment rights of the Alibaba Partnership limits 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. For example, because the Alibaba Partnership will continue to be largely comprised of
members of our management team, the Alibaba Partnership and its director nominees, consistent with our operating philosophy, may focus on the long-term
interests of our ecosystem participants 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, such
shareholder 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 grants the Alibaba Partnership the right to nominate a simple majority of our board of directors notwithstanding a change of control
or merger of our company; and
a classified board with staggered terms that will prevent the replacement of a majority of directors at one time.
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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 more than 30% of our outstanding ordinary shares and its interests may differ from those of our other shareholders.
As of March 31, 2016, SoftBank owned approximately 32.2% 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 Yahoo, 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 Transaction — Transactions and Agreements with
SoftBank and Yahoo — 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.
Foreign ownership of certain types of Internet businesses, such as Internet information services, is subject to restrictions under applicable PRC laws, rules and
regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity interests in a value-added telecommunication service
provider. Any such foreign investor must also have experience and a good track record in providing value-added telecommunications services overseas. Although
according to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational
E-commerce) promulgated by the MIIT on June 19, 2015, 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 Foreign Investment Telecommunications Rules (such as the
track record and experience requirement for a major foreign investor) still apply. It is unclear how this notice will be implemented and there exist high uncertainties
with respect to its interpretation and implementation by authorities.
While the significant majority of our revenue was generated by our wholly-foreign owned enterprises in fiscal year 2016, we provide Internet information
services in China, which are critical to our business, through a number of PRC incorporated variable interest entities. The variable interest entities are owned by
PRC citizens who are our founders or senior employees or by PRC entities owned by such PRC citizens, or the variable interest entity equity holders, with whom
we have contractual arrangements, or the contractual arrangements. The contractual arrangements 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 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.
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In the opinion of Fangda Partners, our PRC counsel, the ownership structures of our material wholly-foreign owned enterprises 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-foreign owned enterprises, 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 PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the opinion of
our PRC legal counsel.
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 enactment timetable, interpretation and implementation of draft PRC Foreign
Investment Law."
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 such 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 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.
Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law.
The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the major existing
laws and regulations governing foreign investment in China. While the MOFCOM completed the solicitation of the comments on this draft in February 2015, there
are still substantial uncertainties with respect to its enactment timetable.
Among other things, the draft Foreign Investment Law purports to introduce the principle of "actual control" in determining whether a company is considered a
foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but "controlled" by foreign
investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction, but cleared by the MOFCOM as "controlled" by PRC entities and/or citizens,
would nonetheless be treated as a PRC domestic entity for investment in the "restriction category" on the "negative list." In this connection, "control" is broadly
defined in the draft law to cover any of the following summarized categories:
•
•
holding 50% or more of the voting rights or similar rights and interests of the subject entity;
holding less than 50% of the voting rights or similar rights and interests of the subject entity but having the power to directly or indirectly appoint or
otherwise secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to materially
influence the board, the shareholders' meeting or other equivalent decision making bodies; or
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•
having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity's operations, financial, staffing and
technology matters.
Once an entity is determined to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within a "negative list" purported to
be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts would be required.
The "variable interest entity" structure, or VIE structure, has been adopted by many PRC-based companies, including us and certain of our equity investees
such as Weibo, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the draft
Foreign Investment Law, variable interest entities that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately "controlled"
by foreign investors. For any companies with a VIE structure in an industry category that is in the "restriction category" on the "negative list," the existing VIE
structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies, or PRC
citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in
the industry category on the "negative list" without market entry clearance may be considered as illegal.
Based on the definition of "control" in the draft Foreign Investment Law as currently proposed, we believe that there are strong basis for a determination that
we and our variable interest entities are ultimately controlled by PRC citizens for the following reasons:
•
•
•
Alibaba Partnership has an exclusive right to nominate and appoint up to a simple majority of the members of our board of directors and therefore
effectively controls the board and all management decisions of our company;
nearly all of the partners of Alibaba Partnership are PRC citizens; and
Alibaba Partnership exercises its nomination rights by a majority of votes of all its partners.
See "Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Alibaba Partnership."
However, there are significant uncertainties as to how the control status of our company, our variable interest entities and our equity investees with a VIE
structure would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether any of the businesses that we currently
operate or plan to operate in the future through our consolidated entities and the businesses operated by our equity investees with a VIE structure would be on the
to-be-issued "negative list" and therefore be subject to any foreign investment restrictions or prohibitions. We also face uncertainties as to whether the enacted
version of the Foreign Investment Law and the final "negative list" would mandate further actions, such as MOFCOM market entry clearance, to be completed by
companies with existing VIE structure and whether such clearance can be timely obtained, or at all. If we or our equity investees with a VIE structure were not
considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law, further actions required to be taken by us
or such equity investees under the enacted Foreign Investment Law may materially and adversely affect our business and financial condition.
In addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not considered as ultimately
controlled by PRC domestic investors under the enacted version of the Foreign Investment Law. For instance, the draft Foreign Investment Law as proposed
purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment
implementation report and investment amendment report that would be required for each investment and alteration of investment specifics, an annual report would
be mandatory, and large foreign investors meeting certain criteria would be required to report on a quarterly basis. Any company found to be non-compliant with
these information reporting obligations could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible could
be subject to criminal liabilities.
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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-foreign Owned Enterprises, 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. For
example, our variable interest entities and their respective equity holders could breach their contractual arrangements with us by, among other things, failing to
conduct their operations, including maintaining our websites and using our domain names and trademarks which the relevant variable interest entities have
exclusive rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option, 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 and any dispute
relating to these contracts or the replacement of the equity holders 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 such 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 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 respect to each variable interest entity to secure certain obligations of such
variable interest entity or its equity holders to us under the contractual arrangements. However, the enforcement of such agreements through arbitral or judicial
agencies 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, 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 such variable interest entity equity holder under the contractual arrangements. If the
relevant variable interest entity or its equity holder (or its successor), as
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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. The
legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover, there are very few precedents and little formal
guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be
difficult to predict how an arbitration panel or court would view such contractual arrangements. As a result, 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-foreign owned
enterprises, 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 holders or
unrelated third-party creditors may claim rights to some or all of the assets of such 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 Jack Ma, our lead founder and executive chairman, 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, Jack has 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 directors and executive officers of the variable interest entities and as directors or employees of our
company, and may also arise due to dual roles both as variable interest entity equity holders and as directors or employees of our company.
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We cannot assure you that these individuals 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. We also cannot assure you that these individuals will ensure that the variable interest entities will not breach the
existing contractual arrangements. If we cannot resolve any such 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 such 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 interest under the above financing. We expect that these arrangements will strengthen our strategic business arrangements
with Wasu to pursue our strategy of expanding entertainment offerings to consumers. See "Item 5. Operating and Financial Review and Prospects — A. Operating
Results — Recent Investment, Acquisition and Strategic Alliance Activities — Digital Entertainment — Wasu" and "Item 7. Major Shareholders and Related Party
Transactions — B. Related Party Transactions — Pledge for the Benefit of and Loan Arrangement with a Related Party."
We cannot assure you that Jack Ma will act in our interest given his ability to control one of the general partners of the PRC limited partnership 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 as the other general partner in the PRC limited partnership, or with our interests in
pursuing our entertainment strategy. If any such conflicts 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 achieve the strategic objectives of
our alliance with Wasu. Furthermore, there is 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 partnership. However, if Simon fails to repay the loan, our
enforcement of such 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 adjustment of related party
transaction pricing 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
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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.
Most of our operations are conducted in the PRC and substantially all of our revenue is sourced from the PRC. 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. Although the PRC government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in
business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a
significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over 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 three 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 operation 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. While the PRC government started easing its monetary policy in 2015, there have been signs of continuing economic slowdown in China. 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.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall
effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However,
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 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 such 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
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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 acquisitions relating to businesses in China must notify MOFCOM, 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 such 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 MOFCOM merger control review. As a result of our size, many of the transactions we may undertake could be subject to
MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required
approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our
business or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest
entity structure. If MOFCOM's practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely
affected and there may be 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 large acquisitions in the future in a timely manner or at all.
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. SAFE Circular 37 requires PRC residents to register with 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 such 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." SAFE Circular 37 further
requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital
contributed by PRC individuals, share
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transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from
carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into
its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed
SAFE Circular 75 reports prior to the promulgation of SAFE Circular 37 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 cannot assure
you 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 such beneficial owners or our PRC subsidiaries to fines and legal sanctions. On February 13, 2015, SAFE promulgated a Notice
on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1,
2015. Pursuant to SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct
investment, including those required under the SAFE Circular 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, will
directly review the applications and conduct the registration.
Furthermore, since it is unclear how those new SAFE regulations, and any future regulation concerning offshore or cross-border transactions, will be
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
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 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 residents residing in the PRC for a continuous period of not less than one year, subject to
limited exceptions, and who have been granted restricted shares, RSUs or options 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, supervisors 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 could be a
PRC subsidiary of such 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 the ability to make payment under the relevant equity incentive plans or receive dividends or sales proceeds related thereto, or
our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises' 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 residents residing in the PRC for a continuous period
of not less than one year, subject to limited exceptions.
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In addition, the State Administration for Taxation has issued circulars concerning employee share options, restricted shares or RSUs. Under these circulars,
employees working in the PRC who exercise share options, or whose restricted shares or RSUs vest, will be subject to PRC individual income tax. The PRC
subsidiaries of an overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and
to withhold individual income taxes of those employees related to their share options, restricted shares or RSUs. Although we and our overseas listed subsidiaries
currently withhold income tax from our PRC employees in connection with their exercise of options and the vesting of their restricted shares and RSUs, 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 and other distributions on equity paid by our principal operating subsidiaries in China and on remittances,
including loans, from the variable interest entities in China to fund offshore cash and financing requirements.
We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries and on
remittances, including loans, from the variable interest entities, 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 or the variable interest entities 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, 2016, these restricted assets totaled RMB39,116 million (US$6,066 million).
Limitations on the ability of the variable interest entities to make remittance to the wholly-foreign owned enterprises to pay dividends to us could limit our
ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay
dividends to our shareholders or otherwise fund and conduct our business.
The services conducted by our wholly-foreign owned enterprises might be regarded as a form of online advertising or as part of services requiring an Internet
content provider license or other licenses and subjecting us to other laws, rules and regulations as well as increased taxes.
Our pay-for-performance, or P4P, services and other related services are currently not classified as a form of online advertising in China or as part of services
requiring an ICP license or other licenses. We conduct our P4P and other related business through our wholly-foreign owned enterprises in the PRC, which are not
qualified to operate an online advertising business and do not hold an ICP license. However, we cannot assure you that the PRC government will not classify our
P4P and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses in the future. On July 1, 2015, the
SAIC published a discussion draft of the Interim Administrative Measures on Internet Advertising, or the Draft Internet Advertising Measures, to solicit public
comments. The Draft Internet Advertising Measures defines Internet advertisement as commercial display, link, email as well as paid-for search results published
in the forms of words, pictures, audio and video, and related media, through Internet media resources. If the Draft Internet Advertising Measures are promulgated
as proposed, our P4P services and other related services may be characterized as Internet advertisement.
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If our P4P and other related services are characterized as a form of online advertising which may require an ICP license or other licenses, we may have to
conduct our P4P business through variable interest entities, which are qualified to operate online advertising business and hold ICP or other licenses, and we may
face increased scrutiny from the tax authorities and may incur additional taxes on any service fees paid by our variable interest entities to our wholly-foreign owned
enterprises. In addition, advertising services are subject to a cultural construction fee under PRC law, which is a 3% surcharge in addition to the applicable value-
added tax. If our P4P and other related services were to be considered a form of online advertising, our revenue from those services would be subject to the 3%
surcharge. If that were to occur, our margins would decline and our net income could be reduced. In addition, the substantial revenue streams attributable to our
P4P services would then be collected from variable interest entities and subject to the risks associated with variable interest entities. If the change in classification
of our P4P and other related services were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and late payment
interest.
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 regulations may result
in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting
the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator's license for operating an advertising
business. In addition, the Draft Internet Advertising Measures requires paid-for search results to be obviously distinguished from natural search results so that
consumers will not misunderstand the nature of such search results. If the Draft Internet Advertising Measures are promulgated as proposed, we will be obligated to
distinguish from others the merchants who purchase P4P and related services or the relevant listings by such merchants. Complying with such 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, government pre-approval of the contents of the advertisement and filing with the local authorities. If we become subject to PRC advertising
laws, we would need to take steps to monitor, and to ensure that our third-party marketing affiliates monitor, the content of any advertisements displayed on our
platforms. This could require 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 such laws, rules and regulations, including any penalties or fines
for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations. Any 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. "De facto management body" refers to a managing body that exercises
substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. 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. Circular 82 provides certain specific criteria for determining whether
the "de facto management body" of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to
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offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may
reflect the State Administration of Taxation's general position on how the "de facto management body" test should be applied in determining the tax resident status
of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate only a small portion of our revenues offshore.
However, if this proportion were to increase and 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 such 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 our 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
such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such 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 such investors is also subject to PRC tax at a current rate of 10%, subject to any exemption set forth in relevant tax treaties, if such 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 ordinary shares or ADSs, would be treated as income derived from sources within the PRC and would 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
such 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 whether if
we or any of our subsidiaries established outside China are considered a PRC resident enterprise, 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 to 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 such 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 assessment every two years.
A number of our China operating entities enjoy such preferential tax treatment. Our effective tax rate in fiscal year 2016 was 10%. The discontinuation of any
of the various types of preferential tax treatment we enjoy could
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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, or other assets attributable 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 replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this
Bulletin, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated
as a direct transfer of PRC taxable assets, if such 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 such indirect transfer may be subject to PRC enterprise income tax.
According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties located in
China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise,
would be subject to PRC enterprise income taxes. When determining whether there is a "reasonable commercial purpose" of the transaction arrangement, factors to
be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise directly or indirectly derives from PRC taxable
assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China,
directly or indirectly; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is
evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the foreign income tax liabilities
arising from the indirect transfer of PRC taxable assets; the replicability of the transaction by direct transfer of PRC taxable assets; and the applicable tax treaties or
similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment or place of business, the resulting gain is to be included with the
enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a
rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not
related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential
tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation.
Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late
payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public
stock exchange where such shares were acquired from a transaction through a public stock exchange.
There are uncertainties as to the application of Bulletin 7. 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 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 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 Circular 698/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
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Circular 698/Bulletin 7, our income tax costs associated with such potential acquisitions or disposals will increase, which may have an adverse effect on our
financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our 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 not 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, which are wholly-foreign owned 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 a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency
exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, service any debt we may incur outside
of China or pay dividends in foreign currencies to our shareholders, including holders of our ADSs. Foreign exchange transactions under the capital account remain
subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to
obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.
Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
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. On July 21, 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three
years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. In
June 2010, the People's Bank of China increased the flexibility of the exchange rate and between June 30, 2010 and December 31, 2013, the value of the Renminbi
appreciated approximately 12.0% against the U.S. dollar, although the value of the Renminbi depreciated approximately 2.5% against the U.S. dollar in 2014. In
August 2015, the People's Bank of China 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 rates. As a
result, in 2015, the value of the Renminbi depreciated approximately 5.8% against the U.S. dollar, and from December 31, 2015 through May 20, 2016, the value of
the Renminbi further depreciated approximately 1.1% against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy 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, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Substantially all of our revenues and costs are
denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while a significant portion of our debt is denominated
in U.S. dollars. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of
the Renminbi may materially and adversely affect our liquidity and cash flows. 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. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for 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. From time to time we enter into hedging activities
with regard to exchange rate risk. We cannot assure you that such hedging activities will successfully mitigate such risks adequately or at all, and in addition
hedging activities may result in greater volatility in our results of operations.
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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, as
such, our shareholders are deprived of the benefits of such 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 is not currently inspected fully by the PCAOB.
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 lack of PCAOB inspections of audit work
undertaken in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, shareholders may be
deprived of the benefits of PCAOB inspections, and 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 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 which supports the audit opinions issued on financial statements of entities with substantial
China operations.
In February 2015, each of the "big four" accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute with the SEC. The settlement
stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to
Chinese firms' audit documents via the CSRC. If a firm does not 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 penalties, such as suspensions
of our audit firm's ability to practice before the SEC.
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. Such a determination 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.
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Risks Related to our ADS
The trading price of our ADSs has been and is likely to continue to be volatile, which could result in substantial losses to our shareholders.
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 2016 were US$95.06 and US$57.20, 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 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;
announcements about our earnings that are not in line with analyst expectations;
publication of operating or industry metrics by third parties, including government statistical agencies, that differ from expectations of industry or
financial analysts;
changes in financial estimates by securities research analysts;
announcements made by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital
commitments;
press reports, whether or not true, about our business;
regulatory allegations or actions or negative reports or publicity against us, regardless of their veracity or materiality to our company;
changes in pricing made by us or our competitors;
conditions in the online retail market;
additions to or departures of our management;
fluctuations of exchange rates between the Renminbi and the U.S. dollar;
release or expiry of transfer restrictions on our outstanding ordinary shares or ADSs;
sales or perceived potential sales or other disposition of existing or additional ordinary shares or ADSs or other equity or equity-linked securities,
including by our principal shareholders, directors officers and other affiliates;
the creation of vehicles that hold our ordinary shares, such as Yahoo's proposed spin-off of our ordinary shares that it holds;
actual or perceived general economic and business conditions and trends in China and globally; and
changes or developments in the PRC or global regulatory environment.
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 have been
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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, 2016, we had 2,473,927,859 ordinary shares outstanding, and 1,183,920,615 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. The ordinary shares held by our affiliates are no longer subject to any lock-up arrangements and will be 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. Concurrent with the completion of our investment in Suning Commerce Group Co., Limited, or Suning, Suning will subscribe for approximately
26.3 million of our newly issued ordinary shares, which will be subject to lock-up arrangements.
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.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and
trading volume could decline.
The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research
analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or
unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or
fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for 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 U.S. Securities
Exchange Act of 1934, as amended, or the Exchange Act);
have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors;
have regularly scheduled executive sessions for non-management directors; or
have executive sessions of solely independent directors each year.
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We have relied on and intend to continue to rely on some of these exemptions. As a result, our shareholders 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 our shareholders
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, our shareholders may be afforded less protection than they would under the Exchange Act rules applicable to
domestic U.S. companies.
If and when permitted by law, we may 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.
Although not currently allowed under PRC law, if and when permitted by law, 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. 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 securities 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 U.S. 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-foreign owned enterprises and the
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 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
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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
(2013 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.
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 such 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. We cannot
assure you 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 such 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.
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The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying the ADSs if holders of such ADSs do not vote at
shareholders' meetings, 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 such 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;
we have instructed the depositary that we do not wish a discretionary proxy to be given;
we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
voting at the meeting is made on a show of hands.
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 such 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 such
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
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assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (1) 75% or more of our gross income
in a taxable year is passive income, or (2) the average percentage of our assets by value in a taxable year which 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 instance, 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, such characterization could result in adverse United States federal income tax consequences to our shareholders that are
United States investors. For example, if we are a PFIC, our United States investors will become subject to increased tax liabilities under United States federal
income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure you 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."
ITEM 4 INFORMATION ON THE COMPANY
A. History and Development of the Company
Alibaba Group Holding Limited is a Cayman Islands holding company established on June 28, 1999, and we conduct our business in China through our
subsidiaries and variable interest entities.
Our significant subsidiaries, as that term is defined under Section 1-02 of Regulation S-X under the Securities Act, include the following entities:
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Taobao Holding Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands, which is our wholly-
owned subsidiary and the indirect holding company of the PRC subsidiaries relating to our Taobao Marketplace and Tmall platform.
Taobao China Holding Limited, a Hong Kong limited liability company, which is the direct wholly-owned subsidiary of Taobao Holding Limited
and the direct holding company of the PRC subsidiaries relating to our Taobao Marketplace and Tmall platform and operating entity for the
overseas business of our Taobao Marketplace and Tmall Global.
Taobao (China) Software Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect subsidiary of Taobao
Holding Limited and a wholly-foreign owned enterprise, and provides software and technology services for our Taobao Marketplace.
Zhejiang Tmall Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect subsidiary of Taobao
Holding Limited and a wholly-foreign owned enterprise, and provides software and technology services for our Tmall platform.
Alibaba.com Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands, which is our wholly-owned
subsidiary and the indirect holding company of the PRC subsidiaries relating to our Alibaba.com, 1688.com and AliExpress businesses.
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Alibaba.com Investment Holding Limited, a company incorporated with limited liability under the laws of the British Virgin Islands, which is the
direct wholly-owned subsidiary of Alibaba.com Limited and a lower level holding company of the PRC subsidiaries relating to our Alibaba.com,
1688.com and AliExpress businesses.
Alibaba Investment Limited, a company incorporated with limited liability under the laws of the British Virgin Islands, which is our wholly-owned
subsidiary and the principal holding company for our strategic investments.
The principal executive offices of our main operations are located at 969 West Wen Yi Road, Yu Hang District, Hangzhou 311121, People's Republic of
China. Our telephone number at this address is +86-571-8502-2077. Our registered office in the Cayman Islands is located at the offices of Trident Trust Company
(Cayman) Limited, Fourth Floor, One Capital Place, P.O. Box 847, George Town, Grand Cayman, Cayman Islands. Our agent for service of process in the
United States is Corporation Service Company located at 1180 Avenue of the Americas, Suite 210, New York, New York 10036. Our corporate website is
www.alibabagroup.com .
We have a demonstrated track record of successful organic business creation. In addition to organic growth, we have made, or have entered into agreements to
make strategic investments, acquisitions and alliances that are intended to increase our service offerings and expand our capabilities. See "Item 5. Operating and
Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities" for more information.
Initial Public Offering
In September 2014, we completed our initial public offering, in which we and certain selling shareholders offered and sold an aggregate of
368,122,000 ordinary shares in the form of ADSs. We received approximately US$10 billion in proceeds before expenses. Our ADSs are listed on the NYSE under
the symbol "BABA."
Share Repurchase Program
On August 12, 2015, we announced the implementation of a share repurchase program in an aggregate amount of up to US$4 billion over a period of two
years, or the Share Repurchase Program. We have repurchased ADSs representing our ordinary shares on the open market under purchase plans adopted to
implement the Share Repurchase Program. In addition, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, have jointly entered into our
plans as affiliated purchasers. See "Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers."
B. Business Overview
Our Mission
Our mission is to make it easy to do business anywhere.
Our founders started our company to champion small businesses, in the belief that the Internet would level the playing field by enabling small enterprises to
leverage innovation and technology to grow and compete more effectively in the domestic and global economies. We believe that concentrating on customer needs
and solving their problems — whether those customers are consumers or merchants — ultimately will lead to the best outcome for our business. We have
developed a large ecosystem for online and mobile commerce that enables participants to create and share value on our platform. Our decisions are guided by how
they serve our mission over the long-term, not by the pursuit of short-term gains.
Our Vision
We aim to build the future infrastructure of commerce. We envision that our customers will meet, work and live at Alibaba, and that we will be a company that
lasts at least 102 years.
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Meet @ Alibaba. We enable hundreds of millions of commercial and social interactions among our users, between consumers and merchants, and among
businesses every day.
Work @ Alibaba. We empower our customers with the fundamental infrastructure for commerce and data technology, so that they can build businesses and
create value that can be shared among our ecosystem participants.
Live @ Alibaba. We strive to expand our products and services to become central to the everyday lives of our customers.
102 Years. For a company that was founded in 1999, lasting at least 102 years means we will have spanned three centuries, an achievement that few
companies can claim. Our culture, business models and systems are built to last, so that we can achieve sustainability in the long run.
Our Values
Our values are fundamental to the way we operate and how we recruit, evaluate and compensate our people.
Our six values are:
•
•
•
•
•
•
Customer First — The interests of our community of consumers and merchants must be our first priority.
Teamwork — We believe teamwork enables ordinary people to achieve extraordinary things.
Embrace Change — In this fast-changing world, we must be flexible, innovative and ready to adapt to new business conditions in order to survive.
Integrity — We expect our people to uphold the highest standards of honesty and to deliver on their commitments.
Passion — We expect our people to approach everything with fire in their belly and never give up on doing what they believe is right.
Commitment — Employees who demonstrate perseverance and excellence are richly rewarded. Nothing should be taken lightly as we encourage
our people to "work happily and live seriously."
Company Overview
To fulfill our mission "to make it easy to do business anywhere," we enable businesses to transform the way they market, sell and operate. We provide the
fundamental technology infrastructure and marketing reach to help merchants, brands and other businesses that provide products, services and digital content to
leverage the power of the Internet to engage with their users and customers.
Our businesses are comprised of core commerce, cloud computing, mobile media and entertainment, and other innovation initiatives. Through investee
affiliates, Cainiao Network and Koubei (
in Ant Financial Services, the financial services group that operates through Alipay, the leading third-party online payment platform in China.
), respectively, we participate in the logistics and local services sectors. In addition, we have a profit sharing interest
Core Commerce
Retail Commerce in China
We are the largest retail commerce company in the world in terms of GMV in the twelve months ended March 31, 2016, compared with others on the basis of
publicly available comparable transaction value data for the most recent fiscal year.
We operate Taobao Marketplace, China's largest mobile commerce destination, and Tmall, China's largest third-party platform for brands and retailers, in each
case by monthly active users in 2015, according to iResearch.
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We also operate Juhuasuan, which is our sales and marketing platform for flash sales where merchants can acquire new customers and raise brand awareness
through special discounts and promotional events. Taobao, Tmall and Juhuasuan, which comprise our China retail marketplaces, generated a combined GMV of
RMB3,092 billion (US$485 billion) in the twelve months ended March 31, 2016. There were 423 million active buyers on these marketplaces in the twelve months
ended March 31, 2016. In the three months ended March 31, 2016, mobile GMV accounted for 73% of our GMV. In March 2016, the various mobile apps that
consumers use to access our China retail marketplaces had 410 million mobile MAUs.
In fiscal year 2016, we generated 79% of our revenue from our China retail marketplaces. Our revenue on these marketplaces is generated from merchants
through online marketing services, commissions on transactions and fees for other online services.
In 2014, we launched our Rural Taobao program, which is one of our key strategic initiatives to address the consumption needs and promote economic
development in China's rural areas.
Wholesale Commerce in China
We operate a China wholesale marketplace, 1688.com, which matches wholesale buyers and sellers in categories such as general merchandise, apparels,
electronics, raw materials, industrial components and agricultural and chemical products. A significant number of merchants on our retail marketplaces source their
inventory on 1688.com.
International and Cross-border Commerce
We operate AliExpress, our global marketplace targeting consumers from around the world to buy directly from manufacturers and distributors in China. Tmall
Global is our platform within Tmall for overseas brands and retailers to reach Chinese consumers without the need for physical operations in China. We also
operate Alibaba.com, China's largest global online wholesale marketplace in 2015 by revenue, according to iResearch. In April 2016, we acquired a controlling
stake in Lazada, which operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. According to Internet Live Stats'
estimates, these six countries have a combined population of approximately 560 million and an Internet user base of approximately 200 million in 2016.
Cloud Computing
We operate Alibaba Cloud Computing, or Alibaba Cloud, China's largest provider of public cloud services in 2015 by revenue, according to IDC. The
technologies that power Alibaba Cloud grew out of our own need to operate the massive scale and complexity of our core commerce business. In 2009, we founded
Alibaba Cloud to make these technologies available to third-party customers. Alibaba Cloud offers a complete suite of cloud services, including: elastic computing,
database, storage and content delivery network (CDN), large scale computing, security, and management and application services. As of March 31, 2016, Alibaba
Cloud had over 2.3 million customers, including over 500,000 paying customers.
Mobile Media and Entertainment
Based on the strength of our relationship with consumers and our capability in leveraging commerce data that can be applied to serving the broader interests of
consumers, we have established an emerging business in mobile media and entertainment, mainly through acquisitions. In 2014, we acquired UCWeb, which
operates UC Browser, the second largest mobile browser in the world after Chrome by page view market share as of April 2016, according to StatCounter (data
available at: http://gs.statcounter.com). UCWeb provides mobile value-added services to users including news feeds, mobile web navigation and mobile search. Its
mobile search business, Shenma (
), was the second largest mobile search engine in China in the three months ended March 31, 2016, according to BigData-
Research. In April 2016, we acquired Youku Tudou, a leading multi-screen entertainment and media company in China, enabling users to search, view and share
high-quality video content quickly and
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easily across multiple devices. These businesses and our other media and entertainment-related businesses, including over-the-top TV services, music, sports and
games, provide a comprehensive platform on which users may discover and consume content and engage and interact with each other.
An ecosystem has developed around our platforms and businesses that consists of consumers, merchants, brands, other enterprises, third-party service
providers and strategic alliance partners. At the nexus of this ecosystem are our technology platform, our marketplace rules and the role we play in connecting these
participants to make it possible for them to discover, engage and transact with each other and manage their businesses anytime and anywhere. Much of our effort,
time and energy is spent on initiatives that are for the greater good of the ecosystem and on balancing the interests of its participants. We feel a strong responsibility
for the continued development of the ecosystem and we take ownership in this development. Accordingly, we refer to this as "our ecosystem." Our ecosystem has
strong self-reinforcing network effects benefitting its various participants, who are in turn invested in our ecosystem's growth and success.
The following chart sets forth our key businesses, selected major investee companies and cooperative partners:
*
Entities that are not consolidated.
Our Strategies
We aim to strengthen and expand our ecosystem in order to achieve long-term growth by:
•
increasing active buyers and our wallet share through geographic expansion, improved customer experience and new product and service categories;
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•
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expanding service offerings to consumers beyond physical goods, including digital entertainment, healthcare and local services;
enhancing the success of merchants, brands and other businesses on our platforms with data-driven marketing services, integrated online and offline
distribution channels, and world-class technology;
extending our mobile leadership through development of market-leading mobile apps with hundreds of millions of users;
applying data and cloud computing technologies in everything we do for our customers and for ourselves; and
continuing to be an innovator in products and technology as well as a disrupter of business models and existing industry value chains.
Our long-term strategic goal is to serve two billion consumers around the world and support ten million businesses to operate profitably. We have embarked on
three key initiatives to achieve this strategic goal: globalization, rural expansion and big data/cloud computing.
Globalization
Cross-border commerce is the focus of our globalization initiative. We aim to address each of the three-pillars of cross-border commerce as follows:
•
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From the world to China. Our China retail marketplaces provide the gateway for international brands, retailers and small businesses to gain access
to Chinese consumers. Through Tmall Global, overseas brands and retailers can reach Chinese consumers without the need for physical operations
in China. Taobao Global further facilitates cross-border commerce by helping Taobao merchants to engage Chinese consumers with a rich variety of
global products that they have sourced from suppliers outside of China.
From China to the world. Through our Alibaba.com wholesale marketplace, we facilitate global trade by connecting Chinese suppliers to
importers, wholesalers and distributors across the world. On the retail front, AliExpress enables consumers worldwide to buy directly from
manufacturers and distributors in China.
From the world to the world. Our long-term vision is to build a global commerce platform that is a virtual, borderless economy, which we refer to
as the World e-Trade Platform, or eWTP. Through the power of the Internet, eWTP aims to eliminate barriers to commerce, promote free trade and
help businesses and consumers everywhere participate in cross-border trade. To that end, we are investing in international talent and infrastructure,
and expanding our presence in key markets around the world to attract and serve international customers.
Rural Expansion
Over 600 million people in China reside in rural areas, according to the National Bureau of Statistics of China as of December 31, 2015. Their access to goods
and services is highly constrained by geographic and infrastructural limitations. We aim to give rural residents greater access to a broader variety of higher quality
goods and services through our Rural Taobao program. At the same time, we help farmers earn more by selling agricultural products directly to urban consumers.
To achieve our goals for the initiative, we had established service centers in over 14,000 rural villages as of March 31, 2016, where service center operators
facilitate purchase orders and delivery logistics.
Big Data and Cloud Computing
We believe our world is rapidly transitioning from an information technology, or IT, economy to a data technology, or DT, economy. Traditionally
unstructured, undiscovered and underutilized data can now be activated and leveraged as a new fundamental energy source. From the development of personal
computer, or PC, to mobile, to the Internet of Things, the explosion of data is bringing about a new era of opportunity. In the future, we believe that the Internet
will play a fundamental role in social and commercial human interactions, with cloud
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computing as a cost-saving public service, and data as a value-enhancing resource. We will continue to implement our data strategy through the application of data
intelligence, machine learning and deep learning technologies to several fields, including marketplace design, user interface, search, targeted marketing, logistics,
platform security, location-based services and financial services, among others. We will continue to invest in our cloud computing platform to support our own
businesses and those of third parties.
Our Businesses
Core Commerce
Our core commerce business is comprised of marketplaces operating in three areas: retail commerce in China; wholesale commerce in China; and international
and cross-border commerce.
Retail Commerce in China
Our retail commerce business in China is comprised of Taobao Marketplace, Tmall and Juhuasuan, collectively our China retail marketplaces, and Rural
Taobao and merchant services. Our China retail marketplaces have become an important part of the everyday life of Chinese online consumers. According to
CNNIC, 413 million Chinese Internet users have experienced online shopping in 2015, out of a total of 688 million Internet users at the end of 2015. Our high
penetration rate of China's online shopping population is evidenced by the 407 million annual active buyers we had in the twelve months ended
December 31, 2015.
We believe consumers appreciate the shopping experience on our China retail marketplaces because of the following value propositions:
•
•
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Broad selection. Our China retail marketplaces had over 1 billion listings as of March 31, 2016 across over 150 product categories, presenting a
comprehensive selection of products and services to consumers.
Convenience. Because of its 24/7 availability and a seamless user experience, especially on mobile, users are rapidly adopting Internet shopping.
Through Cainiao Network and the logistics partners that are connected to its logistics data platform, consumers from cities to rural areas enjoy
predictable and speedy delivery services.
Customized experience. The content on Taobao App and Tmall App is driven by personalized recommendations, news feeds and shopping themes
for individual users, making our apps a highly effective platform for user engagement.
Value for money. Our marketplace business model ensures that merchants offer competitive prices to consumers.
Merchant quality. Consumers can rate a merchant after completion of a transaction based on whether the product matches its description, the
merchant's service level and delivery timeliness. These customer feedbacks contribute to the detailed service rating, or DSR, which is displayed on
the merchant's storefront and is factored into the search algorithm that determines its ranking on search results pages.
Authentic products. Consumers can expect products purchased from our China retail marketplaces are protected by merchant quality ratings, clear
return policies and the Alipay escrow system. These protections are especially valuable in lower-tier cities and rural villages where it has been
difficult to distribute authentic branded products.
Because our China retail marketplaces are the most popular online shopping platform for Chinese consumers, we deliver the following value proposition to
merchants and brands:
•
Efficient distribution. Manufacturers and retailers in China and rest of the world increasingly recognize that e-commerce is essential for survival
and growth. As merchants and retailers turn to online channels for distribution in China, our China retail marketplaces have become part of every
conversation. The 423 million active buyers for the twelve months ended March 31, 2016 represent an unparalleled amount of purchasing power.
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•
•
•
•
Brand identity. Brands use their Tmall storefronts as a platform to distinguish their own brands and build brand proposition and awareness. They
leverage the multi-media capabilities of our platforms, such as social media, videos and dynamic graphics, to tell their unique brand story. Brand
companies, such as Starbucks and P&G, are increasingly recognizing the power of our China retail marketplaces as a top marketing platform, where
the life-time value of customers can be built to benefit their businesses both online and offline. For example, the Starbucks Tmall store is designed
to enhance its brand value of building people connections through e-gifting.
Customer acquisition, retention and engagement. In March 2016, the various mobile apps that consumers use to access our China retail
marketplaces had 410 million mobile MAUs. Consumers come to our platform with strong commercial intent, which drives high conversion rates
and effective return on investment (ROI) for merchants and brands. The consumer behavior data from our platform enables merchants and brands to
acquire, retain and engage their customers effectively, through targeted marketing and a personalized user interface.
Efficient operations. In addition to customer facing storefronts and product catalogues, merchants use the software offered on our merchant service
platform to improve the operation of their planning, marketing and sales activities, as well as our cloud computing services to lower their technology
costs.
Omni-channel opportunities. Brands and retailers that have retail outlets can leverage our omni-channel retailing software and services, including a
data standardization service for warehouse management and a CRM exchange.
A description of the various aspects of our China commerce retail business follows.
Taobao Marketplace
Taobao means "search for treasure" in Chinese. Through the website at www.taobao.com and the Taobao App, Taobao Marketplace is positioned as the
starting point and destination portal for the shopping journey. In addition, consumers use Taobao Marketplace as a commerce-oriented social and community
platform where they can acquire product knowledge, converse with other consumers, receive real-time updates from merchants, and use interactive media to
connect with each other and with their favorite brands and retailers.
Taobao Marketplace provides a top-level traffic funnel that directs users to the various marketplaces, channels and features within our China retail
marketplaces. For example, a search result on Taobao Marketplace display listings not only from Taobao Marketplace merchants but also from Tmall merchants,
thereby generating traffic for Tmall.
Taobao Marketplace reaches a vast consumer base, including and beyond consumers from large cities. In the twelve months ended March 31, 2016,
approximately 65% of active buyers on our China retail marketplaces were located outside of tier 1 and tier 2 cities.
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The substantial majority of users access Taobao Marketplace through a mobile device. Below is a visual presentation of various components of the
Taobao App:
Taobao App — Homepage
Starting point and destination portal for mobile commerce
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Taobao App — Search
Search results are personalized and customized for different users
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Taobao App — Good Find
Shopping recommendations based on consumer actions on our platforms and user profile
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Taobao App — Taobao Headlines
Personalized third-party news feed for consumers to look for new trends and browse for ideas
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Taobao App — Weitao (
)
Social media platform for merchants to engage and interact with consumers
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Interest-based interactive communities for consumers to share shopping experiences and interact with one another
Taobao App — Communities
Taobao Marketplace is also the entry point to verticals such as online travel booking, operated under the Alitrip name, and second-hand auctions, operated
under the Xianyu (
domestic and international airline tickets, train and bus tickets, hotel bookings, vacation packages and tourist attractions through online travel agencies and direct
travel service providers such as airlines and hotels. Xianyu users trade second-hand items using the Xianyu mobile app which offers location-based information
about products and merchant rating reviews.
) name, both of which can also be accessed through their own independent mobile app. Alitrip offers a comprehensive selection of
Merchants on Taobao Marketplace are primarily individuals and small businesses. The creation of storefronts and listings by a merchant on Taobao
Marketplace is free of charge. The escrow payment services provided by Alipay are free of charge to consumers and merchants unless payment is funded through a
credit card, in which case Alipay charges a fee to the merchant based on the related bank fees charged to Alipay. Taobao Marketplace merchants can purchase P4P
and display marketing services to direct traffic to their storefronts. In addition, merchants can acquire additional traffic from third-party marketing affiliates.
Taobao Marketplace merchants can also pay for advanced storefront software that help to upgrade, decorate and manage their online storefronts.
Tmall
Tmall caters to consumers looking for branded products and a premium shopping experience. A large number of international and Chinese brands and retailers
have established storefronts on Tmall. According to iResearch, Tmall is the largest B2C platform in China in terms of monthly active users in 2015. It is positioned
as a trusted platform for consumers to buy both homegrown and international branded products as well as products not available in traditional retail outlets.
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In 2009, Tmall pioneered November 11, known as "Singles Day" in China, as an annual promotional shopping day. Singles Day has become the most
important shopping event in China and we believe it generated the highest one-day retail sales volume in the world: on November 11, 2015, our China and
international retail marketplaces generated GMV of RMB91 billion (US$14 billion) settled through Alipay within a 24-hour period.
Brands and retailers operate their own stores on the Tmall platform with unique brand identities and look and feel, accompanied by full control over their own
branding and merchandising. Merchants on our China retail marketplces can customize their storefronts right down to the software code, without much constraint.
As of March 31, 2016, there were over 100,000 brands on Tmall. Because of the presence of a large number of global brands and the stringent requirements for
merchants to operate on Tmall, a presence on Tmall has become a validation of quality, allowing merchants to take advantage of our significant traffic to extend
and build brand awareness and customer engagement. Major international brands that have physical operations in China, such as Apple, Zara, Bose, Estée Lauder,
P&G and Unilever, are well represented on Tmall. And Tmall Global, an extension of Tmall, addresses the increasing demand from Chinese consumers for
international products and brands that don't have presences in China. Brands and retailers turn to Tmall not only for its broad user base, but also for its merchant
services and tools for customer acquisition, retention and engagement and to enhance the efficiency of their operations.
We also seek to build our mind-share among consumers to position Tmall as the premier shopping destination for everyday items, highlighting value and
convenience. For example, through Tmall Supermarket, we offer consumers frequently purchased products, such as groceries and fast-moving consumer goods, or
FMCG, in densely populated top-tier cities, where consumers enjoy same-day delivery or next-day delivery coordinated through the warehouse and delivery
network partners of Cainiao Network. In consumer electronics, we have leveraged Singles Day to strengthen consumer recognition of Tmall's value proposition
through exclusive promotions of high value items such as mobile phones, as well as high quality delivery, installation and after-sale services on home appliances,
such as television sets, kitchen appliances, refrigerators and washing machines, through our partners Ri Ri Shun (
), or RRS, and Suning.
Merchants on Tmall pay commissions based on a pre-determined percentage of transaction value that varies by product category, typically ranging from 0.4%
to 5.0%. Tmall merchants also pay an annual upfront service fee, up to 100% of which may be refunded depending on sales volume achieved by the merchant
within each year. Like Taobao Marketplace merchants, Tmall merchants have access to online marketing services, third-party marketing affiliates and storefront
software.
Juhuasuan
Juhuasuan is a sales and marketing platform for flash sales where Tmall and Taobao Marketplace merchants can acquire new customers and raise brand
awareness through special discounts and promotional events. Juhuasuan offers selected branded and private label products, products made to custom specifications,
as well as services such as group travel packages. Juhuasuan is an additional avenue for Taobao Marketplace or Tmall merchants to feature their trendiest products
and to generate sales. Transactions from traffic originated on Juhuasuan are completed on the merchants' storefronts on Taobao Marketplace or Tmall. Merchants
primarily pay a commission based on a pre-determined percentage of transaction value generated from Juhuasuan, which varies by product category, and, under
certain circumstances, a placement fee for promotional slots for a specified period.
Rural Taobao
As of December 31, 2015, over 600 million people in China resided in rural areas, according to the National Bureau of Statistics of China. Consumption in the
rural areas is highly constrained by geographic and infrastructural limitations, as the cost of distribution to geographically dispersed and remote locations is
prohibitively high. We aim to increase the level of consumption and commerce in rural China through our Rural Taobao program. We have established service
centers in villages to give rural residents greater access to goods and services and the ability to sell what they make to the cities. Villagers can shop at these service
centers, with the
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help of service center operators whom we call Rural Taobao Partners. Goods ordered online are delivered to county-level stations and then distributed by local
couriers to service centers in the villages for pick up. As of March 31, 2016, we had service centers in over 14,000 rural villages. Coordinated by Cainiao Network,
almost all packages can be delivered from the county-level station to a village service center the next day.
Our Rural Taobao program also helps Chinese rural villages to create a production economy by enabling village residents to sell items, such as agricultural
products, directly to urban consumers. For example, the program facilitated farmers in the southern part of Jiangxi province, to sell more than 250 tonnes of
oranges during the 16-day Ali Chinese New Year Shopping Festival in 2016, helping the region establish its reputation for quality oranges. The program also
assisted rice farmers in Zhaoyuan, a small city in Heilongjiang province, with an innovative pre-order campaign where consumers placed their orders six months
ahead of harvest and delivery. Despite the lack of e-commerce experience among the Zhaoyuan rice farmers, Zhaoyuan has since become a top-selling region for
rice on our China retail marketplaces in 2016, attracting large orders from corporations, such as national airlines and state-owned enterprises.
Through our Rural Taobao program, we are pioneering a two-way distribution infrastructure to connect commerce between cities and rural areas in China. We
believe Rural Taobao brings significant benefits to rural residents by improving their quality of life, and to brands and manufacturers who wish to extend their
reach by accessing China's vast rural population.
Merchant services
While most users experience our China retail marketplaces as a consumer, we have also invested substantially in our relationship with merchants and brands
through development of merchant services, including online software tools. These services enable merchants and brands to manage engagement with their
customers and operate more efficiently. We believe offering reliable and useful services to merchants and brands helps to enhance their loyalty to our platform.
These merchant services include:
•
•
•
•
•
•
•
Customer relationship management. We provide online store owners the capability to tag and manage their customers who have visited their
storefronts by attributes such as demographic characteristics and shopping preferences. This capability enables the store owner to personalize online
storefront for each visitor.
Inventory and fulfillment management. We provide a data standardization platform to aggregate inventory data and facilitate data exchange
between different enterprise systems efficiently, so that retailers can fulfill their online orders from any of their warehouses or offline stores.
Storefront management. We provide a suite of tools that assist storefront owners on Taobao Marketplace and Tmall to manage their storefronts,
free of charge. Advanced versions of storefront management software for upgrades and decorations are available for a subscription fee. We also
offer a free seller management "light app" within our Taobao App that allows merchants to set up and manage their storefronts directly using their
mobile phones.
Mobile engagement. We offer a multi-media news feed channel on Taobao App and Tmall App for consumers to follow the latest news and videos
posted by merchants and brands they have bookmarked. This feature enables merchants and brands to engage and interact with consumers wherever
they are.
Data insight. We offer a secured cloud data insight platform that offers sophisticated data analytic services such as customer data aggregation,
brand marketing and product cycle management services.
Communication. Merchants can use our proprietary instant messenger to communicate with and provide customer service to consumers. The
instant messaging tool supports text, audio and video communication on PC and mobile.
Productivity management. We provide an integrated platform for productivity management that allows merchants to access our suite of software
tools in storefront management, communications and marketing services through a unified interface.
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•
•
Taobao Services Platform. We offer Taobao Services Platform where qualified retail operation partners and ISVs offer product planning, supply
chain management and fulfillment services to merchants. In addition, merchants can find service providers in marketing, fashion modeling and
photography, as well as third-party software tools for storefront and customer relations management on the platform.
Financing. Through Ant Financial Services, merchants doing business on our platforms have access to credit financing. Ant Financial Services
designs credit products and evaluates and monitors the credit risks of merchants through its proprietary model based on real-time data from sales
transactions, customer feedbacks, customer service indicators and other factors. The availability of high-value commerce data unique to our China
retail marketplaces enables Ant Financial Services to provide tailored financing services that we believe are unmatched by other Internet peers.
Wholesale Commerce in China
1688.com China domestic wholesale marketplace
1688.com is our online wholesale marketplace that connects buyers and sellers in China who trade in general merchandise, apparel, electronics, raw materials,
industrial components, and agricultural and chemical products, among others. A significant number of merchants on our retail marketplaces source their inventory
on 1688.com. Listing items on 1688.com is free. Sellers may purchase a China TrustPass membership for an annual subscription fee to host premium storefronts
with access to data-analytics applications and upgraded storefront management tools. Paying members may also pay for additional services, such as premium data
analytics and online marketing services. As of March 31, 2016, 1688.com had over 930,000 paying members.
International and Cross-border Commerce
AliExpress
AliExpress is a global marketplace targeting consumers from around the world to buy directly from manufacturers and distributors in China. In addition to the
global English-language site, AliExpress operates fifteen local language sites, including Russian, Spanish and French. Consumers can access the marketplace
through its websites or the AliExpress App. Top consumer markets where AliExpress is popular are Russia, the United States, Spain, Brazil, France and the
United Kingdom.
Merchants on AliExpress pay a transaction commission, which is typically 5% of transaction value. We also generate revenue on AliExpress from merchants
who participate in the third-party marketing affiliate program and those who purchase P4P marketing services. In the twelve months ended March 31, 2016,
AliExpress generated US$8.4 billion in GMV, US$5.4 billion of which was settled through Alipay.
Tmall Global
Through Tmall Global, an extension of Tmall, we address the increasing Chinese consumer demand for international products and brands. Tmall Global is the
premier platform for overseas brands and retailers to reach Chinese consumers and build brand awareness in China without the need for physical operations in
China. Tmall Global also enables brands to cater to niche demands, reduce time to market to test new products with consumers, and gain valuable consumer
insights in forming their overall China strategy. For example, Costco, Macy's, Chemist Warehouse, LG Household & Health Care and Matsumoto Kiyoshi have
storefronts on Tmall Global.
Alibaba.com global trade marketplace
Alibaba.com is a leading English language wholesale marketplace for global trade. Sellers on Alibaba.com may pay for an annual Gold Supplier membership
to host a premium storefront with product listings on the marketplace. Sellers may also purchase an upgraded membership package to receive value-added services
such as upgraded storefront management tools and P4P marketing services. Buyers on Alibaba.com are located in over
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200 countries all over the world. Buyers are typically trade agents, wholesalers, retailers, manufacturers and SMEs engaged in the import and export business.
Through OneTouch, an Internet-based integrated services platform, we offer members of Alibaba.com and other SMEs services relating to import/export
transactions, including customs clearance, VAT refund, trade financing and logistics. In the twelve months ended March 31, 2016, OneTouch processed over
US$15 billion in import/export transaction volume. In 2015, Alibaba.com began offering Trade Assurance, a service through which we will compensate a buyer for
damages arising from a seller's breach of contract terms. The amount of coverage is based on the seller's credit profile generated from data on our platforms. As of
March 31, 2016, Alibaba.com had over 137,000 paying members.
Lazada
We acquired a controlling stake in Lazada, a leading e-commerce platform across Southeast Asia, in April 2016. Lazada operates e-commerce platforms in
Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, with local language websites and mobile apps in each of the six markets. Lazada offers
third-party brands and merchants a marketplace solution with simple and direct access to consumers in these six countries through one retail channel. Lazada also
sells products owned by its retail operations. It has developed its own logistics infrastructure with warehouses and a last-mile delivery fleet to offer quick and
reliable delivery to its customers. According to Internet Live Stats' estimates, the six countries in which Lazada operates have a combined population of
approximately 560 million and an Internet user base of approximately 200 million in 2016.
Cloud Computing
Alibaba Cloud is China's largest provider of public cloud services in 2015 by revenue, according to IDC. The technologies that power Alibaba Cloud grew out
of our own need to operate the massive scale and complexity of our core commerce business. In 2009, we founded Alibaba Cloud to make these technologies
available for third-party customers.
Alibaba Cloud offers a complete suite of cloud services, including elastic computing, database, storage and content delivery network (CDN), large scale
computing, security and management and application services. Products that differentiate Alibaba Cloud from our domestic peers include proprietary security and
middleware products, large scale computing services and analytic capabilities provided by our big data platform. These products enable customers to build IT
infrastructure quickly on-line without having to work on-premise.
We offer our cloud computing services to merchants doing business on our marketplaces, start-ups, corporations and government organizations. We charges
fees that are primarily based on time and usage. As of March 31, 2016, Alibaba Cloud had over 2.3 million customers, including over 500,000 paying customers.
Customers, including China Railway, Weibo and Beijing Genomics Institute, use our elastic computing services, security and artificial intelligence capabilities for
data storage, transmission and analysis. Customers, such as Sinopec and BYD, also use our middleware services to upgrade their application infrastructures.
Entertainment platforms, including CCTV and Mango TV, use our content delivery networks for live and on-demand video business. China Customs and China
Meteorological Administration use our big data solutions to improve efficiency.
Our cloud computing platform supported our annual Singles Day promotion when record traffic and transactions occur. On Singles Day in 2015, Alibaba
Cloud successfully processed peak transactions of 140,000 orders per second, demonstrating the platform's reliability and scalability. Alibaba Cloud's distributed
computation framework, FuxiSort, set new world records in the Sort Benchmark contest in 2015, a further demonstration of our leadership in general-purpose
computing systems.
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Mobile Media and Entertainment
Based on the strength of our relationship with consumers and our capability to leverage commerce data that can be applied to serve the broader interests of
consumers, we have developed an emerging business in mobile media and entertainment through three distribution platforms, UCWeb mobile media, game
publishing and multi-screen entertainment, and content creation and production companies in film, music and sports.
Distribution Platforms
UCWeb mobile media
UCWeb operates UC Browser, the second largest mobile browser in the world after Chrome by page view market share as of April 2016, according to
StatCounter (data available at: http://gs.statcounter.com). UCWeb also provides mobile value-added services to users including news feeds, mobile web navigation
and mobile search. Its mobile search business, Shenma (
), was the second largest mobile search engine in China in the three months ended March 31, 2016,
according to BigData-Research.
Game publishing
We operate a game publishing platform for Android-based mobile games that also serves as an online community and media platform for gamers. We
cooperate with upstream and downstream players across the game industry value chain, as a partner, exclusive licensee and developer of mobile games.
Multi-screen entertainment
Youku Tudou, a leading multi-screen entertainment and media company in China, enables users to search, view and share high-quality video content quickly
and easily across multiple devices. The Youku Tudou brand is among the most recognized online video brands in China. In March 2016, monthly active users on
Youku Tudou PC platforms reached 344 million and monthly active users of Youku App and Tudou App combined reached over 167 million, according to
iResearch. The total user time spent on Youku Tudou PC platforms, and the two mobile apps combined reached over 2.9 billion hours in March 2016, according to
iResearch. Through licensed operators, we also offer over-the-top TV services, such as the delivery of a variety of video content over the Internet through set-top
boxes developed by us and set-top boxes and smart televisions developed by third parties, of which some are powered by YunOS, our proprietary operating system.
Content Creation and Production
Film
Alibaba Pictures is our equity method investee company that produces and invests in movies and television programs. It has built a pipeline of upcoming
releases including Ferry Man (
Return of the Pearl Princess (
Mission: Impossible — Rogue Nation and Tiny Times 4 (
ticketing platform and a C2B financing platform for entertainment projects and merchandising.
), Three Lives Three Worlds Ten Miles of Peach Blossom (
). In addition to content production, Alibaba Pictures also promotes and distributes films including blockbusters such as
4). It also operates one of the largest suppliers of cinema ticketing systems in China, an online
), The Heroic Age (
) and
Music
We operate Xiami (
), which offers music streaming services through websites and mobile apps. We also operate online music platform Alibaba Planet (
) that connects fans, artists and other music industry participants.
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Sports
Alibaba Sports Group, established in September 2015, is engaged in the development and operation of sports IP, sporting events, e-sports contests, sporting
venues, sports merchandise and acquisition of selected media rights, leveraging our expertise in e-commerce and our various entertainment distribution platforms.
Other Innovation Initiatives
YunOS Operating System
YunOS is a cloud-based mobile operating system for smartphones, Internet of Things devices, set-top boxes, smart televisions and smart cars, among others.
Using YunOS, users can conveniently and securely synchronize data, such as call data, text messages and photos, across their devices through the cloud. YunOS
provides the connectivity between cloud-based applications and hardware devices, with a focus on the data needs of users.
AutoNavi
AutoNavi is a leading provider of digital map, navigation and location-based services in China.
DingTalk
DingTalk is our proprietary enterprise communications app that provides support for text, voice and video communication, work flow management and
collaboration among team members and enterprises of various sizes. With a built-in enterprise directory, users can initiate text chats or voice and video conference
calls as well as secured group chats with members of their organization. DingTalk unifies the tasks of critical communication and collaboration in the work place.
Alibaba Health
Alibaba Health is our flagship vehicle to bring innovative solutions to the healthcare industry.
Monetization Platforms and Systems
Alimama
Alimama is our marketing technology platform that provides the publisher-side serving and demand-side functionalities for merchants and brands to place
various marketing display formats on our marketplaces and other third-party properties. The platform supports P4P marketing based on keyword search rankings or
display marketing in fixed positions that are bid through auctions, as well as cost-per-thousand impression-based (CPM) marketing formats via the display of
photos and graphics.
The ranking of P4P search results on our core commerce marketplaces is based upon proprietary algorithms that take into account the bid price of keywords,
the popularity of an item or merchant, customer feedback ranking of merchants and quality of product displays. For display marketing, the Alimama platform
serves marketing messages based on data from our ecosystem, including transactions on our core commerce platforms, payment data from Ant Financial Services,
logistics data from Cainiao Network, user navigation and behavioral data from our core commerce and media entertainment properties, as well as demographic and
location-based data. The relevance and comprehensiveness of data based on commercial activities and user activities around our ecosystem provide a powerful and
unique advantage for Alimama to target the most relevant information to the most relevant users.
We have developed a system that we call Super ID to track users across different properties and devices. For example, we are able to identify a user watching a
Youku Tudou video on a PC as the same user shopping on our Taobao App. Our Super ID system takes disparate data and attributes the data to a single user, and in
this we can provide marketers with valuable insights into user behavior and preferences.
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The Alimama technology platform supports marketing delivered through personal computers and mobile devices. Under Alimama's bidding system, marketers
may set a higher or lower bid price for mobile marketing than the bid price for marketing on personal computers. Alimama also has an affiliate marketing program
to place marketing displays on third-party websites and mobile apps, thereby enabling marketers, if they so choose, to extend their marketing and promotional
reach to properties and users beyond our own marketplaces.
We believe we have one of the largest online marketing affiliate networks in China in terms of revenue shared with third-party website properties and mobile
apps. Our affiliate marketing program not only provides additional traffic to our core commerce marketplaces, but also generates revenue to us. Under the
Taobaoke program, merchants on Taobao Marketplace and Tmall can generate additional traffic and transactions from third-party websites and mobile apps, and
the marketer pays commissions based on a percentage of transaction value sourced from such third-party affiliates. We share a significant portion of that
commission with our third-party affiliate partners.
Alimama operates the Taobao Ad Network and Exchange, or TANX, one of the largest real-time bidding online marketing exchanges in China. TANX helps
publishers to monetize their media inventories both on web properties and mobile apps. TANX automates the buying and selling of billions of marketing
impressions on a daily basis. Participants on TANX include publishers, marketers and demand side platforms operated by agencies.
Alimama also offers a data management platform through TANX, or DMP, for marketers that wish to execute their campaigns with proprietary and tailored
data. DMP helps the marketer to identify targeted audience groups by mapping their own proprietary data set to the data captured in our ecosystem. By customizing
and tagging the attributes of consumers, the marketer is able to reach and expand its targeted audiences.
UCWeb Mobile Marketing System
Our mobile search engine, Shenma (
related to their products or services. We engage third-party distributors to sell some of our mobile marketing services to marketers. UC Browser monetizes
primarily through time-based display marketing where marketers place icons that link to their webpage or apps in UC Browser. Its news feed feature UC Headline
enables marketers to place marketing messages in news feed on cost-per-click (CPC) basis or impressions on time basis. Our mobile marketing platform enables
marketers to launch targeted marketing for apps, games, web pages and services on mobile media including UC Browser, UC Headline and third-party media
partners, leveraging our deep consumer insights.
), monetizes through a keyword bidding system that enables marketers to reach users who search for information
Youku Tudou Advertising System
Youku Tudou monetizes primarily through brand advertising. Its online advertising services include in-video, display, sponsorship and other forms of
advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or
pause advertisements. Display advertisements can be delivered alongside a video and may take the form of graphical banners or text hyperlinks. Other forms of
advertisements include product placements in the web video series produced in-house, sponsored live events or viral videos produced in-house. Youku Tudou's
advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia
formats with the interactivity and precise targeting capabilities of the Internet.
Other Major Elements of our Ecosystem
Logistics
Cainiao Network is a joint venture that we formed in May 2013 with other shareholders who are engaged in logistics, retail, and real estate, including four
major express courier companies in China. Cainiao Network does not deliver packages itself. It operates a logistics data platform that leverages the capacity and
capabilities of logistics partners to fulfill transactions between merchants and consumers at a large scale. Cainiao Network uses
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data insights and technology to improve efficiency across the logistics value chain. The proprietary data platform provides real-time access to data for merchants to
better manage their inventory and warehousing and for consumers to track their orders. In addition, Cainiao Network's data platform helps logistics service
providers to improve the efficiency and effectiveness of their services, such as leveraging data to optimize the delivery routes used by express courier companies.
Cainiao Network provides two major types of services — assisted-delivery services and end-to-end logistics solutions.
•
•
Assisted-delivery services are data- and technology-based value-added services that link merchants to logistics service providers, provide real-time
order tracking information to consumers and enhance logistics efficiency. Merchants select the services of particular logistics service providers that
rely on Cainiao Network's proprietary data platform for accuracy of delivery information and optimization of delivery routes. Under the assisted-
delivery model, merchants assume the responsibility for order fulfillment out of their chosen warehouses, and they pay for express courier
companies to pick up, transport, sort and make last-mile deliveries to the end consumers. This model does not require Cainiao Network to invest in
capital intensive warehouse, transport or last-mile assets. Currently the vast majority of packages from our China retail marketplaces are fulfilled
and delivered under the assisted-delivery model.
Through the platform approach, Cainiao Network integrates the resources of logistics service providers to build out the logistics ecosystem. As of
March 31, 2016, Cainiao Network's fifteen strategic express courier partners employed over 1,700,000 delivery personnel in more than 600 cities
and 31 provinces in China, according to data provided by them. Collectively they operated more than 150,000 hubs and sorting stations. The top six
of these express courier partners handled the delivery of the majority of packages from our China retail marketplaces in the twelve months ended
March 31, 2016. We believe that orders from transactions generated on our marketplaces represented a significant portion of these express courier
partners' total delivery volumes in the twelve months ended March 31, 2016. Cainiao Network is still in an early stage of development. It has yet to
monetize the majority of the value-added services it provides under the assisted-delivery model.
End-to-end logistics solutions are fulfillment and delivery services offered to merchants where Cainiao Network assumes responsibility of getting
packages to the end consumers. Cainiao Network uses a combination of owned and partner warehouses to fulfill orders, and it collaborates with
providers in warehouse operations, line haul services and express courier services to complete the last-mile delivery. To provide a high quality
solution, Cainiao Network oversees the entire logistics process and promotes standardization on efficiency metrics. During the process, Cainiao
Network also trains the capabilities of its logistics partners through technology and data insights.
In addition to enabling the fulfillment and delivery of orders that fit in standard size packages, we and Cainiao Network also partner with specialized
logistics service providers for category-specific solutions where items require special handling and services. The following are examples of
category-specific solutions that we and Cainiao Network have organized to enhance the consumer experience:
•
•
Large appliances. We have entered into a joint venture with Haier Electronics to invest in its logistics subsidiary, RRS, to handle logistics
services for large appliances. Partnering with RRS, Cainiao Network provides large appliances merchants with inventory planning tools,
data analytics, and logistics services that enhance consumer experience through more efficient inventory placement.
Consumer electronics. In connection with our agreement to invest in Suning, one of the largest electronics retail chain in China with
1,600 stores and over 60 national and regional distribution centers as of December 31, 2015, we and Cainiao Network are cooperating with
Suning to leverage their retail and logistics assets relating to warehousing and delivery capabilities, and after-sale servicing and returns of
electronics products.
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•
•
Tmall Supermarket. Tmall operates a popular supermarket category that generates high frequency purchases and builds consumer
mindshare for high quality fresh produce, food and FMCG products. Cainiao Network provides same-day or next-day delivery under its end-
to-end logistics solutions program by partnering with specialized players in the fresh produce supply chain, cold chain transport, warehouse
operations and last-mile delivery services.
Cross-border. Cainiao Network provides import and export logistics services to merchants on Tmall Global, our premier platform for
overseas brands and retailers, and AliExpress, our global consumer marketplace, respectively.
In order to enhance consumer experience and improve efficiency in last-mile delivery in both rural and urban areas, Cainiao Network is also engaged in
initiatives including arranging delivery from county-level Rural Taobao stations to villages, and setting up pick-up stations around urban communities.
During the twelve months ended March 31, 2016, Cainiao Network and its logistics partners enabled the delivery of 12.2 billion packages from our China retail
marketplaces. Currently, Cainiao Network primarily derives its revenue from end-to-end logistics solutions and generates a significant portion of its revenue from
providing these services to Tmall Supermarket.
Proprietary Logistics Data Platform
Cainiao Network operates a proprietary logistics data platform. This platform links consumers, merchants and logistics service providers and allows them to
share information relating to orders, delivery routes and time, and user feedbacks. The logistics data platform can interface with a broad range of systems including
our marketplace transaction systems, Alipay's payment system, third-party transportation management systems, and the CRM, ERP and warehouse management
systems of merchants. Information generated from the data platform serves many purposes: merchants can review the performance of delivery service providers on
different routes; logistics service providers can compare their performance against peers; and consumers can track orders, receive delivery time information, and
stay in touch with delivery personnel.
Recent Equity Financing of Cainiao Network
Cainiao Network completed a round of equity financing of approximately RMB10 billion in March 2016. Existing shareholders and new investors, including
major sovereign wealth funds and private equity funds, participated in the financing. We subscribed for Cainiao Network's shares on an approximately pro rata
basis. As of March 31, 2016, we own an approximately 47% equity interest in Cainiao Network. See "Item 5. Operating and Financial Review and Prospects — A.
Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Logistics — Cainiao Smart Logistics Network Limited."
Payments
Alipay, a wholly-owned subsidiary of Ant Financial Services, provides payment and escrow services for transactions on Taobao Marketplace, Tmall,
1688.com, AliExpress and certain of our other platforms. Alipay also provides payment and escrow services to third parties in China and overseas. Alipay is the
principal means by which consumers pay for their purchases on our China retail marketplaces. Except for credit card transactions where Alipay charges the
merchant to cover processing costs with banks, neither we nor Alipay charge any payment fees to merchants doing business on our platform. Instead, we pay
Alipay a fee to cover its cost of operating payment and escrow services it provides on our marketplaces pursuant to a commercial agreement with Ant Financial
Services and Alipay. For additional details on our commercial relationship with Ant Financial Services and Alipay, see "Item 7. Major Shareholders and Related
Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."
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Alipay also offers a mobile app, Alipay Wallet, which further facilitates mobile commerce and other consumer services and digital transactions by making
payment accessible and convenient through a mobile device. During the twelve months ended March 31, 2016, there were over 450 million Alipay annual
active users.
Local Services
Through investee companies, we are engaged in the online-to-offline, or O2O, local services business involving restaurants, food delivery, movie ticketing and
retail stores, among others.
Koubei Restaurant and Local Services Guide
In 2015, we and Ant Financial Services set up the joint venture Koubei (
Koubei operates O2O services in conjunction with Alipay and AutoNavi's map navigation by generating demand to local establishments such as restaurants,
supermarkets and convenient stores by offering consumers a "closed loop" experience, from acquiring information on mobile to finding the store to claiming
discounts to payment. For the three months ended March 31, 2016, Koubei generated RMB21 billion (US$3 billion) in GMV settled through Alipay
with merchants.
), one of the leading restaurant and local services guide businesses in China.
Ele.Me Food Delivery
In March 2016, we jointly invested with Ant Financial Services in Ele.me (
company's food delivery app can order meals, snacks and beverages on a mobile device. Through a delivery network of employed and outsourced personnel, the
company's service covered over 300 cities in China as of March 31, 2016. Under a cooperation agreement with the company, food orders generated from the
Taobao App and Alipay Wallet are fulfilled by Ele.me.
), a leading food delivery company in China. Consumers using the
Movie Ticketing
Alibaba Pictures, our equity investee and the flagship unit of our movie business, operates an online movie ticketing platform. In May 2016, the platform raised
RMB1.7 billion Series A financing from a group of investors led by CDH Investments, Ant Financial Services and Sina.com.
Customer Service for China Retail Marketplaces
Merchants on our platforms serve their customers with tools we provide. In addition, our customer service representatives serve consumers and merchants on
our marketplaces through telephone hotlines, real-time instant messaging and online inquiry systems. Our dispute resolution system's adjudication panel of
experienced consumers and merchants provides an easy way for consumers and merchants to resolve their disputes, while other more complicated disputes are
referred to our customer service representatives. In the twelve months ended March 31, 2016, we received dispute cases representing approximately 0.04% of
annual orders placed on our China retail marketplaces.
With certain exceptions, consumers on our China retail marketplaces may return the purchased goods within seven days from their receipt. Alipay's payment
escrow services ensure efficient refunds. In addition, for qualified buyers with good credit history, we may accelerate refund procedure by making the refund
payment directly to the buyer upon the buyer's refund application and providing of proof of shipment for the return goods.
Transaction Platform Safety Programs
Preserving the integrity of our marketplaces is a top priority for us. We are committed to protecting intellectual property rights and eradicating counterfeit
merchandise and fictitious activities. Counterfeiting and infringement of intellectual property, both online and offline, are industry-wide issues affecting brands and
merchants globally. We work with rights holders, trade associations and governments around the world.
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Anti-Counterfeiting
To protect consumers, merchants and brands and to maintain the integrity of our marketplaces, we have taken the following measures through our platforms,
with other industry participants and with governmental authorities:
•
•
•
Through our platforms. We proactively monitor our platforms and have implemented takedown measures to enforce IP rights, including:
•
•
•
•
•
operating an online takedown platform for brand owners to report infringements;
offering qualified rights holders a good-faith takedown program on Taobao Marketplace, where we process infringement takedown requests
on a "good-faith" basis by expediting claims and simplifying the notification procedure;
conducting real-time initial screening of merchandise when merchants add or modify listings;
conducting test-buy programs to spot check whether the goods mailed by a merchant are genuine or meet quality standards; and
improving our monitoring system by developing technologies to automate the process and investing in more manpower.
With other industry participants. We have established cooperative relationships with over 1,900 major brand owners and a large number of leading
industry associations in connection with intellectual property rights protection to enhance the effectiveness of anti-counterfeiting measures.
With government authorities. We cooperate with government authorities, agencies and law enforcement authorities to conduct offline anti-
counterfeiting investigations, and work with local governments in China to support original brands. With insights drawn from our data analytics, our
team works closely with brands and law enforcement authorities, to identify manufacturers and large-scale distributors of counterfeit goods and
bring them to justice.
Combatting Fictitious Transactions
With respect to fictitious activities, we have and will continue to invest significant resources in protecting the trust and credit system we have built on our
marketplaces. Measures to prevent, detect and reduce the occurrence of fictitious transactions on Taobao Marketplace and Tmall we have implemented include:
requiring the use of merchants' real identities when opening accounts;
analyzing transaction patterns to identify anomalies;
offering dynamic password protection and engaging in real-time monitoring of user login behavior;
enabling consumers and merchants to report suspicious transactions;
maintaining a "blacklist" of merchants and sellers who have previously been involved in fictitious transactions; and
collaborating with participants in our ecosystem such as Alipay and Cainiao Network as well as industry partners and law enforcement authorities
on Internet security.
•
•
•
•
•
•
Penalties
We aim to protect consumers from being affected by excluding counterfeit merchandise and fictitious transactions from the ranking system, credit system and
transaction volume statistics. When such activities are confirmed, we penalize the parties involved through a number of means including: limiting the relevant
merchant's ability to add listings, imposing restrictions on participation in promotional activities on our marketplaces, placing
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the relevant merchant's product listings at the bottom in search ranking results, closing down storefronts and permanently banning the merchant from opening any
accounts on our platforms.
Consumer Protection
We believe every consumer has the right to safety and protection from false and misleading claims. We encourage our merchants to make product quality a
priority and have set up various programs to this end. In addition, all Tmall merchants are required to contribute to and maintain a consumer protection fund for the
benefit of consumers. Consumer protection fund deposit requirements vary by product category and typically range from RMB50,000 to RMB150,000 per
storefront. For Tmall Global merchants, the consumer protection fund deposit requirement is typically RMB150,000 for standard storefronts. The majority of
Taobao Marketplace merchants maintain individual consumer protection funds whose minimum amounts range from RMB1,000 to RMB10,000. All Tmall and
Taobao Marketplace merchants are required to sign agreements with us authorizing us to make deductions from their Alipay accounts in the event of confirmed
consumer claims. Many merchants on both Tmall and Taobao Marketplace fulfill more than our basic requirements to demonstrate their confidence in the quality
of their services and products. They provide a larger deposit than required and make additional service commitments, such as expedited shipment, free maintenance
for electronics and installation services for furniture purchases. We incentivize merchants to set up customer protection funds by programming our search results to
prioritize the rankings of product listings for merchants who have established these funds. In addition, the consumer protection fund amounts are displayed on the
merchant's information page. As of March 31, 2016, consumer protection funds deposited in the Alipay accounts of merchants on our China retail marketplaces in
aggregate totaled over RMB17 billion. If the amount in a merchant's consumer protection fund is insufficient, we may still choose to compensate consumers ourself
for any losses, although we are not legally obligated to do so.
Our Technology
Technology is key to our success in achieving efficiency for our business, improving the user experience, and enabling innovation. As of March 31, 2016, we
employed a team of over 18,000 research and development personnel engaged in building our technology platform and developing new online and mobile products.
Key components of our technology include those described below:
Cloud Computing
Our cloud computing platform, called Apsara, is a general purpose distributed computing platform built with proprietary technology that enable server clusters
to perform with enhanced computing power. Apsara offers a suite of cloud services including elastic computing, database storage and services, and large-scale data
processing services through web-based API.
Content Delivery Network
The technology underlying AliCDN, our content delivery network, accelerates the loading of product photographs on web pages delivered to users and offers
them a fast and smooth experience.
Data Science
Our data science technology serves various types of data-intensive computational needs, including deep learning, high-volume batch processing and multi-
variable and multi-dimensional real-time analytics. The data mining and transaction, payment and behavioral data science capabilities are used extensively in
numerous applications such as search and online marketing on our marketplaces.
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Distributed Relational Database
OceanBase, our proprietary distributed relational database management system, plays a critical role in supporting transaction processing on our marketplaces in
a cost-efficient manner.
Search and Online Marketing
Our standard product unit database, or SPU database, is built on the vast amount of items listed on Taobao Marketplace and Tmall. The comprehensive
transactional and user behavior data generated on our marketplaces enable us to construct a powerful search engine that generates personalized results.
Our online marketing technology platform supports millions of online marketers and delivers tens of billions of online marketing impressions every day. Our
online marketing technology enables us to continuously improve the effectiveness of our online marketing services for our merchants through the use of aggregated
behavioral targeting data and analytics.
Deep Learning
Alimama utilizes cloud-based deep learning extensively to enhance the consumer targeting efficiency and return on investments for online marketers of our
P4P marketing, display marketing and DMP service offerings. Supported by our Apsara cloud computing system, Alimama operates a cluster of servers that is
capable of analyzing terabytes of data points for the modeling of tens of billions online marketing impressions.
Security
We are committed to maintaining a secure e-commerce ecosystem. Our back-end security system handles hundreds of millions of instances of malicious
attacks each day to safeguard the security of our e-commerce and cloud platforms.
Multi-Region Availability
Compared to social media platforms, the data availability and security requirement for transactions platforms are higher. Our transaction system is kept live
and available in data centers in multiple regions in China. This configuration provides more scalability, stability and redundancy than the traditional redundancy
configurations.
YunOS
Our YunOS is a cloud-based mobile operating system for smartphones, Internet of Things devices, set-top boxes, smart televisions and smart cars, among
others. With YunOS, users can conveniently and securely synchronize data, such as call data, text messages and photos, across their devices through the cloud.
System level based H5/Web, dynamic service linking and unified data technologies, as well as a multi-level security framework enable developers to deliver
location-based and contextual Internet services with a focus on the data needs of users.
Sales and Marketing
As Taobao Marketplace is China's largest online shopping destination, we enjoy significant organic traffic through word-of-mouth and general awareness of
our brand and platform. We believe word-of-mouth, and the reputation and ubiquitous awareness of our brand and platforms in China and, increasingly, abroad,
provide us with the best and most cost-efficient marketing channel. We employ a variety of methods to attract potential merchants and consumers, paying
members, online marketers and other ecosystem participants and to promote our brands.
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We generate the majority of our revenues through online marketing services from our merchants. As these merchants are mostly participants on our
marketplaces, we do not need to rely on a large sales force for our retail marketplaces. The majority of our sales staff is engaged in selling membership packages to
registered members of our wholesale marketplaces through telephone sales and field sales.
Corporate Social Responsibility
Since our founding, we have been highly committed to sustainable corporate responsibility projects, both through charitable endeavors and by extending the
benefits of our ecosystem to the community at large. We believe the best approach to corporate social responsibility is through embedding elements of social
responsibility in our business model. Our achievements and initiatives in the areas of corporate social responsibility include those described below:
Creating Job Opportunities
The breadth of our ecosystem and the range of different types of service providers needed within it create employment opportunities. In addition to providing
direct business opportunities for merchants, our ecosystem has created new opportunities for service providers in logistics, marketing, consulting, operations
outsourcing, training and other online and mobile commerce professions. According to AliResearch, our research division, as of December 2015, it is estimated that
our China retail marketplaces contributed to the creation of over 15 million job opportunities, including people working directly for online storefronts and service
providers to merchants.
With the power of the Internet, our platforms have leveled the playing fields for businesses in many aspects making it an inclusive place for everyone to thrive
and prosper. In fiscal year 2016, approximately half of our active sellers on our China retail marketplaces are female. We also have programs that create equal
opportunities for everyone such as cloud customer service program for people with disabilities, entrepreneur programs for university students and Rural Taobao
partnership program targeting entrepreneurs returning to their villages to start businesses. We have also established entrepreneurial funds in Hong Kong and
Taiwan to support the career and entrepreneurial aspirations of young people locally.
Alleviating Poverty
As we expand to rural areas in China and help rural farmers reach urban consumers, we have created opportunities for people living in poverty to elevate their
income levels. For the twelve months ended March 31, 2016, merchants in over 800 state-designated poverty counties in China in aggregate generated GMV of
over RMB20 billion on our China retail marketplaces.
Internet Approach to Charity
We support and promote a number of charitable and socially responsible initiatives and programs in ways that we believe are in alignment with our core values
and our mission. Since 2010, we have earmarked 0.3% of our annual revenue to fund efforts designed to encourage environmental awareness and conservation and
other corporate social responsibility efforts. In 2011, we established Alibaba Foundation, a private charity fund that focuses on supporting environmental protection
in China and helping the disadvantaged such as children born with heart defects in underdeveloped areas of China.
Over RMB400 million. In fiscal year 2016, Alibaba Foundation made over RMB210 million in donations to support various charitable causes and initiatives.
We have also leveraged our platform to facilitate other charitable organizations to raise over RMB190 million in donations.
Over 60 projects. In fiscal year 2016, Alibaba Foundation supported more than 60 charitable projects, including those hosted by The Nature Conservancy,
National Geographic Air and Water Conservation Fund,
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Paulson Institute and Institute of Public and Environmental Affairs. For example, we supported the development of Wei Lan Map (
exposes pollution hotspots in China and the companies and factories responsible for it on a map. Hundreds of corporations have made press releases about the data
exposed by this app while a portion of these corporations have reacted by taking actions to rectify the problems exposed.
) mobile app that
Over 130,000 hours. Starting from September 2015, we encourage our employees to perform at a minimum three hours of charitable activities every year.
Since the program's inception until the end of fiscal year 2016, this program saw over 130,000 hours of social service performed by our employees.
Over 3.3 billion participations. We recognize our immense influence on our ecosystem and we leverage that to extend the reach of our charitable work. In
fiscal year 2016, our platforms facilitated over 3.3 billion charitable participations involving over 280 million consumers and over 1.5 million merchants. We
encourage our merchants, consumers and other ecosystem participants to participate in socially responsible activities. For example, charitable organizations can set
up storefronts on our marketplaces to raise funds and engage volunteers. Merchants can designate certain percentage of their sales proceeds generated on our
platforms to go to charitable organizations. Consumers can contribute to charitable causes through purchasing these products or participating in charity auctions
hosted on our platforms.
Competition
We face competition principally from established Chinese Internet companies, such as Tencent, Baidu and their respective affiliates, as well as from certain
offline retailers and vertical e-commerce players, including those that specialize in a limited number of categories. These competitors generate significant traffic
and have established brand recognition, significant technological capabilities and significant financial resources. The areas in which we compete include:
•
•
•
•
Consumers — We compete to attract, engage and retain consumers based on the variety and value of products and services listed on our
marketplaces, the engagement of media and entertainment content available on our platforms and the overall user experience of our products and
services.
Merchants and Brands — We compete to attract and retain merchants based on the size and the engagement of consumers on our platforms and the
effectiveness of our products and services to help them build brand awareness and engagement, acquire and retain customers, complete transactions
and enhance operating efficiency.
Marketers — We compete to attract and retain marketers, publishers and demand side platforms operated by agencies based on the reach and
engagement of our properties, the depth of our consumer data insights and the effectiveness of our branding and marketing solutions.
Talent — We compete for motivated and effective talent and personnel, including engineers and product developers to build compelling apps, tools
and functions for all participants in our ecosystem.
We also face competition from major global Internet companies, including e-commerce companies around the world. Although foreign e-commerce companies
currently have a limited presence in China, we face significant competition from them in the areas of cross-border commerce, in particular as we further carry out
geographic expansions into international markets.
Seasonality
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonal factors and economic cycles that influence
consumer spending as well as promotional shopping activities we conduct.
Historically, we have experienced the highest levels of revenues in the fourth calendar quarter of each year due to a number of factors, including merchants
allocating a significant portion of their online marketing budgets
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to the fourth calendar quarter, promotions, such as Singles Day on November 11 of each year and the impact of seasonal buying patterns in respect of certain
categories such as apparel. We have also experienced lower levels of revenues in the first calendar quarter of each year due to a lower level of allocation of online
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. In addition, seasonal weather patterns may affect the timing of buying decisions. For example, unexpectedly long periods
of warm weather could delay the purchase of heavier clothing items that have higher average selling prices. Moreover, as our business grows, we expect that our
fixed costs and expenses, such as payroll and benefits, bandwidth and co-location fees, will continue to increase, which will result in operating leverage in
seasonally strong quarters but can significantly pressure operating margins in seasonally weak quarters.
Regulation
We operate in an increasingly complex legal and regulatory environment. We and our key service provider, Ant Financial Services, are subject to a variety of
PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations
relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include data protection and privacy,
consumer protection, content regulation, intellectual property, competition, cross-border trade, taxation, anti-money laundering and anti-corruption. See "Item 3.
Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We and Ant Financial Services 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."
Our online and mobile commerce businesses are classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules and
regulations generally restrict foreign ownership in value-added telecommunication services. As a result, we operate our online and mobile commerce businesses
and other businesses in which foreign investment is restricted or prohibited through variable interest entities, each of which is owned by PRC citizens or by PRC
entities owned by PRC citizens, and holds all licenses associated with these businesses.
The applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be required to obtain
additional approvals, licenses and permits and to comply with any new regulatory requirements adopted from time to time. Moreover, substantial uncertainties exist
with respect to the interpretation and implementation of these PRC laws, rules and regulations. See "Item 3. Key Information — D. Risk Factors — Risks Related
to Doing Business in the People's Republic of China — There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations."
Regulation of Foreign Investment
The Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, the latest version of which came into effect on April 10, 2015, was
promulgated and recently amended by the MOFCOM and the National Development and Reform Commission and governs investment activities in the PRC by
foreign investors. The Catalogue divides industries into three categories — "encouraged," "restricted," and "prohibited" for foreign investment. Industries not listed
in the Catalogue are generally deemed as falling into a fourth category, "permitted." However, industries such as value-added telecommunication services,
including Internet information services, are restricted from foreign investment. Among our significant subsidiaries, Taobao (China) Software Co., Ltd. and
Zhejiang Tmall Technology Co., Ltd. are registered in China and mainly engaged in software development, technical services and consultations, which fall into the
encouraged or permitted category under the latest Catalogue. These two significant subsidiaries have obtained all material approvals required for their business
operations. The Catalogue does not apply to our significant subsidiaries that are registered and domiciled in Hong Kong, the British Virgin Islands or the Cayman
Islands, and operate outside China. The
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businesses of our other PRC subsidiaries — including PRC subsidiaries of our significant subsidiaries — are generally software development, technical services
and consulting, which fall into the encouraged or permitted category. Industries such as value-added telecommunication services, including Internet information
services, are generally restricted to foreign investment pursuant to the latest Catalogue. We conduct business operations that are restricted or prohibited to foreign
investment through our variable interest entities.
In January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law, which embodies an expected PRC regulatory trend to
rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic investments. The MOFCOM has solicited comments on this draft and substantial uncertainties exist with respect to its enactment
timetable, the final version, interpretation and implementation. For more details, see "Item 3. Key Information — Risks Related to our Corporate
Structure — Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law."
Regulation of Telecommunications and Internet Information Services
Regulation of Telecommunication Services
Under the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the State Council of
the PRC and most recently amended in February 2016, a telecommunication services provider in China must obtain an operating license from the Ministry of
Industry and Information Technology, or the MIIT, or its provincial counterparts. The Telecommunications Regulations categorize all telecommunication services
in China as either basic telecommunications services or value-added telecommunications services. Our online and mobile commerce businesses, as well as Youku
Tudou's online video businesses, are classified as value-added telecommunications services.
Foreign investment in telecommunications businesses is governed by the State Council's Administrative Rules for Foreign Investments in Telecommunications
Enterprises, or the Foreign Investment Telecommunications Rules, issued by the State Council on December 11, 2001 and most recently amended in
February 2016, under which a foreign investor's beneficial equity ownership in an entity providing value-added telecommunications services in China is not
permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business providing value-added telecommunications services in
China, it must demonstrate a positive track record and experience in providing such services. However, according to the Notice on Lifting the Restriction to
Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated by the MIIT on June 19,
2015, foreign investors are allowed to hold up to 100% of all equity interest in the online data processing and transaction processing business (operational e-
commerce) in China, while other requirements provided by the Foreign Investment Telecommunications Rules shall still apply. It is unclear how this notice will be
implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities. The MIIT's Notice Regarding Strengthening
Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of
these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending
to conduct such businesses in China.
In addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable to holders of value-added
telecommunications services licenses, including that license holders or their shareholders must directly own the domain names and trademarks used in their daily
operations and each license holder must possess the necessary facilities for its approved business operations and maintain such facilities in the regions covered by
its license, including maintaining its network and providing Internet security in accordance with the relevant regulatory standards. The MIIT or its provincial
counterpart has the power to require corrective actions after it discovers any non-compliance of the license holders, and where such license holders fail to take such
steps, the MIIT or its provincial counterpart has the power to revoke the value-added telecommunications services licenses.
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Regulation of Internet Information Services
As a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on Internet Information
Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January 8, 2011. "Internet information services" are
defined as services that provide information to online users through the Internet. Internet information services providers, also called Internet content providers, or
ICPs, that provide commercial services are required to obtain an operating license from the MIIT or its provincial counterpart.
To the extent the Internet information services provided relate to certain matters, including news, publication, education or medical and healthcare (including
pharmaceutical products and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and
regulations governing those industries.
Regulation of Advertising Services
The principal regulations governing advertising businesses in China are:
•
•
the Advertising Law of the PRC (2015, as amended); and
the Advertising Administrative Regulations (1987).
These laws, rules and regulations require companies such as ours that engage in advertising activities to obtain a business license that explicitly includes advertising
in the business scope from the SAIC or its local branches.
Applicable PRC advertising laws, rules and regulations contain certain prohibitions on the content of advertisements in China (including prohibitions on
misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the
public interest). Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited, and the dissemination of advertisements of certain other
products, such as tobacco, patented products, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics, are also subject to specific
restrictions and requirements.
Advertisers, advertising operators and advertising distributors, including the businesses that certain of the variable interest entities operate, are required by
applicable PRC advertising laws, rules and regulations to ensure that the content of the advertisements they prepare or distribute are true and in compliance with
applicable laws, rules and regulations. Violation of these laws, rules and regulations may result in penalties, including fines, confiscation of advertising income,
orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving
serious violations, the SAIC or its local branches may revoke the violator's license or permit for advertising business operations. In addition, advertisers, advertising
operators or advertising distributors may be subject to civil liability if they infringe the legal rights and interests of third parties, such as infringement of intellectual
proprietary rights, unauthorized use of a name or portrait and defamation.
Regulation of Online and Mobile Commerce
China's online and mobile commerce industry is at an early stage of development and there are few PRC laws, regulations or rules specifically regulating this
industry. The SAIC adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services on May 31, 2010 and replaced
those measures with the Administrative Measures for Online Trading on January 26, 2014, which became effective on March 15, 2014. The SAIC also issued the
Opinions on Strengthening the Administration of Online Group Buying Operations on March 12, 2012 to subject group buying website operators to the foregoing
measures, especially those relating to marketplace platform service providers. On December 24, 2014, the MOFCOM promulgated the Provisions on the
Procedures for Formulating Transaction Rules of Third Party Online Retail Platforms (Trial) to regulate the formulation, revision and enforcement of transaction
rules for online retail marketplace platforms.
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These newly issued measures impose more stringent requirements and obligations on the online trading or service operators as well as the marketplace platform
providers. For example, the marketplace platform providers are obligated to make public and file its transaction rules with MOFCOM or its provincial counterparts,
examine the legal status of each third-party merchant selling products or services on the platform and display on a prominent location on the web page of such
merchant the information stated in the merchant's business license or a link to such business license, and a group buying website operator must only allow a third-
party merchant with a proper business license to sell products or services on its platform. Where the marketplace platform providers also act as online distributors,
these marketplace platform providers must make a clear distinction between their online direct sales and sales of third-party merchant products on the marketplace
platform.
Since the promulgation of the Administrative Measures for Online Trading, the SAIC has issued a number of guidelines and implementing rules aimed at
adding greater specificity to these regulations. The SAIC continues to consider and issue guidelines and implementing rules, and we expect that there will be
further development of regulation in this industry. For example, three PRC governmental authorities (the Ministry of Finance, General Administration of Customs
and State Administration of Taxation) issued a notice on March 24, 2016 to regulate cross-border e-commerce trading which has experienced rapid growth in
recent years. The Notice on Tax Policies of Cross-Border E-Commerce Retail Importation effective as of April 8, 2016, or the New Cross-Border E-commerce Tax
Notice, introduced the concept of the Cross-Border E-Commerce Retail Importation Goods Inventory, or the Cross-Border E-Commerce Goods Inventory, which
are to be issued and updated by the three authorities together with other relevant authorities from time to time. Goods beyond the scope of the Cross-Border E-
commerce Goods Inventory will have no tax codes and be effectively removed from cross-border e-commerce platforms. Two batches of the Cross-Border E-
Commerce Goods Inventory have been issued on April 6, 2016 and April 15, 2016, respectively. Cosmetics imported for the first time, nutrition supplements and
other special food products required to be registered with the State Food and Drug Administration are excluded from the Cross-Border E-Commerce Goods
Inventory and will not be able to be sold on the relevant cross-border e-commerce platforms. However, pursuant to a transition policy issued by the General
Administration of Customs, goods which have been imported to or in transit to the bonded areas and special regulated areas of customs before April 8, 2016 can
still be sold on the cross-border e-commerce platforms no matter whether these goods are included in the Cross-Border E-Commerce Goods Inventory or not.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT, the News Office of
the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these
measures specifically prohibit Internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or
violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control
the information posted on their websites. If any prohibited content is found, they must remove such content immediately, keep a record of it and report to the
relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business operation licenses.
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Regulations on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the State Administration of Radio, Film and Television, or the SARFT, promulgated the Rules for the Administration of Broadcasting of
Audio/Video Programs through the Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply
to the launch, broadcasting, aggregation, transmission or download of audio/video programs via the Internet and other information networks. Anyone who wishes
to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the SARFT and
operate pursuant to the scope as provided in such license. Foreign invested enterprises are not allowed to engage in these businesses.
On April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business in China. These
decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for
investment in audio/video broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the SARFT, the
Ministry of Culture and the General Administration of Press and Publication, or the GAPP, to adopt detailed implementing rules according to these decisions.
On December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly
known as Circular 56, which came into effect as of January 31, 2008 and was amended on August 28, 2015. Circular 56 reiterates the requirement set forth in the
Audio/Video Broadcasting Rules that online audio/video service providers must obtain a license from the SARFT. Furthermore, Circular 56 requires all online
audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press questions published on the
SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been
operating lawfully prior to the issuance of Circular 56 may re-register and continue to operate without becoming state-owned or controlled, provided that such
providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Circular 56 was
issued. These policies have been reflected in the Application Procedure for Audio/Video Program Transmission License.
On March 17, 2010, the SARFT issued the Internet Audio/Video Program Services Categories (Provisional), or the Provisional Categories, which classified
Internet audio/video programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the
other three categories are open to privately held entities.
In 2009, the SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content. This notice reiterated, among other things, that all
movies and television shows released or published online must comply with relevant regulations on the administration of radio, film and television. In other words,
these movies and television shows, whether produced in the PRC or overseas, must be pre-approved by the SARFT, and the distributors of these movies and
television shows must obtain an applicable permit before releasing any such movie or television show. In 2012, the SARFT and the State Internet Information
Office of the PRC issued a Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. In 2014, the
General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT, formerly the SARFT and the GAPP, released a Supplemental Notice
on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. This notice stresses that entities producing online
audio/video content, such as Internet dramas and micro films, must obtain a permit for radio and television program production and operation, and that online
audio/video content service providers should not release any Internet dramas or micro films that were produced by any entity lacking such permit. For Internet
dramas or micro films produced and uploaded by individual users, the online audio/video service providers transmitting such content will be deemed responsible as
the producer. Further, under this notice, online audio/video service providers can only transmit content uploaded by individuals whose identity has been verified
and such content must comply with the relevant content management rules. This notice also requires that online audio/video content, include Internet drama and
micro films, be filed with the relevant authorities before release.
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On October 28, 2011, the SARFT issued the Administrative and Operational Requirements for Licensed Internet TV Organizations, commonly known as
Circular 181, which came into effect as of the same date. Circular 181 requires that Smart TVs must be exclusively connected to a specific licensed Internet TV
organization and must not have access to the public Internet or network operators' databases. Up to now, there are only seven licensed Internet TV organizations
and all are state-owned companies.
On September 2, 2014, the GAPPRFT promulgated a Notice on Further Implementing the Relevant Provisions for the Administration of Broadcasting Foreign
Films and TV dramas. The notice stresses that any foreign film or TV drama must have a License for Film Publication or a TV drama Issuance License before
being broadcast online, and that the annual total number of foreign films and TV dramas broadcast by a website must not exceed 30% of the total amount of
domestic films and TV dramas broadcast by such website in the preceding year. Furthermore, online video operators are required to report their annual plans for the
import of foreign films and TV dramas to the GAPPRFT before the end of the preceding year. If the online video operators' import plans are approved, the samples,
contracts, copyright certificates, plot summaries and other materials relevant to the foreign films and TV dramas are subject to further content examination before
the issuance of Licenses for Film Publication or the TV drama Issuance Licenses. The notice also requires these online video operators to upload information about
the foreign films and TV dramas to be broadcast to a unified platform for registration before March 31, 2015. Since April 1, 2015, unregistered foreign films and
TV dramas are no longer allowed to be broadcast online.
Regulations on Internet Publication
The GAPP is responsible for nationwide supervision and administration of publishing activities in China. On June 27, 2002, the GAPP and the MIIT jointly
promulgated the Internet Publication Tentative Administrative Measures, or the Internet Publication Measures, which took effect on August 1, 2002. Pursuant to
the Internet Publication Measures, any entity engaged in Internet publishing activities must obtain the Internet Publication License from the GAPP before
conducting any Internet publication activities. The term "Internet publication" is defined as Internet transmission activity by which Internet information service
providers publish on the Internet or transmit to end-users via the Internet works that they or others have created, after selection and editing, for browsing, reading,
use or downloading by the general public. The works in question primarily include (i) content that has already been published formally, such as books, newspapers,
periodicals, audio/video products and electronic publications, or that has been made public via other media; and (ii) edited works of literature and art or works
concerning natural science, social science, engineering or other topics.
On February 4, 2016, the GAPPRFT and the MIIT jointly promulgated the Online Publication Service Administration Rules, or the Online Publication Rules,
which took effect on March 10, 2016 and replaced the Internet Publication Measures. Pursuant to the Online Publication Rules, an online publication service
provider must obtain the Online Publication Service License from the GAPPRFT. The term "online publication service" is defined as the provision of online
publications to the public through information networks. The term "online publications" is defined as digital works characteristic of publishing such as editing,
production or processing provided to the public through information networks, and primarily include:
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original digital works such as texts, pictures, maps, games, cartoons and audio-visual reading materials in the fields of literature, art, science, etc.,
which are of knowledge or ideology;
digital works, the content of which is the same as that of books, newspapers, periodicals, electronic publication, etc., which have already
been published;
digital works such as online document databases formed by way of selecting, compiling or collecting the abovementioned works; and
other types of digital works determined by the GAPPRFT.
The Online Publication Rules expressly prohibit the foreign invested enterprises from providing online publication services. In addition, if an online
publication service provider intends to cooperate for an online
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publication services project with foreign invested enterprises, overseas organizations or overseas individuals, it must report to the GAPPRFT and obtain an
approval in advance. Also, the online publication service provider is prohibited from lending, leasing, selling or otherwise transferring the Online Publication
Service License, or to allow any other online information service provider to provide online publication services in its name.
Regulations on Internet Drug Information Service
The State Food and Drug Administration, or the SFDA, promulgated the Administrative Measures on Internet Drug Information Service in July 2004 and
certain implementing rules and notices thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications and
requirements for Internet drug information services. An ICP service operator that provides information regarding drugs or medical equipment must obtain an
Internet Drug Information Service Qualification Certificate from the applicable provincial level counterpart of the SFDA.
Regulations on Internet News Publication
Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 7, 2000, the State Council Information Office, or SCIO,
and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News
Measures. These measures require an ICP operator (other than a government authorized news unit) to obtain the approval from SCIO to publish news on its website
or disseminate news through the Internet. Furthermore, any disseminated news is required to be obtained from government-approved sources based on contracts
between the ICP operator and these sources. The copies of such contracts must be filed with relevant government authorities.
On September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet
news information service organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also
provide that no Internet news information service organizations may take the form of a foreign invested enterprise, whether jointly or wholly owned by the foreign
investment, and no cooperation between Internet news information service organizations and foreign invested enterprise is allowed before the SCIO completes the
security evaluation.
Regulations on Internet Culture Activities
On February 17, 2011, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures. The
Internet Culture Measures require ICP operators engaging in "Internet culture activities" to obtain a permit from the Ministry of Culture. The term "Internet culture
activities" includes, among other things, online dissemination of Internet cultural products (such as audio-video products, gaming products, performances of plays
or programs, works of art and cartoons) and the production, reproduction, importation, publication and broadcasting of Internet cultural products.
On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet
Music, or the Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for the Internet service
provider to obtain an Internet culture business permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from
operating Internet culture businesses. However, the laws and regulations on Internet music products are still evolving, and there have not been any provisions
stipulating whether or how music video will be regulated by the Suggestions.
On August 18, 2009, the Ministry of Culture promulgated the Notice on Strengthening and Improving the Content Review of Online Music. According to this
notice, only "Internet culture operating entities" approved by the Ministry of Culture may engage in the production, release, dissemination (including providing
direct links to music products) and importation of online music products. The content of online music must be reviewed by or filed with the Ministry of Culture.
Internet culture operating entities should establish a strict self-monitoring system of online music content and set up a special department in charge of such
monitoring.
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On October 23, 2015, the Ministry of Culture promulgated the Notice on Further Strengthening and Improving the Content Review of Online Music, which
took effect on January 1, 2016. According to this notice, ICP operators are required to submit their content administrative system, review procedures, and work
standards to the provincial culture administrative department where they are located for filing within a prescribed period.
Regulations on Producing Audio/Video Programs
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, effective as of
August 20, 2004 and amended on August 28, 2015. These Measures provide that anyone who wishes to produce or operate radio or television programs must first
obtain an operating permit.
On February 1, 2002, the State Council promulgated the Regulations for the Administration of Films, or the Film Regulations, effective as of February 1, 2002.
The Film Regulations set forth the general regulatory guidelines for China's film industry and address practical issues with respect to production, censorship,
distribution and screening. They also establish the SARFT as the sector's regulatory authority, and serve as the foundation for all other legislation promulgated in
this area. The Film Regulations provide the framework for an industry-wide licensing system operated by the SARFT, under which separate permits (and permit
application procedures) apply.
Regulation of Internet Security
The Decision in Relation to Protection of the Internet Security enacted by the Standing Committee of the National People's Congress of China on
December 28, 2000 provides that the following activities conducted through the Internet are subject to criminal punishment:
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•
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•
gaining improper entry into a computer or system of strategic importance;
disseminating politically disruptive information or obscenities;
leaking State secrets;
spreading false commercial information; or
infringing intellectual property rights.
The Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public
Security on December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State secrets or the
spread of socially destabilizing content. The Provisions on Technological Measures for Internet Security Protection, or the Internet Security Protection Measures,
promulgated on December 13, 2005 by Ministry of Public Security require all ICPs to keep records of certain information about its users (including user
registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required
by laws and regulations. Under these measures, the value-added telecommunications services license holders must regularly update information security and
content control systems for their websites and must also report any public dissemination of prohibited content to local public security authorities. If a value-added
telecommunications services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license
and shut down its websites.
The Communication Network Security Protection Administrative Measures, which was promulgated by the MIIT on January 21, 2010, require that all
communication network operators including telecommunications services providers and Internet domain name service providers divide their own communication
networks into units. Such communication network units shall be rated in accordance with degree of damage to national security, economic operation, social order
and public interest assuming such units is damaged. The communication network operators must file the division and ratings of their communication network with
MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or impose a
fine up to RMB30,000 in case such violation is not duly rectified.
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Internet security in China is also regulated and restricted from a national security standpoint. On July 1, 2015, the National People's Congress Standing
Committee promulgated the New National Security Law which took effect on the same date replaced the former National Security Law promulgated in 1993.
According to the New National Security Law, the state shall ensure that the information system and data in important areas are secure and controllable. In addition,
according to the New National Security Law, the state shall establish national security review and supervision institutions and mechanisms, and conduct national
security reviews of key technologies and IT products and services that affect or may affect national security. There are uncertainties on how the New National
Security Law will be implemented in practice.
Regulation of Privacy Protection
Under the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or
that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security
authorities for such acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also
prohibited from collecting any user personal information or providing any such information to third parties without the consent of a user. ICPs must expressly
inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information
necessary for its services. ICPs are also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal
information, ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People's Congress on
December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision
requires ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the
security of the information and to prevent leakage, damage or loss. Furthermore, MIIT's Rules on Protection of Personal Information of Telecommunications and
Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures to be
taken by ICPs.
The PRC government retains the power and authority to order ICPs to provide an Internet user's personal information if such user posts any prohibited content
or engages in any illegal activities through the Internet.
Regulation of Consumer Protection
Our online and mobile commerce business is subject to a variety of consumer protection laws, including the PRC Consumer Rights and Interests Protection
Law, as amended and effective as of March 15, 2014, and the Administrative Measures for Online Trading, both of which have provided stringent requirements and
obligations on business operators, including Internet business operators and platform service providers like us. For example, consumers are entitled to return goods
purchased online, subject to certain exceptions, within seven days upon receipt of such goods for no reason. To ensure that merchants and service providers comply
with these laws and regulations, we, as platform operators, are required to implement rules governing transactions on our platform, monitor the information posted
by merchants and service providers, and report any violations by such merchants or service providers to the relevant authorities. In addition, online marketplace
platform providers may, pursuant to PRC consumer protection laws, be exposed to liabilities if the lawful rights and interests of consumers are infringed in
connection with consumers' purchase of goods or acceptance of services on online marketplace platforms and the platform service providers fail to provide
consumers with the contact information of the merchant or manufacturer. In addition, platform service providers may be jointly and severally liable with merchants
and manufacturers if they are aware or should be aware that the merchant or manufacturer is using the
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online platform to infringe upon the lawful rights and interests of consumers and fail to take measures necessary to prevent or stop such activity.
Failure to comply with these consumer protection laws could subject us to administrative sanctions, such as the issuance of a warning, confiscation of illegal
income, imposition of a fine, an order to cease business operations, revocation of business licenses, as well as potential civil or criminal liabilities.
Regulation of Pricing
In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law, business operators
must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production, specifications, and
other related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must
not commit the specified unlawful pricing activities, such as colluding with others to manipulate the market price, providing fraudulent discounted price
information, using false or misleading prices to deceive consumers to transact, or conducting price discrimination against other business operators. Failure to
comply with the Pricing Law or other rules or regulations on pricing may subject business operators to administrative sanctions such as warning, orders to cease
unlawful activities, payment of compensation to consumers, confiscation of illegal gains, and/or fines. The business operators may be ordered to suspend business
for rectification, or have their business licenses revoked if the circumstances are severe. Merchants on Tmall and Taobao Marketplace undertake the primary
obligation under the Pricing Law. However, in some cases, we have been and may in the future be held liable and be subject to fines or other penalties if the
authorities determine that, as the platform operator, our guidance for platform-wide promotional activities resulted in unlawful pricing activities by the merchants
on our platforms or if the pricing information we provided for platform-wide promotional activities was determined to be untrue or misleading.
Regulation of Intellectual Property Rights
Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the
date of application, depending on the type of patent right.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and
regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the
Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or
given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark
may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain Name. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants
become domain name holders upon successful registration.
Regulation of Anti-counterfeiting
According to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person's registered trademark, or sale of any label
that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive right to use a registered trademark. The infringing party
will be ordered to cease infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may also be held
liable for damages suffered by the owner of the intellectual property rights, which will be equal to the gains obtained by the infringing party or the losses suffered
by such owner as a result of the infringement, including reasonable expenses incurred by such owner in connection with enforcing its rights.
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Under the Tort Liability Law of the PRC, an Internet service provider may be subject to joint liability if it is aware that an Internet user is infringing upon the
intellectual property rights of others through its Internet services, such as selling counterfeit products, and fails to take necessary measures to stop that activity. If an
Internet service provider receives a notice from an infringed party regarding an infringement, the Internet service provider is required to take certain measures,
including deleting, blocking and unlinking the infringing content, in a timely manner.
In addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of an online trading platform, we
must adopt measures to ensure safe online transactions, protect consumers' rights and prevent trademark infringement.
Tax Regulations
PRC Enterprise Income Tax
The PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules,
which became effective on January 1, 2008. The EIT Law generally imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China,
including foreign-invested enterprises.
The EIT Law and its implementation rules permit certain High and New Technologies Enterprises, or HNTEs, to enjoy a reduced 15% enterprise income tax
rate subject to these HNTEs meeting certain qualification criteria. In addition, the relevant EIT laws and regulations also provide that entities recognized as
Software Enterprises are able to enjoy a tax holiday consisting of a 2-year-exemption commencing from their first profitable calendar year and a 50% reduction in
ordinary tax rate for the following three calendar years, while entities qualified as Key Software Enterprises can enjoy a preferential EIT rate of 10%. A number of
our PRC subsidiaries and operating entities enjoy these types of preferential tax treatment. See "Item 10. Additional Information — E. Taxation — People's
Republic of China Taxation."
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of Alibaba Group and our offshore subsidiaries. Under the EIT Law, an
enterprise established outside of China with a "de facto management body" within China is considered a "resident enterprise," which means that it is treated in the
same manner as a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define "de facto management body" as
a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an
enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, which provides
guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated
under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Alibaba Group
Holding Limited does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore
incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in
Circular 82 to evaluate the tax residence status of Alibaba Group and our subsidiaries organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto
management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
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the primary location of the day-to-day operational management is in the PRC;
decisions relating to the enterprise's financial and human resource matters are made or are subject to approval by organizations or personnel in
the PRC;
the enterprise's primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained
in the PRC; and
50% or more of voting board members or senior executives habitually reside in the PRC.
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We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and our offshore
subsidiaries are incorporated outside the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of
directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore
holding companies with a corporate structure similar to ours that have been deemed a PRC "resident enterprise" by the PRC tax authorities. Accordingly, we
believe that Alibaba Group Holding Limited and our offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria for
"de facto management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency 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" as applicable to our
offshore entities, we will continue to monitor our tax status. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's
Republic of China — 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."
In the event that Alibaba Group Holding Limited or any of our offshore subsidiaries is considered to be a PRC resident enterprise:
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•
Alibaba Group Holding Limited or our offshore subsidiaries, as the case may be, may be subject to the PRC enterprise income tax at the rate of 25%
on our worldwide taxable income;
dividend income that Alibaba Group Holding Limited or our offshore subsidiaries, as the case may be, received from our PRC subsidiaries may be
exempt from the PRC withholding tax; and
dividends paid to our overseas shareholders or ADS holders who are non-PRC resident enterprises as well as gains realized by such shareholders or
ADS holders from the transfer of our shares or ADSs may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at
a rate of up to 10%, subject to any reduction or exemption set forth in relevant tax treaties, and similarly, dividends paid to our overseas
shareholders or ADS holders who are non-PRC resident individuals, as well as gains realized by such shareholders or ADS holders from the transfer
of our shares or ADSs, may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of 20%, subject to any
reduction or exemption set forth in relevant tax treaties.
Under Bulletin 7 issued by the State Administration of Taxation on February 3, 2015, which replaced or supplemented certain previous rules under
Circular 698, 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 such 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 such indirect transfer may be subject to PRC enterprise income tax. According to
Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties in China, and equity
investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as
effectively connected with the PRC establishment or a place of business and therefore included in its enterprise income tax filing, and would consequently be
subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a
PRC resident enterprise, which is not effectively connected to a PRC establishment or a place of business of a non-resident enterprise, a PRC enterprise income tax
at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the
transfer payments has the withholding obligation. There is uncertainty as to the implementation details of Bulletin 7. If Bulletin 7 was determined by the tax
authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be
required to spend valuable resources to comply with Bulletin 7 or to establish that the relevant transactions should not be taxed under Bulletin 7, which may
materially and adversely affect us. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We
and
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our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment
or a place of business of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company."
Where the payers fail to withhold any or sufficient tax, the non-PRC residents, as the transferors, are required to declare and pay such taxes to the tax
authorities on their own within the statutory time limit. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties,
including full payment of taxes owed, and interest on those taxes.
PRC Business Tax and Value-Added Tax
Before August 2013 and pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required
to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology
development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities.
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to
Replace Business Tax. In May and December 2013, April 2014 and March 2016, the Ministry of Finance and the State Administration of Taxation promulgated
Circular 37, Circular 106, Circular 43 and Circular 36 to further expand the scope of services which are to be subject to Value-Added Tax, or VAT, instead of
business tax. Pursuant to these tax rules, from August 1, 2013, a VAT was imposed to replace the business tax in certain service industries, including technology
services and advertising services, and from May 1, 2016, VAT replaced business tax in all industries, on a nationwide basis. A VAT rate of 6% applies to revenue
derived from the provision of certain services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the
output VAT chargeable on the revenue from services provided. Accordingly, although the 6% VAT rate is higher than the previously applicable 5% business tax
rate, no materially different tax cost to us has resulted nor do we expect to result from the replacement of the business tax with a VAT on our services.
PRC Import Tax
Consumer goods imported through cross-border e-commerce platforms were originally classified as "personal baggage or postal articles" under the Notice on
Pilot Bonded Area Import Pattern of Cross-Border Trade E-Commerce Services issued by PRC General Administration of Customs on March 4, 2014. A personal
baggage or postal articles tax was levied on such goods before the online retailors could deliver the same to buyers. The personal baggage or postal articles tax
were exempted if the payable amount was lower than RMB50. The rate of personal baggage or postal articles tax was respectively 10%, 20%, 30% and 50% for
different categories of products imported. Under this tax pattern, a quota of RMB1,000 for each purchase order was imposed on online buyers, otherwise the
imported goods were classified as normal goods, which are subject to value-added tax, consumption tax and tariff.
The above-mentioned pilot bonded area import pattern of cross-border e-commerce was abolished pursuant to the Notice on Tax Policies of Cross-Border E-
commerce Retail Importation, effective on April 8, 2016, or the New Cross-Border E-commerce Tax Notice. The goods imported through cross-border e-commerce
platforms are now treated as normal goods rather than "personal baggage or postal articles" and subject to the usual value-added tax, consumption tax and tariff.
Normally, a 17% value-added tax will be levied on most products sold on the cross-border e-commerce platform and a 30% consumption tax will be levied on
cosmetics and perfumes, while no consumption tax will be levied on skin care products, maternity and baby care products. However, the New Cross-Border E-
commerce Tax Notice provides that, if the goods imported through cross-border e-commerce platforms are within the quota of RMB2,000 for each purchase order
or RMB20,000 per year for each buyer, the payable amount for the value-added tax and the consumption tax will be reduced to 70% of the payable tax, and the
tariff will be waived.
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PRC Export Tax
According to the Notice on the Taxation Policies for Cross-border E-Commerce Retail Export, or the E-Commerce Export Taxation Notice, which was jointly
issued by the Ministry of Finance and the State Administration of Taxation and took effect as of January 1, 2014, an e-commerce export enterprise may be exempt
or refunded from consumption tax and VAT upon satisfaction of the following conditions:
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it is a general VAT taxpayer, and has be granted the export tax refund/exemption eligibility;
the customs export declarations (specifically for export tax refund) for exported goods have been obtained and information thereon is consistent
with the electronic information of the customs export declarations;
the foreign exchange for the exported goods is received prior to the deadline of tax refund or tax exemption; and
where the e-commerce export enterprise is a foreign trade enterprise, it shall have obtained corresponding special VAT invoices, special payment
statements for consumption tax (split pages) or special customs statements for payment of import VAT or consumption tax for purchase of the
goods for export, and relevant information on the foregoing documents shall be consistent with that contained in the customs export declarations
(specifically for export tax refunds).
Even if an e-commerce export enterprise does not satisfy the foregoing conditions, it may also be exempt from consumption tax and VAT if it meets the
following requirements:
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it has completed tax registration;
it has obtained customs export declarations for the exported goods; and
it has obtained legal and valid proof for purchase of the exported goods.
Third-party e-commerce platforms providing transaction services for e-commerce export enterprises are not eligible for a tax refund or exemption under the E-
Commerce Export Taxation Notice.
Regulation of Foreign Exchange and Dividend Distribution
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Regulations on Foreign Exchange Administration of the PRC. Under the PRC
foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be
made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with
appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the
repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign
currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-
registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to
clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a
foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for
equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered
capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE's approval, and such RMB capital may not in any case be
used to repay RMB loans if the proceeds of such loans have not been used.
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Since SAFE Circular 142 has been in place for more than five years, SAFE decided to further reform the foreign exchange administration system in order to
satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of
Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on August 4, 2014.
This circular suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered in such areas with a business scope
including "investment" to use the RMB capital converted from foreign currency registered capital for equity investments within the PRC. On April 9, 2015, SAFE
released the Notice on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE
Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign invested enterprises to settle their foreign
exchange capital on a discretionary basis according to the actual needs of their business operation and provides the procedures for foreign invested companies to
use Renminbi converted from foreign currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi
converted from foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope.
Since Circular 19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented in practice.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct
Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose
foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB
proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no
longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible
previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct
Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct
investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Circular of Further
Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or SAFE Circular 13, which became effective on
June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will be further simplified, and foreign exchange registrations of direct investment
will be handled by the banks designated by the foreign exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still
prohibited by SAFE Circular 13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company
loans.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant
approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
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. SAFE Circular 37 requires PRC residents to register with 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 such 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." SAFE Circular 37 further
requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital
contributed by PRC individuals, share
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transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from
carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into
its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls. On February 13, 2015, SAFE released SAFE Circular 13, under which local banks will examine and handle foreign exchange
registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, from June 1, 2015. However, since the
notice came into force recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities and banks.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed
SAFE Circular 75 reports prior to the promulgation of SAFE Circular 37, on behalf of certain employee shareholders whom we know are PRC residents. However,
we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot
assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. 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 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 may subject such beneficial owners or our PRC subsidiaries to fines and legal
sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or
other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share option rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters
involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE
or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning
the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option
Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share
incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed
company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive
plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of
shares or interests and funds transfers.
Regulation of dividend distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as
amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation
regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in
accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as
general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not
permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with
distributable profits from the current fiscal year.
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Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers
must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and
other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law and the Regulations on the Administration of Housing Funds, employers in China must provide
employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and
housing funds.
Anti-monopoly Law
The PRC Anti-monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conduct, such as entering into monopoly agreements, abuse of
dominant market position and concentration of undertakings that have the effect of eliminating or restricting competition.
Monopoly Agreement
Competing business operators may not enter into monopoly agreements that eliminate or restrict competition, such as by boycotting transactions, fixing or
changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, among others, unless such
agreement will satisfy the exemptions under the Anti-monopoly Law, such as improving technologies, increasing the efficiency and competitiveness of small and
medium-sized undertakings, or safeguarding legitimate interests in cross-border trade and economic cooperation with foreign counterparts. Sanctions for violations
include an order to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year, or
RMB500,000 if the intended monopoly agreement has not been performed).
Abuse of Dominant Market Position
A business operator with a dominant market position may not abuse its dominant market position to conduct acts, such as selling commodities at unfairly high
prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party
without any justifiable cause. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities,
confiscation of the illegal gains and fines (from 1% to 10% of sales revenue from the previous year).
Concentration of Undertakings
Where a concentration of undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be approved by the anti-monopoly
authority before the parties implement the concentration. Concentration refers to (1) a merger of undertakings; (2) acquiring control over other undertakings by
acquiring equities or assets; or (3) acquisition of control over, or the possibility of exercising decisive influence on, an undertaking by contract or by any other
means. If business operators fail to comply with the mandatory declaration requirement, the anti-monopoly authority is empowered to terminate and/or unwind the
transaction, dispose of relevant assets, shares or businesses within certain periods and impose fines of up to RMB500,000.
See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We may become the target of anti-monopoly and unfair
competition claims, which may result in our being subject to fines as well as constraints on our business."
Anti-Terrorism Law
The PRC Anti-Terrorism Law, which was promulgated on December 27, 2015 and came into effect on January 1, 2016, imposes obligations on
telecommunication business operators and Internet service providers to
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provide technical interfaces and technical assistance in decryption and other efforts to public and national security authorities in terrorism prevention and
investigation. Also, the Anti-Terrorism Law requires Internet service providers to implement network security and information and content monitoring systems and
adopt technical security measures to prevent the dissemination of information containing terrorist or extremist content. Once such content is detected, Internet
service providers shall cease the transmission of the information, keep the relevant records, delete the information and report to public and national security bodies.
In addition, the Anti-Terrorism Law requires telecommunication business operators and Internet service providers to verify the identity of their clients, and to not
provide services to anyone whose identity is unclear or who declines to verify his/her identity. However, the Anti-Terrorism Law does not further specify the
required verification measures. Since the Anti-Terrorism Law was promulgated recently, there exist substantial uncertainties with respect to its interpretation and
implementation by governmental authorities.
Regulation Applicable to Alipay
Regulation of Non-financial Institution Payment Services
According to the Administrative Measures for the Payment Services Provided by Non-financial Institutions, or the Payment Services Measures, promulgated
by the PBOC on June 14, 2010 and effective as of September 1, 2010, a payment institution, a non-financial institution providing monetary transfer services as an
intermediary between payees and payers, including online payment, issuance and acceptance of prepaid cards or bank cards, and other payment services specified
by the PBOC, is required to obtain a payment business license. Any non — financial institution or individual engaged in the payment business without such license
may be ordered to cease its payment services and be subject to administrative sanctions and even criminal liabilities. Applications for payment business licenses are
examined by the local branches of the PBOC and then submitted to the PBOC for approval. The registered capital of an applicant that engages in a nationwide
payment business must be at least RMB100 million, while that of an applicant engaging in a payment business within a province must be at least RMB30 million.
A payment institution is required to conduct its business within the scope of business indicated in its payment business license, and may not undertake any
business beyond that scope or outsource its payment business. No payment institution may transfer, lease or lend its payment business license.
On January 20, 2015, the SAFE promulgated the Guiding Opinions on the Pilot Services of Cross-Border Foreign Exchange Payment by Payment Institutions,
or the Guiding Opinions, which replaced the previous guiding opinion issued by SAFE on February 1, 2013. Pursuant to the Guiding Opinions, a payment
institution is required to obtain approval from the SAFE in order to engage in pilot cross-border foreign exchange payment services and may only provide cross-
border foreign exchange payment services for trade in goods or trade in services with real and legitimate transaction background. The payment institution must also
verify the real names and identity information of the customers involved in the cross-border transactions, maintain records of the relevant transactions and make
monthly reports to the local branch of the SAFE.
In addition, on December 28, 2015, the PBOC promulgated the Administrative Measures for the Online Payment Business of Non-bank Payment Institutions,
or the Online Payment Measures, which will come into effect on July 1, 2016. The Online Payment Measures classify online payment accounts into three
categories and require online payment institutions to impose classified management based on the real name system with respect to different categories of online
payment accounts. The Online Payment Measures require online payment institutions to conduct "know your client" checks and implement the real name system
for payment accounts. In addition, a payment account can only be opened by a payment institution with Internet payment business license at the request
of customers.
We rely on Alipay to provide payment services on our marketplaces and Alipay has obtained a payment business license from the PBOC as well as approval
for cross-border foreign exchange payment services from the SAFE.
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Anti-money Laundering Regulations
The PRC Anti-money Laundering Law, which became effective on January 1, 2007, sets forth the principal anti-money laundering requirements applicable to
both financial and non-financial institutions with anti-money laundering obligations, such as Alipay, including the adoption of precautionary and supervisory
measures, establishment of various systems for client identification, preservation of clients' identification information and transactions records, and reports on block
transactions and suspicious transactions. The Payment Services Measures also require that the payment institution follow the rules associated with anti-money
laundering and comply with their anti-money laundering obligations.
In addition, the PBOC promulgated the Administrative Measures for Payment Institutions Regarding Anti-money Laundering and Counter Terrorism
Financing on March 5, 2012, or the Anti-money Laundering Measures, according to which the payment institution must establish and improve unified anti-money
laundering internal control systems and file such systems with the local branch of the PBOC. The Anti-money Laundering Measures also require the payment
institution to set up an anti-money laundering department or designate an internal department to be responsible for anti-money laundering and counter terrorism
financing work.
Alipay is in the process of expanding its business internationally, and it may become subject to additional laws, rules and regulations of the jurisdictions in
which it chooses to operate. These regulatory regimes may be complex and require extensive time and resources to ensure compliance.
C. Organizational Structure
We conduct our business operations across approximately 330 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal
structure and identifies the significant subsidiaries described in "— A. History and Development of the Company," as well as our other subsidiaries and variable
interest entities that are material to our business and the number of their respective subsidiaries, as of March 31, 2016:
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(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes approximately 40 subsidiaries and consolidated entities incorporated in China and approximately 80 subsidiaries incorporated in other jurisdictions that are not illustrated in this chart. In
addition, the entities pictured in this chart hold, directly and indirectly, an aggregate of approximately 100 additional subsidiaries and consolidated entities incorporated in China and approximately
90 additional subsidiaries incorporated outside of China not pictured in the chart.
Primarily involved in the operation of Taobao Marketplace.
Primarily involved in the operation of Tmall and Juhuasuan.
Primarily involved in the operation of Alimama.
Primarily involved in the operation of Alibaba.com, 1688.com and AliExpress.
Primarily involved in the operation of cloud computing services.
Each of these variable interest entities is 80%-owned by Jack Ma and 20%-owned by Simon Xie, other than Zhejiang Taobao Network Co., Ltd., which is 90%-owned by Jack Ma and 10%-owned by
Simon Xie.
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include the
operations of Internet content providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in
China, operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned
enterprises, majority-owned entities and variable interest entities. The relevant variable interest entities, which are incorporated in the PRC and 100% owned by
PRC citizens or by PRC entities owned by PRC citizens, where applicable, hold the ICP licenses and other regulated licenses and operate our Internet businesses
and other businesses in which foreign investment is restricted or prohibited. Specifically, our variable interest entities that are material to our business are Zhejiang
Taobao Network Co., Ltd., Zhejiang Tmall Network Co., Ltd., Hangzhou Alibaba Advertising Co., Ltd., Hangzhou Ali Technology Co., Ltd. and Alibaba Cloud
Computing Ltd. Each of these variable interest entities other than Zhejiang Taobao Network Co., Ltd. is 80%-owned by Jack Ma, our lead founder, executive
chairman and one of our principal shareholders, and 20%-owned by Simon Xie, one of our founders. Zhejiang Taobao Network Co., Ltd. is 90%-owned by Jack
Ma and 10%-owned by Simon Xie. We have entered into certain contractual arrangements, as described in more detail
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below, which collectively enable us to exercise effective control over the variable interest entities and realize substantially all of the economic risks and benefits
arising from, the variable interest entities. As a result, we include the financial results of each of the variable interest entities in our consolidated financial
statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries.
Other than the ICP licenses and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held by our variable interest
entities, we hold our material assets in, and conduct our material operations through, our wholly-foreign owned and majority-owned enterprises, which primarily
provide technology and other services to our customers. We generate the significant majority of our revenue directly through our wholly-foreign owned enterprises,
which directly capture the profits and associated cash flow from operations without having to rely on contractual arrangements to transfer such cash flow from the
variable interest entities to the wholly-foreign owned enterprises.
The following diagram is a simplified illustration of the ownership structure and contractual arrangements that we typically have in place for our variable
interest entities:
The following is a summary of the common contractual arrangements that provide us with effective control of our material variable interest entities and that
enable us to receive substantially all of the economic benefits from their operations.
Contracts that Give Us Effective Control of the Variable Interest Entities
Loan agreements. Pursuant to the relevant loan agreement, the respective wholly-foreign owned enterprise has granted an interest-free loan to the relevant
variable interest entity equity holders, which may only be used for the purpose of a capital contribution to the relevant variable interest entity or as may be
otherwise agreed by the wholly-foreign owned enterprise. The wholly-foreign owned enterprise may require acceleration of repayment at its absolute discretion.
When the variable interest entity equity holders make early repayment of the outstanding amount, the wholly-foreign owned enterprise or a third-party designated
by it may purchase the equity interests in the variable interest entity at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules
and regulations. The variable interest entity equity holders undertake not to enter into any prohibited transactions in relation to the variable interest entity, including
the transfer of any business, material assets, intellectual property rights or equity interests in the variable interest entity to any third-party. The parties to the loan
agreement for each of our material variable interest entities are Jack Ma and Simon Xie on the one hand,
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and Taobao (China) Software Co., Ltd., Zhejiang Tmall Technology Co., Ltd., Alibaba (China) Technology Co., Ltd., Hangzhou Alimama Technology Co., Ltd.
and Zhejiang Alibaba Cloud Computing Ltd., the respective wholly-foreign owned enterprise on the other hand.
Exclusive call option agreements. The variable interest entity equity holders have granted the wholly-foreign owned enterprise an exclusive call option to
purchase their equity interest in the variable interest entity at an exercise price equal to the higher of (i) the registered capital in the variable interest entity; and
(ii) the minimum price as permitted by applicable PRC laws. Each relevant variable interest entity has further granted the relevant wholly-foreign owned enterprise
an exclusive call option to purchase its assets at an exercise price equal to the book value of the assets or the minimum price as permitted by applicable PRC law,
whichever is higher. The wholly-foreign owned enterprise may nominate another entity or individual to purchase the equity interest or assets, if applicable, under
the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of
the equity interest or assets pursuant to the call option. Each wholly-foreign owned enterprise is entitled to all dividends and other distributions declared by the
variable interest entity, and the variable interest entity equity holders have agreed to give up their rights to receive any distributions or proceeds from the disposal of
their equity interests in the variable interest entity which are in excess of the original registered capital that they contributed to the variable interest entity, and to
pay any such distributions or premium to the wholly-foreign owned enterprise. The exclusive call option agreements remain in effect until the equity interest or
assets that are the subject of such agreements are transferred to the wholly foreign owned enterprise. The parties to the exclusive call option agreement for each of
our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its
corresponding wholly-foreign owned enterprise.
Proxy agreements. Pursuant to the relevant proxy agreement, each of the variable interest entity equity holders irrevocably authorizes any person designated
by the wholly-foreign owned enterprise to exercise his rights as an equity holder of the variable interest entity, including the right to attend and vote at equity
holders' meetings and appoint directors. The parties to the proxy agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the
variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Equity pledge agreements. Pursuant to the relevant equity pledge agreement, the relevant variable interest entity equity holders have pledged all of their
interests in the equity of the variable interest entity as a continuing first priority security interest in favor of the corresponding wholly-foreign owned enterprise to
secure the outstanding amounts advanced under the relevant loan agreements described above and to secure the performance of obligations by the variable interest
entity and/or its equity holders under the other structure contracts. Each wholly-foreign owned enterprise is entitled to exercise its right to dispose of the variable
interest entity equity holders' pledged interests in the equity of the variable interest entity and has priority in receiving payment by the application of proceeds from
the auction or sale of such pledged interests, in the event of any breach or default under the loan agreement or other structure contracts, if applicable. These equity
pledge agreements remain in force for the duration of the relevant loan agreement and other structure contracts. The parties to the equity pledge agreement for each
of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its
corresponding wholly-foreign owned enterprise. All of the equity pledges relating to our material variable interest entities have been registered with the relevant
office of the Administration for Industry and Commerce in China.
Contracts that Enable Us to Receive Substantially All of the Economic Benefits from the Variable Interest Entities
Exclusive technical services agreements. Each relevant variable interest entity has entered into an exclusive technical services agreement with the respective
wholly-foreign owned enterprise, pursuant to which the relevant wholly-foreign owned enterprise provides exclusive technical services to the variable interest
entity. In exchange, the variable interest entity pays a service fee to the wholly-foreign owned enterprise which typically amount to what
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would be substantially all of the variable interest entity's pre-tax profit (absent the service fee), resulting in a transfer of substantially all of the profits from the
variable interest entity to the wholly-foreign owned enterprise.
The exclusive call option agreements described above also entitle the wholly-foreign owned enterprise to all dividends and other distributions declared by the
variable interest entity and to any distributions or proceeds from the disposal by the variable interest entity equity holders of their equity interests in the variable
interest entity that are in excess of the original registered capital that they contributed to the variable interest entity.
In the opinion of Fangda Partners, our PRC legal counsel:
•
•
the ownership structures of our material wholly-foreign owned enterprises 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-foreign owned enterprises, our material variable interest entities and the variable interest
entity equity holders governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable PRC laws, rules, and
regulations currently in effect, and will not violate any applicable PRC law, regulation, or rule currently in effect.
However, we have been further advised by our PRC legal counsel, Fangda Partners, that there are substantial uncertainties regarding the interpretation and
application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the
opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the
structure for operating our Internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in,
we could be subject to severe penalties including being prohibited from continuing operations. See "Item 3. Key Information — D. Risk Factors — Risks Related
to Our Corporate Structure."
D. Property, Plant and Equipment
As of March 31, 2016, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling 421,445 square
meters. We maintain offices in China, Dubai, France, Germany, Hong Kong, India, Italy, Korea, Taiwan, Turkey, Russia, Singapore, the United Kingdom and the
United States. In addition, we maintain data centers in China, Hong Kong, Singapore and the United States.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated
financial statements and the related notes included elsewhere in this annual report and in particular, "Item 4. Information on the Company — B. Business
Overview." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could
differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 3. Key
Information — D. Risk Factors" and elsewhere in this annual report. We have prepared our financial statements in accordance with U.S. GAAP. Our fiscal year
ends on March 31 and references to fiscal years 2014, 2015 and 2016 are to the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
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Overview
We achieved significant growth and strong operating results in fiscal year 2016. Our total revenue increased by 45% from RMB52,504 million in fiscal year
2014 to RMB76,204 million in fiscal year 2015, and further increased by 33% to RMB101,143 million (US$15,686 million) in fiscal year 2016. Our net income
increased by 4% from RMB23,403 million in fiscal year 2014 to RMB24,320 million in fiscal year 2015 and further increased by 193% to RMB71,289 million
(US$11,056 million) in fiscal year 2016. Our GMV surpassed RMB3 trillion in fiscal year 2016. We believe our focus on long-term strategic
priorities — globalization, rural expansion, building a world-class cloud computing business and creating a comprehensive media and entertainment
platform — has laid a strong foundation for future growth.
We have experienced significant growth across various key metrics for our China retail marketplaces:
We have also experienced significant growth in our mobile monetization on our China retail marketplaces:
(1)
Annual mobile revenue per mobile MAU from China commerce retail is calculated by dividing mobile revenue from China commerce retail for the previous twelve months, by the
mobile MAUs at the end of the same period.
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We primarily generate revenue from the businesses described below:
Revenue
China Commerce Retail
Businesses
• Taobao Marketplace — Online shopping destination
• Tmall (1) — Brands and retail platform
• Juhuasuan — Flash sale platform
China Commerce Wholesale
• 1688.com — China wholesale marketplace
International Commerce Retail
• AliExpress — Global consumer marketplace
International Commerce Wholesale
• Alibaba.com — Global wholesale marketplace
Cloud Computing
• Alibaba Cloud — Cloud computing services provider
(1)
GMV and revenue of Tmall Global, part of our international retail business, are captured in Tmall.
See "Item 4. Information on the Company — B. Business Overview" for a detailed discussion of our business and our ecosystem.
Our Monetization Model
The revenue we generate on our retail marketplaces is highly correlated with the number and engagement of the consumers on our platforms, the myriad value
propositions of branding, marketing, promotions, distribution and productivity enhancements we offer merchants and brands, and our data and technology
capabilities. The revenue we generate on our wholesale marketplaces is largely driven by the number of paying members and the value of the wholesale
marketplaces as a marketing and distribution platform. We primarily derive revenue from online marketing services, commissions, memberships and cloud
computing services. In fiscal year 2016, revenue from P4P marketing services and display marketing services accounted for 53%, commissions accounted for 27%,
memberships and value-added services accounted for 8%, and cloud computing services accounted for 3%, of our total revenue, respectively.
The pricing of our marketing services is primarily performance-based or impression-based. Performance-based marketing uses clicks or transactions as the
measurement unit for performance. Impression-based marketing uses the number of impressions delivered to the user. The pricing of our marketing services is
typically set by market-based bidding systems so that each marketer determines the price it is willing to pay for the services.
Marketers' willingness to pay and the amount they are willing to pay for our online marketing services is a function of the marketers' expected return on
investment, which generally depends on the following factors:
•
•
•
if our platform serves as a sales and distribution channel for products: the sales volume, profits and inventory turnover expected to be generated on
our platform;
if our platform serves as a customer acquisition and retention channel: the expected online and offline lifetime value of customers acquired from our
platform; and
if our platform serves as a brand building and brand engagement platform: the awareness reach, and brand association, measured both online and
offline, achieved as a result of the marketing.
China Commerce Retail. We generate revenue from our China retail marketplaces primarily through the monetization models described below. In fiscal
year 2016, 75% of GMV on our China retail marketplaces was settled through Alipay. In fiscal year 2016, we generated 65% and 32% of our China commerce
retail revenue from online marketing services and commissions, respectively.
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Online marketing services.
Online marketing services primarily consist of:
•
•
•
•
P4P marketing services , where merchants primarily bid for keywords that match product or service listings appearing in search or browser results
on a cost-per-click, or CPC, basis at prices established by our online auction system, which facilitates price discovery through a market-based
bidding mechanism. P4P marketing services are provided both on our marketplaces as well as through third-party marketing affiliates; and
Display marketing services , where merchants bid for display positions on the relevant marketplaces or through our third-party marketing affiliates
at fixed prices or prices established by a bidding system on a cost-per-thousand impression, or CPM, basis.
For both P4P marketing and display marketing services, we generate a portion of our revenue through third-party marketing affiliates. Revenue from
P4P and display marketing services provided through third- party marketing affiliates represented 6%, 3% and 3% of our total revenue in fiscal
years 2014, 2015 and 2016, respectively, and this revenue is recognized on a gross basis.
Taobaoke program , where merchants on Taobao Marketplace and Tmall pay us commissions based on a percentage of transaction value generated
from users sourced from third-party marketing affiliates. Commissions on Taobaoke are set by the merchants and depend on the amount the
merchant is willing to pay to generate incremental sales through this channel. A significant portion of that commission is shared with our third-party
marketing affiliates and we recognize the remaining portion as our revenue on a net basis. In certain situations where we are obligated to pay for
website inventory costs in fixed amounts to third-party marketing affiliates, we recognize the commission revenue on a gross basis.
Placement services , where merchants pay placement fees to purchase promotional slots on Juhuasuan for a specified period.
Commissions on transactions. In addition to purchasing online marketing services, merchants also pay a commission based on a percentage of transaction
value generated on Tmall or from Juhuasuan. The commission percentages typically range from 0.4% to 5.0% depending on the product category. The commission
rate we establish varies according to our estimate of the industry profit margins in specific product categories. For example, for categories that typically have lower
gross margins, such as consumer electronics, we charge a lower commission rate, whereas for categories such as apparel, where gross margins are generally higher
for the merchants, we charge a higher commission rate.
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Storefront fees. Our revenue from storefront fees is primarily comprised of monthly subscription fees for Wangpu (
includes a suite of tools that assist merchants in upgrading, decorating and managing their storefronts.
), our storefront software that
Purchaser of services:
Taobao Marketplace merchants
Taobao Marketplace
• P4P marketing fees
Tmall
• Not applicable
Juhuasuan
• Commissions
• Placement fees
Tmall merchants
• Display marketing fees
• Taobaoke commissions
• Storefront fees
• Other fees *
• P4P marketing fees
• Display marketing fees
• Commissions
• P4P marketing fees
• Display marketing fees
• Taobaoke commissions
• Commissions
• Placement fees
*
Other fees primarily consist of online travel commissions and lottery commissions. We suspended our online lottery business in late February 2015 around the same time as the other
major online lottery platforms in China in response to regulatory requirements. As of the date of this annual report, there is no clear indication on how long this suspension will last.
China Commerce Wholesale. We generate revenue from our China wholesale marketplace, 1688.com, primarily through:
•
•
Memberships and value-added services. Revenue from our China wholesale marketplace is primarily from the sale of China TrustPass
memberships, which allow wholesalers to host premium storefronts, with access to basic data analytic applications, and upgraded storefront
management tools, as well as from value-added services, such as premium data analytics. In fiscal year 2016, we generated 73% of our China
commerce wholesale revenue from memberships and value-added services.
Online marketing services. Revenue from online marketing services on our China wholesale marketplace is primarily derived from P4P marketing
services. In fiscal year 2016, 27% of our China commerce wholesale revenue was generated from online marketing services.
International Commerce Retail. We generate revenue from our international retail marketplaces, primarily AliExpress, through commissions, which are
typically 5% of transaction value. In the twelve months ended March 31, 2016, GMV on AliExpress settled through Alipay was US$5.4 billion. We also generate
revenue on AliExpress from merchants who participate in the third-party affiliate marketing program and those who purchase P4P marketing services.
International Commerce Wholesale. We generate revenue from our global wholesale marketplace, Alibaba.com, primarily through:
•
•
Memberships and online marketing services. Revenue from our global wholesale marketplace is primarily generated from the sale of our Gold
Supplier memberships on Alibaba.com, which allow wholesalers to host premium storefronts with product listings on the marketplace, as well as
additional online marketing services, primarily P4P marketing services. In fiscal year 2016, 67% of our international commerce wholesale revenue
was generated from memberships and online marketing services.
Value-added services. We generate revenues from providing import/export business solutions through OneTouch, such as custom clearance and
VAT refunds, and other value-added services, such as product showcases. In fiscal year 2016, we generated 33% of our international commerce
wholesale revenue from these value-added services.
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Cloud Computing. We generate revenue from cloud computing services primarily from the time- and usage-based provision of cloud computing services,
such as elastic computing, database, storage and CDN, large scale computing, security and management, and application services, as well as from web-hosting and
domain name registration.
Others. We generate revenue from mobile Internet services provided by UCWeb, as well as other businesses such as AutoNavi, over-the-top TV services
and YunOS. Other revenue also includes annual fees payable by Ant Financial Services to us, calculated at 2.5% of the daily average book balance of the SME
loans generated by the SME loan business we transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial
Services in early February 2015. Prior to this sale, other revenue also included interest income generated by the SME loan business.
Factors Affecting Our Results of Operations
Our Ability to Create Value for Our Users and Generate Revenue. Our ability to create value for our users and generate revenue is driven by the factors
described below:
•
•
•
Number and engagement of consumers. Consumers are attracted to our marketplaces due to the breadth and depth of product and service listings,
relevant entertaining content and good customer experience. In addition, our other businesses, for example, mobile media and entertainment
businesses, and other components of our ecosystem also drive the growth of number of consumers. The engagement of consumers in our ecosystem
is affected by our ability to continue to enhance and expand our product, service and content offerings as well as user experience.
Broader value offered to merchants, brands and other businesses. The willingness of merchants, brands and other businesses to pay us is affected
by the efficiency and effectiveness of our products and services to help them acquire and retain customers, build brand awareness and engagement,
complete transactions, and enhance their operating efficiency. We offer a complete suite of merchant services, including online software tools, for
customer relationship management, inventory and fulfillment management, storefront management, mobile engagement, data insight,
communication and productivity management. We also offer third-party merchant services through our Taobao Services Platform.
Empowering data and technology. Our ability to engage consumers and empower merchants, brands and other businesses is affected by the breadth
and depth of our data insights, such as the accuracy of our shopping recommendations and of our targeted marketing, and our technology
capabilities and infrastructure, such as cloud computing, and our continued ability to develop scalable products and services that adapt to the quickly
evolving industry trends and consumer preferences.
Operating Leverage of Our Marketplace Business Model. Our business model has significant operating leverage and our ecosystem enables us to realize
structural cost savings. For example, Taobao Marketplace drives significant traffic to Tmall as Tmall product listings also appear on Taobao Marketplace search
result pages. In addition, promotional slots purchased on Juhuasuan by Taobao Marketplace and Tmall merchants also drive consumers to Taobao Marketplace and
Tmall storefronts, thereby enabling merchants to introduce consumers to additional product and service offerings beyond those featured on the particular Juhuasuan
promotion and drive additional user traffic. This network effect allows for lower traffic acquisition costs across our marketplaces. In addition, due to the large
number of consumers on our marketplaces, we are able to attract a large number of merchants, which in turn provides a strong source of customers for our online
marketing and storefront services. Merchants purchase marketing services through a self-service platform on our China retail marketplaces. As a result, we do not
rely on a field sales force to generate revenue for our China retail marketplaces.
Our Investment in User Base, Technology, People and Infrastructure. We have made, and will continue to make, significant investments in our platforms
and ecosystem to attract consumers and merchants, enhance user experience and expand the capabilities and scope of our platforms. We expect our investments
will include
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developing and marketing new products and services, enhancing our cloud computing business, and YunOS, a cloud-based mobile operating system for Internet of
Things devices, developing new ways to interact with consumers through our mobile media and entertainment assets, developing new software tools to attract
additional consumers and merchants to our marketplaces as well as executing our globalization strategy. Our operating leverage and margin levels enable us to
continue to invest in our people, particularly engineers, scientists and product management personnel, as well as in our underlying technology capabilities and
infrastructure. In addition, as a result of our financial strength, we expect to invest in the above mentioned new and existing businesses which will lower our
margins but deliver overall long-term growth.
Strategic Investments and Acquisitions. We have made, and intend to make, strategic investments and acquisitions to increase user acquisition and
engagement, improve customer experience and expand our product, service, and content offerings. Our strategic investments and acquisitions may affect our future
financial results, including our margins and our net income. For example, we expect that our recent acquisitions of Youku Tudou and a controlling stake in Lazada
will have a negative effect on our financial results, at least in the short-term. In addition, some of our acquisitions and investments may not be successful, and we
may incur impairment charges in the future.
Components of Results of Operations
Revenue
The following table sets forth the principal components of our revenue for the periods indicated:
2014
RMB
% of
revenue
Year ended March 31,
2015
% of
revenue
RMB
(in millions, except percentages)
RMB
China commerce
Retail
Wholesale
Total China commerce
International commerce
Retail
Wholesale
Total international commerce
Cloud computing
Others
Total revenue
GMV
42,832
2,300
45,132
938
3,913
4,851
773
1,748
52,504
1,677,587
82%
4%
86%
2%
7%
9%
2%
3%
100%
59,732
3,205
62,937
1,768
4,718
6,486
1,271
5,510
76,204
2,443,721
78%
4%
82%
3%
6%
9%
2%
7%
100%
80,033
4,288
84,321
2,204
5,425
7,629
3,019
6,174
101,143
3,092,385
2016
US$
% of
revenue
12,412
665
13,077
342
841
1,183
468
958
15,686
79%
4%
83%
2%
6%
8%
3%
6%
100%
We generate substantially all of our revenue from our retail and wholesale marketplaces. We also earn revenue from services associated with our cloud
computing services and other revenue primarily from mobile Internet services provided by UCWeb. Substantially all of our revenue is attributable to our businesses
in China. See "— Our Monetization Model" for additional information regarding our revenue.
Cost of Revenue
The principal components of our cost of revenue include: payment processing fees paid to Alipay or other financial institutions; traffic acquisition costs paid to
third-party marketing affiliates either at a fixed price or on a
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revenue sharing basis; expenses associated with the operation of our websites, such as bandwidth and co-location fees, and depreciation and maintenance expenses
for our computers, servers, call centers and other equipment; salary, bonuses, benefits and share-based compensation expense relating to customer service and web
operation personnel and payment processing consultants; logistics costs relating to fulfillment services provided to us by our affiliate Cainiao Network, primarily
related to Tmall Supermarket; rebates and subsidies mainly relating to our new business initiatives; business taxes and related surcharges; and allowance for
doubtful accounts in relation to the micro loans and VAT receivables.
Product Development Expenses
Product development expenses primarily include salaries, bonuses, benefits and share-based compensation expense for our employees engaged in the
development, maintenance and enhancement of the infrastructure, applications, operating systems, software, databases and networks for our marketplaces, mobile
products and service platforms. In addition, product development expenses include royalty fees paid to Yahoo pursuant to the Yahoo TIPLA. This royalty fee
arrangement was terminated upon completion of our initial public offering in September 2014. We expense all of our product development costs as they
are incurred.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of online and offline advertising expenses, promotion expenses, sales commissions paid for membership
acquisition for our wholesale marketplaces, and salaries, bonuses, benefits and share-based compensation expense for our employees engaged in sales and
marketing functions.
General and Administrative Expenses
General and administrative expenses consist mainly of salaries, bonuses, benefits and share-based compensation expense for our management and
administrative employees, professional services fees, office facilities, other support overhead costs and charitable contributions. In fiscal year 2014, these expenses
included an equity-settled donation expense of RMB1,269 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit
organization designated by Jack Ma and Joe Tsai. As there are no vesting conditions attached to the above share options, equity-settled donation expense of
RMB1,269 million was recognized in full. See note 9 to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included
elsewhere in this annual report for further information on this expense.
Interest and Investment Income, Net
Interest and investment income, net consists of interest income, investment gain or loss related to our treasury management activities and gain or loss on
deemed disposals, disposals and revaluation of our long term equity investments. Our interest and investment income, net became more significant in fiscal year
2015 as a result of a net gain of RMB6,535 million recognized with respect to the revaluation of previously held equity interests, relating primarily to the step
acquisitions of UCWeb, OneTouch and AutoNavi. In fiscal year 2016, we also recognized a deemed disposal gain of RMB24,734 million (US$3,836 million)
arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity
interest in Alibaba Health.
Interest Expense
Our interest expense is comprised of interest payments and amortization of upfront fees and incidental charges associated with our bank borrowings and
unsecured senior notes issued in November 2014 to refinance our previous syndicated loan arrangements. In addition, we obtained a US$3.0 billion revolving credit
facility in August 2014 and a five-year term loan facility of US$3.0 billion in March 2016, which has been subsequently upsized to US$4.0 billion, both of which
we have not yet drawn as of March 31, 2016.
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Other Income, Net
Other income, net primarily consists of royalty fees and software technology service fees paid by Alipay, government grants as well as exchange gain or loss.
Alipay pays us royalty fees and software technology service fees pursuant to an intellectual property and software technology services agreement, as amended in
August 2014, or the amended Alipay IPLA. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and
Transactions Related to Ant Financial Services and its Subsidiaries — Share and Asset Purchase Agreement — Alipay Intellectual Property License and Software
Technology Services Agreement" for further information on the arrangements between us and Alipay. Government grants primarily relate to grants by central and
local governments in connection with our contributions to technology development and investments in local business districts. These grants may not be recurring in
nature, and we recognize such income when the grants are received and no further conditions need to be met. Exchange gain or loss, arising from our operations
and treasury management activities, recognized in our income statement is largely a result of depreciation or appreciation of RMB, respectively. The amount is also
partly impacted by such currency movements on our hedging activities related to the portion that is deemed ineffective from an accounting perspective.
Income Tax Expense
Our income tax expense is comprised primarily of current tax expense, mainly attributable to certain profitable subsidiaries in China, and deferred tax expense,
mainly including withholding tax on dividends to be distributed by our major subsidiaries operating in China.
Taxation
Cayman Islands Profits Tax
Under Cayman Islands law, our company is not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment
of dividends.
Hong Kong Profits Tax
Our company's subsidiaries incorporated in Hong Kong were subject to Hong Kong profits tax rate of 16.5% in fiscal years 2014, 2015 and 2016.
PRC Income Tax
Under the PRC Enterprise Income Tax Law, or EIT Law, the standard enterprise income tax rate is 25%. Entities qualifying as High and New Technology
Enterprises enjoy a preferential tax rate of 15%. Entities recognized as Software Enterprises are exempt from the EIT for two years beginning from their first
profitable calendar year and are entitled to a 50% reduction in EIT for the following three calendar years. Furthermore, entities recognized as key software
enterprises within the PRC national plan enjoy a preferential EIT rate of 10%.
Certain subsidiaries received the above preferential tax treatments during the calendar years 2013, 2014, 2015 and 2016. One of our major subsidiaries in
China, Zhejiang Tmall Technology Co. Ltd., which is a wholly foreign-owned enterprise primarily involved in the operation of Tmall, is currently in its fifth
profitable year and was subject to an EIT rate of 12.5% (or 50% of the standard statutory rate) in calendar years 2014, 2015 and 2016, and to an EIT rate of 15%
thereafter for so long as the subsidiary continues to qualify as a High and New Technology Enterprise. Two of our subsidiaries in China, Taobao (China)
Software Co. Ltd. and Alibaba (China) Technology Co. Ltd., which are also wholly foreign owned enterprises primarily involved in the operations of Taobao
Marketplace and wholesale marketplaces respectively, were recognized as key software enterprises in the calendar years of 2012, 2013 and 2014 and they were
subject to an EIT rate of 10%. In respect of the calendar years of 2015 and 2016, Key Software Enterprise status has not yet been awarded up to the date of this
annual
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report and accordingly an EIT rate of 15% is used for the accounting of taxation during such periods. Key Software Enterprise status is subject to review by the
relevant authorities every two years and the timing of annual review and notification by the relevant authorities may vary from year to year. The related tax
adjustments in relation to the change in applicable EIT rate will be accounted for in the period prospectively in which Key Software Enterprise status is recognized.
VAT and Other Levies
Our major PRC subsidiaries are subject to VAT on revenue earned for most services under a national VAT reform program. In general, the applicable VAT
rate on the revenue earned for services is 6% with companies entitled to credit VAT paid on certain purchases against VAT on sales. Revenue is recognized net of
VAT in our consolidated income statement.
PRC Withholding Tax
Pursuant to the EIT Law, a 10% withholding tax is generally levied on dividends declared by companies in China to their non-resident enterprise investors. A
lower withholding tax rate of 5% is applicable for direct foreign investors incorporated in Hong Kong with at least a 25% equity interest in the PRC company and
who meet the relevant conditions or requirements pursuant to the tax arrangement between the PRC and Hong Kong. As the equity holders of our major
subsidiaries in China are qualified Hong Kong incorporated companies, our deferred tax liabilities for distributable earnings are calculated based on a 5%
withholding tax. As of March 31, 2016, we have fully accrued the withholding tax on the earnings distributable by all of our subsidiaries in China, except for those
being reserved for permanent reinvestment in China of RMB13.6 billion (US$2.1 billion).
Share-based Compensation
We have various equity incentive plans pursuant to which the employees, consultants and directors of our company, our affiliates and certain other companies
are granted options or awarded RSUs to acquire our ordinary shares. We believe share-based awards are vital to attract, incentivize and retain our employees and
consultants. In addition to on-hire grants for new recruits above a specific job level, we also make performance and promotion grants on an annual basis to our top
performing employees. RSUs and share options granted in the above categories are generally subject to a four-year vesting schedule. Depending on the nature and
the purpose of the grant, share options and RSUs generally vest 25% upon the first anniversary of the vesting commencement date or 50% upon the second
anniversary of the vesting commencement date, and thereafter 25% every year. Starting in fiscal year 2015, RSUs and share options granted to our senior
management members as performance grants were subject to a six-year pro rata vesting schedule. We believe share-based awards are the appropriate tool to align
the interests of the grantees with those of our shareholders.
In addition, Junhan, a major equity holder of Ant Financial Services, granted certain share-based awards similar to share appreciation awards linked to the
valuation of Ant Financial Services to a significant number of our employees. These share-based awards have vesting schedules that are conditioned upon the
fulfillment of requisite services to us, and such awards will be settled in cash by Junhan upon disposal by our employees. We have no obligation to reimburse
Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. See "Item 7. Major Shareholders and Related Party Transactions — B.
Related Party Transaction — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Equity-based Award Arrangements."
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We recognized share-based compensation expense of RMB2,844 million, RMB13,028 million and RMB16,082 million (US$2,494 million) in fiscal years
2014, 2015 and 2016, respectively, representing 5%, 17% and 16% of our revenue in those respective periods. The following table sets forth an analysis of share-
based compensation expense by function for the periods indicated.
Cost of revenue
Product development expenses
Sales and marketing expenses
General and administrative expenses
Total
Year ended March 31,
2014
RMB
2015
RMB
2016
RMB
US$
(in millions)
1,154
795
189
706
2,844
4,176
3,876
1,235
3,741
13,028
4,003
5,703
1,963
4,413
16,082
621
885
304
684
2,494
Share-based compensation expense increased significantly in fiscal years 2015 and 2016 as compared to fiscal year 2014 due to performance-based and
retention grants of share-based awards to our employees and senior management members prior to our initial public offering as well as the increase in average fair
market value of the awards granted. In addition, as a result of "mark-to-market" accounting required under U.S. GAAP, the increase in share-based compensation
expense also reflected the re-measurement charge relating to our share-based awards granted to the employees of Ant Financial Services and share-based awards of
Ant Financial Services granted to our employees by Junhan. The following table sets forth an analysis of share-based compensation expense by type of awards:
Alibaba Group share-based awards granted to:
— Our employees
— Ant Financial Services employees and other consultants (1)
Ant Financial Services share-based awards granted to our employees (1)
Total share-based compensation expense
(1)
Awards subject to mark-to-market accounting treatment.
Year ended March 31,
2014
RMB
2015
RMB
2016
RMB
US$
(in millions)
2,017
827
—
2,844
6,977
2,263
3,788
13,028
9,687
889
5,506
16,082
1,502
138
854
2,494
The expense arising from Ant Financial Services' share-based awards granted to our employees represents a non-cash charge that will not result in any
economic costs or equity dilution to our shareholders. It is the view of Jack Ma, our executive chairman, who controls Ant Financial Services, that the grant of
these equity awards to our employees will benefit us because of the strategic importance of Ant Financial Services as a payment service provider to us and our
significant participation in the profit and value accretion of Ant Financial Services through our agreements with Ant Financial Services.
We expect that our share-based compensation expense will continue to be affected by the change in fair value of our shares, our subsidiaries' share-based
awards (including Youku Tudou and Lazada) and the quantity of awards we grant to our employees and consultants in the future. Furthermore, our share-based
compensation expense will also be affected by the anticipated increase in fair value of share-based awards of Ant Financial Services. As a result of these factors,
we expect that our share-based compensation expense will likely increase. See "— Critical Accounting Policies and Estimates — Share-based Compensation
Expense and Valuation of the Underlying Awards" for additional information regarding our share-based compensation expense.
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Recent Investment, Acquisition and Strategic Alliance Activities
In addition to organic growth, we have made, or have entered into agreements to make, strategic investments, acquisitions and alliances that are intended to
further our strategic objectives. The financial results for these strategic transactions that were completed are reflected in our operating results beginning with the
period of their respective completion. The investments in which we did not obtain control are accounted for under the equity method if we have significant
influence over the investees through investment in common stock or in-substance common stock, or otherwise under the cost method or accounted for as
investment securities based on our accounting policies over different categories of investments and merger and acquisition activities. For the details of our
accounting policies for each category of our investments, see notes 2(d), 2(s) and 2(t) to our consolidated financial statements for the years ended March 31, 2014,
2015 and 2016 included elsewhere in this annual report.
Our investment and acquisition strategy focuses on three objectives:
•
•
•
increasing user acquisition and engagement;
improving customer experience; and
expanding our products and services.
We take a deliberate and staged approach to our investment and acquisition strategy. In some cases, we may begin with an initial minority investment followed
by business cooperation. We have chosen to make minority investments in some circumstances instead of full acquisitions for one or more of the following reasons:
(i) the investee has strong management, where we allow them to have operating independence and potential upside tied to their business in order to retain them;
(ii) the investee does not fit within our core business operations but can generate strategic synergies through an equity relationship; and/or (iii) the investee
demonstrates clear strategic value to us but capital or integration risk in the near term suggests a deliberate and phased-in approach. Where the business results,
cooperation and the overall relationship established with the management of the investee company show increasing value to our ongoing business strategy, we may
increase our investment or acquire the investee company completely. Examples of this type of approach include our investments in UCWeb, AutoNavi and Youku
Tudou, where the period from initial investment to eventual acquisition spanned more than one fiscal year.
We have funded our strategic acquisitions and investments primarily from cash generated from our operations and through debt and equity financing. Our debt
financing primarily consists of unsecured senior notes and bank borrowings. We have issued an aggregate of US$8.0 billion unsecured senior notes. We have
entered into a five-year term loan facility of US$4.0 billion, of which $3.0 billion was drawn down subsequent to March 31, 2016. We have also entered into a
US$3.0 billion revolving credit facility, which we have not yet drawn. Going forward, we expect to fund additional investments through cash generated from our
operations and through debt and equity financing when opportunities arise in the future. Although we expect our margins to be negatively affected by acquisitions
of target companies with lower or negative margins, such as our recent acquisitions of Youku Tudou and a controlling stake in Lazada, we do not expect our
investment activities to have any significant negative impact on our liquidity or operations. We believe acquired businesses operating at a loss do not detract from
the total value of our company because they bring clear strategic value to us in the long run. However, there can be no assurance that our future financial results
would not be materially and adversely affected if our strategic investments and acquisitions are not successful. See "Item 3. Key Information — D. Risk
Factors — Risks Related to Our Business and Industry — Increased investments in our business, strategic acquisitions and investments as well as our focus on
long-term performance and maintaining the health of our ecosystem may negatively affect our margins and our net income" and "Item 3. Key Information —
D. Risk Factors — Risks Related to Our Business and Industry — We face risks relating to our acquisitions, investments and alliances."
Our significant recent strategic investments and acquisitions (including those that are under definitive agreement but have not closed) in fiscal year 2016 and
the period through the date of this annual report are set forth below.
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Local Services
), a joint venture that we set up together with Ant Financial Services during fiscal year 2016. Koubei integrates the
Koubei Holding Limited , or Koubei (
convenience aspects of mobile commerce and big data to provide consumers with information and promotional benefits from local restaurants in China. As of
March 31, 2016, we invested a total cash amount of RMB3,000 million and also injected certain related businesses into Koubei. We and Ant Financial Services
each hold a 49.6% equity interest in Koubei, while an unrelated third-party affiliated with a major Chinese restaurant chain holds a small minority equity interest.
Through Koubei, we participate in the restaurant and local establishment sector in a "closed loop" manner, which is characterized by the "online-to-offline"
interaction of users obtaining information and receiving promotional offers, mostly through a mobile device, and then visiting the physical establishment to enjoy
the services while making on-location payment with Alipay.
Rajax Holding , or Ele.me (
), one of the largest mobile food ordering and delivery services in China, covering over 300 cities as of March 31, 2016.
In March 2016, we and Ant Financial Services completed a portion of the subscription for newly issued convertible preferred shares in Ele.me for a total combined
investment amount of US$1,250 million, of which our total commitment is US$900 million. Our effective equity interest in Ele.me will be approximately 22% on a
fully-diluted basis once the full investment amount is completed. Ele.me complements our investment in Koubei in local services, focusing on food ordering and
delivery characterized by high-frequency usage and last-mile logistics within a city.
Xiaoju Kuaizhi Inc ., or Didi Chuxing (
smartphone applications. We have an existing equity stake of 10% in the fully-diluted equity of Didi Chuxing, which is the resulting company of a merger between
Didi Chuxing and Kuaidi Dache, a taxi hailing company in which we had an investment. We account for our stake in Didi Chuxing as a cost method equity
investment, in which we have an aggregate investment cost of US$445 million. As of the date of this annual report, we have committed to invest a further
US$200 million and Ant Financial Services is expected to invest US$200 million in the preferred shares of Didi Chuxing. In connection with this additional equity
investment, we have signed a cooperation agreement with Didi Chuxing relating to the adoption of navigation and map services provided by AutoNavi to the riders
and drivers of Didi Chuxing's services, thereby further increasing the user base and usage of AutoNavi's services.
), the leading transportation network company that provides vehicles and taxis for hire in China via
Digital Entertainment
Youku Tudou, Inc. , or Youku Tudou, a leading multi-screen entertainment and media company in China that was previously listed on the New York Stock
Exchange. In May 2014, we, through a holding company, invested US$1,090 million to purchase Class A ordinary shares of Youku Tudou, representing an
effective equity interest of 16.5% on a fully-diluted basis. We made this investment on the same terms together with a Yunfeng Fund, which invested
US$132 million for an approximately 2% equity interest. In April 2016, we completed an acquisition of all of the issued and outstanding shares of Youku Tudou
that we or the Yunfeng Fund did not already own for a total cash consideration of US$4.4 billion. Following the completion of the transaction, Youku Tudou
became our consolidated subsidiary, with the Yunfeng Fund holding an approximately 2% minority interest. The management of Youku Tudou has a right for an
option to purchase up to 15% of its equity. Youku Tudou is a core part of our strategy to offer digital entertainment to consumers in our ecosystem, thereby
strengthening user engagement as well as enabling a new marketing channel for the merchants in our ecosystem. Further, Youku Tudou creates additional revenue
sources for us from advertising and membership subscriptions.
Alibaba Pictures Group Limited , or Alibaba Pictures, a producer of movies and television programs in China that is listed on the Hong Kong Stock Exchange.
In June 2014, we acquired control of Alibaba Pictures by completing an investment in newly issued ordinary shares representing an approximately 60% equity
interest in Alibaba Pictures for a total cash consideration of HK$6,244 million. In June 2015, Alibaba Pictures placed newly issued ordinary shares to unrelated
third-party investors with aggregate gross proceeds of HK$12,179 million. Our equity interest in Alibaba Pictures was therefore diluted to 49.5% upon completion
of the placing. Accordingly, we deconsolidated the financial results of Alibaba Pictures starting from June 2015, and recognized a gain of RMB24,734 million
based on revaluation of our remaining equity interest in Alibaba Pictures. In addition, Alibaba
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Pictures completed its purchase of our online movie ticketing business and financing and investment platform for the production of movie and other media content
for a cash consideration of US$350 million plus certain reimbursement amounts in December 2015. With these transactions, Alibaba Pictures has created a
comprehensive platform that integrates valuable assets in the production and distribution value chain for movies and TV dramas.
Wasu Media Holding Co., Ltd. , or Wasu, a company listed on the Shenzhen Stock Exchange and engaged in the business of digital media broadcasting and
distribution in China. In April 2015, Simon Xie, who is one of our founders and an equity holder in certain of our variable interest entities, was granted a financing
with an aggregate principal of up to RMB6.9 billion by a major financial institution in the PRC, which was used to fund a minority investment in Wasu via a PRC
limited partnership. A company controlled by Jack Ma serves as one of the general partners of the limited partnership. 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. Jack, through his control of one of the general
partners, and Mr. Shi, as the other general partner and the executive partner, jointly control this PRC limited partnership. The interest of the general partner
controlled by Jack in the limited partnership is limited to the return of its RMB10,000 contributed capital. The financing is secured by a pledge of 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 with a
principal amount of up to RMB2.0 billion with Simon Xie in April 2015 to finance the repayment by Simon of the interest under the above-mentioned financing.
Our loan to Mr. Xie will be made at an interest rate equal to SHIBOR as specified by us and is repayable in five years. The loan is secured by a pledge of Mr. Xie's
limited partnership interest in the limited partnership, and is available for draw-down starting from January 1, 2016 but it has not yet been drawn. These
arrangements have facilitated our entering into strategic business arrangements with Wasu to enhance our entertainment strategy.
Healthcare
Alibaba Health Information Technology Limited , or Alibaba Health, a company primarily engaged in the business of developing the technology for product
identification, authentication and tracking system for pharmaceutical and medical products in China that is listed on the Hong Kong Stock Exchange. In April 2014,
we completed an acquisition of newly issued ordinary shares representing an effective equity interest of approximately 38% in Alibaba Health for a total purchase
price of HK$932 million. Subsequent to March 31, 2016, we and Alibaba Health entered into a services agreement under which Alibaba Health will provide
outsourced services in relation to product categories related to Tmall's online pharmacy business. Alibaba Health is the flagship vehicle for us to execute our data-
driven healthcare strategy.
Logistics
We have made investments in a number of logistics-related companies as part of our strategy to enhance the customer experience in our core commerce
business through predictable, speedy and high quality logistics services. Below is a description of the major investments in this area.
Cainiao Smart Logistics Network Limited , or Cainiao Network, a logistics data platform that leverages a network of logistics partners' capacity and
capabilities to fulfill the logistics needs of our core commerce business. In May 2013, we took part in establishing Cainiao Network together with other parties with
significant operational experience in logistics, retail and real estate in China. In March 2016, Cainiao Network completed a new equity financing round, after which
our aggregate investment in Cainiao Network increased to RMB7.0 billion. Currently our equity interest in Cainiao Network is approximately 47%. See "Item 4.
Information on the Company — B. Business Overview — Other Major Elements of Our Ecosystem — Logistics."
Haier Electronics Group Co., Ltd. , or Haier, a company that is listed on the Hong Kong Stock Exchange and principally engaged in the research,
development, manufacture and sale of electrical appliances, especially large home appliances such as refrigerators and air conditioners. In March 2014, as part of
our strategy for providing better delivery and installation services to consumers, we completed an acquisition of ordinary shares representing an approximately 2%
equity interest in Haier, an acquisition of a 9.9% equity interest in a wholly-owned subsidiary
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of Haier that is engaged in the logistics business in China, or RRS, and a subscription for a convertible and exchangeable bond which is either convertible into an
approximately 2.6% equity interest in Haier or exchangeable into an approximately 24% equity interest in RRS. We paid a total purchase price of
HK$2,821 million upon the closing of the transactions. Our investment in Haier and RRS has enabled our China retail marketplaces to gain a competitive
advantage in the large home appliance category through high quality delivery, installation and after-sale services.
YTO Express (Logistics) Co., Ltd., or YTO Express, one of the leading express courier companies in China. In May 2015, we invested RMB1,500 million in
YTO Express representing an equity interest of 12% in the company. YTO Express is one of the fifteen strategic express courier partners participating in the data
platform of Cainiao Network to fulfill orders from our core commerce business. We invested in YTO Express so that we can leverage our shareholding relationship
to establish delivery service standards and new service offerings for online shopping. Once implemented and tested, such standards and offerings may be rolled out
to other delivery partners of Cainiao Network, enhancing the overall consumer experience. In January 2016, a company listed on the Shanghai Stock Exchange
filed an application to purchase all of the equity interest in YTO Express through an asset swap and share issue, resulting in a reverse takeover of that company by
YTO Express. The completion of the reverse takeover is subject to the approval by the shareholders of that company and certain regulatory authorities.
Best Logistics Technologies Ltd., or Best Logistics, a provider of comprehensive supply-chain solutions and services including express delivery, freight
delivery, inventory management, warehouse fulfillment, software development, financing, business consulting to cross-border logistics services. Since fiscal year
2009, we have participated in several rounds of equity financing of Best Logistics, including one in January 2015, and have acquired an aggregate of approximately
22% equity interest in Best Logistics for an aggregate investment cost of US$256 million. In 2016, Cainiao Network also participated in a round of equity financing
of Best Logistics in which it invested US$165 million for an approximately 5% equity interest in Best Logistics.
E-commerce and Related Services
Suning Commerce Group Co., Ltd. , or Suning, one of the largest consumer electronics retail chains in China with over 1,600 retail stores and over 60 national
and regional distribution centers as of December 2015 that is listed on the Shenzhen Stock Exchange. In August 2015, we entered into definitive agreements to
establish a comprehensive collaboration with Suning. Under our agreements, we will invest RMB28.2 billion for 19.99% of the enlarged equity capital of Suning.
These transactions are expected to be completed during the quarter ending June 30, 2016. We have formed a strategic alliance with Suning to build on synergies in
e-commerce, logistics and incremental business through joint omni-channel initiatives. We believe these transactions will bring significant strategic benefits,
including improved product selection, competitive pricing, and better customer experience through reliable delivery and after-sale services.
International Expansion
Lazada Group S.A ., or Lazada, a company that operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam,
with local language websites and mobile apps in each of the six markets. In April 2016, we completed an acquisition of a controlling stake in Lazada for a total
cash consideration of US$1.0 billion. Lazada offers third-party brands and merchants a marketplace solution with simple and direct access to consumers in these
six countries through one retail channel. Lazada also sells products owned by its retail operations. It has developed its own logistics infrastructure with warehouses
and a last-mile delivery fleet to offer quick and reliable delivery to its customers. We intend that Lazada will be our vehicle for expansion into the Southeast Asia
consumer market, including potential cross-border opportunities introducing Chinese merchants and international brands to Southeast Asian consumers.
Others
Beijing Shiji Information Technology Co., Ltd., or Shiji, a developer and provider of hotel information management system software, system integration and
technical service that is listed on Shenzhen Stock Exchange. In November 2015, we completed an investment in newly issued ordinary shares, representing
approximately 13%
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equity interest in Shiji for a total cash consideration of RMB2,389 million. Our investment in and strategic alliance with Shiji enhances the customer experience in
our online travel business, Alitrip, as the alliance improves our capability to integrate real time information, such as rooms availability and special promotional
offers, from participating hotels on the Alitrip platform.
AGTech Holdings Limited , or AGTech, an integrated lottery technology and services company in China that is listed on the Hong Kong Growth Enterprise
Market. In March 2016, we and Ant Financial Services agreed to subscribe for newly issued ordinary shares and convertible bonds of AGTech for a total
investment amount of HK$2,388 million, of which our total commitment is HK$1,433 million. Upon the completion of the transaction, AGTech will become our
consolidated subsidiary. The completion of this transaction is subject to a number of customary closing conditions including the approval by shareholders of
AGTech and certain regulatory authorities. We intend that AGTech will be our vehicle for participating in the lottery business in China.
2014 Restructuring of Our Relationship with Ant Financial Services and Alipay
On August 12, 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, and entered into or amended certain ancillary agreements
including an amendment and restatement of the Alipay IPLA. Pursuant to these agreements, we restructured our relationships with Ant Financial Services and
Alipay, its wholly-owned subsidiary, and terminated the 2011 framework agreement.
Pursuant to the 2014 SAPA, we sold the SME loan business and related services to Ant Financial Services for an aggregate cash consideration of
RMB3,219 million. In calendar years 2015 to 2017, we will receive an annual fee equal to 2.5% of the average daily book balance of the SME loans. In calendar
years 2018 to 2021, we will receive an annual fee equal to the amount paid for the calendar year 2017, or collectively the SME annual fee.
In connection with the 2014 SAPA, we also entered into an amended intellectual property license agreement with Alipay, or amended Alipay IPLA, pursuant
to which we license certain intellectual property and provide certain software technology services to Alipay and the SME loan business. Under the amended Alipay
IPLA, we receive royalty streams and a service fee, or collectively the profit share payments, paid at least annually, amounting to the sum of an expense
reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services, subject to certain adjustments.
Pursuant to the terms of the 2014 SAPA, in the event of an initial public offering of Ant Financial Services or Alipay at an implied equity value exceeding
US$25 billion which results in gross proceeds of at least US$2.0 billion (a "Qualified IPO"), if our total ownership of equity interests in Ant Financial Services has
not reached 33%, we would be entitled at our election to either receive a one-time payment equal to 37.5% of the equity value of Ant Financial Services as
determined immediately prior to such Qualified IPO. There is no cap on the maximum value of such liquidity event payment. If we acquire equity interests in Ant
Financial Services in an aggregate amount less than 33%, the percentage of Ant Financial Services' equity value used to calculate such liquidity event payment will
be reduced proportionately.
In lieu of receiving such liquidity event payment, we may elect to continue to receive the profit share payment in perpetuity, subject to the receipt of regulatory
approvals. In connection with a Qualified IPO and if we so elect, Ant Financial Services must use its commercially reasonable efforts to obtain the required
approvals for continued payments under the amended Alipay IPLA. If such approvals are not obtained, Ant Financial Services will pay the liquidity event payment
as described above to us.
The 2014 SAPA provides for future potential equity issuances to us by Ant Financial Services. In the event that Ant Financial Services applies for and receives
certain PRC regulatory approvals in the future, Ant Financial Services will issue and we will purchase newly issued equity interests in Ant Financial Services up to
a 33% equity interest, or such lesser equity interest as may be permitted by the regulatory approvals. If the liquidity event payment described above has not become
payable upon a Qualified IPO of Ant Financial Services, our right to acquire equity interests up to the full 33% equity interest will continue after such Qualified
IPO. However, the maximum equity interest that we are entitled to acquire will be reduced in proportion to any dilutive equity issuances by Ant Financial Services
in and following such Qualified IPO. If we acquire an equity interest in Ant Financial Services pursuant to this arrangement which is below 33%, the liquidity
event payment amount and the
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profit sharing arrangement under the Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by us.
For additional details of the new and amended agreements, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party
Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."
Acquired Intangible Assets and Goodwill
When we make an acquisition, consideration that exceeds the book value of the acquired assets are allocated to acquired intangible assets and goodwill,
respectively. We have and will continue to incur amortization expenses as we amortize acquired intangible assets over their estimated useful life on a straight-line
basis. We do not amortize our goodwill. We test intangible assets and goodwill periodically for impairment, and any such impairment may materially and adversely
affect our financial condition and results of operations. Some of our acquisitions and investments may not be successful, and we may incur impairment charges in
the future. For additional information, see "— Critical Accounting Policies and Estimates — Impairment Assessment on Goodwill and Intangible Assets" and
"Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We face risks relating to our acquisitions, investments
and alliances."
Key Financial Information of Selected Equity Method Investees
Our investments in the following companies are accounted for under the equity method. Consistent with our accounting policies for investments in equity
method investees, we record our share of results of the following companies on a one quarter in arrears basis within share of results of equity investees in the
consolidated income statements.
Cainiao Network
The following table is a summary of key unaudited financial information of Cainiao Network Technology Co., Ltd.*:
Income statement data:
Revenue
Net loss
Balance sheet data:
Total assets
Total liabilities
Total equity
Twelve months ended
December 31,
2014
RMB
2015
RMB
(in millions)
941
(183)
3,099
(617)
As of
December 31,
2014
RMB
2015
RMB
(in millions)
5,951
2,642
3,309
5,929
1,761
4,168
*
Cainiao Network Technology Co., Ltd. is a company incorporated in China. After the completion of a restructuring process in March 2016, it became a wholly owned subsidiary of Cainiao Network.
Prior to the restructuring, we held a direct 48% equity interest in Cainiao Network Technology Co. Ltd. See note 4(w) to the consolidated financial statements included elsewhere in this annual report for
further details.
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We recorded our share of the net loss of Cainiao Network Technology Co., Ltd. of RMB90 million and RMB295 million (US$46 million) in fiscal years 2015
and 2016, respectively. We also have commercial arrangements conducted on an arm's length basis with Cainiao Network to receive certain logistics services,
primarily related to Tmall Supermarket, which are recorded in our cost of revenue. For additional details of the related party transactions with Cainiao Network, see
"Item 7. Major Shareholders and Related Party Transactions — B. Related Party transactions — Transactions with Cainiao Network". Our logistics service costs
paid or payable to Cainiao Network accounted for approximately 60% of its revenue for the twelve months ended December 31, 2015.
Koubei
The following table is a summary of key unaudited financial information of Koubei:
Income statement data:
Revenue
Net loss
Balance sheet data:
Total assets
Total liabilities
Total equity
We recorded our share of the net loss of Koubei of RMB867 million (US$135 million) in fiscal year 2016.
Alibaba Pictures
The following table is a summary of key unaudited financial information of Alibaba Pictures:
Income statement data:
Balance sheet data:
Revenue
Net income
Total assets
Total liabilities
Total equity
123
From the date of
incorporation to
December 31, 2015
RMB
(in millions)
31
(1,735)
As of
December 31, 2015
RMB
(in millions)
1,731
445
1,286
From the date of
deconsolidation to
December 31, 2015
RMB
(in millions)
254
544
As of
December 31, 2015
RMB
(in millions)
18,976
2,782
16,194
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We recorded our share of the net income of Alibaba Pictures of RMB268 million (US$42 million) in fiscal year 2016. We also disposed of our online movie
ticketing business and financing and investment platform for production of movie and other media content to Alibaba Pictures during fiscal year 2016 at a cash
consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts. We recognized a disposal gain of RMB2,214 million (US$343 million)
in interest and investment income, net in our consolidated income statement for fiscal year 2016.
Results of Operations
The following table sets out our consolidated results of operations for the periods indicated:
Year ended March 31,
2014
RMB
2015
RMB
2016
RMB
US$
(in millions, except per share data)
Revenue
China commerce
International commerce
Cloud computing
Others
Total
Cost of revenue
Product development expenses
Sales and marketing expenses
General and administrative expenses
Amortization of intangible assets
Impairment of goodwill
Income from operations
Interest and investment income, net
Interest expense
Other income, net
Income before income tax and share of results of equity investees
Income tax expenses
Share of results of equity investees
Net income
Net (income) loss attributable to noncontrolling interests
Net income attributable to Alibaba Group Holding Limited
Accretion of convertible preference shares
Dividends accrued on convertible preference shares
Net income attributable to ordinary shareholders
62,937
6,486
1,271
5,510
76,204
84,321
7,629
3,019
6,174
101,143
13,077
45,132
1,183
4,851
468
773
958
1,748
52,504
15,686
(13,369) (23,834) (34,355) (5,328)
(5,093) (10,658) (13,788) (2,138)
(8,513) (11,307) (1,753)
(4,545)
(9,205) (1,428)
(7,800)
(4,218)
(455)
(2,931)
(2,089)
(315)
(71)
(455)
(175)
(44)
4,513
8,104
(301)
319
12,635
(8,449) (1,310)
(269)
(1,730)
11,056
27
11,083
—
—
11,083
71,289
171
71,460
—
—
71,460
24,920
1,648
(2,195)
2,429
26,802
23,135
9,455
(2,750)
2,486
32,326
(1,946)
2,058
81,468
29,102
52,254
(3,196)
(203)
(6,416)
(1,590)
(31)
(208)
(15)
(97)
23,315
23,403
23,076
24,320
24,149
24,261
(59)
(88)
Earnings per share/ADS attributable to ordinary shareholders:
Basic
Diluted
10.61
10.00
10.33
9.70
29.07
27.89
4.51
4.33
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Revenue
China commerce
International commerce
Cloud computing
Others
Total
Cost of revenue
Product development expenses
Sales and marketing expenses
General and administrative expenses
Amortization of intangible assets
Impairment of goodwill
Income from operations
Interest and investment income, net
Interest expense
Other income, net
Income before income tax and share of results of equity investees
Income tax expenses
Share of results of equity investees
Net income
Net income attributable to noncontrolling interests
Net income attributable to Alibaba Group Holding Limited
Accretion of convertible preference shares
Dividends accrued on convertible preference shares
Net income attributable to ordinary shareholders
Year ended
March 31,
2014 2015 2016
%
%
%
(as percentage of
revenue)
83
82
86
8
9
9
3
2
2
6
7
3
100
100
100
(25) (31) (34)
(10) (14) (14)
(9) (11) (11)
(9)
(8) (10)
(3)
(3)
(1)
(1) —
29
52
(2)
2
81
(8)
(2)
71
—
71
—
—
71
32
(1) —
32
—
—
32
—
47
3
(4)
5
51
(4)
3
42
44
—
—
44
—
45
30
13
(8)
(2)
(6)
Comparison of Fiscal Years 2015 and 2016
Revenue
China commerce
International commerce
Cloud computing
Others
Total revenue
2015
RMB
Year ended March 31,
2016
RMB
US$
% Change
62,937
6,486
1,271
5,510
76,204
(in millions, except percentages)
84,321
7,629
3,019
6,174
101,143
13,077
1,183
468
958
15,686
34%
18%
138%
12%
33%
Total revenue increased by 33%, from RMB76,204 million in fiscal year 2015 to RMB101,143 million (US$15,686 million) in fiscal year 2016. The increase
was mainly driven by the continued rapid growth of our China commerce retail business.
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China Commerce
Revenue
China commerce retail business
Online marketing services
Commission
Others (1)
China commerce wholesale business
Total
(1)
Primarily consists of storefront fees.
2015
RMB
Year ended March 31,
2016
RMB
US$
% Change
(in millions, except percentages)
37,509
21,201
1,022
59,732
3,205
62,937
52,396
25,829
1,808
80,033
4,288
84,321
8,126
4,006
280
12,412
665
13,077
40%
22%
77%
34%
34%
34%
Revenue from our China commerce retail business increased by 34% from RMB59,732 million in fiscal year 2015 to RMB80,033 million (US$12,412 million)
in fiscal year 2016.
Revenue growth during this period reflected an increase of 27% in GMV transacted on these marketplaces and an increase in the monetization rate. GMV
transacted on Taobao Marketplace increased by 18% from RMB1,597 billion in fiscal year 2015 to RMB1,877 billion (US$295 billion) in fiscal year 2016 and
GMV transacted on Tmall increased by 43% from RMB847 billion in fiscal year 2015 to RMB1,215 billion (US$190 billion) in fiscal year 2016. The overall
increase in total GMV transacted on these marketplaces was primarily driven by a 21% increase in the number of buyers and, to a lesser extent, by a moderate
increase in the average level of their spending. The growth in GMV transacted on Tmall in particular was attributable to the increase in the number of buyers
making purchases on Tmall, reflecting consumer preferences for branded products and a premium shopping experience and the beneficial impact of promotional
events, and increases in the average level of spending of buyers. Our monetization rate during this period increased from 2.44% in fiscal year 2015 to 2.59% in
fiscal year 2016, mainly as a result of the accelerated growth of our online marketing services revenue.
Online marketing services revenue increased by 40% from RMB37,509 million in fiscal year 2015 to RMB52,396 million (US$8,126 million) in fiscal year
2016. The growth was primarily driven by our focus on high-quality merchants and on delivering a broader value proposition to our merchants. This resulted in
higher marketing spend by our merchants as we optimized online marketing efficiency and added new online marketing inventory on both mobile and PC
interfaces, leading to a 44% increase in the number of clicks attributable to our P4P marketing services, and a 1% increase in the cost-per-click paid by our
merchants. To a lesser extent, our online marketing services revenue during this period was also positively impacted by an increase in the CPM of our display
marketing services, partially offset by a decrease in the number of impressions displayed.
Commission revenue increased by 22% from RMB21,201 million in fiscal year 2015 to RMB25,829 million (US$4,006 million) in fiscal year 2016. The lower
year-over-year commission revenue growth relative to the 43% increase in GMV transacted on Tmall during the same period was mainly a result of (i) suspension
of our online lottery business on Taobao Marketplace (which had a higher monetization rate than our overall monetization rate) in late February 2015 in response to
regulatory requirements, (ii) a decrease in the pricing charged on Juhuasuan as an investment to acquire more high-quality merchants and (iii) impact from changes
in category mix. Excluding the effect of the online lottery business, our revenue would have increased by 31% in fiscal year 2016 from fiscal year 2015. Due to the
ongoing shift of user engagement toward mobile devices, categories such as virtual goods on which we charge a lower commission rate, are seeing higher growth
than other categories. As a result of the above, commission revenue increased at a lower rate than the Tmall GMV.
Mobile revenue from our China commerce retail business increased by 182% from RMB17,840 million in fiscal year 2015 to RMB50,337 million in fiscal
year 2016, representing 63% of our China commerce retail business
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revenue in fiscal year 2016, compared to 30% in fiscal year 2015. The increase in mobile revenue from our China commerce retail business was primarily due to an
increase in GMV generated and better monetization of traffic on mobile devices. Mobile monetization rate improved to 2.51% in fiscal year 2016 from 1.79% in
fiscal year 2015.
Revenue from our China commerce wholesale business increased by 34% from RMB3,205 million in fiscal year 2015 to RMB4,288 million (US$665 million)
in fiscal year 2016. The increase in revenue was due to an increase in average revenue from paying members and an increase in paying members.
International Commerce
Revenue
International commerce retail business
International commerce wholesale business
Total
Year ended March 31,
2015
2016
RMB RMB US$
% Change
(in millions, except percentages)
1,768
4,718
6,486
2,204
5,425
7,629
342
841
1,183
25%
15%
18%
Revenue from our international commerce retail business increased by 25% from RMB1,768 million in fiscal year 2015 to RMB2,204 million
(US$342 million) in fiscal year 2016. The main reason for this increase was an increase in GMV transacted on AliExpress, primarily due to the increasing number
of consumers, particularly in Russia, Spain, the United States and France.
Revenue from our international commerce wholesale business increased by 15% from RMB4,718 million in fiscal year 2015, of which 69% was from
membership fees and online marketing services and 31% was from value-added services, to RMB5,425 million (US$841 million) in fiscal year 2016, of which 67%
was from membership fees and online marketing services and 33% was from value-added services. The increase in revenue was due to growth in revenue generated
by the import/export related services provided by One Touch and, to a lesser extent, an increase in online marketing service revenue from China wholesale
suppliers.
Cloud Computing Business
Revenue from our cloud computing business in fiscal year 2016 was RMB3,019 million (US$468 million), an increase of 138% compared to
RMB1,271 million in fiscal year 2015, driven by the continued growth of our cloud computing business. The growth was primarily due to an increase in the
number of paying customers and also to an increase in their usage of and spending on our cloud computing services including more complex offerings, such as our
content delivery network and database services.
Other Revenue
Other revenue in fiscal year 2016 was RMB6,174 million (US$958 million), an increase of 12% compared to RMB5,510 million in fiscal year 2015. This
result included the effect of an increase in revenue from mobile Internet services provided by UCWeb, and revenue from AutoNavi, over-the-top TV services and
YunOS and a decrease in revenue related to the SME loan business that we transferred to Ant Financial Services in February 2015. Revenue from mobile Internet
services, AutoNavi, over-the-top TV services and YunOS increased by 86% year-over-year.
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Cost of Revenue
Cost of revenue
Percentage of revenue
Year ended March 31,
2015
RMB
2016
RMB
US$
% Change
(in millions, except percentages)
23,834
34,355
5,328
44%
31%
34%
Shared-based compensation expense included in cost of revenue
Percentage of revenue
4,176
4,003
621
(4)%
5%
4%
Cost of revenue excluding share-based compensation expense
Percentage of revenue
19,658
30,352
4,707
54%
26%
30%
Our cost of revenue increased by 44% from RMB23,834 million in fiscal year 2015 to RMB34,355 million (US$5,328 million) in fiscal year 2016. This
increase was primarily due to an increase of RMB2,278 million (US$353 million) in bandwidth and co-location fees and depreciation expenses as a result of our
investments in our cloud computing business and our data platform, increases of RMB2,146 million (US$333 million) in costs associated with our new business
initiatives (mainly our mobile operating system, over-the-top TV services and entertainment), an increase of RMB1,865 million (US$289 million) in traffic
acquisition costs as a result of the expansion of our third-party affiliate marketing ecosystem and an increase of RMB1,564 million (US$243 million) in logistics
costs mainly relating to fulfillment services provided to us by our affiliate Cainiao Network, which amounted to RMB2,370 million (US$368 million), or 2% of our
revenue, in fiscal year 2016, primarily related to Tmall Supermarket. Without the effect of share-based compensation expense, cost of revenue as a percentage of
revenue would have increased from 26% in fiscal year 2015 to 30% in fiscal year 2016, primarily due to increase in costs associated with our new business
initiatives and an increase in logistics costs, as discussed above. As we continue to invest in new and acquired businesses, customer service initiatives and
infrastructure, we expect our cost of revenue will increase in absolute dollar amounts and will likely increase as a percentage of revenues.
Product Development Expenses
Product of development expenses
Percentage of revenue
Year ended March 31,
2015
RMB
2016
RMB
US$
% Change
(in millions, except percentages)
10,658
13,788
2,138
29%
14%
14%
Shared-based compensation expense included in product development
expenses
Percentage of revenue
Product development expenses excluding share-based compensation
expense
Percentage of revenue
3,876
5,703
885
47%
5%
6%
6,782
8,085
1,253
19%
9%
8%
Our product development expenses increased by 29% from RMB10,658 million in fiscal year 2015 to RMB13,788 million (US$2,138 million) in fiscal year
2016. The increase was largely due to an increase of RMB3,114 million (US$483 million) in payroll and benefits expenses including share-based compensation
expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), partially offset by a decrease in the royalty fee paid to Yahoo,
which terminated by contract upon the completion of our initial public
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offering in September 2014. Without the effect of share-based compensation expense, product development expenses as a percentage of revenue would have
decreased from 9% in fiscal year 2015 to 8% in fiscal year 2016 due to a decrease in royalty fees paid to Yahoo. We expect our product development expenses will
increase in absolute amounts and may over time increase as a percentage of revenues.
Sales and Marketing Expenses
Sales and marketing expenses
Percentage of revenue
Year ended March 31,
2015
2016
RMB RMB
US$
% Change
(in millions, except percentages)
8,513
11,307
1,753
33%
11%
11%
Shared-based compensation expense included in sales and marketing
expenses
Percentage of revenue
Sales and marketing expenses excluding share-based compensation
expense
Percentage of revenue
1,235
1,963
304
59%
2%
2%
7,278
9,344
1,449
28%
9%
9%
Our sales and marketing expenses increased by 33% from RMB8,513 million in fiscal year 2015 to RMB11,307 million (US$1,753 million) in fiscal year
2016. The increase was due primarily to an increase in advertising and promotional spending mainly focused on strengthening consumer connection to our Taobao
and Tmall brands, especially in top tier cities, as well as to promote our new businesses initiatives, such as Alitrip and DingTalk, during fiscal year 2016. The
increase was also due to an increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation"
above). Without the effect of share-based compensation expense, sales and marketing expenses as a percentage of revenue would have remained stable at 9% in
both fiscal year 2015 and fiscal year 2016. We expect our sales and marketing expenses will increase in absolute amounts and may increase as a percentage of
revenues as we continue to invest in marketing and promotion.
General and Administrative Expenses
General and administrative expenses
Percentage of revenue
Year ended March 31,
2015
2016
RMB RMB US$
% Change
(in millions, except percentages)
7,800
9,205
1,428
18%
10%
9%
Shared-based compensation expense included in general and
administrative expenses
Percentage of revenue
3,741
4,413
684
18%
5%
4%
General and administrative excluding share-based compensation expense
Percentage of revenue
4,059
4,792
744
18%
5%
5%
Our general and administrative expenses increased by 18% from RMB7,800 million in fiscal year 2015 to RMB9,205 million (US$1,428 million) in fiscal year
2016. The increase was primarily due to a significant increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-
based Compensation" above), as well as an increase of RMB353 million (US$55 million) in professional services fees.
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Without the effect of share-based compensation expense, general and administrative expenses as a percentage of revenue in fiscal year 2016 would have remained
stable at 5% in both fiscal year 2015 and fiscal year 2016.
Amortization of Intangible Assets
Amortization of intangible assets
Percentage of revenue
Year ended March 31,
2015
2016
RMB RMB US$ % Change
(in millions, except percentages)
2,089
2,931
455
40%
3%
3%
Amortization of intangible assets increased by 40% from RMB2,089 million in fiscal year 2015 to RMB2,931 million (US$455 million) in fiscal year 2016.
This increase was due to an increase in intangible assets recognized arising from our strategic acquisitions and investments. Because of the recent major
acquisitions we will consolidate, such as Youku Tudou and our controlling stake in Lazada, we expect that our amortization of intangible assets will increase in
the future.
Income from Operations and Operating Margin
Income from operations
Percentage of revenue
2015
RMB
Year ended March 31,
2016
RMB
(in millions, except percentages)
US$
% Change
23,135
30%
29,102
4,513
26%
29%
Our income from operations increased by 26% from RMB23,135 million, or 30% of revenue in fiscal year 2015 to RMB29,102 million (US$4,513 million), or
29% of revenue, in fiscal year 2016. The decrease in our operating margin was primarily attributable to investments in new business initiatives, such as our mobile
operating systems, over-the-top TV services and entertainment, and also to an increase in logistics costs, as discussed above.
Interest and Investment Income, Net
Our net interest and investment income increased significantly from RMB9,455 million in fiscal year 2015 to RMB52,254 million (US$8,104 million) in fiscal
year 2016. The increase was primarily due to a non-cash deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of
Alibaba Pictures, a non-cash gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest in Alibaba Health when we
obtained control over Alibaba Health in fiscal year 2016, as well as gains arising from disposals of certain investments and businesses. See note 4 to our
consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information.
Interest Expense
Our interest expense decreased by 29% from RMB2,750 million in fiscal year 2015 to RMB1,946 million (US$301 million) in fiscal year 2016. Interest
expense in fiscal year 2015 included an one-time charge for financing-related fees of RMB830 million as a result of the early repayment of our US$8.0 billion bank
borrowings with proceeds from our issuance of US$8.0 billion senior unsecured notes.
Other Income, Net
Our other income, net decreased by 17% from RMB2,486 million in fiscal year 2015 to RMB2,058 million (US$319 million) in fiscal year 2016. The decrease
was primarily due to a decrease in income recognized in respect of royalty fees and software technology services fees from Ant Financial Services, which were
RMB1,122 million
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(US$174 million) in fiscal year 2016, compared to RMB1,667 million in fiscal year 2015. Such decrease in income recognized primarily resulted from increased
marketing and promotion activities of Ant Financial Services to drive its user growth and engagement, causing a decrease in its consolidated pre-tax income.
Income Tax Expenses
Our income tax expenses increased by 32% from RMB6,416 million in fiscal year 2015 to RMB8,449 million (US$1,310 million) in fiscal year 2016. The
increase in income tax expenses was primarily due to the increase in taxable income from our operations in China. Our effective tax rate decreased to 10% in fiscal
year 2016 from 20% in fiscal year 2015, primarily due to the non-cash gains relating to the deconsolidation of Alibaba Pictures and consolidation of Alibaba
Health, as discussed in "Interest and Investment Income, Net" above, which are not taxable for income tax purposes. Excluding the above gains and other non-
taxable or non-deductible items, our effective tax rate remains stable.
Share of Results of Equity Investees
Share of losses of equity investees in fiscal year 2016 was RMB1,730 million (US$269 million), an increase of 9% compared to RMB1,590 million in fiscal
year 2015. Share of results of equity investee in fiscal year 2016 consisted of the following:
Share of results of equity investees:
Koubei
Youku Tudou
Cainiao Network
Others
Dilution gains
Impairment
Others
Year ended March 31,
2015
RMB
2016
RMB
(in millions)
US$
—
(99)
(90)
(275)
—
(438)
(688)
(1,590)
(867)
(391)
(295)
62
827
—
(1,066)
(1,730)
(135)
(61)
(46)
10
128
—
(165)
(269)
The increase in share of losses of equity investees in fiscal year 2016 compared to fiscal year 2015 was primarily due to our share of losses of Koubei, Youku
Tudou and Cainiao Network, partially offset by accounting gains related to dilution of our ownership interest in Cainiao Network and Evergrande FC, as these
investees each raised capital at a higher valuation in fiscal year 2016. We established Koubei as a joint venture with Ant Financial Services in September 2015. Our
share of Koubei's loss in fiscal year 2016 represents Koubei's high investments and promotional spending during its start-up stage. We expect such share of loss to
decrease in the future.
Net Income
As a result of the foregoing, our net income increased by 193% from RMB24,320 million in fiscal year 2015 to RMB71,289 million (US$11,056 million) in
fiscal year 2016.
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Comparison of Fiscal Years 2014 and 2015
Revenue
China commerce
International commerce
Cloud computing
Others
Total revenue
Year ended
March 31,
2014
RMB
2015
RMB
% Change
(in millions, except percentages)
62,937
45,132
6,486
4,851
1,271
773
5,510
1,748
76,204
52,504
39%
34%
64%
215%
45%
Total revenue increased by 45%, from RMB52,504 million in fiscal year 2014 to RMB76,204 million in fiscal year 2015. The increase was mainly driven by
the continued rapid growth of our China commerce retail business. Our revenue growth rate will likely decline as our revenue grows to higher levels.
China Commerce
Revenue
China commerce retail business
Online marketing services
Commission
Others (1)
China commerce wholesale business
Total
(1)
Primarily consists of storefront fees.
Year ended
March 31,
2014
RMB
2015
RMB
% Change
(in millions, except percentages)
29,729
12,023
1,080
42,832
2,300
45,132
37,509
21,201
1,022
59,732
3,205
62,937
26%
76%
(5)%
39%
39%
39%
Revenue from our China commerce retail business increased by 39% from RMB42,832 million in fiscal year 2014 to RMB59,732 million in fiscal year 2015.
Revenue growth during this period reflected an increase of 46% in GMV transacted on these marketplaces, including a 36% increase in GMV transacted on
Taobao Marketplace from RMB1,173 billion in fiscal year 2014 to RMB1,597 billion in fiscal year 2015 and a 68% increase in GMV transacted on Tmall from
RMB505 billion in fiscal year 2014 to RMB847 billion in fiscal year 2015. The overall increase in total GMV transacted on these marketplaces was primarily
driven by a 37% increase in the number of consumers and, to a lesser extent, by a moderate increase in the average level of their spending. The rapid increase in
GMV transacted on Tmall in particular was attributable to the increase in the number of consumers making purchases on Tmall, reflecting consumer preferences
for branded products and a premium shopping experience, increases in the average level of spending of consumers and the beneficial impact of promotional events.
Our monetization rate during this period decreased from 2.55% in fiscal year 2014 to 2.44% in fiscal year 2015, mainly as a result of the higher percentage of total
GMV contributed by mobile GMV, which has a lower monetization rate compared to the non-mobile monetization rate.
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Mobile revenue from our China commerce retail business in fiscal year 2015 was RMB17,840 million, an increase of 514% compared to RMB2,905 million in
fiscal year 2014, representing 30% of our China commerce retail business revenue in fiscal year 2015, compared to 7% in fiscal year 2014. The increase in mobile
revenue from our China commerce retail business was primarily due to an increase in GMV generated on mobile devices and also to an increase in the mobile
monetization rate.
Online marketing services revenue increased by 26% from RMB29,729 million in fiscal year 2014 to RMB37,509 million in fiscal year 2015, reflecting GMV
growth of 46% from RMB1,678 billion in fiscal year 2014 to RMB2,444 billion in fiscal year 2015. The lower growth rate of online marketing services revenue
relative to the GMV growth rate reflected the ongoing shift of consumer engagement from personal computers to mobile devices, as we monetize mobile GMV at a
lower rate than GMV transacted on personal computer interfaces because merchants allocated a smaller proportion of their budget to purchase online marketing
services on mobile relative to the GMV generated on mobile. As a result, mobile GMV accounted for 19% and 41% of total GMV in fiscal years 2014 and 2015,
respectively, while mobile revenue accounted for 7% and 30% of China commerce retail business revenue, respectively, during those periods. This lower but
increasing level of mobile monetization reflected our focus on prioritizing mobile user activity and engagement over monetization and the fact that we increased
our efforts to promote online marketing services for mobile interfaces beginning in the three months ended December 31, 2013. The increase in online marketing
services revenue during this period was primarily driven by a 55% increase in the number of clicks attributable to our P4P marketing services. This increase was
partially offset by a 21% decrease in the cost-per-click paid by our merchants, as a result of the higher percentage of total clicks generated on mobile devices,
which have a lower cost-per-click compared to cost-per-click on personal computers. Our strong momentum in mobile and commitment to improving user
experience may slow the growth rate of our online marketing services revenue in the near term, but we believe our approach will create significant value for both
our users and our business in the longer term. To a lesser extent, our online marketing services revenue during this period was also positively impacted by an
increase in the CPM of our display marketing services, which was partially offset by a decrease in the number of impressions displayed.
Commission revenue increased by 76% from RMB12,023 million in fiscal year 2014 to RMB21,201 million in fiscal year 2015, primarily due to a 68%
increase in GMV transacted on Tmall during the same period as well as an increase of RMB989 million in lottery commission income from Taobao marketplace,
which was mainly due to significantly higher activity since the World Cup soccer competition in the summer of 2014 before we suspended our lottery business in
late February 2015, around the same time as the other major online lottery platforms in China in response to regulatory requirements. The published commission
rates we charge by category as well as our blended commission rate remained relatively stable over this period, and accordingly, the increase in revenue from
commissions during this period was principally a result of increased GMV transacted rather than any change in the pricing of commission rates. As Tmall GMV
increased at a higher rate than Taobao Marketplace GMV, commission revenue grew at a faster rate than online marketing services revenue because we charge
commissions on Tmall. Commission revenue from transactions on Tmall is generated from both personal computer and mobile transactions, and accordingly the
ongoing shift of consumer engagement towards mobile devices did not negatively affect commission revenue from GMV transacted on Tmall.
Revenue from our China commerce wholesale business increased by 39% from RMB2,300 million in fiscal year 2014 to RMB3,205 million in fiscal year
2015. The increase in revenue was due to an increase in paying members and an increase in average revenue from paying members.
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International Commerce
Revenue
International commerce retail business
International commerce wholesale business
Total
Year ended
March 31,
2014
2015
RMB RMB % Change
(in millions, except percentages)
938
3,913
4,851
1,768
4,718
6,486
88%
21%
34%
Revenue from our international commerce retail business increased by 88% from RMB938 million in fiscal year 2014 to RMB1,768 million in fiscal year
2015. The main reason for this increase was an increase in GMV transacted on AliExpress, primarily from the increasing number of buyers, particularly in Russia,
Brazil and the United States.
Revenue from our international commerce wholesale business increased by 21% from RMB3,913 million in fiscal year 2014, of which 88% was from
membership fees and value-added services and 12% was from online marketing services, to RMB4,718 million in fiscal year 2015, of which 85% was from
membership fees and value-added services and 15% was from online marketing services. The increase in revenue was due to an increase in the number of paying
members and an increase in average revenue from paying members.
Other revenue
Other revenue in fiscal year 2015 was RMB5,510 million, an increase of 215% compared to RMB1,748 million in fiscal year 2014. This increase was
primarily due to the consolidation of revenue from acquired businesses (mainly UCWeb and AutoNavi) in a total amount of RMB2,489 million, and an increase in
interest income generated by the SME loan business before this business was transferred to Ant Financial Services upon the completion of the restructuring of our
relationship with Ant Financial Services in early February 2015.
Cost of Revenue
Cost of revenue
Percentage of revenue
Year ended
March 31,
2014
RMB
2015
RMB
% Change
(in millions, except percentages)
13,369
23,834
25%
31%
78%
Our cost of revenue increased by 78% from RMB13,369 million in fiscal year 2014 to RMB23,834 million in fiscal year 2015. This increase was primarily due
to increases of RMB4,183 million in payroll and benefits expense mainly resulting from an increase in share-based compensation expense (an effect that we expect
will continue, as discussed in "Share-based Compensation" above), an increase of RMB1,653 million in bandwidth and co-location fees and depreciation expenses
as a result of our investments in our cloud computing business and our data platform, an increase of RMB1,487 million in payment processing fees resulting from
an increase in GMV transacted on our retail marketplaces and an increase of RMB951 million in traffic acquisition costs as a result of the expansion of our third-
party affiliate marketing ecosystem. As we continue to invest in our business, customer service initiatives and infrastructure, we expect our cost of revenue will
increase in absolute dollar amounts and will likely increase as a percentage of revenues.
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Product Development Expenses
Product development expenses
Percentage of revenue
Year ended
March 31,
2014
RMB
2015
RMB
% Change
(in millions, except percentages)
5,093
10%
10,658
109%
14%
Our product development expenses increased by 109% from RMB5,093 million in fiscal year 2014 to RMB10,658 million in fiscal year 2015. The increase
was largely due to an increase of RMB5,465 million in payroll and benefits expenses including share-based compensation expense (an effect that we expect will
continue, as discussed in "Share-based Compensation" above), partially offset by a decrease in the royalty fee paid to Yahoo, which terminated by contract upon
the completion of our initial public offering in September 2014. We expect our product development expenses will increase in absolute amounts and may over time
increase as a percentage of revenues.
Sales and Marketing Expenses
Year ended
March 31,
2014
RMB
2015
RMB
% Change
Sales and marketing expenses
Percentage of revenue
(in millions, except percentages)
8,513
4,545
87%
9%
11%
Our sales and marketing expenses increased by 87% from RMB4,545 million in fiscal year 2014 to RMB8,513 million in fiscal year 2015. The increase was
due primarily to the consolidation of marketing expenses of acquired businesses (mainly UCWeb and AutoNavi), and also to an increase in advertising and
promotional spending mainly focused on strengthening consumer connection to our Taobao and Tmall brands, especially in lower tier cities, as well as to promote
our new businesses initiatives (e.g., offline commerce) during fiscal year 2015. The increase was also due to an increase in share-based compensation expense
(an effect that we expect will continue, as discussed in "Share-based Compensation" above). We expect our sales and marketing expenses will increase in absolute
amounts and may increase as a percentage of revenues as we continue to invest in marketing and promotion.
General and Administrative Expenses
Year ended
March 31,
2014
RMB
2015
RMB
% Change
General and administrative expenses
Percentage of revenue
(in millions, except percentages)
7,800
4,218
85%
8%
10%
Our general and administrative expenses increased by 85% from RMB4,218 million in fiscal year 2014 to RMB7,800 million in fiscal year 2015. The increase
was primarily due to a significant increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based
Compensation" above). Our general and administrative expenses in fiscal year 2014 included a one-time equity-settled donation expense of RMB1,269 million
relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit
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organization. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Equity-settled Donation Relating to Our
Ordinary Shares."
Income from Operations and Operating Margin
Income from operations
Percentage of revenue
Year ended
March 31,
2014
RMB
2015
RMB
(in millions, except percentages)
23,135
24,920
30%
47%
% Change
(7%)
Our income from operations decreased by 7% from RMB24,920 million in fiscal year 2014 to RMB23,135 million in fiscal year 2015. Although our revenue
increased by 45% year-over-year, income from operations decreased, due primarily to a significant increase in share-based compensation expense from
RMB2,844 million in fiscal year 2014 to RMB13,028 million in fiscal year 2015, and also to other factors affecting cost and expenses as discussed above.
Our operating margin decreased from 47% in fiscal year 2014 to 30% in fiscal year 2015. The decrease was primarily attributable to increase in share-based
compensation expense, which amounted to 17% and 5% as a percentage of revenue in fiscal year 2015 and fiscal year 2014, respectively, the consolidation of
acquired businesses with lower overall margins than our margins, mainly UCWeb and AutoNavi, as well as investments in new business initiatives, such as cloud
computing, entertainment, mobile operating system and offline commerce.
Interest and Investment Income, Net
Our net interest and investment income increased significantly from RMB1,648 million in fiscal year 2014 to RMB9,455 million in fiscal year 2015. The
increase was primarily due to a net gain of RMB6,535 million recognized with respect to the revaluation of previously held equity interests, relating primarily to
the step acquisitions of UCWeb, OneTouch and AutoNavi. The increase was also due to an increase in interest income as a result of higher cash balance during the
period, which in turn was due primarily to the proceeds from our initial public offering in September 2014 and also to an increase in operating cash flow.
Interest Expense
Our interest expense increased by 25% from RMB2,195 million in fiscal year 2014 to RMB2,750 million in fiscal year 2015. The increase was primarily due to
an increase in average debt outstanding, with debt outstanding during fiscal year 2014 primarily reflecting a loan of US$5.0 billion drawn down under a
US$8.0 billion credit facility, and debt outstanding during fiscal year 2015 primarily reflecting an additional US$3.0 billion drawn down under the same credit
facility in April 2014, which was refinanced by the US$8.0 billion unsecured senior notes issued in November 2014.
Other Income, Net
Our other income, net increased by 2% from RMB2,429 million in fiscal year 2014 to RMB2,486 million in fiscal year 2015.
Income Tax Expenses
Our income tax expenses increased by 101% from RMB3,196 million in fiscal year 2014 to RMB6,416 million in fiscal year 2015. The increase was due
primarily to the expiration of an EIT exemption period for one of our major subsidiaries, upon which the subsidiary is no longer exempt from paying EIT but is
subject to an EIT rate of 12.5% (or 50% of the statutory EIT rate) in calendar year 2014. The increase in income tax expenses was also due to the increase in
taxable income from our operations in China. Our effective tax rate increased to 20% in fiscal
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year 2015 from 12% in fiscal year 2014, due primarily to the expiration of the EIT exemption as discussed above, and to the increase in share-based compensation
expense, which is not deductible for income tax purposes.
Net Income
As a result of the foregoing, our net income increased by 4% from RMB23,403 million in fiscal year 2014 to RMB24,320 million in fiscal year 2015.
B. Liquidity and Capital Resources
We fund our operations and strategic investments from cash generated from our operations and through debt and equity financing. We generated
RMB26,379 million, RMB41,217 million and RMB56,836 million (US$8,815 million) of cash from operating activities for fiscal years 2014, 2015 and 2016,
respectively. As of March 31, 2016, we had cash and cash equivalents and short-term investments of RMB106,818 million (US$16,566 million) and
RMB4,700 million (US$729 million), respectively. Short-term investments consist primarily of investments in fixed deposits with maturities between three months
and one year and investments in money market funds or other investments whereby we have the intention to redeem within one year.
In November 2014, we issued unsecured senior notes, including floating rate and fixed rate notes, with varying maturities for an aggregate principal amount of
US$8.0 billion. Interest on the unsecured senior notes are payable in arrears, quarterly for the floating rate notes and semiannually for the fixed-rate notes. We used
the proceeds from the issuance of the unsecured senior notes to refinance our previous syndicated loan arrangements in the same amount. We are not subject to any
financial covenant or other significant covenants or restrictions under the unsecured senior notes. In December 2015, we completed an exchange offer to exchange
our outstanding unsecured senior notes for unsecured senior notes that have been registered under the Securities Act. See note 21 to our consolidated financial
statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information.
In August 2014, we entered into a revolving loan facility agreement with certain financial institutions for an amount of US$3.0 billion which has not yet been
drawn down. The interest rate for this credit facility is calculated based on LIBOR plus 120 basis points. This loan facility is reserved for future general corporate
purposes.
In March 2016, we signed a five-year US$3.0 billion syndicated loan agreement with a group of eight lead arrangers which has been subsequently drawn down
in April 2016. The loan was upsized from US$3.0 billion to US$4.0 billion in May 2016 through a general syndication, of which the upsized portion has not yet
been drawn down. The loan has a five-year bullet maturity and is priced at 110 basis points over LIBOR. The use of proceeds of the loan is for general corporate
and working capital purposes (including funding our acquisitions).
As of March 31, 2016, we also had other bank borrowings of RMB6,175 million (US$957 million), primarily used for the construction of corporate campuses
and office facilities and other working capital purposes. See note 20 to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016
included elsewhere in this annual report for further information.
The following table sets out a summary of our cash flows for the periods indicated.
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Year ended March 31,
2014
RMB
2015
RMB
2016
RMB
US$
26,379
(32,997)
9,364
(in millions)
41,217
(53,454)
87,497
56,836
8,815
(42,831) (6,643)
(15,846) (2,457)
We believe that our current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next twelve
months. However, we may need additional cash resources in the
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future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions, which may include investing in
technology, our underlying technical infrastructure, including data management and analytics solutions, or related talent. If we determine that our cash
requirements exceed our amounts of cash on hand or if we decide to further optimize our capital structure, we may seek to issue additional debt or equity securities
or obtain credit facilities or other sources of funding.
Cash Provided by Operating Activities
Cash provided by operating activities in fiscal year 2016 was RMB56,836 million (US$8,815 million) and primarily consisted of net income of
RMB71,289 million (US$11,056 million), as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustments for non-
cash items primarily included a deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of Alibaba Pictures, a gain of
RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest related to Alibaba Health, RMB16,082 million
(US$2,494 million) of share-based compensation expense, RMB3,770 million (US$584 million) of depreciation and amortization of property and equipment and
land use rights, a gain of RMB3,089 million (US$479 million) from disposals of equity investees and RMB2,931 million (US$455 million) of amortization of
intangible assets. Changes in working capital and other activities primarily consisted of an increase of RMB8,104 million (US$1,257 million) in accrued expenses,
accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB2,350 million (US$364 million) in deferred revenue
and customer advances, partially offset by an increase of RMB4,012 million (US$622 million) in prepayment, receivables and other assets.
Cash provided by operating activities in fiscal year 2015 was RMB41,217 million and primarily consisted of net income of RMB24,320 million, as adjusted for
non-cash items and the effects of changes in working capital and other activities. Adjustments for non-cash items primarily included RMB13,028 million of share-
based compensation expense, a net gain from our step acquisitions arising from revaluation of previously held equity interests totaling RMB6,535 million,
RMB2,326 million of depreciation and amortization of property and equipment and land use rights, RMB2,089 million of amortization of intangible assets and
RMB1,659 million of deferred income taxes. Changes in working capital and other activities primarily consisted of an increase of RMB11,415 million in accrued
expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB2,490 million in merchant deposits, which
relate to merchants operating on Tmall, partially offset by an increase of RMB13,927 million in prepayments, receivables and other assets, as a result of the
increase in loan receivables relating to the SME loan business before we transferred this business to Ant Financial Services. See "Item 7. Major Shareholders and
Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — 2014
Restructuring of Our Relationship with Ant Financial Services and Alipay."
Cash provided by operating activities in fiscal year 2014 was RMB26,379 million and primarily consisted of net income of RMB23,403 million, as adjusted for
non-cash items and the effects of changes in working capital and other activities. Adjustment for non-cash items primarily included RMB2,844 million of share-
based compensation expense, RMB1,269 million of equity-settled donation expense, RMB1,466 million of deferred income taxes and RMB1,339 million of
depreciation and amortization expenses. Changes in working capital and other activities primarily consisted of an increase of RMB12,742 million in prepayments,
receivables and other assets due to the increase in loan receivables as a result of the continued growth of our SME loan business, partially offset by an increase of
RMB5,336 million in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of
RMB1,628 million in merchant deposits, which relate to merchants operating on Tmall.
Cash Used in Investing Activities
Cash used in investing activities was RMB42,831 million (US$6,643 million) in fiscal year 2016 and was primarily attributable to RMB54,483 million
(US$8,449 million) in acquisition of available-for-sale, held-to-maturity securities and equity investments mainly held for strategic purposes, including Ele.me,
Koubei, Magic Leap, CMC
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and Cainiao Network, and cash paid for business combinations, net of cash acquired, acquisition of equipment, intangible assets and construction in progress of
RMB10,845 million (US$1,682 million) primarily in connection with the purchase of computer equipment and the continued expansion of our corporate campuses,
partially offset by proceeds from disposal of subsidiaries, equity investees, available-for-sale securities and held-to-maturity securities of RMB17,088 million
(US$2,650 million) and net decrease in short-term investments of RMB4,619 million (US$716 million).
Cash used in investing activities was RMB53,454 million in fiscal year 2015 and was primarily attributable to RMB35,231 million in acquisition of available-
for-sale, held-to-maturity securities and equity investments mainly held for strategic purposes, including Youku Tudou, Intime, Meizu, Weibo and SingPost,
RMB10,255 million in cash paid for business combinations, net of cash acquired, including AutoNavi, UCWeb and OneTouch and acquisitions of equipment,
intangible assets and construction in progress of RMB7,705 million primarily in connection with the purchase of computer equipment and the continued expansion
of our corporate campus.
Cash used in investing activities was RMB32,997 million in fiscal year 2014 and was primarily attributable to RMB16,468 million in equity investments
mainly held for strategic purposes, including UCWeb, Weibo and AutoNavi, a net increase in short-term investments of RMB8,304 million and acquisitions of land
use rights, construction in progress and other property, equipment and intangible assets of RMB4,776 million primarily in connection with the continued expansion
of our corporate campuses and the purchase of computer equipment.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities was RMB15,846 million (US$2,457 million) in fiscal year 2016, and was primarily attributable to cash used in share
repurchase of RMB19,795 million (US$3,070 million), partially offset by net proceeds from borrowings of RMB2,478 million (US$384 million). See "Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers" for further information.
Cash provided by financing activities was RMB87,497 million in fiscal year 2015, and was primarily attributable to the issuance of ordinary shares of
RMB61,831 million in connection with our initial public offering in September 2014 and the additional drawdown of US$3.0 billion under our previous syndicated
loan arrangement in April 2014, which was refinanced with the proceeds from the US$8.0 billion unsecured senior notes issued in November 2014.
Cash provided by financing activities was RMB9,364 million in fiscal year 2014, and was primarily attributable to a drawdown of RMB29,947 million, or
US$5.0 billion, from our previous syndicated loan arrangement, as well as a net increase of RMB7,166 million in secured borrowings underlying our transfers of
micro loans to third-party financial institutions.
Capital Expenditures
Our capital expenditures have been incurred primarily in relation to (1) the acquisition of land use rights and construction of corporate campuses and office
facilities in Hangzhou, Beijing, Guangzhou and Shenzhen; and (2) the acquisition of computer equipment relating to the operation of our websites, furniture and
office equipment and leasehold improvements for our office facilities. In fiscal years 2014, 2015 and 2016, our capital expenditures totaled RMB4,776 million,
RMB7,705 million and RMB10,845 million (US$1,682 million), respectively.
Holding Company Structure
We are a holding company with no operation other than ownership of operating subsidiaries in Hong Kong, China and elsewhere that own and operate our
marketplaces and other businesses as well as a portfolio of intellectual property rights. As a result, we rely on dividends and other distributions paid by our
operating subsidiaries, including funds to pay dividends to our shareholders or to service our outstanding debts. If our operating subsidiaries incur additional debt
on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to pay dividends or make other
distributions to us. In addition,
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applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with
PRC accounting standards and regulations. Moreover, our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each
year to fund general reserves for appropriations until such reserve has reached 50% of the related subsidiary's registered capital. These reserves are not distributable
as cash 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, 2016, these restricted assets totaled RMB39,116 million (US$6,066 million). See note 24 to our consolidated
financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report.
Our holding company structure differs from some of our peers in that we hold our material assets and operations, except for ICP and other licenses for
regulated activities as well as certain equity investments in restricted businesses, in our wholly-foreign owned enterprises and most of our revenue is generated
directly by the wholly-foreign owned enterprises. As revenue is generated directly by our wholly-foreign owned enterprises, the wholly-foreign owned enterprises
directly capture the profits and associated cash flow from operations, without having to rely on contractual arrangements to transfer such cash flow from the
variable interest entities to the wholly-foreign owned enterprises. In fiscal years 2014, 2015 and 2016, the significant majority of our revenues were generated by
our wholly-foreign owned enterprises in China. See "Item 4. Information on the Company — C. Organizational Structure" for a description of these contractual
arrangements and the structure of our company.
Inflation
Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the year-over-
year increase in the consumer price index in calendar years 2013, 2014 and 2015 was 2.6%, 2.0% and 1.4%, respectively. Although we have not been materially
affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher inflation rates in China.
Critical Accounting Policies and Estimates
Our significant accounting policies are set forth in note 2 to our audited consolidated financial statements included elsewhere in this annual report. The
preparation of our consolidated financial statements requires our management to make estimates and assumptions that affect the amount reported in consolidated
financial statements. These estimates and assumptions are periodically re-evaluated by management and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ significantly from those estimates and
assumptions. We have identified the following accounting policies as the most critical to an understanding of our financial position and results of operations,
because the application of these policies requires significant and complex management estimates, assumptions and judgment, and the reporting of materially
different amounts could result if different estimates or assumptions were used or different judgments were made.
Principles of Consolidation
A subsidiary is an entity in which (i) we directly or indirectly control more than 50% of the voting power; or (ii) we have the power to appoint or remove the
majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating
policies of the investee pursuant to a statute or under an agreement among the shareholders or equity holders. However, there are situations in which consolidation
is required even though these usual conditions of consolidation do not apply. Generally, this occurs when an entity holds an interest in another business enterprise
that was achieved through arrangements that do not involve voting interests, which results in a disproportionate relationship between such entity's voting interests
in, and its exposure to the economic risks and potential rewards of, the other business enterprise. This disproportionate relationship results in what is known as a
variable interest, and the entity in which we have the variable interest is referred to as a "VIE." We consolidate a VIE if we are determined to be
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the primary beneficiary of the VIE. The primary beneficiary has both (i) the power to direct the activities of the VIE that most significantly impact the entity's
economic performance, and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
For the entities that we invested in or associated with but in which the usual conditions of consolidation mentioned above do not apply, we continuously
reassess whether these entities possess any of the characteristic of a VIE and whether we are the primary beneficiary.
We consolidate our subsidiaries and the VIEs of which we are the primary beneficiary. On a periodic basis, we reconsider the initial determination of whether a
legal entity is a consolidated entity upon certain events listed in ASC 810-10-35-4 occurred and also continuously reconsider whether we are the primary
beneficiaries of our affiliated entities as facts and circumstances change.
Recognition of Revenue
Revenue principally represents online marketing services revenue, commissions on transactions, membership and cloud computing revenue. Revenue
comprises the fair value of the consideration received or receivable for the provision of services in our ordinary course activities and is recorded net of VAT.
Consistent with the criteria of ASC 605 "Revenue Recognition," we recognize revenue when the following four revenue recognition criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the selling price is fixed or determinable, and (iv) collectability is
reasonably assured.
The application of various accounting principles related to the measurement and recognition of revenue requires us to make judgments and estimates.
Specifically, complex arrangements with non-standard terms and conditions may require significant contract interpretation to determine the appropriate accounting
treatment, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting. Other significant
judgments include determining whether we are acting as the principal or the agent from an accounting perspective in a transaction.
For multiple element arrangements with customers, which primarily relate to the sale of membership packages and online marketing services on our
international wholesale marketplace, the arrangement consideration is allocated at the inception of the arrangement to each element based on their relative fair
values for revenue recognition purposes. The consideration is allocated to each element using vendor-specific objective evidence or third-party evidence of the
standalone selling price for each deliverable, or if neither type of evidence is available, using management's best estimate of selling price. Significant judgment is
required in assessing the fair values of these elements by considering standalone selling price and other observable data. Changes in the estimated fair values may
cause the revenue recognized for each element to change but not the total amount of revenue allocated to a contract. We periodically re-assess the fair value of the
elements as a result of changes in market conditions. These multiple element arrangements are currently not significant to our operations. Revenue recognition for
P4P marketing service and display marketing on our marketplaces does not require our management to exercise significant judgment or estimate.
For other arrangements, we apply significant judgment in determining whether we are acting as the principal or agent in a transaction; we record P4P
marketing services revenue and display marketing revenue generated through third-party marketing affiliate programs on a gross basis; and revenue relating to the
Taobaoke program generated through third-party marketing affiliate partners' websites where we do not take inventory risks on a net basis. In addition, revenue
generated from certain platforms in which we operate as a primary obligor is reported on a gross basis while such revenue was insignificant for each of the periods
presented. Generally, when we are primarily obligated in a transaction and are subject to inventory risk or have latitude in establishing prices, or have several but
not all of these indicators, we record revenue on a gross basis. We record the net amount as revenue share earned if we are not primarily obligated and do not have
inventory risk or latitude in establishing prices. These judgments could have significant implications on the amount of revenue we recognize.
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Share-based Compensation Expense and Valuation of the Underlying Awards
Granting of share options, restricted shares and RSUs relating to our ordinary shares
We account for various types of share-based awards granted to the employees, consultants and directors of our company, our affiliates and certain other
companies, such as Ant Financial Services, in accordance with the authoritative guidance on share-based compensation expense. Under the fair value recognition
provision of such guidance, compensation for share-based awards granted, including share options, restricted shares and RSUs, is measured at the grant date, or at
future vesting date in the case of consultants or other grantees, based on the fair value of the awards and is recognized as expense over the requisite service period,
which is generally the vesting period of the respective award, on an accelerated attribution method. In the case of share-based awards to non-employees, the fair
value of the unvested portion is re-measured each period, with the resulting difference, if any, recognized as expense during the period the related services are
rendered. Under the accelerated attribution method, each vesting installment of a graded vesting award is treated as a separate share-based award, and accordingly
each vesting installment is separately measured and attributed to expense, resulting in accelerated recognition of share-based compensation expense.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated income statement and as such is recorded for only those share-
based awards that we expect to vest. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to reflect changes in facts
and circumstances, if any. We revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.
Determining the fair value of share-based awards requires significant judgment. We estimated the fair value of our share options using the Black-Scholes
option-valuation model, which requires inputs such as the fair value of our ordinary shares, risk-free interest rate, expected dividend yield, expected life and
expected volatility on the following assumptions:
•
•
•
•
•
Fair value of our ordinary shares — prior to our initial public offering in September 2014, the fair value was determined based on management
estimates, as discussed in the paragraphs below. Subsequent to our initial public offering, the market price of our publicly traded ADSs is used as an
indicator of fair value for our ordinary shares.
Risk free interest rate — the risk free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected life of the
share options.
Expected dividend yield — we have never declared or paid any cash dividends on our ordinary shares and do not presently plan to pay cash
dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
Expected life — the expected term was estimated based on the average between the vesting period and the contractual term.
Expected volatility — as we have a short period of trading history for our ordinary shares, the expected volatility for our ordinary shares was
estimated by taking the average historical price volatility for industry peers based on the price fluctuations of their shares over a period equivalent to
the expected term of the share options granted. Industry peers consist of several public companies in the technology industry similar in size, which
are engaged in similar business sectors in China and worldwide. We intend to continue to consistently apply this process using the same or similar
public companies until a sufficient amount of historical information regarding the volatility of our own ordinary share price becomes available, or
unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share
prices are publicly available would be utilized in the calculation.
The fair value of restricted shares and RSUs is determined based on the fair value of our ordinary shares.
Prior to our initial public offering in September 2014, in the absence of a public trading market, the determination of the fair value of our ordinary shares by the
administrators was made with reference to the price at which we had recently sold our ordinary shares to third-party investors, or other representative private share
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sale transactions entered into on an arms-length basis known to us. If such references were not available, the valuations of our ordinary shares were determined in
accordance with the guidelines outlined in the American Institute of Certified Public Accountants' Practice Aid, Valuation of Privately-Held Company Equity
Securities Issued as Compensation, and with the assistance of an independent appraisal firm from time to time. The assumptions we use in the valuation model are
based on future expectations combined with management judgment, with inputs of numerous objective and subjective factors such as our operating and financial
performance, expected growth rates, expected profit margins and the market performance of industry peers, to determine the fair value of our ordinary shares.
In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business enterprise value, or BEV,
and then allocated the BEV to each element of our capital structure (convertible preference shares and ordinary shares) using a hybrid method comprising the
probability-weighted expected return method and the option pricing method. In our case, two scenarios were assumed, namely: (i) the redemption scenario, in
which the option pricing method was adopted to allocate the value between convertible preference shares and ordinary shares, and (ii) the mandatory conversion
scenario, in which equity value was allocated to convertible preference shares and ordinary shares on an as-if converted basis. Increasing probability was assigned
to the mandatory conversion scenario during fiscal year 2014 and the subsequent periods in light of preparations for our initial public offering.
Before April 2014, our BEV was estimated using a combination of two generally accepted approaches: the market approach using the guideline company
method, or GCM, and the income approach using the discounted cash flow method, or DCF. The market approach considers valuation metrics based on trading
multiples of a selected industry peer group of companies. The DCF method estimates enterprise value based on the estimated present value of future net cash flows
that the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as
terminal value. The estimated present value is calculated using a discount rate based on the guideline companies' weighted average cost of capital, which accounts
for the time value of money and the appropriate degree of risks inherent in the business. The GCM and DCF methods are then weighted equally in determining
our BEV.
In addition to the GCM and DCF methods, starting from April 2014, the market transaction method, or MTM, was also adopted. MTM considers recent
transactions of secondary shares by our existing shareholders, which indicate the equity value of the underlying business being evaluated. We assigned a 50%
weight to MTM and the remaining 50% weight equally to GCM and DCF.
Subsequent to our initial public offering in September 2014, the market price of our publicly traded ADSs is used as an indicator of fair value of our ordinary
shares.
If the fair value of the underlying equity and any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation expense
for future awards may differ materially compared with the awards granted previously.
Subscription of rights to acquire our restricted shares
We offered selected partners of the Alibaba Partnership and they have subscribed for rights to acquire our restricted shares. These rights are not subject to any
vesting conditions and entitle the holders to purchase restricted shares at a price of US$14.50 per share during a four year period. Upon the exercise of such rights,
the underlying ordinary shares may not be transferred for a period of eight years from the date of subscription of the relevant rights. The fair value of the rights was
determined by the Black-Scholes option-valuation model. A discount for post-vesting sales restriction was applied to arrive at the estimated value of the restricted
shares for the determination of the fair value of the rights. Share-based compensation expense equivalent to the entire fair value of these rights less the initial
subscription price was recorded in the period of subscription.
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Share-based awards relating to Ant Financial Services
Junhan made grants of certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to a substantial
number of our employees. The vesting of such awards is conditional upon the fulfillment of requisite services to us, and such awards will be settled in cash by
Junhan upon their disposal by the holders. Junhan has the right to repurchase the vested awards from the holders upon an initial public offering of Ant Financial
Services or the termination of the employment of the employees with us at a price to be determined based on the then fair market value of Ant Financial Services.
We have no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. The cost relating to such share-
based awards is recognized by us as a shareholder contribution as the awards will ultimately be settled in cash by Junhan. The awards are accounted for as financial
derivatives and initially measured at their fair value, and the related share-based compensation expense will be recognized over the requisite service period.
Subsequent changes in the fair value of the awards are recorded in the consolidated income statements through the date on which the underlying awards are settled
by Junhan. See note 8(d) to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report. The
fair values of the underlying equity are primarily determined by reference to the BEV of Ant Financial Services which is based on the contemporaneous valuation
reports or recent financing transactions. Given that the determination of the BEV of Ant Financial Services requires the judgments and is beyond our control, the
magnitude of the related accounting impact is unpredictable and may affect our consolidated income statement significantly.
As of March 31, 2016, the total unamortized share-based compensation expense related to (i) ordinary shares of us and our subsidiaries and (ii) awards linked
to the valuation of Ant Financial Services that we expect to recognize was RMB13,709 million (US$2,120 million) and RMB2,542 million with a weighted-
average remaining requisite service period of 2.1 years and 1.7 years, respectively. To the extent the actual forfeiture rate is different from what we have
anticipated, share-based compensation expense related to these awards will be different from our expectations. Furthermore, share-based compensation expense
will be affected by changes in the fair value of our shares, as certain share-based awards were granted to non-employees where the unvested portions of the awards
are re-measured at each reporting date through the vesting dates in the future. As of March 31, 2016, share-based awards granted to non-employees included
384,116 share options and 5,880,443 RSUs. In addition, share-based compensation expense will also be affected by changes in the fair value of awards granted to
our employees by Junhan, which is controlled by Jack Ma. Ant Financial Services has informed us that they expect Junhan will also issue additional share-based
awards to our employees from time to time in the future. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party
Transaction — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Ownership of Ant Financial Services and Alipay." The
expenses associated with these awards will be recognized across the functions in which the award recipients are employed and may continue to be significant in
future periods.
Equity-settled Donation Expense
In October 2013, we granted options to acquire 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai, subject to
irrevocable instructions to designate and transfer these share options to the separate charitable trusts to be established by them. 35,000,000 and 15,000,000 of these
share options have been transferred to the separate charitable trusts established by Jack Ma and Joe Tsai, respectively. These share options were approved by our
board of directors and the options are not subject to any vesting condition and are exercisable for a period of four years starting from the grant date. The exercise
price of these options is US$25.00 per share based on a fair market value appraisal process. For each of the eight years beginning one year after the date of listing
of our ordinary shares on a recognized stock exchange, the charitable trusts are permitted to sell only up to 6,250,000 ordinary shares (or one-eighth of the total
number of ordinary shares subject to the options) per year excluding such number of unsold ordinary shares carried forward from previous years. The fair value of
the share options was determined using the Black-Scholes option valuation model, which requires inputs such as the fair value of the underlying restricted shares,
risk-free interest rate, expected dividend yield, expected life and expected volatility. As we do not have a history of granting such options for
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charity purposes, the expected life was estimated to be the exercisable period of the options. To determine the fair value of the restricted shares, discounts for post-
vesting sales restrictions were applied to the fair value of our ordinary shares depending on the duration of the restriction period of each particular tranche. We have
determined the fair value of these options based on the methodology described above, with the assistance of an independent appraisal firm. As there are no vesting
conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full and recorded in general and
administrative expenses during fiscal year 2014.
The considerations, assumptions and valuations of ordinary shares as well as assumptions for risk-free interest rate, expected dividend yield and expected
volatility used to calculate the equity-based donation expense are the same as those used in connection with our share-based awards during the corresponding
period. See "— Share-based Compensation Expense and Valuation of the Underlying Awards."
Recognition of Income Taxes and Deferred Tax Assets/Liabilities
We are mainly subject to income tax in China, but are also subject to taxation on profit arising in or derived from the tax jurisdiction where our subsidiaries are
domiciled and operate outside China. Income taxes are assessed and determined on an entity basis. There are transactions (including entitlement to preferential tax
treatment and deductibility of expenses) where the ultimate tax determination is uncertain until the final tax position is confirmed by relevant tax authorities. In
addition, we recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes could be due. Where the final tax outcome of these
matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which
such determination is made.
Deferred income tax is recognized for all temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that
taxable profit will be available in the future against which the temporary differences, the carry forward of unused tax credits and unused tax losses could be
utilized. Deferred income tax is provided in full, using the liability method. The deferred tax assets recognized are mainly related to the temporary differences
arising from accrued expenses which are not deductible until paid under the applicable PRC tax laws. We have also recognized deferred tax liabilities on the
undistributed earnings generated by our subsidiaries in China, which are subject to withholding taxes when they resolve to distribute dividends to us. As of
March 31, 2016, we have fully accrued the withholding tax on the earnings distributable by all of our subsidiaries in China, except for those undistributed earnings
that we intend to invest indefinitely in China of RMB13.6 billion. If our intent changes or if these funds are in fact distributed outside China, we would be required
to accrue or pay the withholding tax on some or all of these undistributed earnings and our effective tax rate would be adversely affected.
Fair Value Determination Related to the Accounting for Business Combinations
A component of our growth strategy has been to acquire and integrate complementary businesses into our ecosystem. We complete business combinations
from time to time which require us to perform purchase price allocations. In order to recognize the fair value of assets acquired and liabilities assumed, mainly
consisting of intangible assets and goodwill, as well as the fair value of any contingent consideration to be recognized, we use valuation techniques such as
discounted cash flow analysis and ratio analysis in comparison to comparable companies in similar industries under the income approach, market approach and cost
approach. Major factors considered include historical financial results and assumptions including future growth rates, an estimate of weighted average cost of
capital and the effect of expected changes in regulation. Most of the valuations of our acquired businesses have been performed by independent valuation
specialists under our management's supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on
reasonable assumptions and estimates that market participants would use. However, such assumptions are inherently uncertain and actual results could differ from
those estimates.
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Fair Value Determination Related to Financial Instruments Accounted for at Fair Value
We have a significant amount of investments and liabilities that are classified as Level 2 and Level 3 according to ASC 820 "Fair Value Measurement." The
valuations for the investments and liabilities classified as Level 2 relating to financial derivatives, interest rate swaps and forward exchange contracts are provided
by independent third parties such as the custodian banks. The valuation for the investments and liabilities classified as Level 3 relating to convertible bonds
accounted for under the fair value option, contingent consideration and put liability in relation to investments and acquisitions are determined based on
unobservable inputs, such as historical financial results and assumptions about future growth rates, which require significant judgment to determine the future
outcome of such contingencies.
Impairment Assessment on Goodwill and Intangible Assets
We test annually, or whenever events or circumstances indicate that the carrying value of assets exceeds the recoverable amounts, whether goodwill and
intangible assets have suffered any impairment in accordance with the accounting policy stated in note 2 to our audited consolidated financial statements included
elsewhere in this annual report. For the impairment assessment on goodwill, we have elected to perform a qualitative assessment to determine whether the two-step
impairment testing of goodwill is necessary. In this assessment, we consider primary factors such as industry and market considerations, overall financial
performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the
fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.
For the quantitative assessment of goodwill impairment, we identify the reporting units and compare the fair value of each reporting unit to its carrying
amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will
not be required.
If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting
unit's goodwill. For intangible assets, we perform an impairment assessment whenever events or changes in circumstances indicate the carrying value of an asset
may not be recoverable. These assessments primarily use cash flow projections based on financial forecasts prepared by management and an estimated terminal
value. The expected growth in revenues and operating margin, timing of future capital expenditures, an estimate of weighted average cost of capital and terminal
growth rate are based on actual and prior year performance and market development expectations. The periods of the financial forecasts generally range from three
to five years or a longer period if necessary. Judgment is required to determine key assumptions adopted in the cash flow projections and changes to key
assumptions can significantly affect these cash flow projections and the results of the impairment tests.
Impairment of Investments in Equity Investees
We continually review our investments in equity investees to determine whether a decline in fair value below the carrying value is other than temporary. The
primary factors that we consider include the length of time that the fair value of the investment is below its carrying value; post-balance sheet date fair value of the
investment; the financial condition, operating performance, strategic collaboration with and the prospects of the investee; the economic or technological
environment in which the investee operates; and other entity specific information such as recent financing rounds completed by the investee companies. Fair value
of the listed securities is subject to volatility and may be materially affected by market fluctuations. Judgment is required to determine the weighting and impact of
the aforementioned factors and changes to such determination can significantly affect the results of the impairment tests.
Depreciation and Amortization
The costs of property and equipment and intangible assets are charged ratably as depreciation and amortization expenses, respectively, over the estimated
useful lives of the respective assets using the straight-line
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method. We periodically review changes in technology and industry conditions, asset retirement activity and residual values to determine adjustments to estimated
remaining useful lives and depreciation and amortization rates. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a
change in estimated useful lives and therefore depreciation and amortization expenses in future periods.
Allowance for Doubtful Accounts Relating to Loan and VAT Receivables
We record allowances for doubtful accounts primarily on the micro loans and VAT receivables according to our best estimate of the losses inherent in the
outstanding loan portfolio and VAT receivables. The credit periods extended by us to the merchants relating to micro loans generally range from 7 days to 360 days
and the collection periods for the VAT receivables generally range from three to six months. We estimate the allowances by multiplying pre-determined
percentages to the outstanding loan amounts based on the aging of the loans. Given that substantially all borrowers of the micro loans are merchants on our
marketplaces, we are able to monitor the transaction history of these merchants and other operating data accumulated on our platforms, and assess the general
financial health of these borrowers. VAT receivables mainly represent VAT receivables from relevant PRC tax authorities arising from OneTouch's VAT refund
service. We monitor the aging of the VAT receivables and assess the collectability of these VAT receivables. Judgment is required to determine the percentages
used to determine the allowance amounts and whether such amounts are adequate to cover potential bad debts, and periodic reviews are performed to ensure such
percentages continue to reflect our best estimate of the inherent losses based on our assessment of the merchants' ability to repay the loans or the collectability of
the VAT receivables. The micro loans and the allowance for doubtful accounts relating to micro loans balances were insignificant as of March 31, 2016 because we
disposed substantially all of such business and assets upon the completion of the restructuring of our relationship with Ant Financial Services during the year ended
March 31, 2015. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant
Financial Services and its Subsidiaries — 2014 Restructuring of Our Relationship with Ant Financial Services and Alipay."
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, "Revenue from Contracts with
Customers," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)" and requires entities to recognize revenue in a way that
depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. In April 2016, the FASB issued
ASU 2016-10 to clarify ASU 2014-09 on identifying performance obligations and licensing implementation guidance contained in the new revenue recognition
standard. The new guidance is effective retrospectively for us for the year ending March 31, 2019 and the interim reporting periods during the year ending
March 31, 2019, with early application permitted only for the annual reporting period ending March 31, 2018 and the interim reporting periods during the year
ending March 31, 2018. We are evaluating the existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be
affected by the new requirements.
In January 2015, the FASB issued ASU 2015-01, "Income Statement — Extraordinary and Unusual Items," which eliminates the concept of extraordinary and
unusual items from U.S. GAAP. The new guidance is effective prospectively for us for the year end ending March 31, 2017 and interim reporting periods during
the year ending March 31, 2017. Early adoption is permitted. The revised guidance will not have a material effect on our financial position, results of operations or
cash flows. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810) — Amendments to the Consolidation Analysis," which amends the criteria for
determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral
granted to investment companies for application of the VIE consolidation model. The guidance is effective for us for the year
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ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. The guidance may be applied retrospectively or through a cumulative
effect adjustment to equity as of the beginning of the year of adoption. Early application is permitted, including adoption in an interim period. We are evaluating
the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs relating to a
recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
The new guidance is effective retrospectively for us for the year end ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017.
Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash
flows. At this time, we do not expect this accounting standard update to have a material impact on the financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805) — Simplifying the Accounting for Measurement-Period
Adjustments," which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that
the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is
identified. The new guidance is effective prospectively for us for the year end ending March 31, 2017 and interim reporting periods during the year ending
March 31, 2017. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of
operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes," which simplifies the
presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The new guidance is effective
for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The new guidance
may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are evaluating the effects, if any, of the
adoption of this revised guidance on our financial position, results of operations or cash flows. At this time, we do not expect this accounting standard update to
have a material impact on the financial statements.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10) — Recognition and Measurement of Financial Assets and
Financial Liabilities," which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our
consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of
financial assets and liabilities. The new guidance is effective for us for the year ending March 31, 2019 and interim reporting periods during the year ending
March 31, 2019. Early adoption is permitted only for certain provisions. We are evaluating the effects, if any, of the adoption of this revised guidance on our
financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new ASC 842 "Leases" to replace the
previous ASC 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to
align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09. The new guidance is effective for us for
the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020. Early adoption is permitted. We are evaluating the effects, if
any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-05 "Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting
Relationships," which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC 815
"Derivatives and hedging," does not, in and of itself, require dedesignation of that hedging relationship provided that all other
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hedge accounting criteria continue to be met. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year
ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results
of operations or cash flows.
In March 2016, the FASB issued ASU 2016-06 "Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments" to clarify the requirements
for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt
hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step
decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to
have a debt host) with embedded call (put) options. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during
the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on the Company's
financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-07 "Simplifying the Transition to the Equity Method of Accounting," to simplify the accounting for equity method
investments, which eliminates the requirement in ASC 323 "Investments — equity method and joint ventures" that an entity retroactively adopt the equity method
of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments
require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest
and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for us for
the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if
any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting," to simplify the accounting for employee
share-based payment transactions, including the income tax consequences, classification of excess tax benefits on the statement of cash flows, introduction of
accounting policy election on forfeitures, and the change of the threshold of share withholding by employer for settlement of employees' tax without causing the
award to be liability classified. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending
March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of
operations or cash flows.
C. Research and Development, Patents and Licenses, etc.
Research and Development
We have built our core technology for our e-commerce and cloud computing businesses in-house. As of March 31, 2016, we employed over 18,000 research
and development personnel engaged in building our technology platform and developing new online and mobile products. We recruit top and experienced talent
locally and oversea, and we have advanced training programs designed specifically for new campus hires.
Intellectual Property
We believe the protection of our trademarks, copyrights, domain names, trade names, trade secrets, patents and other proprietary rights is critical to our
business. We rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China and other
jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our trademarks. We also enter into
confidentiality and invention assignment agreements with all of our employees, and we rigorously control access to our proprietary technology and information. As
of March 31, 2016, we had 1,529 issued patents and 2,141 publicly filed patent applications in China and 1,387 issued patents and 3,096 publicly filed patent
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applications in various countries and jurisdictions internationally. We do not know whether any of our pending patent applications will result in the issuance of
patents or whether the examination process will require us to narrow our claims.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the current fiscal
year that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital reserves, or that caused the disclosed financial
information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements in fiscal years 2014, 2015 or 2016.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of March 31, 2016:
Contractual Obligations
Short term borrowings (1)
Long term borrowings (2)
Unsecured senior notes (3)
Contractual Commitments
Total
Less than
1 Year
Payment due by period
1-3
Years
(in millions of RMB)
3-5
Years
More than
5 Years
4,304
1,871
51,726
4,304
—
—
—
1,202
8,405
—
669
14,548
—
—
28,773
Purchase of property and equipment
Construction in progress
Leases for office facility and transportation equipment
Co-location, bandwidth fees and marketing expenses
Investment commitments (4)
Acquisition of license and copyrights
Total
803
1,688
900
8,422
65,597
3,770
139,081
796
1,500
394
2,680
65,597
885
76,156
7
185
330
2,733
—
1,627
14,489
—
3
111
2,186
—
1,258
18,775
—
—
65
823
—
—
29,661
(1)
(2)
(3)
(4)
Excluding estimated interest payments of RMB61 million assuming the applicable interest rates in effect as of March 31, 2016. The majority of the borrowings are subject to floating
interest rates.
Excluding estimated interest payments of RMB254 million in total (RMB99 million, RMB132 million and RMB23 million over the periods of less than one year, one to three years
and three to five years from April 1, 2016, respectively), assuming the applicable interest rates in effect as of March 31, 2016. Substantially all of the borrowings are subject to
floating interest rates.
Excluding estimated interest payments of RMB11,588 million in total (RMB1,522 million, RMB2,873 million, RMB2,300 million and RMB4,893 million over the periods of less
than one year, one to three years, three to five years and more than five years from April 1, 2016, respectively), assuming the applicable interest rates in effect as of March 31, 2016.
Aggregate principal amount of fixed rate notes and floating rate notes were US$7.7 billion and US$300 million respectively.
Including the consideration for the acquisitions of Youku Tudou of RMB28.4 billion, which was completed in April 2016, and of Suning of RMB28.2 billion, which is expected to be
completed by the end of the quarter ending June 30, 2016.
G. Safe Harbor
See "Forward-Looking Statements."
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ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Directors and Executive Officers
The following table sets forth certain information relating to our directors and executive officers.
Name
Jack Yun MA †(1)
Joseph C. TSAI †(2)
Jonathan Zhaoxi LU †(1)
Daniel Yong ZHANG †(1)
J. Michael EVANS †(2)
Masayoshi SON ‡(3)
Chee Hwa TUNG (2)
Walter Teh Ming KWAUK (2)
Jerry YANG (2)
Börje E. EKHOLM (2)
Wan Ling MARTELLO (2)
Maggie Wei WU (2)
Jane Fang JIANG (1)
Jeff Jianfeng ZHANG (1)
Zhenfei LIU (1)
Trudy Shan DAI (1)
Timothy A. STEINERT (2)
Jianhang JIN (1)
Chris Pen-hung TUNG (1)
Yongfu YU (1)
Simon Xiaoming HU (1)
Sophie Minzhi WU (1)
Jessie Junfang ZHENG (1)
Age
Position/Title
51 Executive Chairman
52 Executive Vice Chairman
46 Vice Chairman
44 Director and Chief Executive Officer
58 Director and President
58 Director
Independent director
79
Independent director
63
Independent director
47
Independent director
53
58
Independent director
48 Chief Financial Officer
42 Chief People Officer
42 Chief Technology Officer
44 Chief Risk Officer
39 Chief Customer Officer
56 General Counsel and Secretary
46 President
46 Chief Marketing Officer
39 President, Mobile Internet and Alimama
46 President, Alibaba Cloud Computing
40 President, Wholesale Marketplaces
42 Chief Platform Governance Officer and Deputy Chief Financial Officer
†
‡
(1)
(2)
(3)
Director nominated by the Alibaba Partnership.
Director nominated by SoftBank.
c/o 969 West Wen Yi Road, Yu Hang District, Hangzhou 311121, the People's Republic of China.
c/o Alibaba Group Services Limited, 26/F Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong S.A.R.
SoftBank Group Corp., 1-9-1 Higashi-shimbashi, Minato-ku, Tokyo, 105-7303, Japan.
Biographical Information
) is our lead founder and, since May 2013, has served as our executive chairman. From our founding in 1999 and until May 2013, Jack
Jack Yun MA (
served as our chairman and chief executive officer. He is also the founder of the Zhejiang-based Jack Ma Foundation. Jack currently serves on the board of
SoftBank Group Corp., one of our major shareholders and a Japanese corporation listed on the Tokyo Stock Exchange. He is also a member of the Foundation
Board of the World Economic Forum, a member of the U.K. government's Business Advisory Group, chairman of the Zhejiang Chamber of Commerce, as well as
chairman of the China Entrepreneur Club. In January 2016, he was named a Sustainable Development Goals (SDGs) advocate by the United Nations. Jack
graduated from Hangzhou Teacher's Institute with a major in English language education.
Joseph C. TSAI (
) joined our company in 1999 as a member of the Alibaba founding team and has served as our executive vice chairman since
May 2013. He has been a non-executive director of Alibaba Health since September 2015. Joe previously served as our chief financial officer and has been a
member of our board of
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directors since our formation. From 1995 to 1999, Joe worked in Hong Kong with Investor AB, the main investment vehicle of Sweden's Wallenberg family, where
he was responsible for Asian private equity investments. Prior to that, he was vice president and general counsel of Rosecliff, Inc., a management buyout firm
based in New York. From 1990 to 1993, Joe was an associate attorney in the tax group of Sullivan & Cromwell LLP, a New York-based international law firm. Joe
serves on the boards of directors of several of our investee companies. Joe is qualified to practice law in the State of New York. He received his bachelor's degree
in Economics and East Asian Studies from Yale College and a juris doctor degree from Yale Law School.
Jonathan Zhaoxi LU (
) has been our director since September 2014 and vice chairman since May 2015. Jonathan joined our company in 2000 and
served as chief executive officer from May 2013 to May 2015. Mr. Lu has at different points served as the top executive officer of almost all of our key business
units. He has previously served as our chief data officer and also oversaw our YunOS division. Before that, he served as chief executive officer of Alibaba.com
from February 2011 until its privatization in 2012. He joined Taobao in January 2008 and served as its chief executive officer from January 2010 to June 2011. In
September 2004, he led a dedicated team to establish Alipay and became Alipay's first president. From 2000 to 2004, Jonathan held several leadership roles at
Alibaba.com and managed its South China sales region. Before joining Alibaba Group, Jonathan was co-founder of a network communications company. Since
May 2014, Jonathan has served on the board of directors of Youku Tudou. Jonathan received a graduate certificate in hotel management from Guangzhou
University and a master's degree in business administration from China Europe International Business School.
) has been our Chief Executive Officer since May 2015 and our director since September 2014. Prior to his current role, he
Daniel Yong ZHANG (
served as our Chief Operating Officer from September 2013 to May 2015. He joined our company in August 2007 as Chief Financial Officer of Taobao
Marketplace and served in this position until June 2011. He took on the additional role of general manager for Tmall.com in August 2008, which he served in
concurrence until appointment as president of Tmall.com in June 2011 when Tmall.com became an independent platform. Prior to joining Alibaba, Daniel served
as Chief Financial Officer of Shanda Interactive Entertainment Limited, an online game developer and operator then listed on NASDAQ, from August 2005 to
August 2007. From 2002 to 2005, he was a senior executive of PricewaterhouseCoopers' Audit and Business Advisory Division in Shanghai. Daniel is Chairman of
Intime Retail, a company listed on SEHK, and serves on the boards of Haier, a company listed on SEHK, and Weibo, a company listed on NYSE. Daniel received a
bachelor's degree in finance from Shanghai University of Finance and Economics.
J. Michael EVANS has been our president since August 2015 and our director since September 2014. Mr. Evans served as Vice Chairman of The Goldman
Sachs Group, Inc. from February 2008 until his retirement in December 2013. Mr. Evans served as chairman of Asia operations at Goldman Sachs from 2004 to
2013 and was the global head of Growth Markets at Goldman Sachs from January 2011 to December 2013. He also co-chaired the Business Standards Committee
of Goldman Sachs from 2010 to 2013. Mr. Evans joined Goldman Sachs in 1993, became a partner of the firm in 1994 and held various leadership positions within
the firm's securities business while based in New York and London, including global head of equity capital markets and global co-head of the equities division, and
global co-head of the securities business. Mr. Evans is a board member of City Harvest. He is also a trustee of the Asia Society and a member of the Advisory
Council for the Bendheim Center for Finance at Princeton University. In August 2014, Mr. Evans joined the board of Barrick Gold Corporation. In October 2014,
Mr. Evans was appointed as an independent board member of Castleton Commodities International LLC. Mr. Evans received his bachelor's degree in politics from
Princeton University in 1981.
Masayoshi SON has been our director since 2000 and is the founder, chairman and chief executive officer of SoftBank Group Corp., a Japanese corporation
listed on the Tokyo Stock Exchange, with operations in broadband, mobile and fixed-line telecommunications, e-commerce, Internet, technology services, media
and marketing, and other businesses. Mr. Son founded SoftBank Group Corp. in 1981. Mr. Son also serves as chairman and chief executive officer of several other
SoftBank subsidiaries and affiliates, including SoftBank Corp. as well as serving
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as chairman of Yahoo Japan Corporation since 1996, and of Sprint Corporation since 2013. Mr. Son received a bachelor's degree in Economics from the University
of California, Berkeley.
) has been our director since September 2014 and is the Vice Chairman of the Twelfth National Committee of the Chinese
Chee Hwa TUNG (
People's Political Consultative Conference of the PRC, which is an important institution of multiparty cooperation and political consultation in the PRC. Mr. Tung
is the Founding Chairman of the China-United States Exchange Foundation, which is a non-profit organization registered in Hong Kong to promote understanding
and strengthening relationships between China and the United States. Mr. Tung also serves in various public sector and advisory positions, including as a member
of the J.P. Morgan International Council, the China Development Bank International Advisory Committee and the Advisory Board of the Schwarzman Scholars
Program at Tsinghua University. Prior to these appointments, Mr. Tung served as the First Chief Executive of the Hong Kong Special Administrative Region from
July 1997 to March 2005. Mr. Tung had a successful and distinguished career in business, including serving as the Chairman and Chief Executive Officer of Orient
Overseas (International) Limited, a SEHK-listed company with its principal business activities in container transport and logistics services on a global scale.
Mr. Tung is also the chairman and chief executive officer of Our Hong Kong Foundation Limited, a non-government, non-profit organization dedicated to
promoting the long-term and overall interests of Hong Kong. Mr. Tung received a bachelor's degree in science from the University of Liverpool.
) has been our director since September 2014. He previously served as an independent non-executive director and
Walter Teh Ming KWAUK (
chairman of the audit committee of Alibaba.com Limited, one of our subsidiaries, which was listed on the SEHK, from October 2007 to July 2012. Mr. Kwauk is
currently a senior consultant of Motorola Solutions (China) Co., Ltd. and serves as an independent non-executive director of Thunder Power Co. Ltd., a Taiwan
company with its shares traded on Taiwan's Gre Tai Securities Market; Sinosoft Technology Group Limited, a company listed on the SEHK, of which Mr. Kwauk
is also the chairman of its audit committee; and several private companies. Mr. Kwauk was a vice president of Motorola Solutions, Inc. and its director of corporate
strategic finance and tax, Asia Pacific from 2003 to 2012. Mr. Kwauk served with KPMG from 1977 to 2002 and held a number of senior positions, including the
general manager of KPMG's joint venture accounting firm in Beijing, the managing partner in KPMG's Shanghai office and a partner in KPMG's Hong Kong
Office. He is a member of the Hong Kong Institute of Certified Public Accountants. Mr. Kwauk received a bachelor's degree in science and a licentiate's degree in
accounting from the University of British Columbia.
) has been our director since September 2014. Mr. Yang previously served as our director from October 2005 to January 2012. Since
Jerry YANG (
March 2012, Mr. Yang has served as the founding partner of AME Cloud Ventures, a venture capital firm. Mr. Yang is a co-founder of Yahoo! Inc., and served as
Chief Yahoo! and as a member of its board of directors from March 1995 to January 2012. In addition, he served as Yahoo!'s Chief Executive Officer from
June 2007 to January 2009. From January 1996 to January 2012, Mr. Yang served as a director of Yahoo! Japan. Mr. Yang also served as an independent director
of Cisco Systems, Inc. from July 2000 to November 2012. He is currently an independent director of Workday Inc., a company listed on the New York Stock
Exchange, and Lenovo Group Ltd., a company listed on the SEHK. He also serves as a director of various private companies and foundations. Mr. Yang received a
bachelor's degree and a master's degree in electrical engineering from Stanford University and served on Stanford University's board of trustees from October 2005
to September 2015.
Börje E. EKHOLM has been our director since June 2015. Mr. Ekholm is currently the head of Patricia Industries, a newly created division of Investor AB, a
Swedish investment company, where he has held a variety of management positions since joining the firm in 1992. Prior to his current position, Mr. Ekholm served
as president and chief executive officer and a member of the board of directors of Investor AB. Prior to becoming president and chief executive officer in 2005,
Mr. Ekholm was a member of the management group of Investor AB. Previously, Mr. Ekholm worked at McKinsey & Co. Inc. Mr. Ekholm is currently the non-
executive chairman of NASDAQ OMX Inc. and also serves as a director of Chalmers Innovation AB, Telefonaktiebolaget LM Ericsson, KTH Royal Institute of
Technology, Choate Rosemary Hall and NASDAQ-listed Trimble Navigation Ltd.
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Mr. Ekholm received a master's degree in electrical engineering from KTH Royal Institute of Technology and a master's degree in business administration
from INSEAD.
Wan Ling MARTELLO has been our director since September 2015. She is currently the executive vice president, head of zone Asia, Oceania, Sub-Saharan
Africa of Nestlé S.A. Prior to this appointment, Ms. Martello was executive vice president, chief financial officer of Nestlé S.A., and joined the company in
November 2011. Before joining Nestlé S.A., Ms. Martello worked at Walmart Stores Inc. from 2005 to 2011 where she served as executive vice president, global
ecommerce, and senior vice president and chief financial officer, Walmart International, at different times. Prior to that, Ms. Martello worked at NCH Marketing
Services Inc. from 1998 to 2005 and Borden Foods Corporation from 1995 to 1998, where she held various senior management positions. Previously, Ms. Martello
worked at Kraft Foods, Inc. from 1985 to 1995. Ms. Martello received a master's degree in business administration from the University of Minnesota and a
bachelor's degree in business administration and accountancy from the University of the Philippines. She is a certified public accountant in the Philippines.
) has been our chief financial officer since May 2013. Maggie served as our deputy chief financial officer from October 2011 to
Maggie Wei WU (
May 2013. Maggie joined our company in July 2007 as chief financial officer of Alibaba.com and was responsible for instituting Alibaba.com's financial systems
and organization leading up to its initial public offering in Hong Kong in November of that year, as well as co- leading the privatization of Alibaba.com in 2012.
She was voted best CFO in FinanceAsia's annual poll for Asia's Best Managed Companies in 2010. Before joining our company, Maggie was an audit partner at
KPMG in Beijing. In her 15 years with KPMG, she was lead audit partner for the initial public offerings and audits of several major large-cap Chinese companies
listed in international capital markets and provided audit and advisory services to major multinational corporations operating in China. Maggie is a member of the
Association of Chartered Certified Accountants (ACCA) and a member of the Chinese Institute of Certified Public Accountants. She received a bachelor's degree in
accounting from Capital University of Economics and Business.
) joined our company in 1999 as a member of our founding team and was appointed our chief people officer in April 2016. She is
Jane Fang JIANG (
currently responsible for strategy and execution of our talent and organizational culture development and overseeing our integrity department. Jane has held a
number of senior management roles in different departments within the company, at different times leading China TrustPass product planning, business analysis,
global operations, website operations and marketing for Alibaba.com, as well as credit system development. Prior to her current position, she was our deputy chief
people officer. Jane received a bachelor's degree in industry and foreign trade from the Hangzhou Institute of Electrical Engineering.
) has served as our chief technology officer since April 2016. Prior to his current position, Jeff was president of China retail
Jeff Jianfeng ZHANG (
marketplaces from May 2015 to April 2016, and president of Taobao Marketplace and the wireless business division prior to that. He joined our company in
July 2004 and has held various management positions, at different times leading Taobao Marketplace's technology infrastructure team, the B2C development team
and Taobao Marketplace's product technology development team from 2004 to 2011. He served as vice president of product technology and operations of Taobao
Marketplace from June 2011 to March 2012, and vice president of website and technology of Alibaba.com's China operations from March 2012 to January 2013.
From January 2013 to February 2014, he oversaw Juhuasuan, local services, 1688.com, and Tmall.com. Jeff studied computer science at Zhejiang University.
) has been our chief risk officer since May 2015. Prior to his current position, Zhenfei served in various management positions since he
Zhenfei LIU (
joined us in 2006. He was head of our infrastructure services division from September 2009 to March 2016, and concurrently served as head of our security
technology division from May 2014 to May 2015. Prior to those roles, he was head of Alimama's advertising technology team. Zhenfei received his bachelor's
degree in computer science from University of Science and Technology Beijing and holds a master's degree in computer science from Peking University.
Trudy Shan DAI (
) joined our company in 1999 as a member of our founding team and has been our chief customer officer since June 2014. Prior to
her current position, Trudy served as senior vice president of human resources and administration of Taobao and Alibaba.com as well as our deputy chief people
officer and
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chief people officer from 2009 to 2014. She was general manager of Alibaba.com's international operations from 2007 to 2008. Prior to that, she was vice president
of human resources of China Yahoo! and the first general manager of Alibaba.com's Guangzhou branch, in charge of field and telephone sales, marketing and
human resources in Guangdong Province. From 2002 to 2005, Trudy served as senior sales director of China TrustPass in Alibaba.com's China marketplace
division. She received a bachelor's degree in engineering from Hangzhou Institute of Electrical Engineering.
Timothy A. STEINERT has been our general counsel since July 2007 and also serves as our secretary. From 1999 until he joined our company, Tim was a
partner in the Hong Kong office of Freshfields Bruckhaus Deringer. From 1994 to 1999, he was an associate attorney at Davis Polk & Wardwell in Hong Kong and
New York, and from 1989 to 1994, he was an associate attorney at Coudert Brothers in Beijing and New York. Tim is qualified to practice law in the State of
New York and in Hong Kong. He received a bachelor's degree in history from Yale College and a juris doctor degree from Columbia University School of Law.
) joined our company in 1999 as a member of our founding team and was appointed the president of our company in August 2014.
Jianhang JIN (
Prior to his current position, he served as senior vice president of corporate affairs from September 2009 to July 2014 and from March 2007 to December 2007. He
also served as general manager of China Yahoo! (later Yahoo! Koubei) from January 2008 to August 2009 and was vice president of human resources and the CEO
office from January 2006 to February 2007. As a founding member, he has served in a variety of other management roles at different times since our company's
inception, including heading the marketing and website operations functions for one of our marketplaces. He received a bachelor's degree in journalism from Fudan
University.
Chris Pen-hung TUNG (
) joined our company as chief marketing officer in January 2016. Prior to his current position, he was the chief executive
officer of VML China, a marketing agency, from October 2010 to January 2016. Prior to joining VML, he was at PepsiCo China from October 2004 to October
2010 where he served as vice president of marketing. Prior to that, Chris worked at Proctor & Gamble from 1995 to 1998, Gigamedia from 1998 to 2001 and
L'Oréal from 2001 to 2003 in various senior management positions. Chris currently serves as a director of VML China. He received a bachelor's degree in electrical
engineering from National Taiwan University and a master's degree in industrial engineering from University of Michigan, Ann Arbor.
) has served as president of Mobile Internet and Alimama since May 2015. Prior to his current position, Yongfu served as president of
Yongfu YU (
UCWeb after he joined our company in June 2014 and president of AutoNavi from March 2015. From 2006 to June 2014, Yongfu was chairman and chief
executive officer of UCWeb before it became our wholly-owned subsidiary. Prior to that, Yongfu was a vice president and associate with Legend Capital from
2001 to 2006. He also serves as an independent director and a member of the audit committee of Xunlei Limited, a NASDAQ-listed company. Yongfu received a
bachelor's degree in business administration from Nankai University.
) has been the president of Alibaba Cloud Computing since November 2014. Prior to his current position, Simon served in
Simon Xiaoming HU (
various management positions at our company and at Ant Financial Services since he joined us in June 2005. He served as chief risk officer of Ant Financial
Services from November 2013 to October 2014. From July 2009 to November 2013, he was general manager of our SME loan business. Before joining our
company, Simon worked in financial institutions including China Construction Bank and China Everbright Bank for over ten years. He serves as an independent
director of Zhejiang Daily Media Group Co., Ltd., a company listed on the Shanghai Stock Exchange, and a director of Hundsun Technologies Inc., a Company
listed on the Shanghai Stock Exchange. Simon received a bachelor's degree in finance from Zhejiang University and an executive MBA degree from China Europe
International Business School.
Sophie Minzhi WU (
company in November 2000 and has served in several sales management roles, including general manager of regional sales, director and vice president of China
Gold Supplier sales, and vice president of China TrustPass sales. Later, Sophie became vice president of Alibaba.com's supplier
) has served as president of Alibaba.com and 1688.com, our international and China wholesale marketplaces. Sophie joined our
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service division, responsible for leading her team to optimize service to China Gold Supplier members and enhance supplier quality. In March 2012, she was
appointed the head of Alibaba.com's international operations and later also took charge of 1688.com. From October 2014 to February 2015, she also led the Rural
Taobao team. Before joining Alibaba Group, Sophie was sales and customer manager at a technology development company wholly owned by Zhejiang University.
She holds a bachelor's degree in international trade from Zhejiang University and an EMBA degree from China Europe International Business School.
Jessie Junfang ZHENG (
wholesale marketplaces. She has also been our deputy chief financial officer since November 2013. Prior to her current position, she served as financial vice
president of Alibaba.com from December 2010 to October 2013. Before joining our company, Jessie was an audit partner at KPMG. Jessie received a bachelor's
degree in accounting from Northeastern University in China.
) has been our chief platform governance officer since December 2015, responsible for the governance of our retail and
Alibaba Partnership
Since our founders first gathered in Jack Ma's apartment in 1999, they and our management have acted in the spirit of partnership. We view our culture as
fundamental to our success and our ability to serve our customers, develop our employees and deliver long-term value to our shareholders. In July 2010, in order to
preserve this spirit of partnership and to ensure the sustainability of our mission, vision and values, we decided to formalize our partnership as Lakeside Partners,
named after the Lakeside Gardens residential community where Jack and our other founders started our company. We refer to the partnership as the Alibaba
Partnership.
We believe that our partnership approach has helped us to better manage our business, with the peer nature of the partnership enabling senior managers to
collaborate and override bureaucracy and hierarchy. The Alibaba Partnership currently has 34 members comprised of 26 members of our management, seven
members of management of Ant Financial Services and one member of management of Cainiao Network. The number of partners in Alibaba Partnership is not
fixed and may change from time to time due to the election of new partners, the retirement of partners and the departure of partners for other reasons.
Our partnership is a dynamic body that rejuvenates itself through admission of new partners each year, which we believe enhances our excellence, innovation
and sustainability. Unlike dual-class ownership structures that employ a high-vote class of shares to concentrate control in a few founders, our approach is designed
to embody the vision of a large group of management partners. This structure is our solution for preserving the culture shaped by our founders while at the same
time accounting for the fact that founders will inevitably retire from the company.
Consistent with our partnership approach, all partnership votes are made on a one-partner-one-vote basis.
The partnership is governed by a partnership agreement and operates under principles, policies and procedures that have evolved with our business and are
further described below.
Nomination and Election of Partners
The Alibaba Partnership elects new partners annually after a nomination process whereby existing partners propose candidates to the partnership committee, or
the partnership committee, as described below. The partnership committee reviews the nominations and determines whether the nomination of a candidate will be
proposed to the entire partnership for election. Election of new partners requires the approval of at least 75% of all of the partners.
To be eligible for election, a partner candidate must have demonstrated the following attributes:
•
•
a high standard of personal character and integrity;
continued service with Alibaba Group, our affiliates and/or certain companies with which we have a significant relationship such as Ant Financial
Services for not less than five years;
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•
•
a track record of contribution to the business of Alibaba Group; and
being a "culture carrier" who shows a consistent commitment to, and traits and actions consonant with, our mission, vision and values.
We believe the criteria and process of the Alibaba Partnership applicable to the election of new partners, as described above, promote accountability among the
partners as well as to our customers, employees and shareholders. In order to align the interests of partners with the interests of our shareholders, we require that
each partner maintain a meaningful level of equity interests in our company during such individual's tenure as a partner. Since a partner nominee must have been
our employee or an employee of one of our related companies or affiliates for at least five years, as of the time he or she becomes a partner, he or she will typically
already own or have been awarded a personally meaningful level of equity interest in our company through our equity incentive and share purchase plans.
Duties of Partners
The main duty of partners in their capacity as partners is to embody and promote our mission, vision and values. We expect partners to be evangelists for our
mission, vision and values, both within our organization and externally to customers, business partners and other participants in our ecosystem.
Partnership Committee
The partnership committee must consist of at least five partners and is currently comprised of Jack Ma, Joe Tsai, Jonathan Lu, Lucy Peng and Ming Zeng. The
partnership committee is responsible for administering partner elections and allocating the relevant portion of the annual cash bonus pool for all partner members of
management, with any amounts payable to partners who are our executive officers or directors or members of the partnership committee subject to approval of the
compensation committee of our board of directors. Partnership committee members serve for a term of three years and may serve multiple terms. Elections of
partnership committee members are held once every three years. Prior to each election, the partnership committee will nominate a number of partners equal to the
number of partnership committee members that will serve in the next partnership committee term plus three additional nominees. Each partner votes for a number
of nominees equal to the number of partnership committee members that will serve in the next partnership committee term and all except the three nominees who
receive the least votes from the partners are elected to the partnership committee.
Director Nomination and Appointment Rights
Pursuant to our articles of association, the Alibaba Partnership has the exclusive right to nominate or, in limited situations, appoint up to a simple majority of
the members of our board of directors.
The election of each director nominee of the Alibaba Partnership will be subject to the director nominee receiving a majority vote from our shareholders voting
at an annual general meeting of shareholders. If an Alibaba Partnership director nominee is not elected by our shareholders or after election departs our board of
directors for any reason, the Alibaba Partnership has the right to appoint a different person to serve as an interim director of the class in which the vacancy exists
until our next scheduled annual general meeting of shareholders. At the next scheduled annual general meeting of shareholders, the appointed interim director or a
replacement Alibaba Partnership director nominee (other than the original nominee) will stand for election for the remainder of the term of the class of directors to
which the original nominee would have belonged.
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 and without the need for any additional shareholder action) to
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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 determining the Alibaba Partnership director nominees who will stand for election to our board, the partnership committee will propose director nominees
who will be voted on by all of the partners, and those nominees who receive a simple majority of the votes of the partners will be selected for such purposes. The
director nominees of the Alibaba Partnership may be partners of the Alibaba Partnership or other qualified individuals who are not affiliated with the Alibaba
Partnership.
The Alibaba Partnership's right to nominate or appoint up to a simple majority of our directors is conditioned on the Alibaba Partnership being governed by the
partnership agreement in effect as of the completion of our initial public offering in September 2014, or as may be amended in accordance with its terms from time
to time. Any amendment to the provisions of the partnership agreement relating to the purpose of the partnership, or to the manner in which the Alibaba Partnership
exercises its right to nominate a simple majority of our directors, will be subject to the approval of the majority of our directors who are not nominees or appointees
of the Alibaba Partnership and are "independent directors" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual. The
provisions relating to nomination rights and procedures described above are incorporated in our articles of association. Pursuant to our articles of association, the
Alibaba Partnership's nomination rights and related provisions of our articles of association may only be changed upon the vote of shareholders representing 95%
of the votes present in person or by proxy at a general meeting of shareholders.
Our board of directors currently consists of eleven members, and five of these directors are Alibaba Partnership nominees. 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 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 and without the need for any additional shareholder approval) to nominate or appoint such number of additional directors as necessary to ensure that the
directors nominated or appointed by the Alibaba Partnership comprise a simple majority of our board of directors. Accordingly, the Alibaba Partnership is entitled
to nominate or appoint two additional directors to our board, which would increase the total number of directors to thirteen. We have entered into a voting
agreement pursuant to which both SoftBank and Yahoo will agree to vote their shares in favor of the Alibaba Partnership director nominees at each annual general
shareholders meeting so long as SoftBank owns at least 15% of our outstanding ordinary shares. Accordingly, for so long as SoftBank and Yahoo remain
substantial shareholders, we expect the Alibaba Partnership nominees will receive a majority of votes cast at any meeting for the election of directors and will be
elected as directors. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with
SoftBank and Yahoo — Voting Agreement."
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Current Partners
The following table sets forth the names, in alphabetical order by surname, and other information regarding the current partners of the Alibaba Partnership as
of the date of this annual report.
Age
Gender
M
M
Year
Joined
Alibaba
Group
2000 Principal Engineer
2005 Chief Technology Officer, Ant Financial
Current position with Alibaba Group or
related/affiliated companies
Services
Name
Jingxian CAI (
Li CHENG (
)
)
Trudy Shan DAI (
Luyuan FAN (
)
)
)
)
Yongxin FANG (
Simon Xiaoming HU (
Jane Fang JIANG (
Peng JIANG (
)
)
Jianhang JIN (
Eric Xiandong JING (
Zhenfei LIU (
)
Jonathan Zhaoxi LU (
)†
Jack Yun MA (
)
Xingjun NI (
Lucy Lei PENG (
Sabrina Yijie PENG (
)†
Xiaofeng SHAO (
)
)†
)
)
Timothy A. STEINERT
Lijun SUN (
Judy Wenhong TONG (
Joseph C. TSAI (
Jian WANG (
Shuai WANG (
)
Sophie Minzhi WU (
Maggie Wei WU (
)
Eddie Yongming WU (
Sara Siying YU (
Yongfu YU (
Ming ZENG (
Jeff Jianfeng ZHANG (
Daniel Yong ZHANG (
Yu ZHANG (
Ying ZHAO (
Jessie Junfang ZHENG (
)
)†
)
)
)
39
41
39
43
42
46
42
42
46
43
44
46
51
38
42
37
50
56
39
45
52
53
41
40
48
41
41
39
46
42
44
46
42
42
)
)
)†
)
)
)
)
)
)
)
†
Member of the partnership committee.
159
F
M
1999 Chief Customer Officer
2007 President, Payment Business, Ant Financial
Services
M
M
F
M
M
M
M
M
M
M
F
F
2000 Director, Human Resources
2005 President, Alibaba Cloud Computing
1999 Chief People Officer
2000 Senior Vice President
1999 President
2007 President, Ant Financial Services
2006 Chief Risk Officer
2000 Vice Chairman
1999 Executive Chairman
2003 Principal Engineer, Ant Financial Services
1999 Chief Executive Officer, Ant Financial Services
2000 General Manager, International, Ant Financial
Services
M
2005 Senior Vice President, Director, Office of the
Chairman
M
M
F
M
M
M
F
F
M
F
M
M
M
M
F
F
F
2007 General Counsel and Secretary
2002 General Manager, Rural Taobao
2000 Chief Executive Officer, Cainiao Network
1999 Executive Vice Chairman
2008 Chairman, Technology Committee
2003 Senior Vice President
2000 President, Wholesale Marketplaces
2007 Chief Financial Officer
1999 Chairman, Alibaba Health
2005 Associate General Counsel, China
2014 President, Mobile Internet and Alimama
2006 Executive Vice President
2004 Chief Technology Officer
2007 Chief Executive Officer
2004 Vice President, Corporate Development
2005 Vice President, Ant Financial Services
2010 Chief Platform Governance Officer and Deputy
Chief Financial Officer
Table of Contents
Bonus Pool
Our board of directors, acting on the recommendation of our compensation committee, approves an annual cash bonus pool for management of our company
(which in fiscal year 2016 comprised over 250 individuals) equal to a percentage of our adjusted pre-tax operating profits. Once the annual cash bonus pool is
calculated, our compensation committee will then first determine the proportion to be allocated to the non-partner members of our management. Any remaining
portion will then be available for the partner members of our management. The partnership committee will determine the allocation of the relevant portion of the
annual cash bonus pool for all partner members of management, with any amounts payable to partners who are our executive officers or directors or members of
the partnership committee subject to approval of the compensation committee of our board of directors. We understand that a partner's level of contribution to our
business and to the promoting of our mission, vision and values will be a key factor in determining his or her allocation from the bonus pool. A portion of the
annual cash bonus pool that is available to the partner members of management may, upon the recommendation of the partnership committee and approval of our
compensation committee, be deferred, with the allocations of deferred payment determined by the partnership committee with any amounts payable to our
executive officers or directors who are partners or members of the partnership committee subject to approval of the compensation committee of our board of
directors. We understand that participation in deferred distributions, other than retirement pension payments funded out of the deferred pool, is conditioned on a
partner's continued employment with us, our affiliates and/or certain companies with which we have a significant relationship, such as Ant Financial Services.
Retirement and Removal
Partners may elect to retire from the partnership at any time. All partners except continuity partners are required to retire upon reaching the age of sixty or upon
termination of their qualifying employment. Continuity partners may remain partners until they elect to retire from the partnership, die or are incapacitated or are
removed as partners. Either two or three partners may be designated as continuity partners at a time, with Jack and Joe serving as the initial continuity partners.
Continuity partners are either designated by a retiring continuity partner or by the serving continuity partners. Any partner, including continuity partners, may be
removed upon the vote of a simple majority of all partners present at a duly-called meeting of partners for violations of certain standards set forth in the partnership
agreement, including failure to actively promote our mission, vision and values, fraud, gross misconduct or gross negligence. As with other partners, continuity
partners must maintain the shareholding levels required by us of all partners as described below. Partners who retire from the partnership upon meeting certain age
and service requirements may be designated as honorary partners by the partnership committee. Honorary partners may not act as partners, but may be entitled to
allocations from the deferred portion of the annual cash bonus pool described below as retirement pension payments. Continuity partners will not be eligible to
receive allocations from the annual cash bonus pool if they cease to be our employees even if they remain partners, but may be entitled to receive allocations from
the deferred bonus pool if they are honorary partners.
Restrictive Provisions
Under our articles of association, in connection with any change of control, merger or sale of our company, the partners and other holders of our ordinary
shares shall receive the same consideration with respect to their ordinary shares in connection with any such transaction. In addition, our articles of association
provide that the Alibaba Partnership may not transfer or otherwise delegate or give a proxy to any third-party with respect to its right to nominate directors,
although it may elect not to exercise its rights in full. In addition, as noted above, our articles of association also provide that the amendment of certain provisions
of the Alibaba Partnership agreement relating to the purpose of the partnership or the manner in which the partnership exercises its rights to nominate or appoint a
majority of our board of directors will require the approval of a majority of directors who are not appointees of the Alibaba Partnership and are "independent
directors" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual.
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Amendment of Alibaba Partnership Agreement
Pursuant to the partnership agreement, amendment of the partnership agreement requires the approval of 75% of the partners in attendance at a meeting of the
partners at which not less than 75% of all the partners are in attendance, except that the general partner may effect certain administrative amendments. In addition,
certain amendments relating to the purposes of the Alibaba Partnership or the manner in which it exercises its nomination rights with respect to our directors
require the approval of a majority of our independent directors not nominated or appointed by the Alibaba Partnership.
Alibaba Group Equity Interest Holding Requirements for Partners
Each of the partners holds his or her equity interests in our company directly as an individual or through his or her affiliates. We have entered into share
retention agreements with each partner. These agreements provide that a period of three years from the date on which such person becomes a partner, or for 27 of
the existing partners, from January 1, 2014, three of the existing partners, from August 26, 2014, and four of the existing partners, from December 8, 2015, we
require that each partner retain at least 60% of the equity interests (including unvested shares and shares underlying vested and unvested awards) that he or she held
on the starting date of such three-year period. Following the initial three-year holding period and for so long as he or she remains a partner, we require that the
partner retain at least 40% of the equity interests (including unvested shares and shares underlying vested and unvested awards) that he or she held on the starting
date of the initial three-year holding period. Exceptions to the holding period rules described in the share retention agreements must be approved by a majority of
the independent directors.
B. Compensation
Compensation of Directors and Executive Officers
For fiscal year 2016, we paid and accrued aggregate fees, salaries and benefits (excluding equity-based grants) of up to approximately RMB435 million to our
directors and executive officers as a group and granted options to purchase an aggregate of 4,100,000 ordinary shares and 6,231,000 RSUs to our directors and
executive officers.
The board, acting on the recommendation of our compensation committee, may determine the remuneration to be paid to non-employee directors. Employee
directors will not receive any additional remuneration for serving as directors other than their remuneration as employees of us or our related entities. Pursuant to
our service agreements with our directors, neither we nor our subsidiaries provide benefits to directors upon termination of employment. We do not separately set
aside any amounts for pensions, retirement or other benefits for our executive officers, other than pursuant to relevant statutory requirements. Management
members who are partners of the Alibaba Partnership may receive retirement payments from the deferred portion of the annual cash bonus pool available to the
Alibaba Partnership.
Mr. Chee Hwa Tung has indicated to us his intention to donate all cash compensation and equity-based awards he receives from us as an independent director
to one or more non-profit or charitable organizations to be designated by him.
For information regarding equity-based grants to directors and executive officers, see "— Equity Incentive Plans."
Employment Agreements
We have entered into employment agreements with each of our executive officers. We may terminate their employment at any time, with cause, and we are not
required to provide any prior notice of such termination. We may also terminate their employment in circumstances prescribed under and in accordance with the
requirements of applicable labor law, including notice and payment in lieu. Executive officers may terminate their employment with us at any time upon written
notice. Although our employment agreements with our executive officers do not provide for severance pay, where severance pay is mandated by law, our executive
officers will be entitled to such
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severance pay in the amount mandated by law when his or her employment is terminated. We have been advised by our PRC counsel, Fangda Partners, that we may
be required to make such severance payments upon termination without cause to comply with the PRC Labor Law, the labor contract law and other relevant PRC
regulations, which entitle employees to severance payments in case of early termination of "de facto employment relationships" by PRC entities without statutory
cause regardless of whether there exists a written employment agreement with such entities.
Our grant letter agreements under our equity incentive plans also contain, among other rights, restrictive covenants that enable us to terminate grants and
repurchase shares at par or the exercise price paid for such shares in the event of a grantee's termination for cause for breaching such covenants. See "— Equity
Incentive Plans" below.
Equity Incentive Plans
We have adopted the following equity incentive plans since our inception:
•
•
•
•
•
•
1999 Share Option Plan, or the 1999 Plan;
2004 Share Option Plan, or the 2004 Plan;
2005 Share Option Plan, or the 2005 Plan;
2007 Share Incentive Plan, or the 2007 Plan;
2011 Equity Incentive Plan, or the 2011 Plan; and
2014 Post-IPO Equity Incentive Plan, or the 2014 Plan.
Currently, awards are only available for issuance under our 2014 Plan. If an award under the 2011 Plan terminates, expires or lapses, or is cancelled for any
reason, ordinary shares subject to the award become available for the grant of a new award under the 2014 Plan. As of March 31, 2016, there were:
•
•
•
15,108,078 ordinary shares issuable upon exercise of outstanding options and 2,699,250 issued but unvested restricted shares;
78,005,100 ordinary shares subject to unvested RSUs; and
23,050,439 ordinary shares authorized for issuance under the 2014 Plan; plus, on April 1, 2015 and each anniversary thereof, an additional amount
equal to the lesser of (A) 25,000,000 ordinary shares and (B) such lesser number of ordinary shares determined by our board of directors.
Our equity incentive plans provide for the granting of incentive and non-statutory options, restricted shares, RSUs, dividend equivalents, share appreciation
rights and share payments to any directors, employees, and consultants of ours, our affiliates and certain other companies, such as Alipay. Share options and RSUs
granted are generally subject to a four-year vesting schedule as determined by the administrator of the respective plans. Depending on the nature and the purpose of
the grant, share options and RSUs in general vest 25% upon the first anniversary of the vesting commencement date for annual incentive awards or 50% upon the
second anniversary of the vesting commencement date for on-hire awards, and thereafter 25% every year. Starting in fiscal year 2015, certain RSUs and share
options granted to our senior management members were subject to a six-year pro rata vesting schedule. We believe equity-based awards are vital to attract,
motivate and retain our directors, employees and consultants, and those of certain of our affiliates and other companies, such as Alipay, and are the appropriate tool
to align their interests with our shareholders. Accordingly, we will continue to grant equity-based awards to the employees, consultants and directors of our
company, our affiliates and certain other companies as an important part of their compensation packages.
In addition, our equity incentive award agreements generally provide that, in the event of a grantee's termination for cause or violation of a non-competition
undertaking, we will have the right to repurchase the shares acquired by such grantee, generally at par or the exercise price paid for such shares.
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The following paragraphs summarize other key terms of our equity incentive plans.
Plan administration. Subject to certain limitations, our equity incentive plans are generally administered by the compensation committee of the board (or a
subcommittee thereof), or such other committee of the board to which the board has delegated power to act; provided, that in the absence of any such committee,
our equity incentive plans will be administered by the board. Grants to any executive directors of the board must be approved by the disinterested directors of
our board.
Types of awards. The equity incentive plans provide for the granting of incentive and non-statutory options, restricted shares, restricted share units, dividend
equivalents, share appreciation rights, share payments and other rights.
Award agreements. Generally, awards granted under the equity incentive plans are evidenced by an award agreement providing for the number of ordinary
shares subject to the award, and the terms and conditions of the award, which must be consistent with the relevant plan.
Eligibility. Any employee, consultant or director of our company, our affiliates or certain other companies, such as Alipay, is eligible to receive grants under
the equity incentive plans, but only employees of our company, our affiliates and certain other companies, such as Alipay, are eligible to receive incentive
stock options.
Term of awards. The term of awards granted under our equity incentive plans are generally not to exceed ten years from the date of grant.
Acceleration, waiver and restrictions. The administrator of our equity incentive plans has sole discretion in determining the terms and conditions of any
award, any vesting acceleration or waiver of forfeiture restrictions, and any restrictions regarding any award or the ordinary shares relating thereto.
Change in control. If a change in control of our company occurs, the plan administrator may, in its sole discretion,
•
•
•
accelerate the vesting, in whole or in part, of any award;
purchase any award for an amount of cash or ordinary shares of our company equal to the value that could have been attained upon the exercise of
the award or the realization of the plan participant's rights had such award been currently exercisable or payable or fully vested; or
provide for the assumption, conversion or replacement of any award by the successor corporation, or a parent or subsidiary of the successor
corporation, with other rights or property selected by the plan administrator in its sole discretion, or the assumption or substitution of the award by
the successor or surviving corporation, or a parent or subsidiary of the surviving or successor corporation, with such appropriate adjustments as to
the number and kind of shares and prices as the plan administrator deems, in its sole discretion, reasonable, equitable and appropriate.
Amendment and termination. Unless earlier terminated, our equity incentive plans continue in effect for a term of ten years. The board may at any time
terminate or amend the 2014 Plan in any respect, including amendment of any form of any award agreement or instrument to be executed, provided, however, that
to the extent necessary and desirable to comply with applicable laws or stock exchange rules, shareholder approval of any amendment to the 2014 Plan shall be
obtained in such manner and to such degree as required.
Senior Management Equity Incentive Plan
We adopted the Senior Management Equity Incentive Plan in 2010, pursuant to which selected management of our company subscribed for preferred shares in
a special purpose vehicle, Alternate Solutions Management Limited, which holds our ordinary shares. These preferred shares, subject to a non-compete provision,
are redeemable by the holders thereof for our ordinary shares upon the earlier to occur of an initial public offering of our shares (subject to statutory and contractual
lock-up periods), and five years from the respective dates of
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issuance of the preferred shares to the participants. The maximum number of our ordinary shares redeemable upon the redemption of the preferred shares issued
under this plan by the participants is 15,000,000. The underlying ordinary shares have already been issued to the special purpose vehicle and are included in our
total outstanding share number. The preferred shares are subject to forfeiture if a holder engages in certain activities that compete with us.
Partner Capital Investment Plan
We adopted the Partner Capital Investment Plan in 2013 to provide partners of the Alibaba Partnership an opportunity to invest in interests in our ordinary
shares in order to align further their interests with the interests of our shareholders. Pursuant to the Partner Capital Investment Plan, the partners subscribed for
convertible preferred shares in two special purpose vehicles, PCIP I Limited and PCIP II Limited. These convertible preferred shares are, for a period of up to four
years from the respective dates of issuance thereof, convertible into exchangeable ordinary shares in these special purpose vehicles, which are exchangeable for our
ordinary shares after eight years following the respective dates of issuance of the convertible preferred shares. The convertible preference shares and the
exchangeable ordinary shares of these special purpose vehicles are subject to forfeiture if a partner engages in certain activities that compete with us. The maximum
number of our ordinary shares that may be acquired upon the exchange of exchangeable ordinary shares in the special purpose vehicles by the partners is
18,000,000. The underlying ordinary shares have already been issued by us to the special purpose vehicles and are included in our total outstanding share number.
The Partner Capital Investment Plan permits the issuance of additional shares to the partners as the board may approve from time to time.
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Share-based Awards Held by Our Directors and Officers
The following table summarizes, the outstanding options (including unvested restricted shares related to options early exercised), RSUs and other rights held as
of March 31, 2016 by our directors and executive officers, as well as by their affiliates, under the our equity incentive plans, as well as equity held through their
investments in our Senior Management Equity Incentive Plan and Partner Capital Investment Plan.
Name
Jack Yun MA
Joseph C. TSAI
Jonathan Zhaoxi LU
Daniel Yong ZHANG
J. Michael EVANS
Masayoshi SON
Chee Hwa TUNG
Walter Teh Ming KWAUK
Jerry YANG
Börje E. EKHOLM
Wan Ling MARTELLO
Maggie Wei WU
Jane Fang JIANG
Ordinary shares
underlying
outstanding
options / restricted
shares or RSUs /
other rights
granted or
subscribed
260,000 (2)
75,000 (2)
1,200,000 (1)
130,000 (2)
45,000 (2)
* (3)
* (4)
* (5)
* (2)
* (3)
* (4)
* (5)
* (2)
* (5)
* (2)
* (2)
* (2)
* (2)
* (5)
* (2)
—
* (2)
* (2)
* (2)
* (2)
* (2)
* (3)
* (4)
* (2)
* (2)
* (3)
* (2)
* (4)
* (2)
* (2)
Exercise
price
(US$/Share)
—
—
5.00
—
—
18.50
14.50
56.00
—
18.50
14.50
56.00
—
87.06
—
—
—
—
79.96
—
—
—
—
—
—
—
18.50
14.50
—
—
18.50
—
14.50
—
—
165
Date of grant (6)
Date of expiration
June 26, 2013
January 27, 2016
November 12, 2010
June 26, 2013
January 27, 2016
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
May 18, 2013
July 26, 2013
July 2, 2014
July 2, 2014
May 10, 2015
May 10, 2015
January 27, 2016
March 17, 2016
September 24, 2014
July 31, 2015
July 31, 2015
—
September 24, 2014
September 24, 2014
September 24, 2014
June 1, 2015
September 1, 2015
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
May 18, 2013
September 10, 2013
July 26, 2013
July 2, 2014
February 21, 2016
June 26, 2019
January 27, 2024
—
June 26, 2019
January 27, 2024
May 18, 2019
—
July 2, 2022
January 27, 2024
May 18, 2019
—
July 2, 2022
July 2, 2022
May 10, 2023
May 10, 2023
January 27, 2024
March 17, 2024
September 24, 2020
July 31, 2023
July 31, 2023
—
September 24, 2020
September 24, 2020
September 24, 2020
June 1, 2021
September 1, 2021
May 18, 2019
—
July 2, 2022
January 27, 2024
May 18, 2019
September 10, 2019
—
July 2, 2022
February 21, 2024
Table of Contents
Name
Jeff Jianfeng ZHANG
Zhenfei LIU
Trudy Shan DAI
Timothy A. STEINERT
Jianhang JIN
Chris Pen-hung TUNG
Yongfu YU
Simon Xiaoming HU
Sophie Minzhi WU
Jessie Junfang ZHENG
Ordinary shares
underlying
outstanding
options / restricted
shares or RSUs /
other rights
granted or
subscribed
Exercise
price
(US$/Share)
18.50
14.50
—
69.54
—
18.50
14.50
—
—
18.50
14.50
—
—
5.00
18.50
14.50
—
—
5.00
—
—
14.50
—
67.28
—
—
—
—
18.50
14.50
—
—
18.50
14.50
—
—
18.50
—
—
—
* (3)
* (4)
* (2)
* (5)
* (2)
* (3)
* (4)
* (2)
* (2)
* (3)
* (4)
* (2)
* (2)
* (1)
* (3)
* (4)
* (2)
* (2)
* (1)
* (2)
* (2)
* (4)
* (2)
* (5)
* (2)
* (2)
* (2)
* (2)
* (3)
* (4)
* (2)
* (2)
* (3)
* (4)
* (2)
* (2)
* (3)
* (2)
* (2)
* (2)
Date of grant (6)
Date of expiration
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
January 27, 2016
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
November 12, 2010
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
November 12, 2010
May 3, 2011
May 11, 2012
July 26, 2013
January 27, 2016
February 21, 2016
February 21, 2016
August 20, 2013
November 15, 2014
August 21, 2015
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
May 18, 2013
July 26, 2013
July 2, 2014
January 27, 2016
May 18, 2013
May 22, 2014
August 21, 2014
August 21, 2015
May 18, 2019
—
July 2, 2022
January 27, 2024
January 27, 2024
May 18, 2019
—
July 2, 2022
January 27, 2024
May 18, 2019
—
July 2, 2022
January 27, 2024
May 18, 2019
—
—
July 2, 2022
January 27, 2024
May 3, 2017
May 11, 2018
—
—
January 27, 2024
February 21, 2022
February 21, 2022
August 20, 2019
November 15, 2020
August 21, 2021
May 18, 2019
—
July 2, 2022
January 27, 2024
May 18, 2019
—
July 2, 2022
January 27, 2024
May 18, 2019
May 22, 2020
August 21, 2020
August 21, 2021
*
The options, RSUs and other rights to acquire ordinary shares in aggregate held by each of these directors and executive officers and their affiliates represent less than 1% of our total outstanding shares.
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(1)
(2)
(3)
(4)
(5)
(6)
Represents rights under the Senior Management Equity Incentive Plan subscribed for at a subscription price of US$0.50 per preference share in 2010.
Represents RSUs.
Represents unvested restricted shares related to options early exercised.
Represents rights under the Partner Capital Investment Plan subscribed for at US$4.00 per preference share. See note 8(c) to our consolidated financial statements for the years ended March 31, 2014,
2015 and 2016 included elsewhere in this annual report for further information.
Represents options.
Date of grant represents the original grant date of the options, RSUs and other rights held by the respective director or executive officer. Each outstanding option and RSU described in this table that is
not held by a U.S. resident was cancelled and replaced with a new grant under the terms of the 2014 Plan (as described herein) with such terms and conditions that are substantially similar to those that
applied to the cancelled awards.
C. Board Practices
Nomination and Terms of Directors
Pursuant to our articles of association, our board of directors is classified into three classes of directors designated as Group I, Group II and Group III, each
generally serving a three-year term unless earlier removed. The Group I directors currently consist of Joe Tsai, Michael Evans, Jonathan Lu and Börje Ekholm; the
Group II directors currently consist of Daniel Zhang, Chee Hwa Tung, Jerry Yang and Wan Ling Martello; and the Group III directors currently consist of Jack Ma,
Masayoshi Son and Walter Kwauk. Unless otherwise determined by the shareholders in a general meeting, our board will consist of not less than nine directors for
so long as SoftBank has a director nomination right. The Alibaba Partnership has the exclusive right to nominate up to a simple majority of our board of directors,
and SoftBank has the right to nominate one director for so long as SoftBank owns at least 15% of our outstanding shares. 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 shall be entitled (in its sole discretion) to 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. The remaining members of the board of directors will be nominated by the nominating and corporate governance committee of the board.
Director nominees will be elected by the simple majority vote of shareholders at our annual general meeting.
If a director nominee is not elected by our shareholders or departs our board of directors for any reason, the party or group entitled to nominate that director has
the right to appoint a different person to serve as an interim director of the class in which the vacancy exists until our next scheduled annual general meeting of
shareholders. At the next scheduled annual general meeting of shareholders, the appointed interim director or a replacement director nominee (who, in the case of
Alibaba Partnership nominees, cannot be the original nominee) will stand for election for the remainder of the term of the class of directors to which the original
nominee would have belonged.
For additional information, see "Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Alibaba Partnership" and
"Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with SoftBank and Yahoo —
Voting Agreement."
Code of Ethics and Corporate Governance Guidelines
We have adopted a code of ethics, which is applicable to all of our directors, executive officers and employees. Our code of ethics is publicly available on
our website.
In addition, our board of directors has adopted a set of corporate governance guidelines covering a variety of matters, including approval of related party
transactions. Our corporate governance guidelines also provide that any adoption of a new equity incentive plan and any material amendments to such plans will be
subject to the approval of our non-executive directors and also provide that the director nominated by SoftBank is entitled to
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notices and materials for all meetings of committees of our board of directors and, by giving prior notice, may attend, observe and participate in any discussions at
any committee meetings. The guidelines reflect certain guiding principles with respect to our board's structure, procedures and committees. The guidelines are not
intended to change or interpret any applicable law, rule or regulation or our articles of association.
Duties of Directors
Under Cayman Islands law, all of our directors owe us fiduciary duties, including a duty of loyalty, a duty to act honestly and a duty to act in good faith and in
a manner they believe to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a
reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our articles
of association, as amended and restated from time to time. We have the right to seek damages if a duty owed by any of our directors is breached.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our corporate
governance guidelines provide that a majority of the members of our compensation committee and nominating and corporate governance committee will be
independent directors within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual. All members of our audit committee shall
be independent within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual and will meet the criteria for independence set
forth in Rule 10A-3 of the Exchange Act by the end of the one year transition period for companies following an initial public offering.
Audit Committee
Our audit committee currently consists of Walter Kwauk, Börje Ekholm and Wan Ling Martello. Mr. Kwauk is the chairman of our audit committee.
Mr. Kwauk satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Mr. Kwauk, Mr. Ekholm and Ms. Martello
satisfy the requirements for an "independent director" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual and meet the
criteria for independence set forth in Rule 10A-3 of the Exchange Act.
The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our audit committee is responsible
for, among other things:
•
•
•
•
•
•
•
•
•
selecting, and evaluating the qualifications, performance and independence of, the independent auditor;
pre-approving or, as permitted, approving auditing and non-auditing services permitted to be performed by the independent auditor;
considering the adequacy of our internal accounting controls and audit procedures;
reviewing with the independent auditor any audit problems or difficulties and management's response;
reviewing and approving related party transactions between us and our directors, senior management and other persons specified in Item 6B of
Form 20-F;
reviewing and discussing the quarterly financial statements and annual audited financial statements with management and the independent auditor;
establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable
accounting or auditing matters;
meeting separately, periodically, with management, internal auditors and the independent auditor; and
reporting regularly to the full board of directors.
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Compensation Committee
Our compensation committee currently consists of Jerry Yang, Walter Kwauk and Joe Tsai. Mr. Yang is the chairman of our compensation committee.
Mr. Yang and Mr. Kwauk satisfy the requirements for an "independent director" within the meaning of Section 303A of the New York Stock Exchange Listed
Company Manual.
Our compensation committee is responsible for, among other things:
•
•
•
•
•
•
•
determining the amount of the annual cash bonus pool to be allocated to each executive officer and determining the total proportions of the annual
cash bonus pool to be allocated in aggregate to the non-partner members of our management and in aggregate to the partners we employ;
reviewing, evaluating and, if necessary, revising our overall compensation policies;
reviewing and evaluating the performance of our directors and executive officers and determining the compensation of our directors and executive
officers;
reviewing and approving our executive officers' employment agreements with us;
determining performance targets for our executive officers with respect to our incentive compensation plan and equity-based compensation plans;
administering our equity-based compensation plans in accordance with the terms thereof; and
carrying out such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee currently consists of Jack Ma, Chee Hwa Tung and Jerry Yang. Jack is the chairman of our nominating
and corporate governance committee. Mr. Tung and Mr. Yang satisfy the "independence" requirements of Section 303A of the New York Stock Exchange Listed
Company Manual.
Our nominating and corporate governance committee is responsible for, among other things:
•
•
•
•
selecting the board nominees (other than the director nominees to be nominated by the Alibaba Partnership and SoftBank) for election by the
shareholders or appointment by the board;
periodically reviewing with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills,
experience and diversity;
making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and
advising the board periodically with regards to significant developments in corporate governance law and practices as well as our compliance with
applicable laws and regulations, and making recommendations to the board on corporate governance matters.
Committee Observer
In accordance with our articles and the voting agreement entered into among us, Jack Ma, Joe Tsai, SoftBank and Yahoo, we have agreed that the director
nominated by SoftBank is entitled to receive notices and materials for all meetings of our committees and to join as an observer meetings of the audit committee,
the compensation committee, the nominating and corporate governance committee and/or our other board committees we may establish upon notice to the relevant
committee.
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D. Employees
Employees
As of March 31, 2014, 2015 and 2016, we had a total of 22,072, 34,985 and 36,446 full-time employees, respectively. Substantially all of our employees are
based in China.
The following table sets out the breakdown of our full-time employees by functions as of March 31, 2016:
Function
Research and development
Operations and customer services
Sales and marketing
General and administrative
Total
Number of
employees (1)
18,737
7,877
6,606
3,226
36,446
% of total
employees (1)
51%
22%
18%
9%
100%
(1)
The number of employees presented in this table does not include third-party consultants and contractors that we employ from time to time.
We believe that we have a good working relationship with our employees and we have not experienced any significant labor disputes.
E. Share Ownership
For information regarding the share ownership of our directors and officers, see "Item 7. Major Shareholders and Related Party Transactions — A. Major
Shareholders." For information as to stock options granted to our directors, executive officers and other employees, see "Item 6. Directors, Senior Management and
Employees — B. Compensation — Equity Incentive Plans."
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date of this annual report by:
•
•
•
each of our directors and executive officers;
our directors and executive officers as a group; and
each person known to us to beneficially own 5% and more of our ordinary shares.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes the power to direct the voting or the disposition of the
securities or to receive the economic benefit of the ownership of the securities. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of this annual report, including through the
exercise of any option or other right and the vesting of restricted shares. These shares, however, are not included in the computation of the percentage ownership of
any other person. The calculations of percentage ownership in the table below are based on 2,495,276,682 ordinary shares outstanding as of May 20, 2016.
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Name
Directors and Executive Officers:
Jack Yun MA (1)
Joseph C. TSAI (2)
Jonathan Zhaoxi LU
Daniel Yong ZHANG
J. Michael EVANS
Masayoshi SON
Chee Hwa TUNG
Walter Teh Ming KWAUK
Jerry YANG
Börje E. EKHOLM
Wan Ling MARTELLO
Maggie Wei WU
Jane Fang JIANG
Jeff Jianfeng ZHANG
Zhenfei LIU
Trudy Shan DAI
Timothy A. STEINERT
Jianhang JIN
Chris Pen-hung TUNG
Yongfu YU
Simon Xiaoming HU
Sophie Minzhi WU
Jessie Junfang ZHENG
All directors and executive officers as a group
Greater than 5% Beneficial Owners:
SoftBank (3)
Yahoo (4)
Ordinary shares
beneficially owned Percent
193,744,241
80,026,036
*
*
*
—
*
*
*
*
—
*
*
*
*
*
*
*
*
*
*
*
*
311,196,212
7.8%
3.2%
*
*
*
—
*
*
*
*
—
*
*
*
*
*
*
*
*
*
*
*
*
12.5%
797,742,980
383,565,416
32.0%
15.4%
Notes:
*
(1)
(2)
This person beneficially owns less than 1% of our outstanding ordinary shares.
Represents (i) 2,175,677 ordinary shares held directly by Jack Ma, (ii) 35,000,000 ordinary shares held by APN Ltd., a Cayman Islands company with its registered address at Fourth
Floor, One Capital Place, P.O. Box 847, Grand Cayman, KY1-1103, Cayman Islands, in which Jack holds a 70% equity interest, which ordinary shares, together with Jack's equity
interest in APN Ltd., have been pledged to us to support certain obligations under the 2014 SAPA, (iii) 17,500,000 ordinary shares underlying options held by Yun Capital Limited, a
British Virgin Islands company with its registered address at Woodbourne Hall, Road Town, Tortola, British Virgin Islands, which has granted Jack a revocable proxy over such
shares and which is wholly-owned by The Jack Ma Philanthropic Foundation, (iv) 17,500,000 ordinary shares underlying options held by Ying Capital Limited, a British Virgin
Islands company with its registered address at Woodbourne Hall, Road Town, Tortola, British Virgin Islands, which has granted Jack a revocable proxy over such shares and which
is wholly owned by The Jack Ma Philanthropic Foundation, (v) 57,367,988 ordinary shares held by JC Properties Limited, a British Virgin Islands company with its registered
address at Woodburne Hall, Road Town Tortola, British Virgin Islands, which is wholly-owned by a trust established for the benefit of Jack's family and (vi) 64,200,576 ordinary
shares held by JSP Investment Limited, a British Virgin Islands company with the address of P.O. Box 916, Woodbourne Hall, Road Town, Tortola, British Virgin Islands, which is
wholly-owned by a trust established for the benefit of Jack and his family. Excludes shares held by SoftBank representing SoftBank's share ownership in excess of 30% of our
outstanding ordinary shares as of the most recent record date with respect to any shareholders action and up to 21,500,000 ordinary shares held by Yahoo, over which Jack and Joe
will share voting power pursuant to the voting agreement that we, Jack, Joe, SoftBank and Yahoo entered into as described in "Item 7. Major Shareholders and Related Party
Transactions — B. Related Party Transactions — Transactions and Agreements with Yahoo and SoftBank — Voting Agreement." Jack has historically voted the ordinary shares held
by the family trusts and he is deemed a beneficial owner of the ordinary shares held by the family trusts. Jack does not have any pecuniary interests in the 35,000,000 ordinary shares
underlying options held by Yun Capital Limited and Ying Capital Limited. Jack's business address is 969 West Yi Road, Yu Hang District, Hangzhou 311121, the People's Republic
of China.
Represents (i) 1,510,464 ordinary shares held directly by Joe Tsai, (ii) 15,000,000 ordinary shares held by APN Ltd., in which Joe holds a 30% equity interest and serves as a
director, which ordinary shares, together with Joe's equity interest in APN Ltd., have been pledged to us to
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support certain obligations under the 2014 SAPA, (iii) 15,000,000 ordinary shares underlying options held by Joe and Clara Tsai Foundation Limited, a company incorporated under
the law of the Island of Guernsey with its registered address at Helvetia Court, South Esplanade, St. Peter Port, Guernsey GY1 4EE, that has granted Joe a revocable proxy over such
shares and which is wholly-owned by Joe and Clara Tsai Foundation, (iv) 21,905,952 ordinary shares and 1,200,000 ordinary shares underlying preferred shares of Alternate
Solutions Management Limited, in each case held by Parufam Limited, a Bahamas corporation with its registered address at Suite 200B, 2nd Floor, Centre of Commerce, One Bay
Street, P.O. Box N-3944, Nassau, Bahamas, and over which, Joe, as a director of Parufam Limited, has been delegated sole voting and disposition power, (v) 21,000,000 ordinary
shares held by PMH Holding Limited, a British Virgin Islands corporation with its registered address at Trident Chambers, P.O. Box 146, Road Town, Tortola, British Virgin Islands,
and over which, Joe, as sole director of PMH Holding Limited, has voting and dispositive power, (vi) 2,868,198 ordinary shares held by MFG Limited, a British Virgin Islands
corporation with its registered address at Trident Chambers, P.O. Box 146, Road Town, Tortola, British Virgin Islands, and over which, Joe, as sole director of MFG Limited, has
voting and dispositive power and (vii) 1,541,422 ordinary shares held by MFG II Ltd., a British Virgin Islands corporation with its registered address at Trident Chamber,
P.O. Box 146, Road Town, Tortola, British Virgin Islands, and over which Joe, as sole director of MFG II Ltd., has voting and dispositive power. Excludes shares held by SoftBank
representing SoftBank's share ownership in excess of 30% of our outstanding ordinary shares as of the most recent record date with respect to any shareholders action and up to
121,500,000 ordinary shares held by Yahoo, over which Joe and Jack will share voting power pursuant to the voting agreement that we, Jack, Joe, SoftBank and Yahoo have entered
into as described in "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with Yahoo and SoftBank —
Voting Agreement." Joe does not have any pecuniary interests in the 15,000,000 ordinary shares underlying options held by Joe and Clara Tsai Foundation Limited. Joe's business
address is c/o Alibaba Group Services Limited, 26/F Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong S.A.R.
(3)
(4)
Represents (a) 466,826,180 ordinary shares owned by SoftBank Group Corp. with its registered office at 1-9-1 Higashi-Shimbashi Minato-ku, Tokyo 105-7303, Japan,
(b) 15,000,000 ordinary shares owned by SBBM Corporation with its registered office at 1-9-1 Higashi-Shimbashi Minato-ku, Tokyo 105-7303, Japan and (c) 315,916,800 ordinary
shares owned by SB China Holdings Pte Ltd. with its registered office at 20 Raffles Place, #09-01 Ocean Towers, Singapore 048620. SoftBank Group Corp. is a public company
listed on the Tokyo Stock Exchange.
Represents (a) 92,626,716 ordinary shares owned by Yahoo! Inc. with its registered office at 701 First Avenue, Sunnyvale, CA 94089, the United States and (b) 290,938,700 ordinary
shares owned by Aabaco Holdings Hong Kong Limited with its registered office at 15/F Caroline Centre, 28 Yun Ping Road, Causeway Bay, Hong Kong S.A.R. Yahoo! Inc. is a
public company listed on the NASDAQ Global Select Market.
We have one class of ordinary shares, and each holder of our ordinary shares is entitled to one vote per share.
As of May 20, 2016, 2,495,276,682 of our ordinary shares were outstanding. To our knowledge, 1,300,005,347 ordinary shares, representing approximately
52% of our total outstanding shares, were held by 126 record shareholders in the United States. The number of beneficial owners of our ADSs in the United States
is likely to be much larger than the number of record holders of our ordinary shares in the United States. We are not aware of any arrangement that may at a
subsequent date, result in a change of control of our company.
B. Related Party Transactions
Our Related Party Transaction Policy
In order to prevent risks of conflicts of interest or the appearance of conflicts of interest, all of our directors and employees are subject to our code of business
conduct and other policies which require, among other things, that any potential transaction between us and an employee or director, their relatives and closely
connected persons and certain entities in which they, their relatives or closely connected persons have an interest be approved in writing by an appropriate
supervisor or compliance officer.
We have also adopted a related party transaction policy to which all of our directors, senior management and other key management personnel, all such
person's family members, Ant Financial Services and its subsidiaries as well as the Alibaba Partnership and certain other related entities are subject. This policy is
intended to supplement the procedures set forth in our code of business conduct and our other corporate governance policies and does not exempt any person from
more restrictive provisions that may exist in our existing procedures and policies.
This related party transaction policy provides, among other things, that, unless otherwise pre-approved by our board of directors:
•
each related party transaction, or any material amendment or modification of a related party transaction, shall be adequately disclosed to, and
reviewed and approved or ratified by, our audit committee or any committee composed solely of disinterested independent directors or by the
disinterested members of such committee; and
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•
any employment relationship or similar transaction involving our directors or senior management of our company and any related compensation
shall be approved by the disinterested members of our compensation committee or recommended by the disinterested members of the compensation
committee to our board for its approval.
Our related party transaction policy, code of business conduct and our other corporate governance policies are subject to periodic review and revision by
our board.
Transactions and Agreements with SoftBank and Yahoo
Voting Agreement
We have entered into a voting agreement with Jack Ma, Joe Tsai, SoftBank and Yahoo, which provides SoftBank with the right to nominate one director to our
board of directors who will, subject to certain conditions, have the right to receive notices and materials for all meetings of our committees and to join such
meetings as an observer, which rights are also reflected in our memorandum and articles of association. These nomination rights will terminate when SoftBank's
shareholding declines below 15% of our outstanding shares. The voting agreement also contains provisions to the effect that:
•
•
•
•
•
SoftBank agrees (i) to vote its shares in favor of the election of the Alibaba Partnership's director nominees at each annual general shareholders
meeting until SoftBank's shareholding declines below 15% of our outstanding shares and (ii) to grant the voting power of any portion of its
shareholdings exceeding 30% of our outstanding ordinary shares to Jack and Joe by proxy;
Jack and Joe will vote their shares and any other shares over which they hold voting rights in favor of the election of the SoftBank director nominee
at each annual general shareholders meeting in which the SoftBank nominee stands for election until SoftBank's shareholding declines below 15%
of our outstanding ordinary shares;
Yahoo agrees (i) to vote its shares in favor of the election of all of the Alibaba Partnership's director nominees and the SoftBank director nominee, if
so standing for election, at each annual general shareholders meeting until SoftBank's shareholding declines below 15% of our outstanding shares
and (ii) to grant the voting power over any shares it owns, up to 121.5 million of our ordinary shares, to Jack and Joe by proxy;
each party to the voting agreement will use its commercially reasonable efforts to cause any other person with whom it jointly files a statement
(or an amendment to a statement) on Schedule 13D or Schedule 13G pursuant to the Exchange Act to become a party to the voting agreement and
vote its shares in favor of SoftBank's and the Alibaba Partnership's director nominees pursuant to the foregoing; and
SoftBank and Yahoo will receive certain information rights in connection with the preparation of their financial statements.
SoftBank's and Yahoo's proxy obligations described in clause (ii) in the first bullet and the third bullet above, respectively, shall (a) not apply in respect of any
proposal submitted to our shareholders that may result in an issuance of shares or other equity interests of us, including securities exchangeable or convertible into
shares, that would increase the amount of our then-outstanding shares by 3% or more and (b) terminate when Jack owns less than 1% of our outstanding shares on a
fully diluted basis or if we materially breach the voting agreement.
Yahoo Technology and Intellectual Property License Agreement
We and Yahoo entered into a technology and intellectual property license agreement dated October 24, 2005, as amended and restated on September 18, 2012,
or the Yahoo TIPLA. Under the Yahoo TIPLA, Yahoo granted to us the use of certain intellectual property. In consideration of the rights granted under the Yahoo
TIPLA, we paid Yahoo a lump sum payment in the amount of US$550 million and agreed to pay Yahoo an annual royalty equal to 2% of our consolidated
revenues (less certain costs) for the period from January 1, 2006 to December 31,
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2012 and 1.5% of our consolidated revenues (less certain costs) for the period from January 1, 2013 until the completion of our initial public offering in
September 2014. No royalties have been payable since then. For fiscal years 2014 and 2015, the royalty fees amounted to RMB748 million and RMB448 million,
respectively.
Patent Sale and Assignment Agreement with Yahoo
We and Yahoo entered into patent sale and assignment agreements in fiscal years 2014 and 2015, pursuant to which we acquired ownership of certain patents
and patent applications for aggregate consideration of US$70 million and US$24 million, respectively.
Our Repurchase of Ordinary Shares from Yahoo
On May 20, 2012, we entered into a share repurchase and preference share sale agreement with Yahoo, or the Yahoo repurchase agreement. As amended
through July 14, 2014, the agreement governed the terms on which we have repurchased 523,565,416 ordinary shares from Yahoo in September 2012 and caused
Yahoo to sell 140,000,000 ADSs representing 140,000,000 of our ordinary shares in connection with our initial public offering in September 2014. As of March 31,
2016, Yahoo owned 383,565,416 ordinary shares, representing approximately 15.5% of our then issued share capital.
Investments Involving SoftBank
We have invested in businesses in which SoftBank is an existing shareholder or co-invested with SoftBank in other businesses. SoftBank has also invested in
businesses in which we or our controlled entities are existing shareholders. For instance, in January 2015, we participated in a financing round with SoftBank in
Travice Inc., the operator and developer of Kuaidi Dache, which in February 2015 merged into Didi Chuxing, the leading transportation network company that
provides vehicles and taxis for hire in China via smartphone applications. In June 2015, we announced that we agreed to invest in SoftBank's robotics business. We
expect that we will continue to engage in investment activities that involve SoftBank in the future. We may continue to co-invest with SoftBank, invest in
businesses in which SoftBank is already an existing investor, and may also bring SoftBank as an investor into our new businesses or businesses in which we are an
existing investor.
Agreements and Transactions Related to Ant Financial Services and Its Subsidiaries
Ownership of Ant Financial Services and Alipay
We originally established Alipay in December 2004 to operate our payment services business. In June 2010, the PBOC issued new regulations that required
non-bank payment companies to obtain a license in order to operate in China. These regulations provided specific guidelines for license applications only for
domestic PRC-owned entities. These regulations stipulated that, in order for any foreign-invested payment company to obtain a license, the scope of business, the
qualifications of any foreign investor and any level of foreign ownership would be subject to future regulations to be issued, which in addition would require
approval by the PRC State Council. Further, the regulations required that any payment company that failed to obtain a license must cease operations by
September 1, 2011. Although Alipay was prepared to submit its license application in early 2011, at that time the PBOC had not issued any guidelines applicable to
license applications for foreign-invested payment companies (and no such guidelines have been issued as of the date of this annual report). In light of the
uncertainties relating to the license qualification and application process for a foreign-invested payment company, our management determined that it was
necessary to restructure Alipay as a company wholly-owned by PRC nationals in order to avail Alipay of the specific licensing guidelines applicable only to
domestic PRC-owned entities. Accordingly, we divested all of our interest in and control over Alipay in 2011, which resulted in deconsolidation of Alipay from our
financial statements. This action enabled Alipay to obtain a payment business license in May 2011 without delay and without any detrimental impact to our China
retail marketplaces or to Alipay.
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Following the divestment of our interest in and control over Alipay, effective in the first calendar quarter of 2011, the ownership structure of Alipay's parent
entity, Ant Financial Services, was changed such that Jack Ma held a substantial majority of the equity ownership interest in Ant Financial Services. The ownership
structure of Ant Financial Services has subsequently been further restructured. In May 2016, Ant Financial Services completed a round of equity financing of
approximately US$4.5 billion. As of the date of this annual report, approximately 42.28% of its equity interests are held by Junhan, approximately 34.15% of its
equity interests are held by Junao and approximately 23.57% of its equity interests are held by other shareholders.
Economic interests of Ant Financial Services through Junhan are owned by Jack Ma, Simon Xie and other employees of our company and Ant Financial
Services. These economic interests are in the form of limited partnership interests and interests similar to share appreciation rights tied to potential appreciation in
the value of Ant Financial Services. The economic interests in Junao are held in the form of limited partnership interests by certain members of the Alibaba
Partnership.
We understand that it is the intention of the shareholders of Ant Financial Services that:
•
•
•
Jack Ma's direct and indirect economic interest in Ant Financial Services will be reduced over time to a percentage that does not exceed his and his
affiliates' interest in our company as of the time immediately prior to the completion of our initial public offering (the percentage of our ordinary
shares Jack and his affiliates beneficially owned immediately prior to the completion of our initial public offering was 8.8%) and that this reduction
will be caused in a manner by which neither Jack nor any of his affiliates would receive any economic benefit. See "— Commitments of Jack Ma to
Alibaba Group." We have been informed by Ant Financial Services that such proposed reduction of Jack's economic interest is expected to be
accomplished within three to five years from our initial public offering in September 2014 through a combination of future equity-based incentive
awards to employees and dilutive issuances of equity in Ant Financial Services, among others;
from time to time, additional economic interests in Ant Financial Services in the form of interests similar to share appreciation rights issued by
Junhan will be transferred to employees of Ant Financial Services and our employees; and
Ant Financial Services will raise equity capital from investors in the future in order to finance its business expansion, with the effect that the
shareholding of Junao and Junhan in Ant Financial Services will be reduced through dilution (the amount of such dilution would depend on future
valuations and the amount of equity capital to be raised), but it is the intention that the combined ownership of Junao and Junhan (and through them,
Jack Ma) will continue to constitute a majority of the outstanding equity interests of Ant Financial Services.
The general partner of both Junao and Junhan is an entity 100% owned by Jack Ma. As the general partner, this entity, and therefore indirectly Jack, holds the
voting rights in the two limited partnerships, while the limited partners hold a majority of the economic interests in each of Junao and Junhan. Accordingly, Jack is
able to exercise the voting power of Junao and Junhan as the major shareholders of Ant Financial Services.
Our Relationship with Ant Financial Services and Alipay through August 2014
After the divestment of our interest in and control over Alipay, we entered into a framework agreement in July 2011, or the 2011 framework agreement, with
SoftBank, Yahoo, Alipay, Ant Financial Services, Jack Ma and Joe Tsai and certain of their affiliates. At the same time, we also entered into various
implementation agreements that included a commercial agreement, or the Alipay commercial agreement, an intellectual property license and software technology
service agreement, or the Alipay IPLA, and a shared services agreement, which together governed our financial and commercial relationships with Ant Financial
Services and Alipay.
As described in more detail below, we restructured our relationship with Ant Financial Services in August 2014 with the approval of our board of directors and
with the agreement of SoftBank, Yahoo, Alipay, Ant Financial Services, Jack Ma and Joe Tsai and certain of their and our affiliates.
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Alipay Commercial Agreement
Under the Alipay commercial agreement among us, Alipay and Ant Financial Services, which agreement remains in place following the restructuring described
below, Alipay provides payment processing and escrow services to us. These services enable settlement of transactions on our marketplaces through a secure
payment platform and escrow process. We pay Alipay a fee on terms that are preferential to us for such services. These preferential terms enable us, with certain
exceptions, to make available basic payment processing and escrow services to consumers and merchants on our marketplaces free of charge. We believe that these
services provide us with a competitive advantage that otherwise would be diminished without the preferential terms of the Alipay commercial agreement.
The fees that we pay Alipay are based on fee rates and actual payment volumes processed on our marketplaces. The fee rates reflect, among other things,
Alipay's bank-processing costs and operating costs allocable to the services provided to us, and accordingly are subject to adjustment on an annual basis to the
extent such costs increase or decline. The Alipay commercial agreement provided that the directors of our company designated by SoftBank and Yahoo approve the
fee rates payable by us in advance on an annual basis. In connection with the restructuring of our relationship with Ant Financial Services, the Alipay commercial
agreement was amended to provide that, after the completion of our initial public offering, a special committee formed by our independent directors and the
director designated by SoftBank must approve the fee rates in advance on an annual basis. The fee rates for the immediately preceding year remain in effect until
such time as such annual approval by the special committee has been obtained. In fiscal years 2014, 2015 and 2016, we paid fees to Alipay totaling
RMB2,349 million, RMB3,853 million and RMB4,898 million (US$760 million), respectively, under this agreement. The Alipay commercial agreement has an
initial term of 50 years, and is automatically renewable for further periods of 50 years, subject to our right to terminate at any time upon one year's prior written
notice. If the Alipay commercial agreement is required by applicable regulatory authorities, including under stock exchange listing rules, to be modified in certain
circumstances, a one-time payment may be payable to us by Ant Financial Services to compensate us for the impact of such adjustment.
2014 Restructuring of Our Relationship with Ant Financial Services and Alipay
On August 12, 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, and entered into or amended certain ancillary agreements
including an amendment and restatement of the Alipay IPLA, or the amended Alipay IPLA. Pursuant to these agreements, we restructured our relationships with
Ant Financial Services and Alipay, its wholly-owned subsidiary, and terminated the 2011 framework agreement. The restructuring contemplated by the 2014 SAPA
and the ancillary agreements described below has taken effect and these agreements now govern our economic and commercial relationships with Ant Financial
Services and Alipay. Under the 2014 SAPA, the arrangements are structured with the aim of securing long-term economic participation in Ant Financial Services
which we believe is in the best interests of our company and all of our shareholders. The potential for long-term economic participation can come in the form of
either a perpetual 37.5% profit share stream or a possible future direct equity interest as described below. We believe this restructuring will strengthen and benefit
our company as well as better position us for future growth.
Share and Asset Purchase Agreement
Sale of SME Loan Business and Certain Other Assets
Pursuant to the 2014 SAPA, we agreed to sell certain securities and assets primarily relating to our SME loan business and other related services to Ant
Financial Services, for aggregate cash consideration of RMB3,219 million, which was based on a premium to the aggregate book value of the entities operating the
SME loan business. The sale was completed in February 2015. In addition, pursuant to software system use and service agreements relating to the know-how and
related intellectual property that we agreed to sell together with the SME loan business and related services, we will receive annual fees for a term of seven years.
These fees, which will be recognized as other revenue, will be determined as follows: for calendar years 2015 to 2017, the entities
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operating the SME loan business will pay us an annual fee equal to 2.5% of the average daily balance of the SME loans provided by such entities, and in calendar
years 2018 to 2021, these entities will pay an annual fee equal to the amount of the fees paid in the calendar year 2017. In fiscal years 2015 and 2016, we received
annual fees of RMB90 million and RMB708 million (US$110 million), respectively, from Ant Financial Services and its affiliates.
For regulatory reasons, we retained approximately RMB1,225 million of the existing SME loan portfolio upon the completion of the transfer of the SME loan
business, which will be wound down over time as such loans are repaid. We will not conduct any new SME loan business going forward. The remaining balance of
this retained portfolio of loans was insignificant as of March 31, 2016.
Liquidity Event Payment
Under the 2014 SAPA, in the event of a qualified IPO of Ant Financial Services or Alipay, if our total ownership of equity interests in Ant Financial Services,
if any, acquired as described under "— Potential Equity Interest" below, has not reached 33%, which we refer to as the full 33% equity interest, we would be
entitled, at our election, to receive a one-time payment equal to 37.5% of the equity value, immediately prior to such qualified IPO of Ant Financial Services, as a
whole and not just of Alipay, its subsidiary. If we acquire equity interests in Ant Financial Services in an aggregate amount less than the full 33% equity interest,
then the percentage of Ant Financial Services' equity value used to calculate the liquidity event payment will be reduced proportionately.
In lieu of receiving the liquidity event payment, we may elect to receive payments under the profit sharing provision of the amended Alipay IPLA described
below in perpetuity, subject to the receipt of regulatory approvals, including under applicable stock exchange listing rules, required to permit continuation of the
profit share following a qualified IPO of Ant Financial Services or Alipay. If we so elect, in connection with such a qualified IPO, Ant Financial Services must use
its commercially reasonable efforts to obtain such regulatory approvals. If such approvals are not obtained, then Ant Financial Services will pay us the liquidity
event payment described above.
Jack Ma and Joe Tsai contributed 35,000,000 and 15,000,000, respectively, of our ordinary shares held by them to APN Ltd., a vehicle they established to hold
such shares. The shares of APN Ltd., as well as the 50,000,000 ordinary shares in us held by APN Ltd., have been pledged to us to secure the liquidity event
payment and certain other obligations of Ant Financial Services under the 2014 SAPA and commercial agreement, as well as the direct liability of APN Ltd. for up
to US$500 million of the liquidity event payment whenever any such liquidity event payment becomes due.
Potential Equity Interest
The 2014 SAPA provides for future potential equity issuances to us by Ant Financial Services. In the event that Ant Financial Services applies for and receives
certain PRC regulatory approvals in the future, Ant Financial Services will issue and we will purchase newly-issued equity interests in Ant Financial Services, up to
the full 33% equity interest, or such lesser equity interest as may be permitted by the applicable regulatory approvals.
If we were to acquire such equity interests, we will have a pre-emptive right prior to the time of a qualified IPO of Ant Financial Services, in the event Ant
Financial Services issues additional equity interests to third parties, that will entitle us to acquire additional equity interests in order to maintain the equity
ownership percentage we hold in Ant Financial Services immediately prior to such third-party issuances.
If the liquidity event payment described above under "— Liquidity Event Payment" has not become payable upon a qualified IPO of Ant Financial Services,
then our right to acquire up to the full 33% equity interest will continue after such qualified IPO. However, the equity interests that we are entitled to acquire will
be reduced in proportion to any dilutive issuances of equity securities by Ant Financial Services in and following such qualified IPO.
The consideration to be paid by us to acquire any equity interest in Ant Financial Services up to the full 33% equity interest will be fully funded by payments
from Ant Financial Services under the 2014 SAPA in respect of
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certain intellectual property and asset transfers. Similarly, in connection with our exercise of the pre-emptive right, under the amended Alipay IPLA, we will
receive payments from Ant Financial Services that will effectively fund our subscription for such additional equity interests up to a value of US$1.5 billion.
To the extent we acquire the full 33% equity interest pursuant to the provisions of the 2014 SAPA, the liquidity event payment and the profit share under the
amended Alipay IPLA described in "— Alipay Intellectual Property License and Software Technology Services Agreement" below, other than the payments that
effectively offset the purchase price with respect to the exercise of the pre-emptive right, will automatically terminate. If we acquire less than the full 33% equity
interest in Ant Financial Services pursuant to the provisions of the 2014 SAPA, the liquidity event payment amount and the profit sharing arrangement under the
amended Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by us.
We believe that under applicable regulatory rules and practices currently in effect, the relevant PRC approvals necessary for us to own an equity interest in Ant
Financial Services would not be granted. There can be no assurance that such applicable regulatory rules and practices will change in the near future.
Certain Restrictions on the Transfer of Ant Financial Services Equity Interests
Pursuant to the 2014 SAPA and amended Alipay IPLA, certain parties thereto, including in some cases our company, are subject to restrictions on the transfer
of equity interests in Ant Financial Services, including:
•
•
•
•
prior to our acquisition of the full 33% equity interest, none of Jack Ma, Junao, Junhan, our company or Ant Financial Services may transfer any
shares of Ant Financial Services that would result in Jack Ma, Junao, Junhan and our company, collectively, no longer having beneficial ownership
of a majority voting interest in Ant Financial Services;
prior to our acquisition of the full 33% equity interest, none of Jack Ma, Joe Tsai (if he holds any equity interest at that time), Junao, Junhan, Ant
Financial Services or Alipay may transfer any equity interest in Ant Financial Services or Alipay if, to its knowledge, such transfer would result in a
non-PRC person or entity acquiring beneficial ownership of any equity interest in Ant Financial Services or Alipay;
following the earliest occurrence of any equity issuance by Ant Financial Services to us as described above in the first paragraph under "Share and
Asset Purchase Agreement — Potential Equity Interest" and until the earlier of a qualified IPO of Ant Financial Services or the termination of the
independent director rights provided in the 2014 SAPA, none of Jack Ma, Joe Tsai (if he holds any equity interest at that time), Junao, Junhan or
Ant Financial Services may knowingly transfer any equity in Ant Financial Services to a third-party who would thereby acquire more than 50% of
the voting or economic rights in, or assets of, Ant Financial Services; and
in the event we acquire an equity interest in Ant Financial Services, any transfer of equity interests in Ant Financial Services by Junao or Junhan, on
the one hand, or our company, on the other hand, will be subject to a right of first refusal by the other party.
Non-competition Undertakings
Under the 2014 SAPA, we and Ant Financial Services have each agreed to certain limitations on our respective ability to enter into or participate in the same
line of business as the other party. The 2014 SAPA provides that Ant Financial Services may not engage in any business conducted by us from time to time,
including businesses that we enter into after the date of the 2014 SAPA, or logical extensions thereof, and we are restricted from engaging in specified activities
within the scope of business of Ant Financial Services, including the provision and distribution of credit facilities and insurance, the provision of investment
management and banking services, payment transaction processing and payment clearing services, leasing, lease financing and related services, trading, dealing and
brokerage with respect to foreign exchange and financial instruments, distribution of securities, commodities, funds, derivatives and other financial products and
the provision of credit ratings, credit profiles and credit reports. Each party may, however, make passive investments in competing businesses below specified
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thresholds, in some cases after offering the investment opportunity to the other party, and we will be permitted to wind down the portion of our SME loan business
that is not transferred to Ant Financial Services.
Corporate Governance Provisions
The 2014 SAPA provides that, unless not permitted in connection with a qualified IPO of Ant Financial Services and subject to other conditions, we and Ant
Financial Services will recommend one independent person who Ant Financial Services will nominate as a member of its board, and Jack Ma, Joe Tsai, Junhan and
Junao will agree to vote the equity interests in Ant Financial Services controlled by them in favor of such nomination. Pursuant to the 2014 SAPA, we and the other
parties agreed on the initial independent director who Ant Financial Services subsequently nominated and appointed as a member of its board. If such independent
director resigns or such seat otherwise becomes vacant, so long as SoftBank owns at least 20% of our outstanding ordinary shares, and certain other conditions are
satisfied, SoftBank and Jack, acting jointly, will select on our behalf the individual to be designated as a replacement director, subject to the approval of an
independent committee of our board. We have agreed to form an independent committee of our board comprised of our directors who meet the independent director
standards under New York Stock Exchange listing rules and who are not our officers or employees, as well as any director of our board nominated by SoftBank, to
approve certain actions that we may take in connection with the 2014 SAPA and related agreements.
Ancillary Agreements
In connection with the 2014 SAPA, we also entered into the amended Alipay IPLA, a data sharing agreement, an amended and restated shared services
agreement, a cooperation agreement and a trademark agreement, each of which is described below. We also entered into a binding term sheet in respect of a
technology services agreement pursuant to which we agreed to provide certain cloud computing, database service and storage, computing services and certain other
services to Ant Financial Services on a cost-plus basis. We further agreed to a new form of crosslicense agreement to be entered into under the 2014 SAPA,
providing for a license of certain intellectual property by Ant Financial Services to us, and by us to Ant Financial Services.
Alipay Intellectual Property License and Software Technology Services Agreement
Under the terms of the Alipay IPLA, we and our subsidiaries, licensed to Alipay certain intellectual property rights and provided various software technology
services to Alipay and its subsidiaries. We originally entered into the Alipay IPLA in connection with the 2011 framework agreement, and, in August 2014, we
entered into the amended Alipay IPLA.
Under the Alipay IPLA, Alipay paid us a royalty and software technology services fee equal to the sum of an expense reimbursement plus 49.9% of the
consolidated pre-tax income of Alipay and its subsidiaries until a liquidity event of Alipay or Ant Financial Services. Such profit share percentage was subject to
downward adjustments upon certain dilutive equity issuances by Alipay or Ant Financial Services. Under the Amended IPLA, which became effective on the date
we entered into the 2014 SAPA, we will receive, in addition to a service fee, royalty streams related to Alipay and other current and future businesses of Ant
Financial Services, which we refer to collectively as the profit share payments. The profit share payments will be paid at least annually and will equal the sum of an
expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services on a consolidated basis (subject to certain adjustments), including
not only Alipay but all of Ant Financial Services' subsidiaries. The profit share payments will be reduced in proportion to any equity issuances made to us under the
2014 SAPA.
In addition, if we acquire any equity interest in Ant Financial Services as described above under "Share and Asset Purchase Agreement — Potential Equity
Interest," the profit share payments will be reduced in proportion to such equity issuance and, at or prior to the time of such equity issuance, Ant Financial Services
will make a payment to us in consideration for the reduction in profit share payments, in exchange for the transfer by us to Ant Financial Services of certain
intellectual property. This payment by Ant Financial Services will effectively fund
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our subscription for up to the full 33% equity interest. This payment will result in our acquiring equity interests in Ant Financial Services with effectively no cash
impact to us, subject to applicable taxes.
The amended Alipay IPLA will terminate, and the remainder (if any) of the intellectual property exclusively related to the business of Ant Financial Services
will be transferred to Ant Financial Services after the termination of the amended Alipay IPLA, (i) after our total equity interest ownership in Ant Financial
Services has reached the full 33%, when either the full funding of funded payments under the 2014 SAPA is completed or a qualified IPO of Ant Financial Services
or Alipay occurs; (ii) after a qualified IPO of Ant Financial Services or Alipay has occurred, when our total equity interest ownership in Ant Financial Services
reaches the full 33%; (iii) when the liquidity event payment as described above under "Share and Asset Purchase Agreement — Liquidity Event Payment" becomes
payable or (iv) upon transfer of certain intellectual property to Ant Financial Services as required by the relevant stock exchange or securities authority in order to
obtain approval for a qualified IPO of either Ant Financial Services or Alipay.
In fiscal years 2014, 2015 and 2016, under the Alipay IPLA, we recognized royalty and software technology services fee income, net of costs incurred by our
company, amounting RMB1,764 million, RMB1,667 million and RMB1,122 million (US$174 million), respectively, as other income.
The effect of the amended Alipay IPLA is that the base of profits of the financial services businesses that we will share has been expanded, from the pre-tax
income of only Alipay to the pre-tax income of the entire Ant Financial Services, while the profit sharing percentage is reduced to align with the percentage that
will be used to calculate the liquidity event payment. In addition, our participation in the profits of Ant Financial Services, subject to receipt of required regulatory
approvals, including under applicable stock exchange listing rules, is perpetual under the amended Alipay IPLA (unless we elect to receive the liquidity event
payment under the 2014 SAPA upon a qualified IPO of Ant Financial Services or Alipay or unless we acquire the full 33% equity interest in Ant Financial
Services), as opposed to automatic termination of the profit share upon a liquidity event under the 2011 framework agreement and Alipay IPLA.
Data Sharing Agreement
We and Ant Financial Services have entered into a data sharing agreement dated August 12, 2014.
Pursuant to the data sharing agreement, we, Ant Financial Services, and our controlled affiliates, which we refer to hereinafter as full data participants, will
contribute all data collected or generated as a result of the use by users of our or their respective products or services (subject to applicable law, industry rules and
contractual requirements) to a data platform that we operate and maintain, and to which all of the full data participants will have access. A data platform
management committee established by us and Ant Financial Services may also approve non-controlled affiliates of us and Ant Financial Services and unaffiliated
third parties to have certain access to and contribute data to the platform, subject to execution of a data platform participation agreement containing the terms and
restrictions on access to and use of the data sharing platform and shared data as the data management committee shall determine. No fees or other compensation are
required to be paid by any of the full data participants for access to the data platform, other than the obligation for such participants to share in the costs of the
operation of the data platform on a fair and reasonable basis. The data sharing agreement provides that none of the participants may reproduce any of the data on
the data platform for transfer to their own servers, except that a participant may retain its own data that it has contributed to the data platform. As of the date of this
annual report, Cainiao Network, Koubei and Alibaba Pictures have entered into data platform participation agreements with us.
The data sharing agreement initially had a minimum term of 10 years. Pursuant to the data sharing agreement, if we completed our initial public offering within
five years from the date of the agreement, our board could extend the term for up to a total of 50 years. In May 2015, our board approved the extension of the term
of the agreement to a total of 50 years.
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Cooperation Agreement
We and Ant Financial Services entered into a SME loan cooperation framework agreement dated August 12, 2014, pursuant to which each party agreed to
cooperate with, and provide certain services with respect to, the other party's enforcement of certain rights of such other party against users of its platforms and
services and with respect to the provision of certain financial services to our customers and merchants. In particular, we agreed, upon request, to close down or
suspend online storefronts and restrict marketing activities on our platforms of persons defaulting on loans made by Ant Financial Services and persons in violation
of Alipay rules and regulations, and to publish notices on our platforms and provide information regarding such persons, in each case in a manner to be further
agreed from time to time. Ant Financial Services agreed, upon request, to make loans and/or extensions of credit and related financial services available to our
users, freeze and pay over to us funds in accounts of users violating our rules and regulations or agreements with us, accelerate loans and terminate credit facilities
of such users, restrict marketing activities on its platforms by such users, and provide information regarding such users, in each case in a manner to be further
agreed from time to time. Neither party is required to pay any fees in consideration for the services provided by the other party, and apart from the provision of
these services, there will be no other exchange of value in connection with this agreement. The cooperation agreement has an initial term of five years, with
automatic renewals upon expiry for additional five year periods. From time to time, we expect to enter into similar commercial arrangements with respect to
cooperation matters and the provision of services between us and Ant Financial Services and to our respective customers.
Trademark Agreement
We and Ant Financial Services entered into a trademark agreement dated August 12, 2014, pursuant to which we granted Ant Financial Services a non-
transferable, non-assignable and non-sublicensable (except to its subsidiaries) license for it and its sublicensed subsidiaries to continue to use certain trademarks
and domain names based on trademarks owned by us, in connection with their payment services business and the SME loan business transferred by us to them, and
in the same manner of such uses as of August 12, 2014, and a non-transferable, non-assignable and non-sublicensable (except to its subsidiaries) license to use such
other trademarks and domain names based on trademarks owned by us, and in such manner, as we may agree to allow in the future. Pursuant to the trademark
agreement, each of the parties further agreed to the rights and limitations that each would have to use the "Ali" name or prefix and the "ecommerce" (and its
Chinese equivalent) name, prefix or logo as part of a trademark or domain name in each party's and its subsidiaries' respective businesses. Neither party is required
to pay any fees under this agreement, and apart from the licenses and rights set forth in the agreement, there will be no other exchange of value in connection with
this agreement.
Shared Services Agreement with Ant Financial Services
We and Ant Financial Services have entered into a shared services agreement, which was amended and restated as of August 12, 2014, in connection with the
2014 SAPA, pursuant to which we and Ant Financial Services provide certain administrative and support services to each other and our respective affiliates.
Ant Financial Services paid us RMB46 million, RMB158 million and RMB670 million (US$104 million) in fiscal years 2014, 2015 and 2016, respectively, for
the services we provided to it under the agreement. We paid Ant Financial Services nil, RMB58 million and RMB56 million (US$9 million) in fiscal years 2014,
2015 and 2016, respectively, for services Ant Financial Services provided to us under the agreement.
Other Commercial Arrangements with Ant Financial Services
We have also entered into other commercial arrangements with Ant Financial Services, its subsidiaries and affiliates, such as online marketing services,
treasury management and other services. In fiscal years 2014, 2015 and 2016, the amounts generated and receivable from Ant Financial Services under these
arrangements were nil, nil and RMB416 million (US$65 million), respectively. During the same periods, the amounts incurred and payable by us to Ant Financial
Services under these arrangements were RMB21 million, RMB248 million and RMB243 million (US$38 million), respectively.
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Investments Involving Ant Financial Services
We have invested in businesses in which Ant Financial Services is an existing shareholder or co-invested with Ant Financial Services in other businesses. For
instance, in September 2015, we established a joint venture under the brand name Koubei with Ant Financial Services. We and Ant Financial Services injected
certain related businesses into Koubei and each invested RMB3.0 billion in this joint venture. Koubei is one of the leading restaurant and local services guide
businesses in China. In addition, in February 2016, we agreed to invest US$900 million in a co-investment with Ant Financial Services in Ele.me, an operator of
one of the largest mobile food ordering and delivery services in China.
Equity-based Award Arrangements
We grant options and RSUs relating to our ordinary shares to the employees of Ant Financial Services. As of March 31, 2014, 2015 and 2016, there were
6,397,150, 6,097,651 and 4,362,339 of our ordinary shares, respectively, underlying outstanding options and RSUs held by employees of Ant Financial Services.
We entered into agreements with Ant Financial Services in calendar years 2012 and 2013 under which we will receive reimbursements for options and RSUs
relating to our ordinary shares granted to the employees of Ant Financial Services and its subsidiaries during the period from December 14, 2011 to March 31,
2014. Pursuant to these agreements, we will, upon vesting of such options and RSUs, receive a cash reimbursement equal to their respective grant date fair value.
The amounts of these reimbursements in fiscal years 2014, 2015 and 2016 were RMB266 million, RMB206 million and RMB113 million (US$18 million),
respectively.
We understand that Jack Ma, as the controlling shareholder of Ant Financial Services, believes that providing equity-related awards to our employees tied to
the success of Ant Financial Services will enhance the value of our business because of the strategic importance of Alipay to our marketplaces and because,
through our strategic and financial relationship with Ant Financial Services, we have a significant participation in the profits and value accretion of Ant Financial
Services. In March 2014, Junhan, the general partner of which is an entity controlled by Jack Ma, made a grant of certain equity-based awards similar to share-
appreciation rights linked to the valuation of Ant Financial Services to most of our employees. Since then, Junhan has granted similar equity-based performance
awards to our employees on an annual basis.
The grant by Junhan to our employees is subject to approval by our audit committee. The vesting of such awards is conditional upon the fulfillment of requisite
service conditions to us, and such awards will be settled in cash by Junhan upon disposal of such awards by the holders. Junhan has the right to repurchase the
vested awards from the holders upon an initial public offering of Ant Financial Services or the termination of their employment with us at a price to be determined
based on the then fair market value of Ant Financial Services. Junhan's obligation to cash settle these awards will be funded by the proceeds of sales of or loans
against the equity interests in Ant Financial Services that Jack contributed to Junhan. We have no obligation to reimburse Junhan, Ant Financial Services or its
subsidiaries for the cost associated with these awards. For accounting purposes, we recognize the cost relating to such equity-based awards granted by the
shareholder through Junhan as a shareholder contribution as the awards will ultimately be settled in cash by Junhan. The awards are accounted for as financial
derivatives and initially measured at their fair value, and the related expense will be recognized over the requisite service period in our consolidated income
statements with a corresponding credit to additional paid-in capital. Subsequent changes in the fair value of the awards are recorded in our consolidated income
statements through the date on which the underlying awards are settled by Junhan. The expenses arising from Ant Financial Services' share-based awards granted to
our employees represent a non-cash charge that will not result in any economic costs or equity dilution to our shareholders.
Subsequent to our initial public offering, based on the arrangements agreed to in the 2014 SAPA, we, Junhan and Ant Financial Services entered into an
agreement, under which we agreed to continue granting our share-based awards to employees of Ant Financial Services, and Junhan and Ant Financial Services
agreed that Junhan and/or Ant Financial Services through one of its subsidiaries will continue granting equity-based performance awards to our employees on an
annual basis. Due to the mutually beneficial nature of this arrangement, the parties agreed that none of them has any obligation to reimburse any other party any
expenses relating to such equity-
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based awards. This agreement has a term of three years and will be automatically renewed for another three years, unless otherwise terminated by written
agreement among the parties or unilaterally by Ant Financial Services if it is required under applicable laws (including any regulatory requirements applicable to a
public offer of Ant Financial Services' shares) to terminate the agreement.
Transactions with Alibaba Pictures
In June 2014, as part of our entertainment media strategy, we completed an investment of HK$6,244 million (RMB4,955 million) in newly issued ordinary
shares representing approximately 60% of the issued share capital of Alibaba Pictures. In addition, in June 2015, Alibaba Pictures placed newly issued ordinary
shares to unrelated third-party investors for aggregate proceeds of approximately HK$12,179 million (RMB9,647 million). Our equity interest in Alibaba Pictures
was therefore diluted to 49.5% upon completion of this transaction. In December 2015, Alibaba Pictures completed its purchase of our online movie ticketing
business and movie and TV series financing platform for a cash consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts.
Transactions with Alibaba Health
In April 2014, through a holding company jointly held with a Yunfeng Fund, we acquired newly issued ordinary shares representing an effective equity interest
of approximately 38% in Alibaba Health. The Yunfeng Fund acquired an effective equity interest of approximately 16% in this investment. See "— Relationship
with Investment Funds Affiliated with Our Executive Chairman" below. We paid a purchase price of HK$932 million upon the closing of the transaction. In
April 2015, we entered into an agreement pursuant to which we agreed to transfer the operations of Tmall's online pharmacy business to Alibaba Health in
consideration for newly issued shares and convertible bonds of Alibaba Health. In July 2015, pursuant to an agreement with the Yunfeng Fund, we obtained control
over the holding company that holds approximately 54% of the equity interests in Alibaba Health (including the 38% effective equity interest we own), and as a
result, Alibaba Health became our consolidated subsidiary. Our proposed transaction with Alibaba Health was not completed before its expiration date in
March 2016 and therefore lapsed. In April 2016, we and Alibaba Health entered into a services agreement pursuant to which Alibaba Health will provide
outsourced services in relation to product categories related to Tmall's online pharmacy business.
Transaction with Entity Affiliated with Our Directors and Officers
Jack Ma, our executive chairman, Joe Tsai, our executive vice chairman, and J. Michael Evans, our president, have purchased their own aircraft for both
business and personal use. The use of the above-mentioned executive officers' own aircraft in connection with the performance of their duties as our employees is
free of charge to us, and we have agreed to assume the cost of maintenance, crew and operation of the aircraft where such cost is allocated for business purposes.
Relationship with Investment Funds Affiliated with Our Executive Chairman
Jack Ma currently has an approximately 40% interest, held directly and/or indirectly, in the general partners of each of four Yunfeng Capital-sponsored
investment funds in which he is entitled to receive a portion of carried interest proceeds, namely, Yunfeng Fund, L.P., Shanghai Yunfeng Equity Investment
(Limited Partnership), Shanghai Yunfeng New Innovation Enterprise Equity Investment (Limited Partnership) and Smart System Investment Fund, L.P. Jack Ma
also currently has an approximately 26.7% indirect interest in the general partner of Yunfeng Fund II, L.P. and KHL, L.P., each of which is also a Yunfeng Capital-
sponsored investment fund in which he is also entitled to receive a portion of carried interest proceeds. Of the six Yunfeng Capital-sponsored funds in respect of
which Jack Ma holds an interest in the general partner entities thereof and is entitled to receive carried interest proceeds, two are U.S. dollar denominated funds, or
the U.S. Dollar Funds, two are RMB denominated funds, or the RMB Funds, one is a co-investment fund of one of the U.S. Dollar Funds and one is a parallel fund
of one of the U.S. Dollar Funds. We refer to these funds collectively as the Yunfeng Funds. Jack Ma also currently has a 40% interest in each of Yunfeng Capital
Limited, Shanghai Yunfeng Investment Management Co., Ltd. and Shanghai Yunfeng New Innovation Investment Management Co., Ltd., which are the
investment
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advisor entities of the U.S. Dollar Funds and the RMB Funds, respectively, and which we collectively refer to as Yunfeng Capital. Jack Ma, his wife, a trust
established for the benefit of his family and an entity controlled by Jack and his wife have committed, directly or indirectly, approximately US$5.2 million and
US$46.0 million as general partners and limited partners, respectively, to the U.S. Dollar Funds, and approximately RMB16.0 million and approximately
RMB201.1 million as general partners and limited partners, respectively, to the RMB Funds. The U.S. Dollar Funds have accepted over US$1.4 billion in capital
commitments and the RMB Funds have accepted over RMB5.0 billion in capital commitments.
Jack will donate all distributions of (x) carried interest proceeds he may receive in respect of the Yunfeng Funds and (y) dividends he may receive with respect
to his holdings of shares in any member of Yunfeng Capital, which we collectively refer to as the Yunfeng Distributions, to, or for the benefit of, the Alibaba Group
Charitable Fund or other entities identified by Jack that serve charitable purposes. In addition, Jack has agreed that he will not claim any deductions from his
applicable income tax obligations resulting from payment of the Yunfeng Distributions to the Alibaba Group Charitable Fund or any other entity identified by Jack
that serves charitable purposes. See "— Commitments of Jack Ma to Alibaba Group." We expect that, through its expertise, knowledge base and extensive network
of contacts in private equity in China, Yunfeng Capital will assist us in developing a range of relevant strategic investment opportunities.
Yunfeng Funds have historically, and may in the future, enter into co-investment transactions with us and third parties, such as our recent investments in
Youku Tudou and Alibaba Health. In April 2014, in conjunction with our investment in Alibaba Health and on the same terms as us, a Yunfeng Fund acquired,
through a holding company it jointly established with us, an effective equity interest of approximately 16% in Alibaba Health for a total purchase price of
HK$395 million. Also in April 2014, in conjunction with our investment in Youku Tudou and on the same terms as us, a Yunfeng Fund agreed to invest
approximately US$132 million to purchase Class A ordinary shares of Youku Tudou, representing an effective equity interest of 2.0% on a fully-diluted basis. See
"Item 5. Operating and Financial Review Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Entertainment."
We have also invested in other businesses in which Yunfeng Funds are existing shareholders. In addition, we committed US$80 million as a limited partner of
Yunfeng Fund II, L.P. Through such investment, we have formalized an institutional relationship with Yunfeng Capital. In addition, Yunfeng Fund, L.P. was an
indirect holder of approximately 84,600 convertible preference shares purchased by an entity wholly-owned by it in September 2012, and such convertible
preference shares were automatically converted into our ordinary shares upon the completion of our initial public offering in September 2014.
Commitments of Jack Ma to Alibaba Group
Jack Ma, our executive chairman, has confirmed the following commitments to our board of directors in writing:
•
•
•
•
He intends to reduce and thereafter limit his direct and indirect economic interest in Ant Financial Services over time, to a percentage that does not
exceed his and his affiliates' interest in our company immediately prior to our initial public offering and that such reduction will be caused in a
manner by which neither Jack nor any of his affiliates would receive any economic benefit;
He has entered into a deed to, and will, donate all of his Yunfeng Distributions to, or for the benefit of, the Alibaba Group Charitable Fund or other
entities identified by him that serve charitable purposes;
He will not claim any deductions from his applicable income tax obligations resulting from donating his Yunfeng Distributions to the Alibaba
Group Charitable Fund or any other entity identified by him that serve charitable purposes; and
If required by us, while he remains an Alibaba executive, he will assume for our benefit legal ownership of investment vehicles, holding companies
and variable interest entities that further our business interests in Internet, media and telecom related businesses and, in such circumstances, he will
disclaim all economic benefits from such ownership and enter into agreements to transfer any such benefits to us (or as we may direct) when
permitted by applicable law.
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Pledge for the Benefit of and Loan Arrangement with a Related Party
In May 2015, we entered into a pledge with a financial institution in the PRC in connection with certain wealth management products with an aggregate
principal amount of RMB7.3 billion we invested in to secure an RMB6.9 billion financing provided by such financial institution to Simon Xie, one of our founders
and an equity holder in certain of our variable interest entities, to finance the minority investment by a PRC limited partnership in Wasu, a company listed on the
Shenzhen Stock Exchange and engaged in the business of digital media broadcasting and distribution in China. In addition, we entered into a loan agreement for a
principal amount of up to RMB2.0 billion with Simon Xie in April 2015 to finance the repayment by Simon of the interest under the financing. These arrangements
strengthen our strategic business arrangements with Wasu to enhance our entertainment strategy. Our loan to Simon will be made at an interest rate equal to
SHIBOR as specified by us from time to time and is repayable in five years. The loan is secured by a pledge of Simon's limited partnership interest in the PRC
limited partnership and is available for draw-down starting from January 1, 2016, but it has not yet been drawn. We have entered into strategic cooperation
agreements with a major shareholder of Wasu in order to enhance our capabilities and influence in the entertainment sector in China. A company controlled by Jack
Ma serves as one of the general partners of the PRC limited partnership. 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 who is also an entrepreneur with significant experience in and
knowledge of the media industry in China, serves as the other general partner. Jack, through his control of one of the general partners, and Mr. Shi, as the other
general partner and the executive partner, jointly control this PRC limited partnership. The interest of the general partner controlled by Jack in the limited
partnership is limited to the return of its RMB10,000 contributed capital.
Equity-settled Donation Relating to Our Ordinary Shares
During fiscal year 2014, we granted options to acquire 50,000,000 ordinary shares of ours to a non-profit organization designated by Jack Ma and Joe Tsai.
35,000,000 and 15,000,000 of these share options have been transferred to the separate charitable trusts established by Jack Ma and Joe Tsai, respectively. These
share options were approved by our board of directors and the options are not subject to any vesting conditions and are exercisable for a period of four years from
the grant date. The exercise price of these options is US$25.00 per share based on a fair market value appraisal process. For each of the eight years beginning one
year after the date of listing of our ordinary shares on a recognized stock exchange, the charitable trusts are permitted to sell only up to 6,250,000 ordinary shares
(or one-eighth of the total number of ordinary shares subject to the options) per year excluding such number of unsold ordinary shares carried forward from
previous years. As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full
and recorded in general and administrative expenses during fiscal year 2014.
Transactions with Cainiao Network
We entered into agreements with Cainiao Network, our equity-accounted affiliate, during fiscal year 2014, whereby we disposed of two wholly-owned
subsidiaries to the parent Cainiao of Network for cash consideration of RMB524 million. The gain on disposals in fiscal year 2014 was RMB74 million. In
addition, during fiscal year 2016, we disposed a wholly-owned subsidiary to Cainiao Network for cash consideration of US$33 million (RMB204 million). The
gain on disposal in fiscal year 2016 was RMB3 million (US$0.5 million). The major assets of the disposed subsidiaries consisted of land use rights in the PRC.
We have commercial arrangements with Cainiao Network conducted on an arm's length basis to receive certain logistics services. Expenses incurred in
connection with the logistics services provided by Cainiao Network in fiscal years 2015 and 2016 were RMB785 million and RMB2,370 million (US$368 million),
respectively.
We also have cost sharing arrangements with Cainiao Network on various administrative and cloud computing services. In connection with the services we
provided, Cainiao Network paid us RMB20 million and RMB86 million (US$13 million) in fiscal years 2015 and 2016, respectively.
From time to time, we also co-invest with Cainiao Network in other businesses.
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Transactions with Weibo
We entered into a strategic collaboration agreement and a marketing cooperation agreement with Weibo during fiscal year 2014, pursuant to which Weibo
provided marketing services. In fiscal years 2014, 2015 and 2016, the amounts paid to Weibo pursuant to these agreements were RMB154 million,
RMB654 million and RMB715 million (US$111 million), respectively.
We also have other commercial arrangements with Weibo primarily relating to the provision of cloud computing services. In connection with the services we
provided, Weibo paid us nil, RMB2 million and RMB38 million (US$6 million) in fiscal years 2014, 2015 and 2016, respectively.
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Chinese law restricts foreign ownership in enterprises that provide value-added telecommunications services, which includes the ICPs. As a result, we operate
our Internet businesses and other businesses in which foreign investment is restricted or prohibited in China through contractual arrangements between our wholly-
foreign owned enterprises, our variable interest entities, which, where applicable, hold the ICP licenses and other regulated licenses and generally operate our
Internet businesses and other businesses in which foreign investment is restricted or prohibited, and the variable interest entity equity holders. For a description of
these contractual arrangements, see "Item 4. Information on the Company — C. Organizational Structure — Contractual Arrangements among Our Wholly-foreign
Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders."
Indemnification Agreements
We have entered into indemnification agreements with our directors and executive officers. These agreements require us to indemnify such individuals, to the
fullest extent permitted by law, for certain liabilities to which they may become subject as a result of their affiliation with us.
Employment Agreements
See "Item. 6 Directors, Senior Management and Employees — B. Compensation — Employment Agreements."
Share Options
See "Item. 6 Directors, Senior Management and Employees — B. Compensation — Equity Incentive Plans."
C. Interests of Experts and Counsel
Not applicable.
ITEM 8 FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See "Item 18. Financial Statements."
Legal and Administrative Proceedings
We are involved from time to time, and may in the future be involved in, litigation, claims or other disputes in the ordinary course of business regarding,
among other things, contract disputes with our customers, copyright, trademark and other intellectual property infringement claims, consumer protection claims,
employment related cases and other matters in the ordinary course of our and disputes between our merchants and consumers.
We establish balance sheet provisions relating to potential losses from litigation based on estimates of such losses. For this purpose, we classify potential losses
as remote, reasonably possible or probable. We analyze
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potential outcomes from current and potential litigation and proceedings as loss contingencies in accordance with U.S. GAAP. Our management believes that the
risk of loss in connection with the proceedings discussed below is currently remote and that these proceedings will not have a material adverse effect on our
financial condition, either individually or in the aggregate. However, in light of the inherent uncertainties involved in these matters, some of which are beyond our
control, the risk of loss may become more likely and an adverse outcome of one or more of these matters could be material to our results of operations or cash
flows for any particular reporting period. See note 2(ad) to our audited consolidated financial statements included elsewhere in this annual report for more
information on our provisioning policy with regard to legal and administrative proceedings.
Class Action Lawsuits
Federal Consolidated Exchange Act Actions
In January 2015, we were named as a defendant in the first of seven putative shareholder class action lawsuits filed in the United States District Courts for the
Southern District of New York, Central District of California and Northern District of California. The operative complaint is brought on behalf of a putative class
of shareholders who acquired our American Depositary Shares from October 21, 2014 through January 29, 2015, inclusive. The complaints assert claims under the
United States Securities Exchange Act of 1934.
In June 2015, the U.S. Judicial Panel on Multidistrict Litigation ordered transfer of the actions in the Central District of California to the Southern District of
New York for coordinated or consolidated pretrial proceedings with the four actions before that court. In June 2015, the Panel ordered transfer of the action
pending in the Northern District of California to the Southern District of New York. All of the actions are now pending in the Southern District of New York under
the master caption, Christine Asia Co., Ltd. et al. v. Alibaba Group Holding Limited et al. , No. 1:15-md-02631-CM (S.D.N.Y.) and related cases.
The Southern District of New York has appointed a Lead Plaintiff and Lead Counsel on behalf of the putative class pursuant to the Private Securities Litigation
Reform Act.
In June 2015, the Lead Plaintiff filed a consolidated amended complaint, which generally alleges that the registration statement and prospectus filed in
connection with our initial public offering and various other public statements contained misrepresentations regarding our business operations and financial
prospects, and failed to disclose, among other things, regulatory scrutiny by the SAIC prior to our initial public offering. Specifically, plaintiffs allege that we
should have disclosed a 2014 SAIC anti-counterfeiting initiative in the e-commerce market, a July 16, 2014 administrative guidance meeting we had with the SAIC
that was later the subject of a self-described "white paper" issued and then withdrawn by the SAIC, and the alleged impact of the sale of counterfeit goods on our
financial results. Plaintiffs assert claims against our company and Executive Chairman Jack Yun Ma, Executive Vice Chairman Joseph C. Tsai, then Chief
Executive Officer Jonathan Zhaoxi Lu and Chief Financial Officer Maggie Wei Wu for violation of sections 10(b) and 20(a) of the United States Exchange Act and
Rule 10b-5. Plaintiffs seek unspecified damages, attorneys' fees and costs.
In July 2015, the Defendants filed motions to dismiss the complaint for failure to state a claim. Briefing on the motion was complete on September 2015. The
parties are awaiting the court's decision.
California State Consolidated Securities Act Actions
In October 2015, we were named as a defendant in the first of three securities class action lawsuits filed in the Superior Court of the State of California, San
Mateo County. The three actions were consolidated in October 2015, and plaintiffs filed a consolidated complaint on March 25, 2016. The consolidated action is
captioned Gary Buelow, et al. v. Alibaba Group Holding Limited, et al. , No. CIV-535692 (San Mateo Sup. Ct.). The consolidated action is brought on behalf of a
putative class of investors who purchased Alibaba American Depositary Shares pursuant or traceable to the IPO. The complaint alleges violations of Sections 11,
12(a)(2) and 15 of the United States Securities Act of 1933.
The consolidated complaint names our company, Executive Chairman Jack Yun Ma, Executive Vice Chairman Joseph C. Tsai, then Chief Executive Officer
Jonathan Zhaoxi Lu, Chief Financial Officer Maggie Wei Wu,
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Director Masayoshi Son, General Counsel and Secretary Timothy A. Steinert, and 34 separate underwriters of our initial public offering. It alleges that our
company, our senior officers who signed the registration statement, and the underwriters made material misrepresentations in our initial offering materials similar
to those alleged in the above federal consolidated complaint.
We filed a demurrer for failure to state a claim and lack of subject matter jurisdiction in response to the consolidated complaint on May 6, 2016. Briefing on
the demurrer is expected to be complete in July 2016. Regulatory Inquiry
Pending SEC Inquiry
Earlier this year, the SEC informed us that it was initiating 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
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 Singles Day. We are voluntarily disclosing this SEC request for information and 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.
Concluded SEC Inquiry
On January 30, 2015, following the release of the so-called SAIC "white paper," the SEC initiated a non-public inquiry into whether any violations of the
federal securities laws had occurred. The SEC advised us that the existence of the inquiry should not be construed as an indication by the SEC or its Staff that we or
any of our officers or directors had violated any of the federal securities laws. As part of its inquiry, the SEC requested that we voluntarily provide certain
information. The SEC's initial information request covered background facts and other information related to our interaction with the SAIC, and related matters. In
September 2015, the SEC notified us that it had concluded its inquiry and, based on the information it had received, it did not intend to recommend an enforcement
action against us.
Kering Lawsuit
In May 2015, we were named as a defendant in a lawsuit filed in the Southern District of New York by Gucci America Inc., Balenciaga S.A., Balenciaga
America, Inc., Bottega Veneta S.A., Bottega Veneta Inc., Yves Saint Laurent America, Inc., Luxury Goods International (L.G.I.) S.A. and Kering S.A. The case is
captioned Gucci America, Inc. et al. v. Alibaba Group Holding Ltd. et al. , No. 15-cv-03784-PKC (S.D.N.Y.). A second amended complaint was filed in
September 2015. The complaint generally alleges that merchants on our marketplaces sold allegedly counterfeit or otherwise trademark infringing merchandise,
purportedly with our actual or constructive knowledge, and that we purportedly supported such merchants and merchandise. In their complaint, the plaintiffs assert
multiple claims against our company and seek unspecified damages. We filed a motion to dismiss Plaintiffs' Racketeer Influenced and Corrupt Organizations Act,
or RICO, claims in October 2015 and this motion is pending before the Court. Discovery on other claims is proceeding.
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Dividend Policy
Since our inception, we have not declared or paid any dividends on our ordinary shares. We have no present plan to pay any dividends on our ordinary shares
in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Any future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our
future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors
may deem relevant. If we pay any dividends, the depositary will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of
the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we rely on
dividends distributed by our PRC subsidiaries. Dividend distributions from our PRC subsidiaries to us are subject to PRC taxes, such as withholding tax. In
addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in
accordance with its articles of association and the accounting standards and regulations in China. See "Item 3. Key Information — D. Risk Factors — Risks Related
to Doing Business in the People's Republic of China — We rely to a significant extent on dividends and other distributions on equity paid by our principal
operating subsidiaries in China and on remittances, including loans, from the variable interest entities in China to fund offshore cash and financing requirements."
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9 THE OFFER AND LISTING
A. Offer and Listing Details.
Our ADSs, each representing one of our ordinary shares, have been listed on the New York Stock Exchange since September 19, 2014 under the symbol
"BABA." The table below shows, for the periods indicated, the high and low market prices, based on the highest and lowest intraday sales prices, on the New York
Stock Exchange for our ADSs through May 20, 2016.
Annual highs and lows
Fiscal year 2015 (from September 19, 2014)
Fiscal year 2016
Quarterly highs and lows
Third calendar quarter 2015
Fourth calendar quarter 2015
First calendar quarter 2016
Second calendar quarter 2016 (through May 20, 2016)
Monthly highs and lows
December 2015
January 2016
February 2016
March 2016
April 2016
May 2016 (through May 20, 2016)
(1)
Source: Bloomberg
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Market Price (1)
(US$)
High
Low
120.00
95.06
80.03
57.20
85.38
86.42
79.84
85.89
57.20
58.20
59.25
75.01
85.82
78.68
70.58
79.84
85.89
80.49
78.99
65.34
59.25
69.86
75.66
75.01
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B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing one of our ordinary shares, have been listed on the New York Stock Exchange since September 19, 2014 under the
symbol "BABA."
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10 ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our F-
1 registration statement (File No. 333-195736), as amended, initially filed with the SEC on May 6, 2014. Our shareholders adopted our amended and restated
memorandum and articles of association by a special resolution on September 2, 2014, and effective upon completion of our initial public offering of ordinary
shares represented by our ADSs.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in "Item 4. Information on the
Company," "Item 5. Operating and Financial Review and Prospects" or elsewhere in this annual report.
D. Exchange Controls
See "Item 4. Information on the Company — B. Business Overview — Regulation — Regulation of Foreign Exchange and Dividend Distribution — Foreign
Exchange Regulation."
E. Taxation
The following is a general summary of certain Cayman Islands, PRC and United States federal income tax consequences relevant to an investment in our ADSs
and ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is
based on laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or different interpretations,
possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People's
Republic of China and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of
our ADSs and ordinary shares. To the extent that this discussion relates to matters of Cayman
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Islands tax law, it is the opinion of Maples and Calder, our special Cayman Islands counsel. To the extent that the discussion states definitive legal conclusions
under PRC tax laws and regulations, it is the opinion of Fangda Partners, our special PRC counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the
nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. There are no other taxes likely to be
material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution
brought within, the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on the issue of shares by, or any transfers of shares of,
Cayman Islands companies (except those which hold interests in land in the Cayman Islands). The Cayman Islands is not party to any double tax treaties that are
applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ADSs and ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be
required on the payment of a dividend or capital to any holder of our ADSs or ordinary shares, as the case may be, nor will gains derived from the disposal of our
ADSs or ordinary shares be subject to Cayman Islands income or corporation tax.
People's Republic of China Taxation
We are a holding company incorporated in the Cayman Islands and we gain substantial income by way of dividends from our PRC subsidiaries. The EIT Law
and its implementation rules, both of which became effective on January 1, 2008, provide that China-sourced income of foreign enterprises, such as dividends paid
by a PRC subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such
foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a lower withholding tax rate for which the foreign investor is eligible.
Under the EIT Law, an enterprise established outside of China with a "de facto management body" within China is considered a "resident enterprise," which
means that it is treated in the same manner as a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define
"de facto management body" as a managing body that exercises substantive and overall management and control over the production and business, personnel,
accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State
Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise,
defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary
controlling shareholder. Although Alibaba Group Holding Limited does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is
therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we
have applied the guidance set forth in Circular 82 to evaluate the tax residence status of Alibaba Group Holding Limited and its subsidiaries organized outside
the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto
management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
•
•
•
the primary location of the day-to-day operational management is in the PRC;
decisions relating to the enterprise's financial and human resource matters are made or are subject to approval by organizations or personnel in
the PRC;
the enterprise's primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained
in the PRC; and
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•
50% or more of voting board members or senior executives habitually reside in the PRC.
We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and its offshore
subsidiaries are incorporated outside the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of
directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore
holding companies with a corporate structure similar to ours that has been deemed a PRC "resident enterprise" by the PRC tax authorities. Accordingly, we believe
that Alibaba Group Holding Limited and its offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria for "de facto
management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency 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" as applicable to our offshore entities, we
will continue to monitor our tax status.
The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from
transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how
"domicile" may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered
as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders or ADS holders which are non-resident enterprises as
well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as China-sourced income and as a result
become subject to PRC withholding tax at a rate of 10%, unless any such non-resident enterprise's jurisdiction has a tax treaty with China that provides for a
preferential treatment.
Furthermore, if we are considered a PRC resident enterprise and the competent PRC tax authorities consider dividends we pay with respect to our shares or
ADSs and the gains realized from the transfer of our shares or ADSs to be income derived from sources within the PRC, such dividends and gains we pay to our
overseas shareholders or ADS holders who are non-resident individuals may be subject to PRC individual income tax at a rate of 20%, unless any such non-resident
individuals' jurisdiction has a tax treaty with China that provides for a preferential tax rate or a tax exemption. It is also unclear whether, if we are considered a PRC
resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other
countries or areas.
See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — 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." and
"Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — Dividends payable to our foreign investors
and gains on the sale of our ADSs or ordinary shares by our foreign investors may become subject to PRC taxation."
Material United States Federal Income Tax Considerations
The following summary describes the material United States federal income tax consequences of the ownership of our ordinary shares and ADSs as of the date
of this annual report. The discussion set forth below is applicable only to United States Holders. Except where noted, this summary deals only with ordinary shares
and ADSs held as capital assets. As used herein, the term "United States Holder" means a beneficial owner of an ordinary share or ADS that is for United States
federal income tax purposes:
•
•
•
an individual citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the
United States, any state thereof or the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
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•
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons has or have the
authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be
treated as a United States person.
This summary does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special
treatment under the United States federal income tax laws, including if you are:
•
•
•
•
•
•
•
•
•
•
•
•
a dealer in securities or currencies;
a financial institution;
a regulated investment company;
a real estate investment trust;
an insurance company;
a tax-exempt organization;
a person holding our ordinary shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;
a trader in securities that has elected the mark-to-market method of accounting for your securities;
a person liable for alternative minimum tax;
a person who owns or is deemed to own 10% or more of our voting stock;
a partnership or other pass-through entity for United States federal income tax purposes; or
a person whose "functional currency" is not the United States dollar.
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, and regulations, rulings and judicial
decisions thereunder as of the date of this annual report, and such authorities may be replaced, revoked or modified so as to result in United States federal income
tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes
that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
If a partnership holds our ordinary shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisors.
This summary does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances
and does not address the Medicare tax on net investment income, or the effects of any state, local or non-United States tax laws. If you are considering the
purchase, ownership or disposition of our ordinary shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax
consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are
represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
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Taxation of Dividends
Subject to the discussion under "— Passive Foreign Investment Company" below, the gross amount of distributions on the ADSs or ordinary shares (including
any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as
determined under United States federal income tax principles. Such income (including withheld taxes) will be includable in your gross income as ordinary income
on the day actually or constructively received by you, in the case of the ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be
eligible for the dividends received deduction allowed to corporations under the Code. The following discussion assumes that all dividends will be paid in
U.S. dollars.
With respect to non-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of
taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs
backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that
our ADSs (which are listed on the New York Stock Exchange) are readily tradable on an established securities market in the United States. Thus, we believe that
dividends we pay on our ordinary shares that are represented by ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our
ordinary shares will be listed on an established securities market, we do not believe that dividends that we pay on our ordinary shares that are not represented by
ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an
established securities market in subsequent years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain
income tax treaties with the United States. In the event that we were deemed to be a PRC resident enterprise under the EIT Law, although no assurance can be
given, we might be eligible for the benefits of the income tax treaty between the United States and the PRC, which is hereinafter referred to as the Treaty, and if we
were eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would be eligible for the
reduced rates of taxation. See "— People's Republic of China Taxation." Non-corporate United States Holders that do not meet a minimum holding period
requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as "investment income" pursuant to Section 163(d)
(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not
apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This
disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given
your particular circumstances.
Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment
company, or PFIC, in the taxable year in which such dividends are paid or in the preceding taxable year. See "— Passive Foreign Investment Company" below.
In the event that we were deemed to be a PRC resident enterprise under the EIT Law, you might be subject to PRC withholding taxes on dividends paid to you
with respect to the ADSs or ordinary shares. See "— People's Republic of China Taxation." In that case, subject to certain conditions and limitations, PRC
withholding taxes on dividends would be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of
calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and will generally constitute passive
category income. However, in certain circumstances, if you have held the ADSs or ordinary shares for less than a specified minimum period during which you are
not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any PRC withholding
taxes imposed on dividends paid on the ADSs or ordinary shares. If you are eligible for Treaty benefits, any PRC taxes on dividends will not be creditable against
your United States federal income tax liability to the extent withheld at a rate exceeding the applicable Treaty rate. The rules governing the foreign tax credit are
complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.
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To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under
United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs
or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or
ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange, as described below under "— Taxation
of Capital Gains." Consequently, such distributions in excess of our current and accumulated earnings and profits would generally not give rise to foreign source
income and you would generally not be able to use the foreign tax credit arising from any PRC withholding tax imposed on such distributions unless such credit
can be applied (subject to applicable limitations) against United States federal income tax due on other foreign source income in the appropriate category for
foreign tax credit purposes. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you
should expect that a distribution will generally be treated as a dividend (as discussed above).
Distributions of ADSs, ordinary shares or rights to subscribe for ordinary shares that are received as part of a pro rata distribution to all of our shareholders
generally will not be subject to United States federal income tax. Consequently, such distributions generally will not give rise to foreign source income and you
generally will not be able to use the foreign tax credit arising from any PRC withholding tax imposed on such distributions unless such credit can be applied
(subject to applicable limitations) against United States federal income tax due on other foreign source income in the appropriate category for foreign tax credit
purposes.
Passive Foreign Investment Company
Based on the projected composition of our income and valuation of our assets, including goodwill, we do not expect to be a PFIC for our current taxable year,
and we do not expect to become one in the future, although there can be no assurance in this regard.
In general, we will be a PFIC for any taxable year in which:
•
•
at least 75% of our gross income is passive income; or
at least 50% of the value (determined on a quarterly basis) of our assets is attributable to assets that produce or are held for the production of
passive income.
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a
trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of
the PFIC tests, as owning our proportionate share of the other corporation's assets and receiving our proportionate share of the other corporation's income. Although
we do not expect to be 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 instance,
because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.
The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year
due to changes in our asset or income composition. Because we have valued our goodwill based on the projected market value of our equity, a decrease in the price
of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject
to special tax rules discussed below.
If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules with respect to any "excess
distribution" received and any gain realized from a sale or other disposition, including a pledge, of ADSs or ordinary shares. Distributions received in a taxable year
that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable
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years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special tax rules:
•
•
•
the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares;
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as
ordinary income; and
the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable
to underpayments of tax will be imposed on the resulting tax attributable to each such year.
In addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the
taxable year in which such dividends are paid or in the preceding taxable year. You will generally be required to file Internal Revenue Service Form 8621 if you
hold our ADSs or ordinary shares in any year in which we are classified as a PFIC.
If we were a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries was also a PFIC, a
United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these
rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a
PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-
market election may be available to United States Holders of ADSs if the ADSs are listed on the New York Stock Exchange, which constitutes a qualified
exchange, and are "regularly traded" for purposes of the mark-to-market election (for which no assurance can be given). It should also be noted that it is intended
that only the ADSs and not the ordinary shares will be listed on the New York Stock Exchange. Consequently, if you are a United States Holder of ordinary shares
that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if we are or were to become a PFIC.
If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of
your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your
adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result
of the mark-to-market election. If you make an effective mark-to-market election, in each year that we are a PFIC any gain you recognize upon the sale or other
disposition of your ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously
included in income as a result of the mark-to-market election.
Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-
to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years
unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to
consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular
circumstances.
Alternatively, you can sometimes avoid the rules described above by electing to treat a PFIC as a "qualified electing fund" under Section 1295 of the Code.
However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary shares if we are
considered a PFIC in any taxable year.
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Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal
to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion under
"— Passive Foreign Investment Company" above, such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital
assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized
by you will generally be treated as United States source gain or loss. However, if we were treated as a PRC resident enterprise for EIT Law purposes and PRC tax
were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty. If you are not
eligible for the benefits of the Treaty or you fail to make the election to treat any gain as PRC source, then you may not be able to use the foreign tax credit arising
from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on
other income derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty, you are a resident of the United States,
and you meet other requirements specified in the Treaty. Because the determination of whether you qualify for the benefits of the Treaty is fact-intensive and
depends upon your particular circumstances, you are specifically urged to consult your tax advisors regarding your eligibility for the benefits of the Treaty. You are
also urged to consult your tax advisor regarding the tax consequences in case any PRC tax is imposed on gain on a disposition of our ADSs or ordinary shares,
including the availability of the foreign tax credit and the election to treat any gain as PRC source, under your particular circumstances.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale, exchange or redemption of
our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A
backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or, in the case of
dividend payments, if you fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability
provided the required information is furnished to the Internal Revenue Service in a timely manner.
Under the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to ADSs or ordinary
shares, subject to certain exceptions (including an exception for ADSs or ordinary shares held in accounts maintained by certain financial institutions), by attaching
a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold ADSs or
ordinary shares. You are urged to consult your own tax advisors regarding information reporting requirements relating to your ownership of the ADSs or ordinary
shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
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H. Documents on Display
We have previously filed with the SEC our registration statement on Form F-1 (File No. 333-195736), as amended, with respect to our ordinary shares and
ADSs. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we previously filed with the SEC. This means that
we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is
considered to be part of this annual report.
You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC's Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549 and at the SEC's regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual
report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the
SEC's Public Reference Room.
The SEC also maintains a website at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. Our
annual report and some of the other information submitted by us to the SEC may be accessed through this website.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of
the Exchange Act.
In accordance with NYSE Rule 203.01, we will post this annual report on our website www.alibabagroup.com . In addition, we will provide hardcopies of our
annual report to shareholders, including ADS holders, free of charge upon request.
I. Subsidiary Information
Not applicable.
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
Interest Rate Risk
Our main interest rate exposure relates to bank borrowings. In addition, one tranche of our unsecured senior notes bear interest at three-month LIBOR plus
0.520% per annum. We also have interest-bearing assets, including cash and cash equivalents, short-term investments and restricted cash. We manage our interest
rate exposure with a focus on reducing our overall cost of debt and exposure to changes in interest rates. From time to time, we use derivatives, such as interest rate
swaps, to manage our interest rate exposure. Approximately 92% of the aggregate principal amount of our bank borrowings and unsecured senior notes was at fixed
rates, and the remaining 8% was at floating rates as of March 31, 2016.
As of March 31, 2015 and 2016, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount
outstanding at March 31, 2015 and 2016 under our bank borrowings and the tranche of our unsecured senior notes that bear floating interest was outstanding for the
entire respective fiscal years, profit attributable to equity owners of our company would have been RMB1,202 million and RMB1,089 million (US$169 million)
higher/lower, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and short-term investments.
Foreign Exchange Risk
Foreign currency risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Although we
operate businesses in different countries, substantially all of our revenue-generating transactions, and a majority of our expense-related transactions, are
denominated in Renminbi,
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which is the functional currency of our major operating subsidiaries and the reporting currency of our financial statements. From time to time, we enter into
hedging activities with regard to exchange rate risk.
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. On July 21, 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three
years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band.
In June 2010, the People's Bank of China increased the flexibility of the exchange rate and between June 30, 2010 and December 31, 2013, the value of the
Renminbi appreciated approximately 12.0% against the U.S. dollar, although the value of the Renminbi depreciated approximately 2.5% against the U.S. dollar in
2014. In August 2015, the People's Bank of China 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
rates. As a result, in 2015, the value of the Renminbi depreciated approximately 5.8% against the U.S. dollar, and from December 31, 2015 through May 20, 2016,
the value of the Renminbi further depreciated approximately 1.1% against the U.S. dollar. There remains significant international pressure on the PRC government
to adopt a more flexible currency policy, which could result in greater fluctuations of the Renminbi against the U.S. dollar. Accordingly, it is difficult to predict
how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
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 reduce the
Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or ADSs, servicing our outstanding debts, or for other business purposes, appreciation of the U.S. dollar against the Renminbi
would reduce the U.S. dollar amounts available to us.
As of March 31, 2015, we had Renminbi-denominated cash and cash equivalents and short term investments of RMB107,089 million and U.S. dollar-
denominated cash and cash equivalents of US$2,461 million. Assuming we had converted RMB107,089 million into U.S. dollars at the exchange rate of
RMB6.199 for US$1.00 as of March 31, 2015, our total U.S. dollar cash balance would have been US$19,736 million. If the Renminbi had depreciated by 10%
against the U.S. dollar, our U.S. dollar cash balance would have been US$18,166 million.
As of March 31, 2016, we had Renminbi-denominated cash and cash equivalents and short term investments of RMB82,302 million and U.S. dollar-
denominated cash and cash equivalents of US$4,359 million. Assuming we had converted RMB82,302 million into U.S. dollars at the exchange rate of
RMB6.448 for US$1.00 as of March 31, 2016, our total U.S. dollar cash balance would have been US$17,123 million. If the Renminbi had depreciated by 10%
against the U.S. dollar, our U.S. dollar cash balance would have been US$15,963 million.
Market Price Risk
We are exposed to market price risk primarily with respect to investment securities, to a lesser extent interest rate swaps and forward exchange contracts, held
by us which are reported at fair value. A substantial portion of our investment in equity investees are all held for long-term appreciation or for strategic purposes.
All of these are accounted for under cost or equity method and not subject to market price risk. We are not exposed to commodity price risk.
The sensitivity analysis is determined based on the exposure of financial assets at fair value to market price risks related to equity and debt securities at the end
of each reporting period. The securities we hold are accounted for as convertible bonds, trading securities or available-for-sale securities. Their changes in fair
values are recorded as income for convertible bonds and trading securities or through equity for available-for-sale securities, respectively. If market prices of the
respective instruments held by us had been 1% higher/lower as of March 31, 2015 and March 31, 2016, our investment securities would have been approximately
RMB169 million
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and RMB228 million (US$35 million) higher/lower, respectively, of which RMB50 million and RMB56 million (US$8 million) relating to trading securities would
be recognized as income or loss during the respective period.
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees Paid by Our ADS Holders
As an ADS holder, you will be required to pay the following service fees to the depositary, Citibank, N.A.:
Persons depositing or withdrawing
shares or ADS holders must pay:
Up to US$5.00 per 100 ADSs (or fraction thereof)
For:
• Issuance of ADSs upon deposit of Shares (excluding
issuances as a result of distributions of ADSs pursuant to
(i) stock dividends or other free stock distributions, or
(ii) exercise of rights to purchase additional ADSs.
• Delivery of ordinary shares against surrender of ADSs.
• Distribution of cash dividends or other cash distributions.
• Distribution of ADSs pursuant to (i) stock dividends or
other free stock distributions, or (ii) exercise of rights to
purchase additional ADSs.
• Distribution of securities other than ADSs or rights to
purchase additional ADSs.
Up to US$5.00 per 100 ADS per calendar year
• ADS services
As an ADS holder you will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
•
•
•
•
•
•
taxes (including applicable interest and penalties) and other governmental charges;
fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands
(i.e., upon deposit and withdrawal of ordinary shares);
expenses incurred for converting foreign currency into U.S. dollars;
expenses for cable, telex and fax transmissions and for delivery of securities;
fees and expenses as are incurred by the depositary in connection with compliance with applicable exchange control regulations; and
fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
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Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients)
receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for
cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and
the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
The Depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock
dividend, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in
the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders.
In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC
(whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and
custodians who hold their clients' ADSs in DTC accounts in turn charge their clients' accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment
is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice
of such changes.
Fees and Payments from the Depositary to Us
Our depositary has agreed to reimburse us for certain expenses we incur that are related to the administration and maintenance of the ADS program. There are
limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees
the depositary collects from investors. The depositary has reimbursed us for any expenses related to the administration and maintenance of the facility in an amount
of US$13.7 million, after deduction of applicable U.S. taxes, for the year ended March 31, 2016.
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ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See "Item 10. Additional Information" for a description of the rights of securities holders, which remain unchanged.
ITEM 15 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the
Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act, at March 31, 2016. Based
on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms, and that information required to be disclosed in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding
required disclosure.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. As required by Rule 13a-15(c) of the Exchange Act, our management conducted an evaluation of our company's internal control over
financial reporting as of March 31, 2016 based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as
of March 31, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness of our internal control over financial reporting to future periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our independent registered public accounting firm, PricewaterhouseCoopers, has audited the effectiveness of our internal control over financial reporting as of
March 31, 2016, as stated in its report, which appears on page F-2 of this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Walter Kwauk, an independent director within the meaning of Section 303A of the New York Stock Exchange
Listed Company Manual and a member of our audit committee, qualifies as "audit committee financial expert" as defined in Item 16A of Form 20-F.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to all of our directors, executive officers and employees. We have filed our code of ethics as an
exhibit to our registration statement on Form F-1 (File Number 333-195736), as amended, initially filed with the Commission on May 6, 2014. The code is also
available on our official website under the investor relations section at www.alibabagroup.com .
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by
PricewaterhouseCoopers, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated
below.
Audit Fees (1)
Audit-related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
Year ended
March 31,
2015
2016
(in thousands of RMB)
66,956*
5,422
5,060
111
77,549
38,000
5,958
480
967
45,405
*
(1)
(2)
(3)
(4)
Includes audit fees relating to our initial public offering completed in September 2014.
"Audit Fees" represents the aggregate fees billed for each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial
statements and assistance with and review of documents filed with the SEC and other statutory and regulatory filings.
"Audit-related Fees" represents the aggregate fees billed for each of the fiscal years listed for the assurance and related services rendered by our principal auditors that are reasonably
related to the performance of the audit or review of our financial statements and not reported under "Audit Fees."
"Tax Fees" represents the aggregate fees billed for each of the fiscal years listed for the professional tax services rendered by our principal auditors.
"All Other Fees" represents the aggregate fees for services rendered by our principal auditors other than services reported under "Audit Fees," "Audit-related Fees" and "Tax Fees."
The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers, including audit services, audit-
related services, tax services and other services as described above, other than those for de minimus services which are approved by the audit committee prior to the
completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
On August 12, 2015, we announced the implementation of a share repurchase program in an aggregate amount of up to US$4 billion over a period of two
years. We have repurchased ADSs representing our ordinary shares on the open market under purchase plans adopted to implement the Share Repurchase Program.
In
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addition, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, have jointly entered into our plans as affiliated purchasers.
In addition, our equity incentive award agreements generally provide that, in the event of a grantee's termination for cause or violation of a non-competition
undertaking, we will have the right to repurchase the shares acquired by such grantee, generally at par or the exercise price paid for such shares. See "Item 6.
Directors, Senior Management and Employees — B. Compensation — Equity Incentive Plans." In addition, when an employee leaves our company, we repurchase
any shares acquired by such employee pursuant to early-exercised but unvested options.
The table below summarizes the repurchases we made in the periods indicated.
Average Price
Paid Per
Ordinary
Share (2)
(US$)
18.33
—
18.50
—
70.18
64.36
Par value
Par value
—
10.57
63.14
—
Total Number of
Ordinary
Shares
Purchased as
Part of Share
Repurchase
Program (3)
—
—
—
—
18,653,009
22,126,613
—
—
—
—
5,775,441
—
Total Price
Paid (1)
(US$)
531,875
—
1,310,411
—
1,440,310,625
1,499,765,925
—
—
—
462,500
455,836,405
—
Approximate
Dollar Value of
Ordinary Shares
that May Yet Be
Purchased
Under Share
Repurchase
Program (4)
(US$, in millions)
—
—
—
—
2,690
1,265
1,265
1,265
1,265
1,265
900
900
Total Number of
Ordinary
Shares
Purchased (1)
29,018
—
70,833
—
20,523,626
23,301,329
906
14,324
—
43,750
7,219,297
—
Month
April, 2015
May 2015
June 2015
July 2015
August 2015
September 2015
October 2015
November 2015
December 2015
January 2016
February 2016
March 2016
(1)
(2)
(3)
(4)
Includes (i) an aggregate of 46,555,063 ADSs representing our ordinary shares we repurchased pursuant to our Share Repurchase Program, (ii) an aggregate of 4,472,187 ADSs
representing our ordinary shares repurchased by Jack Ma and Joe Tsai, our affiliate purchasers, and (iii) an aggregate of 175,833 ordinary shares, including 143,333 ordinary shares
underlying unvested awards, we repurchased pursuant to our equity incentive award agreements.
Ordinary shares we repurchased pursuant to our equity incentive award agreements were generally repurchased at par or the exercise price paid by the grantee for such shares.
Includes only those ADSs representing our ordinary shares we repurchased pursuant to the Share Repurchase Program.
Our Share Repurchase Program, implemented in August 2015, authorizes the repurchase in an aggregate amount of up to US$4 billion over a period of two years.
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE.
We are a "foreign private issuer" (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs, each representing one ordinary share, are listed
on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York Stock Exchange listed companies
that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the New York Stock
Exchange with limited exceptions. The following summarizes some significant ways in which our corporate governance practices differ from those followed by
domestic companies under the listing standards of the New York Stock Exchange.
204
Table of Contents
Under the New York Stock Exchange Listed Company Manual, or the NYSE Manual, U.S. domestic listed companies are required to have a majority
independent board, which is not required under the Companies Law of the Cayman Islands, our home country. Currently, our board of directors is composed of
eleven members, five of whom are independent directors. In addition, the NYSE Manual requires U.S. domestic listed companies to have a compensation
committee and a nominating/corporate governance committee, each composed entirely of independent directors, which are not required under the Companies Law
of the Cayman Islands. Currently, our compensation committee is composed of three members, only two of whom are independent directors. Our nominating and
corporate governance committee is composed of three members, only two of whom are independent directors. In addition, the NYSE Manual requires shareholder
approval for certain matters, such as requiring that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to
those plans, which is not required under the Cayman Islands law. We intend to comply with the requirements of Cayman Islands law only in determining whether
shareholder approval is required.
ITEM 16H. MINE SAFETY DISCLOSURE.
Not applicable.
205
Table of Contents
ITEM 17 FINANCIAL STATEMENTS.
We have provided financial statements pursuant to Item 18.
ITEM 18 FINANCIAL STATEMENTS.
PART III
The following financial statements are filed as part of this annual report, together with the report of the independent auditors:
•
•
•
•
•
•
•
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the years ended March 31, 2014, 2015 and 2016
Consolidated Statements of Comprehensive Income for the years ended March 31, 2014, 2015 and 2016
Consolidated Balance Sheets as of March 31, 2015 and 2016
Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 2014, 2015 and 2016
Consolidated Statements of Cash Flows for the years ended March 31, 2014, 2015 and 2016
Notes to the Consolidated Financial Statements
ITEM 19 EXHIBITS.
Exhibit
Number
Description of Document
1.1* Form of Amended and Restated Memorandum and Articles of Association of the Registrant as currently in effect
2.1* Registrant's Form of Ordinary Share Certificate
2.2† Form of Deposit Agreement between the Registrant, the depositary and holders and beneficial holders of American
Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American
Depositary Receipt
2.3† Form of American depositary receipt evidencing American depositary shares (included in Exhibit 2.2)
2.4* Amended and Restated Registration Rights Agreement among the Registrant and the persons whose names are set out
in Schedule I thereto, dated September 18, 2012
2.5* Voting Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., the Management Members as defined
therein and certain other shareholders of the Registrant
2.6††
Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee
2.7†† First Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon
as Trustee
2.8†† Second Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York
Mellon as Trustee
2.9†† Third Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon
as Trustee
2.10†† Fourth Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York
Mellon as Trustee
206
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Exhibit
Number
Description of Document
2.11†† Fifth Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon
as Trustee
2.12†† Sixth Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon
as Trustee
2.13†† Form of Floating Rate Senior Notes Due 2017 (included in Exhibit 2.7)
2.14†† Form of 1.625% Senior Notes Due 2017 (included in Exhibit 2.8)
2.15†† Form of 2.500% Senior Notes Due 2019 (included in Exhibit 2.9)
2.16†† Form of 3.125% Senior Notes Due 2021 (included in Exhibit 2.10)
2.17†† Form of 3.600% Senior Notes Due 2024 (included in Exhibit 2.11)
2.18†† Form of 4.500% Senior Notes Due 2034 (included in Exhibit 2.12)
2.19††† Registration Rights Agreement dated as of November 28, 2014 between the Registrant and Morgan Stanley & Co.
International plc, Citigroup Global Markets Inc., Deutsche Bank AG, Singapore Branch and J.P. Morgan
Securities LLC
4.1* 2011 Equity Incentive Plan of the Registrant
4.2* Senior Management Equity Incentive Plan
4.3* Partner Capital Investment Plan
4.4* Form of Indemnification Agreement between the Registrant and its directors and executive officers
4.5* Form of Employment Agreement between the Registrant and its executive officers
4.6* English translation of Loan Agreements entered into by and among Jack Ma, Simon Xie and Taobao (China)
Software Co., Ltd., dated January 1, 2009, as amended on October 11, 2010 and March 13, 2013
4.7* English translation of Exclusive Call Option Agreement entered into by and among Jack Ma, Simon Xie, Taobao
(China) Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009
4.8* English translation of Proxy Agreement entered into by and among Jack Ma, Simon Xie, Taobao (China)
Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009
4.9* English translation of Equity Pledge Agreements entered into by and among Jack Ma, Simon Xie, Taobao (China)
Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009, as amended on March 13, 2013
4.10* English translation of Exclusive Technical Services Agreement entered into by and between Taobao (China)
Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009
4.11* Share Repurchase and Preference Share Sale Agreement by and between the Registrant, Yahoo! Inc. and Yahoo!
Hong Kong Holdings Limited, dated May 20, 2012
4.12* First Amendment to Share Repurchase and Preference Share Sale Agreement by and between the Registrant,
Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated September 11, 2012
4.13* Second Amendment to Share Repurchase and Preference Share Sale Agreement by and between the Registrant,
Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated October 14, 2013
4.14* Amended and Restated Technology and Intellectual Property License Agreement by and between the Registrant and
Yahoo! Inc., dated September 18, 2012
207
Table of Contents
Exhibit
Number
Description of Document
4.15* Framework Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., Alipay.com Co., Ltd., APN Ltd.,
Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the Joinder Parties, dated July 29, 2011
4.16* Amendment to Framework Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp.,
Alipay.com Co., Ltd., APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the
Joinder Parties, dated November 15, 2012
4.17* Second Amendment to Framework Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp.,
Alipay.com Co., Ltd., APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the
Joinder Parties, dated May 3, 2014
4.18* Waiver and Consent Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., Alipay.com Co., Ltd.,
APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the Joinder Parties, dated
January 23, 2014
4.19* Commercial Agreement by and among the Registrant, Zhejiang Alibaba E-Commerce Co., Ltd. and
Alipay.com Co., Ltd., dated July 29, 2011
4.20* Amendment to Commercial Agreement by and among the Registrant, Zhejiang Alibaba E-Commerce Co., Ltd. and
Alipay.com Co., Ltd., dated December 14, 2011
4.21*
Intellectual Property License and Software Technology Services Agreement by and between the Registrant and
Alipay.com Co., Ltd., dated July 29, 2011
4.22* Share Subscription and Purchase Agreement among Ali WB Investment Holding Limited, SINA Corporation and
Weibo Corporation, dated April 29, 2013
4.23* Agreement and Plan of Merger by and among Alibaba Investment Limited, Ali ET Investment Holding Limited and
AutoNavi Holdings Limited, dated April 11, 2014
4.24* Voting Agreement by and among Alibaba Investment Limited, Ali ET Investment Holding Limited and Shareholders
Listed thereto, dated April 11, 2014
4.25†† English Translation of Loan Agreement between Simon Xie and Taobao (China) Software Co., Ltd., dated April 22,
2015
4.26*
Investment Agreement by and among Youku Tudou Inc., 1Look Holdings Ltd., Ali YK Investment Holding Limited
and, solely for the purposes of Section 11.4, 11.5 and 11.16 therein, the Registrant, dated April 28, 2014
4.27*
Investor Rights Agreement by and among Youku Tudou Inc., Ali YK Investment Holding Limited and solely for the
purposes of Section 7.1 and 7.2 and Article VIII therein, the Registrant and YF Venus Ltd, dated April 28, 2014
4.28* Shareholders Agreement by and among Ali YK Investment Holding Limited and each of the persons listed on
Exhibit A thereto, dated April 28, 2014
4.29* Amended and Restated Share Purchase and Shareholders Agreement by and among Ali YK Investment Holding
Limited, YF Venus Ltd and Alibaba Investment Limited, dated May 21, 2014
4.30* Share Purchase Agreement by and among Ali UC Investment Holding Limited, the Management and the Selling
Shareholders as defined therein, dated May 28, 2014
4.31* Schedules of Material Differences of Contractual Arrangements of Material Variable Interest Entities of the Registrant
4.32* Share and Asset Purchase Agreement by and among the Registrant, Zhejiang Ant Small and Micro Financial Services
Group Co., Ltd., Yahoo! Inc., SoftBank Corp. and the other Parties named therein, dated August 12, 2014
208
Table of Contents
Exhibit
Number
Description of Document
4.33* Second Amendment to Commercial Agreement by and among the Registrant, Zhejiang Ant Small and Micro Financial
Services Group Co., Ltd. (formerly known as Zhejiang Alibaba E-Commerce Co., Ltd.) and Alipay.com Co., Ltd.,
dated August 12, 2014
4.34* Amended and Restated Intellectual Property License and Software Technology Services Agreement by and among the
Registrant, Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. and Alipay.com Co., Ltd., dated
August 12, 2014
4.35* Data Sharing Agreement by and between the Registrant and Zhejiang Ant Small and Micro Financial Services
Group Co., Ltd., dated August 12, 2014
4.36* English Translation of Software System Use and Service Agreement between Alibaba (China) Co., Ltd. and
Chongqing Alibaba Small Loan Co. Ltd., dated August 12, 2014
4.37* US$3,000,000,000 Facility Agreement between the Registrant and other parties named therein, dated August 20, 2014
4.38* Form of 2014 Post-IPO Equity Incentive Plan
4.39* Third Amendment to Share Repurchase and Preference Share Sale Agreement by and between the Registrant,
Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated July 14, 2014
4.40* Form of Share Retention Agreement between the Registrant and certain members of management
4.41†† English Translation of Pledge Agreement between ICBC Credit Suisse Investment Management Co., Ltd. and Taobao
(China) Software Co., Ltd., dated May 28, 2015
4.42†† Share Purchase Agreement among Alibaba Health Information Technology Limited, Ali JK Investment Holding Limit
and other parties named therein, dated April 8, 2015
4.43††† English translation of Share Subscription Agreement between Suning Commerce Group Co., Ltd. And Taobao (China)
Software Co., Ltd., dated August 9, 2015
4.44†††
Investment Agreement by and between Alibaba Group Holding Limited and Suning Commerce Group Co., Ltd., dated
August 9, 2015
4.45††† Share Subscription Agreement between Alibaba Group Holding Limited and Zhejiang Ant Small and Micro Financial
Services Group Co., Ltd., dated September 7, 2015
4.46 Agreement and Plan of Merger among Ali YK Investment Holding Limited, Ali YK Subsidiary Holding Limited,
Youku Tudou Inc. and Alibaba Investment Limited, dated November 6, 2015
4.47 US$3,000,000,000 Facility Agreement between the Registrant and other parties named therein, dated March 9, 2016
4.48 Syndication and Amendment Agreement, dated May 3, 2016, in respect of a US$3,000,000,000 Facility Agreement
dated March 9, 2016
4.49 Amended and Restated Investment Agreement by and between Alibaba Group Holding Limited and Suning
Commerce Group Co., Ltd., dated August 9, 2015 and amended and restated as of May 19, 2016
8.1 Significant Subsidiaries and Consolidated Entities of the Registrant
11.1* Code of Ethics of the Registrant
12.1 Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2 Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1** Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2** Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
209
Table of Contents
Exhibit
Number
Description of Document
15.1 Consent of PricewaterhouseCoopers — Independent Registered Public Accounting Firm
15.2 Consent of Fangda Partners
15.3 Consent of Maples and Calder
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
†
††
†††
**
Previously filed with the Registration Statement on Form F-1 (File No. 333-195736), initially filed on May 6, 2014 and incorporated herein by reference.
Previously filed with the Registration Statement on Form F-6 (File No. 333-198401), dated August 27, 2014 and incorporated herein by reference.
Previously filed with our Annual Report on Form 20-F for the Fiscal Year Ended on March 31, 2015 (File No. 001-36614), filed on June 25, 2015 and incorporated herein by reference.
Previously filed with the Registration Statement on Form F-4 (File No. 333-266575), initially filed on August 26, 2015 and incorporated herein by reference.
Furnished with this annual report on Form 20-F
210
Table of Contents
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
Alibaba Group Holding Limited
By: /s/ DANIEL YONG ZHANG
Name: Daniel Yong Zhang
Title: Chief Executive Officer
211
Date: May 24, 2016
Table of Contents
ALIBABA GROUP HOLDING LIMITED
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the Years Ended March 31, 2014, 2015 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended March 31, 2014, 2015 and 2016
Consolidated Balance Sheets as of March 31, 2015 and 2016
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended March 31, 2014, 2015 and 2016
Consolidated Statements of Cash Flows for the Years Ended March 31, 2014, 2015 and 2016
Notes to the Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-7
F-10
F-13
F-1
Table of Contents
To the Board of Directors and Shareholders of Alibaba Group Holding Limited:
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated statements of comprehensive income,
changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Alibaba Group Holding Limited and its subsidiaries
(collectively, the "Company") at March 31, 2015 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended
March 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to
express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in
2016). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Hong Kong, May 24, 2016
F-2
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED INCOME STATEMENTS
Revenue
Cost of revenue
Product development expenses
Sales and marketing expenses
General and administrative expenses
Amortization of intangible assets
Impairment of goodwill
Income from operations
Interest and investment income, net
Interest expense
Other income, net
Income before income tax and share of results of equity investees
Income tax expenses
Share of results of equity investees
Net income
Net (income) loss attributable to noncontrolling interests
Net income attributable to Alibaba Group Holding Limited
Accretion of Convertible Preference Shares
Dividends accrued on Convertible Preference Shares
Net income attributable to ordinary shareholders
Earnings per share/ADS attributable to ordinary shareholders
Basic
Diluted
Weighted average number of share/ADS used in computing earnings per share/ADS (million share)
10
Basic
Diluted
The accompanying notes form an integral part of these consolidated financial statements.
F-3
2014
RMB
Year ended March 31,
2015
RMB
RMB
2016
US$
(Note 2(a))
(in millions, except per share data)
Notes
5
23
23
23
9, 23
16
17
6, 23
76,204
101,143
52,504
(13,369) (23,834) (34,355)
(5,093) (10,658) (13,788)
(8,513) (11,307)
(4,545)
(9,205)
(7,800)
(4,218)
(2,931)
(2,089)
(315)
(455)
(175)
(44)
24,920
1,648
(2,195)
2,429
26,802
23,135
9,455
(2,750)
2,486
32,326
29,102
52,254
(1,946)
2,058
81,468
7
14
(3,196)
(203)
(6,416)
(1,590)
(8,449)
(1,730)
23,403
24,320
23,315
24,261
(88)
(31)
(208)
(59)
71,289
171
71,460
(15) —
(97) —
71,460
23,076
24,149
22
22
10
15,686
(5,328)
(2,138)
(1,753)
(1,428)
(455)
(71)
4,513
8,104
(301)
319
12,635
(1,310)
(269)
11,056
27
11,083
—
—
11,083
10.61
10.00
10.33
9.70
29.07
27.89
4.51
4.33
2,175
2,332
2,337
2,500
2,458
2,562
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income:
- Foreign currency translation:
Change in unrealized gains
Less: reclassification adjustment for (gains) losses recorded in net income
Net change
- Available-for-sale securities:
Change in unrealized gains
Less: reclassification adjustment for gains recorded in net income
Less: tax effect
Net change
- Interest rate swaps under hedge accounting:
Change in unrealized gains (losses)
- Forward exchange contracts under hedge accounting:
Change in unrealized losses
Other comprehensive income
Total comprehensive income
Less: total comprehensive (income) loss attributable to noncontrolling interests
Total comprehensive income attributable to Alibaba Group Holding Limited
The accompanying notes form an integral part of these consolidated financial statements.
F-4
2014
RMB
Year ended March 31,
2015
RMB
RMB
2016
US$
(Note 2(a))
23,403
24,320
71,289
11,056
(in millions)
538
52
(14) —
52
524
306
3,102
(13) —
—
3,102
—
293
312
21
333
2,343
(422)
(488)
1,433
48
3
51
363
(65)
(76)
222
36
(36) —
—
—
853
24,256
—
3,118
27,438
(90)
(56)
24,166
27,382
(168)
1,598
72,887
102
72,989
(26)
247
11,303
16
11,319
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Restricted cash
Investment securities
Prepayments, receivables and other assets
Total current assets
Investment securities
Prepayments, receivables and other assets
Investment in equity investees
Property and equipment, net
Land use rights
Intangible assets
Goodwill
Total assets
Liabilities, Mezzanine Equity and Shareholders' Equity
Current liabilities:
Current bank borrowings
Income tax payable
Accrued expenses, accounts payable and other liabilities
Merchant deposits
Deferred revenue and customer advances
Total current liabilities
Deferred revenue
Deferred tax liabilities
Non-current bank borrowings
Unsecured senior notes
Other liabilities
Total liabilities
The accompanying notes form an integral part of these consolidated financial statements.
F-5
2015
RMB
As of March 31,
2016
RMB
(in millions)
US$
(Note 2(a))
108,193
14,148
2,297
3,658
13,813
142,109
14,611
4,085
33,877
9,139
3,105
6,575
41,933
255,434
1,990
2,733
19,834
7,201
7,914
39,672
445
4,493
1,609
48,994
2,150
97,363
106,818
4,700
1,346
4,178
17,028
134,070
29,392
6,007
91,461
13,629
2,876
5,370
81,645
364,450
4,304
2,790
27,334
7,314
10,297
52,039
418
6,471
1,871
51,596
2,166
114,561
16,566
729
209
648
2,640
20,792
4,558
932
14,184
2,114
446
833
12,662
56,521
667
433
4,240
1,134
1,597
8,071
65
1,004
290
8,002
335
17,767
Notes
2(q)
11
12
13
12
13
14
15
2(v)
16
17
20
19
2(ab)
18
18
7
20
21
19
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Commitments and contingencies
Mezzanine equity
Alibaba Group Holding Limited shareholders' equity:
Ordinary shares, US$0.000025 par value; 4,000,000,000 shares authorized as of March 31, 2015 and 2016;
2,495,499,036 and 2,473,927,859 shares issued and outstanding as of March 31, 2015 and 2016, respectively
Additional paid-in capital
Treasury shares at cost
Restructuring reserve
Subscription receivables
Statutory reserves
Accumulated other comprehensive income
Cumulative translation adjustments
Unrealized gain on available-for-sale securities, interest rate swaps and others
Retained earnings
Total Alibaba Group Holding Limited shareholders' equity
Noncontrolling interests
Total equity
Total liabilities, mezzanine equity and equity
The accompanying notes form an integral part of these consolidated financial statements.
F-6
2015
RMB
As of March 31,
2016
RMB
US$
(Note 2(a))
(in millions)
Notes
25, 26
—
—
—
658
350
54
1
117,142
—
1
132,206
—
(1,152)
(411)
2,715
(888)
(172)
3,244
—
20,504
—
(138)
(27)
503
2(ae)
4(b)
2(af)
2(ag)
(1,095)
3,397
24,842
145,439
11,974
157,413
255,434
(1,050)
4,894
78,752
216,987
32,552
249,539
364,450
(163)
760
12,213
33,652
5,048
38,700
56,521
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Ordinary shares
Share
Amount
RMB
Additional
paid-in
capital
RMB
Treasury
shares
RMB
Subscription
receivables
RMB
Statutory
reserves
RMB
Accumulated other
comprehensive income
(loss)
Unrealized
gain (loss) on
available-for-
sale
securities,
interest
rate swaps
and
others
RMB
Total
Alibaba
Group
Holding
Limited
shareholders'
equity
(deficits)
RMB
Retained
earnings
(Accumulated
deficits)
RMB
Cumulative
translation
adjustments
RMB
Noncontrolling
interests
RMB
Total
equity
RMB
(in millions, except share data)
Balance as of April 1, 2013
Foreign currency translation adjustment
Net change in unrealized gains on
available-for-sale securities
Change in fair value of interest rate
swaps under hedge accounting
Net income for the year
Deconsolidation of subsidiaries
Acquisition of shares of a consolidated
subsidiary
Acquisition of subsidiaries
Issuance of ordinary shares for Partner
Capital Investment Plan (Note 8(c))
Exercise of share options and vesting of
early exercised options and RSUs,
including repayment of related
employee loans
Repurchase and retirement of ordinary
shares
Amortization of compensation cost
Equity-settled donation
Issuance of ordinary shares in relation to
investment in equity investees and
others
Accretion to convertible preferred
shareholders
Dividend to convertible preferred
shareholders
Appropriation to statutory reserves
Balance as of March 31, 2014
2,175,220,739
—
21,655 —
— — —
1
(852)
1,337
16 —
(1,666)
536
—
—
—
—
— — —
— —
—
— — —
— — —
— — —
— —
— —
— —
—
—
828,299 —
(7) —
276 —
— —
— —
—
—
(14)
—
—
18,000,000 — — —
— —
—
30,880,761 —
700 —
(12) —
—
(3,943,139) —
—
—
—
—
(32) —
2,784 —
1,269 —
308 —
— —
— —
—
—
—
5,824,000 —
637 —
— —
—
—
—
(31) —
— —
—
—
—
2,226,810,660
(208) —
—
— — —
27,043 —
1
— —
1,137
—
2,474
(540)
—
—
(1,144)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8)
293
36
(20,491)
—
—
—
23,315
—
—
—
—
—
—
—
—
—
—
(504)
321
(1,137)
1,183
(24)
552
293
36
23,315
(14)
(7)
276
—
688
(228)
2,784
1,269
637
(31)
(208)
—
29,338
537
2
513
554
293
36
88 23,403
(14)
(2)
(9)
276
442
442
688
(228)
12 2,796
1,269
637
(31)
(208)
—
1,079 30,417
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes form an integral part of these consolidated financial statements.
F-7
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Ordinary shares
Share
Amount
RMB
Additional
paid-in
capital
RMB
Treasury
shares
RMB
Restructuring
reserve
(Note 4(b))
RMB
Subscription
receivables
RMB
Statutory
reserves
RMB
Accumulated other
comprehensive income
(loss)
Unrealized
gain (loss) on
available-for-
sale
securities,
interest
rate swaps
and
others
RMB
Total
Alibaba
Group
Holding
Limited
shareholders'
equity
RMB
Retained
earnings
RMB
Cumulative
translation
adjustments
RMB
Noncontrolling
interests
RMB
Total
equity
RMB
Balance as of April 1, 2014 2,226,810,660
Foreign currency
1
27,043 —
(in millions, except share data)
(540)
2,474
(1,144)
321
1,183
29,338
1,079 30,417
— —
49
10 —
59
(7)
52
— — —
— — —
— — —
— — —
—
—
—
—
—
8,876,755 —
— — —
3,782 —
20,240,334 —
516 —
(892,859) —
(13) —
—
—
—
—
—
—
—
—
—
translation adjustment
Net change in unrealized
gains on available-for-
sale securities
Change in fair value of
interest rate swaps under
hedge accounting
Net income for the year
Liquidation and
deconsolidation of
subsidiaries
Acquisition of subsidiaries
Exercise of share options
and vesting of early
exercised options and
RSUs, including
repayment of related
employee loans
Repurchase and retirement
of ordinary shares
Deemed disposals of partial
interest in subsidiaries
arising from exercise or
vesting of share-based
awards
Repurchase from, net of
— —
—
3,102 —
3,102
(36) —
24,261
(36)
24,261
—
—
3,102
(36)
63 24,324
— —
— —
—
—
—
(26)
— —
—
—
160 —
—
6 —
—
—
—
—
—
—
26
—
—
3,782
(378)
(378)
10,897 14,679
—
(249)
676
(256)
—
—
676
(256)
—
—
(7) —
—
— —
—
—
—
(7)
17
10
subscription, by
noncontrolling interest
for Partner Capital
Investment Plan
(Note 8(c))
Redemption of treasury
shares granted for Senior
Management Share
Incentive Scheme
Capital injection from
noncontrolling interests
Amortization of
compensation cost
Issuance of Ordinary
Shares — initial public
offer
Excess value receivable
—
— — —
—
(37) —
—
—
—
(37)
(86)
(123)
—
—
—
—
15 —
— — —
—
12,659 —
149,220,834 —
61,536 —
—
—
—
—
— —
—
— —
—
— —
—
—
—
—
—
15
(15) —
—
—
174
174
—
12,659
291 12,950
— —
—
—
—
61,536
—
61,536
arising from the
restructuring of the
commercial arrangements
with Ant Financial
Services and related
amortization (Note 4(b))
Conversion of convertible
preferred shares
Accretion to convertible
preferred shareholders
Dividend to convertible
preferred shareholders
Dividend declared by a
consolidated subsidiary
to noncontrolling
interests
Appropriation to statutory
reserves
Balance as of March 31,
—
—
1,318 —
(1,152)
— —
—
91,243,312 —
10,293 —
—
—
—
—
— — —
— — —
— — —
— — —
—
—
—
—
—
— —
—
— —
—
— —
—
— —
—
—
267
—
—
—
—
—
—
—
—
166
—
10,293
(15)
(97)
(15)
(97)
—
—
—
—
166
10,293
(15)
(97)
—
(267)
—
—
(61)
(61)
—
—
2015
2,495,499,036
1
117,142 —
(1,152)
(411)
2,715
(1,095)
3,397 24,842
145,439
11,974 157,413
The accompanying notes form an integral part of these consolidated financial statements.
F-8
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Ordinary shares
Share
Amount
RMB
Additional
paid-in
capital
RMB
Treasury
shares
RMB
Restructuring
reserve
(Note 4(b))
RMB
Subscription
receivables
RMB
Statutory
reserves
RMB
Accumulated other
comprehensive income
(loss)
Unrealized
gain (loss) on
available-for-
sale
securities,
interest
rate swaps
and
others
RMB
Total
Alibaba
Group
Holding
Limited
shareholders'
equity
RMB
Retained
earnings
RMB
Cumulative
translation
adjustments
RMB
Noncontrolling
interests
RMB
Total
equity
RMB
Balance as of April 1, 2015 2,495,499,036
Foreign currency
1
117,142 —
(1,152)
(411)
2,715
(1,095)
3,397 24,842
145,439
11,974 157,413
(in millions, except share data)
translation adjustment
Net change in unrealized
gains on available-for-
sale securities
Change in fair value of
forward exchange
contracts under hedge
accounting
Net income for the year
Deconsolidation of
subsidiaries
Acquisition of subsidiaries
Exercise of share options
and vesting of early
exercised options and
RSUs, including
repayment of related
employee loans
Repurchase and retirement
of ordinary shares
Acquisition of shares of a
—
—
—
—
—
—
— — —
— — —
— — —
— — —
— — —
— — —
25,016,386 —
519 —
(46,587,563) —
(2,774) —
consolidated subsidiary
—
—
(30) —
—
—
—
—
—
13 —
— — —
—
16,434 —
—
725 —
—
—
—
—
—
—
—
—
—
—
—
—
—
(16) —
24
232 —
240
56
296
— —
—
1,433 —
1,433
—
1,433
— —
— —
— —
— —
—
—
21
—
255 —
—
— —
—
— —
—
— —
—
— —
—
— —
—
— —
—
—
—
—
—
—
—
—
—
—
—
(168) —
71,460
(168)
71,460
—
(168)
(158) 71,302
—
—
21
—
(10,849) (10,828)
31,409 31,409
—
774
(17,021)
(19,795)
—
(30)
—
—
—
774
(19,795)
(30)
—
13
(13) —
—
—
56
56
—
16,434
80 16,514
—
725
—
725
—
—
177 —
264
— —
—
—
—
441
—
441
—
—
— — —
— — —
—
—
— —
—
—
529
—
—
—
—
(529)
—
—
(3)
(3)
—
—
2016
2,473,927,859
1
132,206 —
(888)
(172)
3,244
(1,050)
4,894 78,752
216,987
32,552 249,539
The accompanying notes form an integral part of these consolidated financial statements.
F-9
Redemption of treasury
shares granted for Senior
Management Share
Incentive Scheme
Capital injection from
noncontrolling interests
Amortization of
compensation cost
Tax benefits from share-
based awards
Amortization of excess
value receivable arising
from the restructuring of
the commercial
arrangements with Ant
Financial Services
(Note 4(b)) and others
Dividend declared by a
consolidated subsidiary
to noncontrolling
interests
Appropriation to statutory
reserves
Balance as of March 31,
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Revaluation of previously held equity interest
Loss (Gain) on disposals of equity investees
Realized and unrealized gain related to investment securities
Change in fair value of other assets and liabilities
Gain on disposals of other subsidiaries
Depreciation and amortization of property and equipment and land use rights
Amortization of intangible assets
Tax benefits from share-based awards
Share-based compensation expense
Equity-settled donation expense
Impairment of cost method equity investees and investment securities
Impairment of goodwill
Gain on disposals of property and equipment
Amortization of restructuring reserve (Note 4(b))
Share of results of equity investees
Deferred income taxes
Allowance for doubtful accounts relating to micro loans
Changes in assets and liabilities, net of effects of acquisitions and disposals:
Restricted cash and escrow receivables
Prepayments, receivables and other assets
Income tax payable
Accrued expenses, accounts payable and other liabilities
Merchant deposits
Deferred revenue and customer advances
Net cash provided by operating activities
Cash flows from investing activities:
(Increase) Decrease in short-term investments, net
Decrease in restricted cash
(Increase) Decrease in trading investment securities, net
Acquisitions of available-for-sale and held-to-maturity securities
Disposals of available-for-sale and held-to-maturity securities
Acquisitions of equity investees
Disposals of equity investees
Acquisitions of:
Land use rights and construction in progress
Other property, equipment and intangible assets
Cash paid for business combinations, net of cash acquired
Deconsolidation and disposal of subsidiaries, net of cash proceeds
(Note 4(b) and (e))
Loans to employees, net of repayments
Net cash used in investing activities
The accompanying notes form an integral part of these consolidated financial statements.
F-10
2014
RMB
Year ended March 31,
2015
RMB
RMB
2016
US$
(Note 2(a))
(in millions)
23,403
24,320
71,289
11,056
—
3
(90)
(98)
(387)
1,339
315
—
2,844
1,269
119
44
—
—
203
1,466
442
(6,535) (18,603)
(3,089)
(906)
84
(128)
(178)
102
(307) (26,913)
2,326
2,089
—
13,028
—
419
175
(13)
166
1,590
1,659
650
3,770
2,931
(1,120)
16,082
—
1,864
455
(11)
264
1,730
1,226
(2,885)
(479)
(141)
13
(4,174)
584
455
(174)
2,494
—
289
71
(2)
41
269
190
(1)
(9)
(1,329)
(851) —
(12,742) (13,927)
1,008
5,336
1,628
1,606
26,379
1,410
11,415
2,490
1,317
41,217
—
(622)
192
1,257
18
364
8,815
(4,012)
1,237
8,104
113
2,350
56,836
(8,304)
199
(147)
(1,113)
1,139
4,619
746
9
(16)
(2,972) (11,801) (15,363)
939
(16,468) (23,430) (37,625)
2,177
372
89
99
10,021
(1,491)
(3,285)
(2,935)
(4,770)
(732) (10,255)
(5,407)
(5,438)
(1,495)
(46)
(212)
(1,271)
(40)
4,890
35
(32,997) (53,454) (42,831)
716
116
1
(2,382)
338
(5,835)
1,554
(839)
(843)
(232)
758
5
(6,643)
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Cash flows from financing activities:
Issuance of ordinary shares, including repayment of loan and interest receivable
on employee loans for the exercise of ordinary shares
Repurchase of ordinary shares
Issuance (Repurchase) of ordinary shares for Partner Capital Investment Plan
(Note 8(c))
Payment of dividend on Convertible Preference Shares (Note 22)
Redemption of Redeemable Preference Shares
Acquisition of the remaining noncontrolling interest in a subsidiary
Dividend paid by a consolidated subsidiary to noncontrolling interests
Capital Injection from noncontrolling interest
Deemed disposals of partial interest in subsidiaries, net of related costs
Tax benefits from share-based awards
Proceeds from secured borrowings relating to micro loans
Repayment of secured borrowings relating to micro loans
Proceeds from current bank borrowings
Repayment of current bank borrowings
Proceeds from non-current bank borrowings
Repayment of non-current bank borrowings
Proceeds from unsecured senior notes
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes form an integral part of these consolidated financial statements.
F-11
2014
RMB
Year ended March 31,
2015
RMB
RMB
2016
US$
(Note 2(a))
(in millions)
1,638
(157)
61,831
693
(270) (19,795)
108
(3,070)
442
(208)
(5,131) —
(9) —
(123) —
(104) —
—
—
—
—
—
—
(3) —
(61)
—
9
56
174
—
—
—
6
—
112
725
—
—
—
53,195
—
88,422
—
(46,029) (82,269) —
4,374
28,208
25,804
(4,086)
119
(23)
681
(423) (24,734) (26,349)
765
(146)
19,602
30,153
(24,788) (49,538)
—
9,364
48,757
87,497
—
(15,846)
—
(97)
(112)
2,649
30,396
33,045
75,148
33,045
108,193
466
(1,375)
108,193
106,818
(2,457)
72
(213)
16,779
16,566
Table of Contents
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow information:
Payment of income taxes
Income tax paid was RMB722 million, RMB3,458 million and RMB6,465 million for the years ended March 31, 2014, 2015 and 2016, respectively.
Payment of interest
Interest paid was RMB1,220 million, RMB956 million and RMB1,560 million for the years ended March 31, 2014, 2015 and 2016, respectively.
Business combinations
Cash paid for business combinations
Cash acquired in business combinations
Major non-cash transactions
2014
(767)
35
(732)
Year ended March 31,
2015
(in millions of RMB)
2016
(16,291) (3,055)
1,560
(10,255) (1,495)
6,036
During the year ended March 31, 2014, the Company entered into certain non-compete agreements with certain key individuals in exchange for restricted
shares, restricted share units and options underlying 7,195,581 ordinary shares of the Company. The Company did not have similar arrangement during the year
ended March 31, 2015 and 2016.
Restructuring of equity investments
During the year ended March 31, 2016, RMB6,202 million included in both acquisitions and disposals of equity investees under investing activities were
related to the restructuring of certain equity investments, including Cainiao Network (Note 4(w)) and others, to establish new holding company. The Company
withdrew the investments in such underlying equity investees and the proceeds from the withdrawals were reinvested in full in their new holding companies
established.
The accompanying notes form an integral part of these consolidated financial statements.
F-12
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
1. Organization and principal activities
Alibaba Group Holding Limited (the "Company," and where appropriate, the term "Company" also refers to its subsidiaries and variable interest entities as
a whole), was incorporated in the Cayman Islands on June 28, 1999. The Company is a holding company and conducts its businesses primarily through its
subsidiaries and variable interest entities ("VIEs"). The Company is principally engaged in online and mobile commerce through offering of products,
services and technology that enable merchants, brands and other businesses to transform the way they market, sell and operate in the People's Republic of
China (the "PRC" or "China") and internationally. Major shareholders of the Company include SoftBank Corp. ("SoftBank") and Yahoo! Inc. ("Yahoo").
The Company's core commerce business is comprised of marketplaces operating in retail commerce in China, wholesale commerce in China and
international and cross-border commerce. Retail commerce in China operated by the Company includes (i) the China online commerce destination ("Taobao
Marketplace"); (ii) the China third-party platform for brands and retailers ("Tmall") and (iii) the sales and marketing platform for flash sales ("Juhuasuan").
Wholesale commerce in China operated by the Company includes the China domestic wholesale marketplace ("1688.com"). International and cross-border
commerce operated by the Company includes (i) the global marketplace targeting consumers from around the world to buy directly from manufacturers and
distributors in China ("AliExpress"); (ii) a platform within the Tmall for overseas brands and retailers to reach Chinese consumers without the need for
physical operations in China ("Tmall Global") and (iii) the wholesale marketplace for global trade ("Alibaba.com").
In addition, the Company is a provider of public cloud services which offers a complete suite of cloud services: including elastic computing, database,
storage and content delivery network, large scale computing, security and management and application services, to third-party customers ("Alibaba Cloud
Computing"). The Company also operates business in mobile media and entertainment through three distribution platforms, UCWeb mobile media, game
publishing and multi-screen entertainment as well as content creation and production companies in film, music and sports. The Company also participates
in the logistics and local services sectors through investments in Cainiao Network (Note 4(w)) and Koubei (Note 4(n)), respectively. In addition, the
Company has a profit sharing interest in Ant Financial Services (Note 4(b)), the financial services group that operates through Alipay.com Co., Ltd.
("Alipay"), a third-party online payment platform in China. The Company makes available online payment processing services ("Payment Services") on its
marketplaces through an arrangement with Alipay.
The Company derives substantially all of its revenue from the PRC.
2. Summary of significant accounting policies
(a) Basis of presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP").
Translations of balances in the consolidated balance sheet, consolidated income statement, consolidated statement of comprehensive income and statement
of cash flows from Renminbi ("RMB") into the United States Dollar ("US$") as of and for the year ended March 31, 2016 are solely for the convenience of
the readers and were calculated at the rate of US$1.00=RMB6.4480, representing the exchange rate set forth in the H.10 statistical release of the Federal
Reserve Board on March 31, 2016. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$
at that rate on March 31, 2016, or at any other rate.
F-13
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(b) Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about
the carrying values of assets and liabilities.
(c) Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, including the wholly-foreign owned enterprises
("WFOEs"), and VIEs for which the Company is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and VIEs have
been eliminated upon consolidation. The results of subsidiaries and VIEs acquired or disposed of are recorded in the consolidated income statements from
the effective date of acquisition or up to the effective date of disposal, as appropriate.
A subsidiary is an entity in which (i) the Company directly or indirectly controls more than 50% of the voting power; or (ii) the Company has the power to
appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or to govern
the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders or equity holders. A VIE entity is
required to be consolidated by the primary beneficiary of the entity if the equity holders in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties.
To comply with the PRC legal restrictions on foreign ownership of companies that operate Internet content and other restricted businesses, the Company
operates its websites and engages in such restricted services in the PRC through certain PRC domestic companies, whose equity interests are held by certain
management members or founders of the Company. The registered capital of these PRC domestic companies was funded by the Company through loans
extended to certain management members or founders of the Company. The Company has entered into certain exclusive technical services agreements with
these PRC domestic companies, which entitle it to receive a majority of their residual returns and make it obligatory for the Company to absorb a majority
of the risk of losses from their activities. In addition, the Company has entered into certain agreements with those management members or founders,
including loan agreements that require them to contribute registered capital to those PRC domestic companies, exclusive call option agreements to acquire
the equity interests in these companies when permitted by the PRC laws, rules and regulations, equity pledge agreements of the equity interests held by
those management members or founders, and proxy agreements that irrevocably authorize individuals designated by the Company to exercise the equity
owner's rights over these PRC domestic companies.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
Details of the typical VIE structure of the Company's significant VIEs, primarily domestic companies associated with the operations of Taobao
Marketplace, Tmall, Juhuasuan, 1688.com, AliExpress, Alibaba.com and Alibaba Cloud Computing, are set forth below:
(i)
Contracts that give the Company effective control of VIEs
Loan agreements
Pursuant to the relevant loan agreements, the respective WFOEs have granted interest-free loans to the relevant VIEs equity holders, which may
only be used for the purpose of capital contributions to the relevant VIEs or as may be otherwise agreed by the WFOEs. The WFOEs may require
acceleration of repayment at their absolute discretion. When the VIEs equity holders make early repayment of the outstanding amount, the WFOEs
or a third party designated by the WFOEs may purchase the equity interests in the VIEs at a price equal to the outstanding amount of the loan,
subject to any applicable PRC laws, rules and regulations. The VIEs equity holders undertake not to enter into any prohibited transactions in relation
to the VIEs, including the transfer of any business, material assets, intellectual property rights or equity interests in the VIEs to any third party.
Exclusive call option agreements
The VIEs equity holders have granted the WFOEs exclusive call options to purchase their equity interest in the VIEs at an exercise price equal to
the higher of (i) the registered capital in the VIEs; and (ii) the minimum price as permitted by applicable PRC laws. Each relevant VIE has further
granted the relevant WFOE an exclusive call option to purchase its assets at an exercise price equal to the book value of the assets or the minimum
price as permitted by applicable PRC laws, whichever is higher. The WFOEs may nominate another entity or individual to purchase the equity
interest or assets, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and
regulations do not prohibit completion of the transfer of the equity interest or assets pursuant to the call option. Each WFOE is entitled to all
dividends and other distributions declared by the VIE, and the VIE equity holders have agreed to give up their rights to receive any distributions or
proceeds from the disposal of their equity interests in the VIE which are in excess of the original registered capital that they contributed to the VIE,
and to pay any such distributions or premium to the WFOE. The exclusive call option agreements remain in effect until the equity interest or assets
that are the subject of such agreements are transferred to the WFOEs.
Proxy agreements
Pursuant to the relevant proxy agreements, each of the VIEs equity holders irrevocably authorizes any person designated by the WFOEs to exercise
his rights as an equity holder of the VIEs, including the right to attend and vote at equity holders' meetings and appoint directors.
Equity pledge agreements
Pursuant to the relevant equity pledge agreements, the relevant VIEs equity holders have pledged all of their interests in the equity of the VIEs as a
continuing first priority security interest in favor of the
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
corresponding WFOEs to secure the outstanding amounts advanced under the relevant loan agreements described above and to secure the
performance of obligations by the VIEs and/or the equity holders under the other structure contracts. Each WFOE is entitled to exercise its right to
dispose of the VIEs equity holders' pledged interests in the equity of the VIE and has priority in receiving payment by the application of proceeds
from the auction or sale of such pledged interests, in the event of any breach or default under the loan agreement or other structure contracts, if
applicable. These equity pledge agreements remain in force for the duration of the relevant loan agreement and other structure contracts. These
equity pledges have been registered with the relevant office of the Administrations for Industry and Commerce in the PRC.
(ii)
Contracts that enable the Company to receive substantially all of the economic benefits from the VIEs
Exclusive technical services agreements
Each relevant VIE has entered into an exclusive technical services agreement with the respective WFOE, pursuant to which the relevant WFOE
provides exclusive technical services to the VIE. In exchange, the VIE pays a service fee to the WFOE which typically amount to what would be
substantially all of the VIE's pre-tax profit, resulting in a transfer of substantially all of the profits from the VIE to the WFOE.
Other arrangements
The exclusive call option agreements described above also enable the Company to receive substantially all of the economic benefits from the VIEs
by typically entitling the WFOEs to all dividends and other distributions declared by the VIEs and to any distributions or proceeds from the disposal
by the VIEs equity holders of their equity interests in the VIEs that are in excess of the original registered capital that they contributed to the VIEs.
Based on these contractual agreements, the Company believes that the PRC domestic companies as described above should be considered as VIEs because
the equity holders do not have significant equity at risk nor do they have the characteristics of a controlling financial interest and the Company is the
primary beneficiary of these PRC domestic companies. Accordingly, the Company believes that these VIEs should be consolidated based on the structure as
described above.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
The following financial information of the VIEs in the PRC was recorded in the accompanying consolidated financial statements:
Cash and cash equivalents and short-term investments
Amounts due from Ant Financial Services
Investment in equity investees and securities
Property and equipment and intangible assets
Others
Total assets
Amounts due to WFOEs and other non-VIEs group companies
Others
Total liabilities
Revenue (i)
Net (loss) income (i)
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
As of March 31,
2015
2016
(in millions of RMB)
2,272
2,741
4,018
1,353
3,427
13,811
7,741
3,679
11,420
3,978
247
11,605
1,218
2,698
19,746
12,372
4,649
17,021
Year ended March 31,
2014
2015
2016
(in millions of RMB)
6,170
(587)
(2,642)
(1,337)
4,157
10,457
659
(7,343)
(5,502)
13,018
8,558
35
1,224
(7,160)
6,494
(i)
Revenue and net (loss) income earned and incurred by the VIEs are primarily from the businesses of providing display marketing on the Company's
retail marketplaces, cloud computing services as well as mobile media and entertainment services and others.
The VIEs did not have any material related party transactions except for those transacted with WFOEs which were eliminated in these consolidated
financial statements and the related party transactions disclosed in Note 23 or elsewhere in these consolidated financial statements.
Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs and can have assets transferred out of the
VIEs under its control. Therefore, the Company considers that there is no asset in any of the consolidated VIEs that can be used only to settle obligations of
the VIEs, except for registered capital and PRC statutory reserves. As all consolidated VIEs are incorporated as limited liability companies under the
Company Law of the PRC, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the
consolidated VIEs.
Currently there is no contractual arrangement which requires the Company to provide additional financial support to the VIEs. However, as the Company
conducts its businesses primarily based on the licenses and approvals held by its VIEs, the Company has provided and will continue to provide financial
support to the VIEs considering the business requirements of the VIEs, as well as the Company's own business objectives in the future.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
Unrecognized revenue-producing assets held by the VIEs include certain Internet content provision and other licenses, domain names and trademarks. The
Internet content provision and other licenses are required under relevant PRC laws, rules and regulations for the operation of Internet businesses in the PRC,
and therefore are integral to the Company's operations. The Internet content provision licenses require that core PRC trademark registrations and domain
names are held by the VIEs that provide the relevant services.
(d) Business combinations and noncontrolling interests
The Company accounts for its business combinations using the acquisition method of accounting in accordance with Accounting Standards Codification
("ASC") 805 "Business Combinations." The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred
and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as
incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the
extent of any noncontrolling interests. The excess of (i) the total costs of acquisition, fair value of the noncontrolling interests and acquisition date fair value
of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost
of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income
statements. During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the assets
acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the
values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements
of operations.
In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining
control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements.
When there is a change in ownership interests that result in a loss of control of a subsidiary, the Company deconsolidates the subsidiary from the date
control is lost. Any retained noncontrolling investment in the former subsidiary is measured at fair value and is included in the calculation of the gain or
loss upon deconsolidation of the subsidiary.
For the Company's majority-owned subsidiaries and VIEs, a noncontrolling interest is recognized to reflect the portion of their equity which is not
attributable, directly or indirectly, to the Company. Consolidated net income (loss) on the consolidated income statements includes the net income (loss)
attributable to noncontrolling interests and mezzanine equity holders when applicable. Net income (loss) attributable to mezzanine equity holders is
included in net income (loss) attributable to noncontrolling interests on the consolidated income statements, while it is excluded from the consolidated
statements of changes in shareholders' equity. The cumulative results of operations attributable to noncontrolling interests, along with adjustments for share-
based compensation expense arising from outstanding share-based awards relating to subsidiaries' shares, are also recorded as noncontrolling interests in the
Company's consolidated balance sheets. Cash flows related to transactions with noncontrolling interests are presented under financing activities in the
consolidated statements of cash flows.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(e) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, which is a strategic
committee comprised of members of the Company's management team. In the respective periods presented, the Company had one single operating and
reportable segment, namely the provision of online and mobile commerce and related services. Although the online and mobile commerce and related
services consist of different business units of the Company, information provided to the chief operating decision-maker is at the revenue level and the
Company does not allocate operating costs or assets across business units, as the chief operating decision-maker does not use such information to allocate
resources or evaluate the performance of the business units. Details of the Company's revenue are set out in Note 5. As the Company's long-lived assets are
substantially all located in the PRC and substantially all of the Company's revenue is derived from within the PRC, no geographical information
is presented.
(f) Foreign currency translation
The functional currency of the Company is US$ and reporting currency of the Company is RMB. The Company's subsidiaries and VIEs with operations in
the PRC, Hong Kong, United States and other jurisdictions use their respective currencies as their functional currencies. The financial statements of the
Company's subsidiaries and VIEs, other than the subsidiaries and VIEs with the functional currency of RMB, are translated into RMB using the exchange
rate as of the balance sheet date for assets and liabilities and average exchange rate for the year for income and expense items. Translation gains and losses
are recorded in accumulated other comprehensive income or loss as a component of shareholders' equity.
In the financial statements of the Company's subsidiaries and VIEs, transactions in currencies other than the functional currency are measured and recorded
in the functional currency using the exchange rate in effect at the date of the transaction. At the balance sheet date, monetary assets and liabilities that are
denominated in currencies other than the functional currency are translated into the functional currency using the exchange rate at the balance sheet date.
All gains and losses arising from foreign currency transactions are recorded in the determination of net income or loss during the year in which they occur.
(g) Revenue recognition
Revenue principally represents online marketing services revenue, commissions on transactions, membership and storefront fees and cloud computing
services revenue. Revenue comprises the fair value of the consideration received or receivable for the provision of services in the ordinary course of the
Company's activities and is recorded net of value-added tax ("VAT"). Consistent with the criteria of ASC 605 "Revenue Recognition" ("ASC 605"), the
Company recognizes revenue when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or services have been provided, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(g) Revenue recognition (Continued)
Revenue arrangements with multiple deliverables are divided into separate units of accounting. The arrangement consideration is allocated at the inception
of the arrangement to each element based on their relative fair values for revenue recognition purposes. The consideration is allocated to each element using
vendor-specific objective evidence or third-party evidence of the standalone selling price for each deliverable, or if neither type of evidence is available,
using management's best estimate of selling price. Revenue arrangements with multiple deliverables primarily relate to the sale of membership packages
and online marketing services on the international wholesale marketplace, which are not material to the Company's total revenue.
In accordance with ASC 605, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net
amount earned as commissions. When the Company is primarily obligated in a transaction, is subject to inventory risk, has latitude in establishing prices
and selecting suppliers, or has several but not all of these indicators, revenue is recorded on a gross basis. When the Company is not the primary obligor,
does not bear the inventory risk and does not have the ability to establish the price, revenue is recorded on a net basis.
When services are exchanged or swapped for other services, the exchange is regarded as a revenue-generating transaction. The amount of revenue
recognized for barter transactions was insignificant for each of the periods presented.
Revenue recognition policies for each type of service are analyzed as follows:
Online marketing services revenue
The Company receives service fees from merchants on the retail and wholesale marketplaces for pay for performance ("P4P") marketing services, display
marketing, placement services and Taobaoke program on the Company's marketplaces and certain third party marketing affiliates' websites.
P4P marketing services allow merchants to bid for keywords that match product or service listings appearing in search or browser results on the Company's
marketplaces. Merchants prepay for P4P marketing services and the related revenue is recognized when a user clicks their product or service listings. The
positioning of such listings and the price for such positioning are determined through an online auction system, which facilitates price discovery through a
market-based mechanism.
Display marketing allows merchants to place advertisements in particular areas of a web page, at fixed prices or prices established by a real-time bidding
system, in particular formats and over particular periods of time. In general, merchants need to prepay for display marketing and revenue is recognized
ratably over the period in which the advertisement is displayed or when an advertisement appears on pages clicked or viewed by users.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(g) Revenue recognition (Continued)
In delivery of these online marketing services, the Company, through the third-party marketing affiliate program, also places the P4P marketing services
content of the participating merchants on third-party websites in the forms of picture or text links through contextual relevance technology to match
merchants' marketing content to the textual content of the third-party website and the users' attributes based on the Company's systems and algorithms.
When such links on third-party websites are clicked, users are diverted to a landing page of the Company's marketplaces where listings of the participating
merchant as well as similar products or services of other merchants are presented. These other merchants may include those also participating in the online
marketing services through the third-party marketing affiliate program or those only purchasing online marketing services on the Company's own
marketplaces, as well as, in some cases, those who do not purchase online marketing services at all. Revenue is only recognized when such users further
click on the P4P marketing content on such landing pages. In limited cases, the Company may embed a search box for one of its marketplaces on such third-
party websites, and when a keyword is input into the search box, the user will be diverted to the Company's website where search results are presented and
revenue can be generated through a similar mechanism. For third-party marketing affiliates with whom the Company has an arrangement to share such
revenue, traffic acquisition cost is also recognized at the same time if the P4P marketing content on the landing page clicked by the users is from merchants
participating in the third-party marketing affiliate program. The Company places display marketing content on third-party websites in a similar manner. A
substantial portion of online marketing services revenue generated through the third-party marketing affiliate program represented P4P marketing services
revenue for each of the years presented. P4P marketing service revenue as well as display marketing revenue generated on the Company's marketplaces or
through the third-party marketing affiliate program are recorded on a gross basis principally because the Company is the primary obligor to the merchants
in the arrangements.
The Company receives placement services fees from merchants on promotional slots for a specified period on the Company's Juhuasuan marketplace and
recognizes those fees as revenue when the underlying promotional services are provided.
In addition, the Company offers the Taobaoke program which generates commissions from merchants for transactions completed and settled by consumers
sourced from certain third party marketing affiliates' websites. The Company's portion of commission revenue generated through third party marketing
affiliates' websites is recognized at the time when the underlying transaction is completed and is recorded on a net basis principally because the Company is
not the primary obligor as it does not have latitude in establishing prices or does not have inventory risk. In certain occasions where the Company is
obligated to pay for website inventory costs in fixed amounts to third-party marketing affiliates regardless of whether commission revenue is generated
from these marketing affiliates, such commission revenue is recorded on a gross basis.
Commissions on transactions
The Company earns commissions from merchants when transactions are completed and settled on certain retail marketplaces of the Company. Such
commissions are generally determined as a percentage based on the value of merchandise being sold by the merchants. Revenue related to commissions is
recognized in the consolidated income statements at the time when the underlying transaction is completed.
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Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(g) Revenue recognition (Continued)
Membership and storefront fees
The Company earns membership revenue from wholesale sellers in respect of the sale of membership packages and subscriptions which allow them to host
premium storefronts on the Company's wholesale marketplaces. The Company also earns revenue from merchants who subscribe to Wangpu, the
Company's storefront software that includes a suite of tools that assist merchants in upgrading, decorating and managing their storefronts on retail
marketplaces. These service fees are paid in advance for a specific contracted service period. All these fees are initially deferred when received and revenue
is recognized ratably over the term of the respective service contracts as the services are provided.
Cloud computing
The Company earns revenue from cloud computing from the provision of services such as elastic computing, database services and storage and large scale
computing services, as well as web hosting and domain name registration. Revenue is recognized at the time when the services are provided or ratably over
the term of the service contracts as appropriate.
Interest and other income
Interest income on micro loans (Note 2(r)) is recognized as other revenue using the effective interest rate method which is reviewed and adjusted
periodically based on changes in estimated cash flows. The Company disposed of certain equity interests and assets primarily relating to the micro loan
business and related services and ceased to generate interest income on micro loans upon the completion of the restructuring of Payment Services during the
year ended March 31, 2015 (Note 4(b)). Other interest income is recognized on a time-proportion basis using the effective interest method, and is classified
as "interest and investment income" in the consolidated income statements. Other than the above, receipts of fees in respect of all other incidental services
provided by the Company, including mobile value-added services, are recognized when services are delivered and the amounts relating to such incidental
services are not material to the Company's total revenue.
(h) Cost of revenue
Cost of revenue consists primarily of staff costs and share-based compensation expense, payment processing fees, expenses associated with the operation of
the Company's websites, such as bandwidth and co-location fees, depreciation and maintenance costs for computers, servers, call centers and other
equipment, traffic acquisition costs, logistics costs and other related incidental expenses that are directly attributable to the Company's principal operations.
(i) Product development expenses
Product development expenses consist primarily of staff costs and share-based compensation expense and other related incidental expenses that are directly
attributable to the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, database and network for the
Company's marketplaces, mobile products as well as transaction and service platforms. In addition, royalty fees accrued and paid to Yahoo up to the closing
of the Company's initial public offering in September 2014 are recorded as part of product development expenses (Note 23).
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(i) Product development expenses (Continued)
The Company expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that are associated
with repair or maintenance of the existing websites or the development of software and website content. Costs incurred in the development phase are
capitalized and amortized over the estimated product life. However, since the inception of the Company, the amount of costs qualifying for capitalization
has been insignificant and as a result, all website and software development costs have been expensed as incurred.
(j) Sales and marketing expenses
Sales and marketing expenses consist primarily of online and offline advertising expenses, promotion expenses, sales commissions, staff costs and share-
based compensation expense and other related incidental expenses that are incurred directly to attract or retain consumers and merchants for the Company's
marketplaces.
The Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of delivering advertisements in the
period in which the advertising space or airtime is used. Advertising and promotional expenses totaled RMB2,022 million, RMB4,090 million and
RMB5,524 million during the years ended March 31, 2014, 2015 and 2016, respectively.
(k) Share-based compensation
Share-based awards granted to the Company's employees are measured at fair value on grant date and share-based compensation expense is recognized
(i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the
requisite service period. The fair value of share options is determined using the Black-Scholes valuation model and the fair value of restricted shares and
restricted share units ("RSUs") is determined with reference to the fair value of the underlying shares. Share-based awards granted to non-employees are
initially measured at fair value on the grant date and re-measured at each reporting date through the vesting date. Such value is recognized as expense over
the respective service period, net of estimated forfeitures. Share-based compensation expense, when recognized, is charged to the consolidated income
statements with the corresponding entry to additional paid-in capital or noncontrolling interests as disclosed in Note 2(d).
At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine
the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected
volatility and expected forfeiture rates. As the Company was a private company prior to its initial public offering (Note 4(a)), the sources utilized to
determine those attributes at the date of measurement were subjective in nature and required the Company to use judgment in applying such information to
the share valuation models. The Company was required to consider many factors and made certain assumptions during this assessment. If any of the
assumptions used to determine the fair value of the share-based awards changes significantly, share-based compensation expense may differ materially in
the future from that recorded in the current reporting period.
(l) Other employee benefits
The Company's subsidiaries and VIEs in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain
retirement, medical and other welfare benefits are
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(l) Other employee benefits (Continued)
provided to employees. The relevant labor regulations require the Company's subsidiaries in the PRC to pay the local labor and social welfare authorities
monthly contributions at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor and social
welfare authorities are responsible for meeting all retirement benefits obligations and the Company's subsidiaries in the PRC have no further commitments
beyond their monthly contributions. The contributions to the plan are expensed as incurred. During the years ended March 31, 2014, 2015 and 2016,
contributions to such plan amounting to RMB974 million, RMB1,601 million and RMB2,094 million, respectively, were charged to the consolidated
income statements.
The Company also makes payments to other defined contribution plans for the benefit of employees employed by subsidiaries outside of the PRC. Amounts
contributed during the years ended March 31, 2014, 2015 and 2016 were insignificant.
(m) Income taxes
The Company accounts for income taxes using the liability method, under which deferred income taxes are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized as income or expense in the period that includes the
enactment date. Valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that the asset will not be realizable in the
foreseeable future.
Deferred taxes are also recognized on the undistributed earnings of subsidiaries, which are presumed to be transferred to the parent company and are subject
to withholding taxes, unless there is sufficient evidence to show that the subsidiary has invested or will invest the undistributed earnings indefinitely or that
the earnings will be remitted in a tax-free liquidation.
The Company adopts ASC 740-10-25 "Income Taxes" which prescribes a more likely than not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for
income taxes in interim periods and income tax disclosures. The Company did not have significant unrecognized uncertain tax positions or any
unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of and for the years ended March 31, 2014, 2015 and 2016.
(n) Government grants
For government grants that are non-operating in nature and with no further conditions to be met, the amounts are recognized as income in other income, net
upon receipt. For government grants that contain certain operating conditions, the amounts are recorded as liabilities upon receipt, and are recognized in the
consolidated income statements as a reduction of the related costs for which the grants are intended to compensate when the conditions are met.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(o) Leases
Leases are classified as either capital or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are
accounted for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as
operating leases wherein rental payments are recognized in the consolidated income statements on a straight-line basis over the lease terms. The Company
had no capital leases for the years ended March 31, 2014, 2015 and 2016.
(p) Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. Cash and
cash equivalents of the Company primarily represent bank deposits, fixed deposits with maturities less than three months and investments in money market
funds. As of March 31, 2015 and 2016, the Company had certain amounts of cash held in accounts managed by Alipay in connection with the provision of
online and mobile commerce and related services for a total amount of RMB1,443 million and RMB786 million, respectively, which have been classified as
cash and cash equivalents on the consolidated balance sheets.
(q) Short-term investments
Short-term investments consist primarily of investments in fixed deposits with maturities between three months and one year and investments in money
market funds or other investments whereby the Company has the intention to redeem within one year. As of March 31, 2015 and 2016, the fixed deposits
that were recorded as short-term investments amounted to RMB11,462 million and RMB97 million, respectively. As of the same dates, the Company had
certain amounts of short-term investments held in accounts managed by Alipay for a total amount of RMB1,185 million and RMB2,564 million,
respectively.
(r) Loan and VAT receivables
Loan receivables consist primarily of micro loans extended to small and medium size enterprises that are merchants on the Company's marketplaces. VAT
receivables mainly represent the advance settlement of relevant VAT refund amounts provided by OneTouch (Note 4(g)) to its customers prior to receiving
such VAT refund from tax authorities. Such amounts are recorded at the principal or claimed refund amount less allowance for doubtful accounts relating to
micro loans and the VAT receivables, respectively, and include accrued interest receivable as of the balance sheet date. Allowance for doubtful accounts
relating to micro loans and VAT receivables represent the Company's best estimate of the losses inherent in the outstanding portfolio of loans and VAT
receivables. The credit periods extended by the Company to the merchants related to the micro loans generally range from 7 to 360 days and the collection
periods related to the VAT receivables generally range from three to six months. Judgment is required to determine the allowance amounts and whether
such amounts are adequate to cover potential bad debts, and periodic reviews are performed to ensure such amounts continue to reflect the best estimate of
the losses inherent in the outstanding portfolio of debts. As of March 31, 2015 and 2016, allowance for doubtful accounts relating to VAT receivables
amounted to RMB184 million and RMB699 million, respectively. The Company disposed of certain equity interests and assets primarily relating to the
micro loan business and related services and upon the completion of the restructuring of Payment Services during the year ended March 31, 2015
(Note 4(b)), accordingly the balances of micro loans and allowance for doubtful accounts relating to micro loans became insignificant since then. For the
years ended March 31, 2014, 2015 and 2016, the charge-offs and recoveries in
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(r) Loan and VAT receivables (Continued)
relation to the allowance for doubtful accounts relating to micro loans and VAT receivables were also insignificant.
(s) Investment securities
The classification of investment securities is based on the Company's intent, which is re-evaluated at each balance sheet date, with respect to those
securities. Investment securities classified as trading securities, comprising of listed equity securities and financial derivatives such as warrants and equity
swaps used as market access products to invest in listed equity securities in the PRC, are carried at fair value with realized or unrealized gains and losses
recorded in the consolidated income statements. The securities that the Company has positive intent and ability to hold to maturity are classified as held-to-
maturity securities and stated at amortized cost. The maturities of the held-to-maturity securities held by the Company generally range from one to ten
years. Other investment securities classified as available-for-sale are carried at fair value with unrealized gains and losses recorded in accumulated other
comprehensive income (loss) as a component of shareholders' equity. Realized gains and losses and provision for decline in value judged to be other than
temporary, if any, are recognized in the consolidated income statements. In computing realized gains and losses on available-for-sale securities, the
Company determines cost based on amounts paid, including direct costs such as commissions to acquire the security, using the average cost method. Other
than the above, the Company has applied the fair value option for convertible bonds subscribed. Such fair value option permits the irrevocable fair value
option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument.
The convertible bonds accounted for under the fair value option is carried at fair value with realized or unrealized gains and losses recorded in the
consolidated income statements. Interest income is recognized using the effective interest rate method which is reviewed and adjusted periodically based on
changes in estimated cash flows. Dividend income is recognized when the right to receive the payment is established.
(t) Investment in equity investees
Equity investments represent the Company's investments in privately held companies and listed securities. The Company applies the equity method to
account for an equity investment, in common stock or in-substance common stock, according to ASC 323 "Investment — Equity Method and Joint
Ventures," over which it has significant influence but does not own a majority equity interest or otherwise control.
An investment in in-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that
entity's common stock. The Company considers subordination, risks and rewards of ownership and obligation to transfer value when determining whether
an investment in an entity is substantially similar to an investment in that entity's common stock.
For other equity investments that are not considered as debt securities or equity securities that have readily determinable fair values and over which the
Company neither has significant influence nor control through investment in common stock or in-substance common stock, the cost method is used.
Under the equity method, the Company's share of the post-acquisition profits or losses of the equity investee is recognized in the consolidated income
statements and its share of post-acquisition movements in accumulated other comprehensive income is recognized in shareholders' equity. The Company
records its
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(t) Investment in equity investees (Continued)
share of the results of such equity investees on a one quarter in arrears basis. The excess of the carrying amount of the investment over the underlying
equity in net assets of the equity investee represents goodwill and intangible assets acquired. When the Company's share of losses in the equity investee
equals or exceeds its interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or made
payments or guarantees on behalf of the equity investee.
Under the cost method, the Company carries the investment at cost and recognizes income to the extent of dividends received from the distribution of the
equity investee's post-acquisition profits.
(u) Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization less any provision required for impairment in value. Depreciation
and amortization are computed using the straight-line method with no residual value based on the estimated useful lives of the various classes of assets,
which range as follows:
Computer equipment and software
Furniture, office and transportation equipment
Buildings
Leasehold improvements
3 - 5 years
3 - 5 years
20 - 50 years
shorter of remaining lease period or estimated useful life
Construction in progress represents buildings and related premises under construction, which is stated at actual construction cost less any impairment loss.
Construction in progress is transferred to the respective category of property and equipment when completed and ready for its intended use.
Costs of repairs and maintenance are expensed as incurred and asset improvements are capitalized. The cost and related accumulated depreciation and
amortization of assets disposed of or retired are removed from the accounts, and any resulting gain or loss is reflected in the consolidated income
statements.
(v) Land use rights
Land use rights represent lease prepayments to the local Bureau of Land and Resources. Land use rights are carried at cost less accumulated amortization
and impairment losses. Amortization is provided to write off the cost of lease prepayments on a straight-line basis over the period of the right which is
40 - 70 years.
(w) Intangible assets
Intangible assets acquired through business acquisitions are recognized as assets separate from goodwill if they satisfy either the "contractual-legal" or
"separability" criterion. Purchased intangible assets and intangible assets arising from the acquisitions of subsidiaries and VIE subsidiaries are recognized
and measured at fair
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(w) Intangible assets (Continued)
value upon acquisition. Separately identifiable intangible assets that have determinable lives continue to be amortized over their estimated useful lives using
the straight-line method as follows:
User base and customer relationships
Trade names, trademarks and domain names
Developed technology and patents
Licenses and copyrights
Non compete agreements
2 - 6 years
3 - 12 years
2 - 5 years
1 - 5 years
over the contracted term from 2 - 6 years
Separately identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. Measurement of any impairment loss for identifiable intangible assets is based on the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
(x) Goodwill
Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities
assumed of the acquired entity as a result of the Company's acquisitions of interests in its subsidiaries and VIEs. Goodwill is not amortized but is tested for
impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company first assesses
qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, the
Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific
information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than
the carrying amount, the quantitative impairment test is performed.
In performing the two-step quantitative impairment test, the first step compares the fair values of each reporting unit to its carrying amount, including
goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value
of a reporting unit's goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the
allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for the purposes
of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. Application of a goodwill impairment test
requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and
determining the fair value of each reporting unit.
(y) Impairment of long-lived assets other than goodwill
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(y) Impairment of long-lived assets other than goodwill (Continued)
measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of
the assets. No impairment of long-lived assets other than investment in equity investees was recognized for the years ended March 31, 2014, 2015
and 2016.
(z) Derivatives and hedging
In accordance with ASC 815 "Derivatives and Hedging," all contracts that meet the definition of a derivative should be recognized on the consolidated
balance sheets as either assets or liabilities and recorded at fair value. Changes in the fair value of derivatives are either recognized periodically in the
consolidated income statements or in other comprehensive income depending on the use of the derivatives and whether it qualifies for hedge accounting and
is so designated.
To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management
objective and strategy for the hedge (which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is
being assessed. A derivative has to be effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being
hedged. The effectiveness of the hedging relationship is evaluated on a prospective and retrospective basis using qualitative and quantitative measures of
correlation. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include a comparison
of the changes in the fair value or discounted cash flow of the hedging instrument to the hedged item. A hedging relationship is considered effective if the
results of the hedging instrument are within a ratio of 80% to 125% of the results of the hedged item.
Interest rate swaps
Interest rate swaps designated as hedging instruments to hedge against the cash flows attributable to recognized assets or liabilities or forecast payments
may qualify as cash flow hedges. During the year ended March 31, 2014, the Company entered into interest rate swap contracts to swap floating interest
payments related to certain borrowings for fixed interest payments to hedge the interest rate risk associated with certain forecasted payments and
obligations. The effective portion of changes in the fair value of interest rate swaps that are designated and qualify as cash flow hedges is recognized in
accumulated other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in interest and investment income,
net in the consolidated income statements. The fair value change of the interest rate swaps not qualified for hedge accounting held by the Company resulted
in a gain of RMB102 million and a loss of RMB43 million, which were recognized in interest and investment income, net in the consolidated income
statements for the years ended March 31, 2014 and 2015, respectively.
Amounts in accumulated other comprehensive income shall be reclassified into earnings in the same period during which the hedged forecasted transaction
affects earnings. Upon the termination of the interest rate swap contracts during the year ended March 31, 2015, the hedging instruments were derecognized
from the consolidated balance sheets and accumulated other comprehensive income was recorded in interest and investment income, net resulting in a loss
of RMB59 million in the consolidated income statements for the year ended March 31, 2015.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(z) Derivatives and hedging (Continued)
Forward exchange contracts
Forward exchange contracts designated as hedging instruments to hedge against the future changes in currency exposure of net investments in foreign
operations may qualify as net investment hedges. During the year ended March 31, 2016, the Company entered into several forward exchange contracts to
hedge the foreign currency risk associated with investments in net assets of certain subsidiaries with operations in the PRC of which their functional
currencies are RMB. The effective portion of the changes in fair value of the forward exchange contracts that are designated and qualified as net investment
hedges is recognized in accumulated other comprehensive income to offset the cumulative translation adjustments related to those subsidiaries. The gain or
loss relating to the ineffective portion, which is measured based on changes in forward exchange rates, is recognized immediately in other income, net in the
consolidated income statements. Amounts accumulated are removed from accumulated other comprehensive income and recognized in the consolidated
income statements upon disposal of those subsidiaries. Once the hedge becomes ineffective, hedge accounting is discontinued prospectively. As of
March 31, 2016, forward exchange contracts with fair value of US$40 million (RMB257 million) are qualified and designated as hedging instruments.
During the year ended March 31, 2016, the Company recognized a loss of US$46 million (RMB298 million) in other income, net in the consolidated
income statement, which was the aggregate of (i) the changes in fair value of the forward exchange contracts not qualified for hedge accounting and (ii) the
ineffective portion of the changes in fair value of the forward exchange contracts that are designated and qualified as net investment hedges.
Changes in the fair value of the derivatives not qualified for hedge accounting are reported in the consolidated income statements. The estimated fair value
of the derivatives is determined based on relevant market information. These estimates are calculated with reference to the market rates using industry
standard valuation techniques.
(aa) Bank borrowing and unsecured senior notes
Bank borrowings are recognized initially at fair value, net of upfront fees and other incident fees incurred. Unsecured senior notes are recognized initially at
fair value, net of debt discounts or premiums and debt issuance costs. Costs incurred which are directly attributable to the bank borrowings and unsecured
senior notes are capitalized and amortized over the estimated term of the facilities using the effective interest method. Upfront fees, debt discount or
premium and debt issuance costs are recorded as a reduction of the proceeds received and the related accretion is recorded as interest expense in the
consolidated income statements over the estimated term of the facilities using the effective interest method.
(ab) Merchant deposits
The Company collects deposits representing an annual upfront service fee from merchants on Tmall at the beginning of each calendar year. These deposits
are initially recorded as a liability by the Company. Such deposits are refundable to a merchant depending on the level of sales volume that is generated by
that merchant on Tmall during the period. If the transaction volume target is not met at the end of each calendar year, the relevant deposits will be non-
refundable and such portion of the deposits is recognized as revenue in the consolidated income statements.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(ac) Deferred revenue and customer advances
Deferred revenue and customer advances represent service fees received from customers that relate to services to be provided in the future. Deferred
revenue, mainly relating to membership and storefront fees, is stated at the amount of service fees received less the amount previously recognized as
revenue upon the provision of the respective services over the terms of the respective service contracts.
(ad) Commitments and contingencies
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide
range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can
be reasonably estimated.
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only
be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims
that may result in such proceedings, the Company, in consultation with its legal counsel, evaluates the perceived merits of any legal proceedings or
unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the consolidated financial statements. If the assessment indicates that a potentially material loss contingency is
not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the
range of the reasonably possible loss, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would
be disclosed.
(ae) Treasury shares
The Company accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury
shares account on the consolidated balance sheets. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares. The
excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid-in capital (up to the amount credited to the
additional paid-in capital upon original issuance of the shares) and retained earnings. The treasury shares account includes 28,245,662 and 24,393,569
ordinary shares issued at par to subsidiaries of the Company for the purpose of certain equity investment plans for management as of March 31, 2015 and
2016, respectively.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(af) Subscription receivables
The Company made available loans to certain employees of the Company and its related companies in order to finance their exercise of share options and
subscription for ordinary shares of the Company (Note 13). The participants of all such loans have pledged the ownership of their ordinary shares or
restricted shares as security for these loans. For accounting purposes, loans outstanding with respect to the exercise of vested options and share subscription
are recorded as subscription receivables in equity. Further, unvested options that were exercised are recorded as other current liabilities and they are
transferred to equity upon vesting.
(ag) Statutory reserves
In accordance with the relevant regulations and their articles of association, subsidiaries of the Company incorporated in the PRC are required to allocate at
least 10% of their after-tax profit determined based on the PRC accounting standards and regulations to the general reserve until such reserve has reached
50% of the relevant subsidiary's registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of
the respective board of directors of the subsidiaries. These reserves can only be used for specific purposes and are not transferable to the Company in the
form of loans, advances or cash dividends. During the years ended March 31, 2014, 2015 and 2016, appropriations to the general reserve amounted to
RMB1,137 million, RMB267 million and RMB529 million, respectively. No appropriations to the enterprise expansion fund and staff welfare and bonus
fund have been made by the Company.
(ah) Reclassification of comparative figures
In previous years, loan receivables arising from micro loans extended to small and medium size enterprises are separately presented as "Loan receivables,
net" on the consolidated balance sheets. After the Company disposed of certain equity interests and assets primarily relating to the micro loan business and
related services upon the completion of the restructuring of Payment Services during the year ended March 31, 2015 (Note 4(b)), the loan receivables
balance became insignificant. Accordingly, the Company revised the presentation to report the loan receivables balance under "Prepayments, receivables
and other assets." Prior year amounts have been reclassified to maintain consistency with the current year presentation. These reclassifications had no effect
on the reported results of operations and net assets. Corresponding reclassifications have also been made to the consolidated statement of cash flows.
3. Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with
Customers," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)" and requires entities to recognize revenue in a
way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. In
April 2016, the FASB issued ASU 2016-10 to clarify ASU 2014-09 on identifying performance obligations and licensing implementation guidance
contained in the new revenue recognition standard. The new guidance is effective retrospectively for the Company for the year end ending March 31, 2019
and the interim reporting periods during the year ending March 31, 2019, with early application permitted only for the annual reporting period ending
March 31, 2018 and the interim reporting periods during the year ending March 31, 2018. The Company is evaluating the existing revenue recognition
policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
3. Recent accounting pronouncements (Continued)
In January 2015, the FASB issued ASU 2015-01, "Income Statement — Extraordinary and Unusual Items," which eliminates the concept of extraordinary
and unusual items from U.S. GAAP. The new guidance is effective prospectively for the Company for the year end ending March 31, 2017 and interim
reporting periods during the year ending March 31, 2017. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this
revised guidance on the Company's financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810) — Amendments to the Consolidation Analysis," which amends the criteria
for determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends
the deferral granted to investment companies for application of the VIE consolidation model. The guidance is effective for the Company for the year ending
March 31, 2017 and interim reporting periods during the year ending March 31, 2017. The guidance may be applied retrospectively or through a cumulative
effect adjustment to equity as of the beginning of the year of adoption. Early application is permitted, including adoption in an interim period. The
Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs relating to a
recognized debt liability to be presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. The new guidance is effective retrospectively for the Company for the year end ending March 31, 2017 and interim reporting periods
during the year ending March 31, 2017. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance
on the Company's financial position, results of operations or cash flows. At this time, the Company does not expect this accounting standard update to have
a material impact on the consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805) — Simplifying the Accounting for Measurement-Period
Adjustments," which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires
that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the
adjustment is identified. The new guidance is effective prospectively for the Company for the year ending March 31, 2017 and interim reporting periods
during the year ending March 31, 2017. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance
on the Company's financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes," which simplifies the
presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. The new
guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early
adoption is permitted. The new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations
or cash flows. At this time, the Company does not expect this accounting standard update to have a material impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10) — Recognition and Measurement of Financial Assets
and Financial Liabilities," which amends various aspects of
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
3. Recent accounting pronouncements (Continued)
the recognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company's consolidated financial statements, the
most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The
new guidance is effective for the Company for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early
adoption is permitted only for certain provisions. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's
financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and
lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new ASC 842
"Leases" to replace the previous ASC 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the
previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09.
The new guidance is effective for the Company for the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020.
Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position,
results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-05 "Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting
Relationships," which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC
815 "Derivatives and hedging," does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria
continue to be met. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending
March 31, 2018. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's
financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-06 "Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments" to clarify the
requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely
related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in
accordance with the four-step decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid
financial instruments that are determined to have a debt host) with embedded call (put) options. The new guidance is effective for the Company for the year
ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The Company is evaluating the
effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-07 "Simplifying the Transition to the Equity Method of Accounting," to simplify the accounting for equity
method investments, which eliminates the requirement in ASC 323 "Investments — equity method and joint ventures" that an entity retroactively adopt the
equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of
influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the
investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.
The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018.
Early adoption is permitted. The Company
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
3. Recent accounting pronouncements (Continued)
is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting" to simplify the accounting for employee
share-based payment transactions, including the income tax consequences, classification of excess tax benefits on the statement of cash flows, introduction
of accounting policy election on forfeitures, and the change of the threshold of share withholding by employer for settlement of employees' tax without
causing the award to be liability classified. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting
periods during the year ending March 31, 2018. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised
guidance on the Company's financial position, results of operations or cash flows.
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments
Equity transactions
(a) Initial public offering
On September 24, 2014, the Company completed its initial public offering on the New York Stock Exchange under the symbol of "BABA." The Company
offered 123,076,931 American Depositary Shares, or ADS, and other selling shareholders, including Yahoo, among others, offered an aggregate of
197,029,169 ADSs. Each ADS represents one ordinary share and was sold to the public at US$68.00 per ADS. On the same date of the initial public
offering, the underwriters exercised in full the option to purchase an additional 26,143,903 ADSs and 21,871,997 ADSs at US$68.00 per ADS from the
Company and certain other selling shareholders respectively. Net proceeds raised by the Company from the initial public offering amounted to
US$10.0 billion after deducting underwriting discounts and commissions and other offering expenses.
Restructuring transactions
(b) Restructuring of Payment Services
Restructuring of Payment Services in 2011
Pursuant to the regulations issued by the People's Bank of China (the "PBOC"), non-bank payment companies were required to obtain a license in order to
operate a payment business in the PRC. These regulations provided specific guidelines for license applications only for domestic PRC-owned entities.
These regulations stipulated that, in order for any foreign-invested payment company to obtain a license, the scope of business, the qualifications of any
foreign investor and any level of foreign ownership would be subject to future regulations to be issued, which in addition would require approval by the
PRC State Council. Further, the regulations required that any payment company that failed to obtain a license must cease operations by September 1, 2011.
Although Alipay was prepared to submit its license application in early 2011, at that time the PBOC had not issued any guidelines applicable to license
applications for foreign-invested payment companies. In light of the uncertainties relating to the license qualification and application process for a foreign-
invested payment company, the Company's management determined that it was necessary to restructure Alipay as a company wholly-owned by PRC
nationals in order to avail Alipay of the specific licensing guidelines applicable only to domestic PRC-owned entities. Accordingly, the Company divested
all of its interest in and control over Alipay, which resulted in deconsolidation of Alipay from the consolidated financial statements.
F-35
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
As part of the restructuring, the loan extended for the funding of paid-in capital of Zhejiang Ant Small and Micro Financial Services Group Co., Ltd.
("Ant Financial Services") that held the equity interests of Alipay was repaid by the management members in full to the Company. Certain agreements
entered into between the Company and Ant Financial Services, such as the loan agreement, the pledge agreement for the same equity interests held by
certain management members of the Company, the option agreement to acquire the equity interests in Ant Financial Services when permitted by the PRC
laws, among others (the "Agreements"), which allowed the Company to control Ant Financial Services, were also terminated.
Following the restructuring during the year ended March 31, 2011, the Company has not consolidated or equity accounted for the entities engaging in
Payment Services because the Company has no direct and indirect investment in and does not control or have significant influence over Ant Financial
Services, Alipay and their subsidiaries.
During the year ended March 31, 2012, the Company entered into the following commercial arrangements, among others, with APN Ltd., a company
owned by two directors of the Company, Yahoo, SoftBank, Alipay, Ant Financial Services, and Ant Financial Services' equity holders, setting out the
mechanism for the future collaboration among the relevant parties relating to the Payment Services:
(i)
Framework Agreement
Pursuant to the terms of the Framework Agreement, the Company will receive from Ant Financial Services an amount equal to 37.5% of the equity
value of Alipay less US$500 million (RMB3,100 million), being the face value of the Promissory Note payable, upon a Liquidity Event as defined
in this agreement (the "Liquidity Payment"). Under no circumstances will the amount of the Liquidity Payment plus US$500 million be less than
US$2.0 billion (RMB12.4 billion) or more than US$6.0 billion (RMB37.2 billion), subject to certain increases and additional payments if a
Liquidity Event does not occur by the sixth anniversary of the agreement. If a Liquidity Event does not occur by the tenth anniversary of this
agreement, the Company will have a right to demand Ant Financial Services and Alipay to effect a Liquidity Event as soon as practicable, provided
that the equity value or enterprise value of Alipay at such time exceeds US$1.0 billion (RMB6.2 billion). If the Liquidity Event is demanded by the
Company, the minimum amount of US$2.0 billion (RMB12.4 billion) described above will not apply to the Liquidity Payment, unless the Liquidity
Event is effected by means of a transfer of more than 37.5% of the securities of Alipay. Upon payment of the Liquidity Payment, certain assets and
intellectual property related to the operations of Payment Services, which were retained by the Company (the "Retained Business Assets"), will be
transferred to Alipay.
"Liquidity Event" means the earliest to occur of: (a) a qualified initial public offering of Alipay; (b) a transfer of 37.5% or more of the securities of
Alipay; or (c) a sale of all or substantially all of the assets of Alipay.
In addition, the Company received a non-interest bearing promissory note (the "Promissory Note") in the principal amount of US$500 million
(RMB3,100 million) with a seven-year maturity from APN Ltd. The Promissory Note was secured by a pledge of 50 million ordinary shares of the
Company, which were contributed by two directors of the Company to APN Ltd. The Promissory Note formed part of the consideration for the
transfer of the Retained Business Assets upon the Liquidity Event and the
F-36
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
Promissory Note was payable upon the earlier of the occurrence of the Liquidity Event or December 14, 2018. The Framework Agreement was
subsequently amended and pursuant to the terms of the amendment, the Promissory Note was cancelled and the amount of the Liquidity Payment
which the Company would be entitled to receive in the event of a Liquidity Event was increased by US$500 million, the principal amount of the
cancelled Promissory Note.
(ii)
Intellectual Property License and Software Technology Services Agreement
Under the terms of this agreement, the Company licenses certain intellectual property and provides certain software technology services to Alipay in
exchange for a royalty fee and software technology services fee in an amount equal to the costs incurred by the Company in providing the software
technology services plus 49.9% of the consolidated pre-tax income of Alipay and its subsidiaries, subject to downward adjustments upon certain
dilutive equity issuances by Ant Financial Services or Alipay, but in no case below 30.0%. If Alipay incurs a pre-tax loss, the fee that the Company
would charge Alipay would equal the costs incurred by the Company in providing the software technology services. This agreement will terminate
at the earlier of (a) the payment of the Liquidity Payment, and (b) such time when termination may be required by applicable regulatory authorities
in connection with a qualified initial public offering by Alipay.
(iii)
Commercial Agreement
Under the terms of this agreement, the Company receives payment processing services from Alipay, the fee rate for which is subject to review and
approval by the Company's independent directors designated by Yahoo and SoftBank on an annual basis (the "Payment Processing Fee"). This
agreement has an initial term of fifty years and shall be renewable thereafter. If the commercial agreement is required by applicable regulatory
authorities to be modified in certain circumstances, a one-time payment may be payable to the Company by Ant Financial Services as compensation
for the impact of such adjustment. Expenses in connection with the Payment Processing Fee of RMB2,349 million, RMB3,853 million and
RMB4,898 million were recorded in cost of revenue in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016,
respectively (Note 23).
All closing conditions attached to the Framework Agreement and related supplemental arrangements were fulfilled in December 2011.
Restructuring of Payment Services in 2014
The Framework Agreement and related supplemental arrangements were terminated in August 2014 upon the restructuring of the commercial agreements
with Payment Services when the Company entered into a share and asset purchase agreement (the "2014 SAPA") with Ant Financial Services, the other
parties to the Framework Agreement entered into in 2011, Hangzhou Junhan Equity Investment Partnership ("Junhan") and Hangzhou Junao Equity
Investment Partnership, a PRC limited partnership the interests in which are held by certain members of the Alibaba Partnership.
Pursuant to the 2014 SAPA, the Company sold the micro loan business and related services (the "Transferred Business") to Ant Financial Services for
aggregate cash consideration of RMB3,219 million. In addition, the
F-37
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
Company entered into software system use and service agreements with Ant Financial Services relating to the know how and related intellectual property
that the Company has agreed to sell together with the micro loan business and related services (Note 23). In calendar years 2015 to 2017, the Company
received or will receive an annual fee equal to 2.5% of the average daily book balance of the micro loans managed by Ant Financial Services. In calendar
years 2018 to 2021, the Company will receive an annual fee equal to the amount paid for the calendar year 2017 (together with the fees received in calendar
years 2015 to 2017, the "SME Annual Fee"). The SME Annual Fee of RMB90 million and RMB708 million were recorded in revenue in the consolidated
financial statements for the years ended March 31, 2015 and 2016, respectively.
In connection with the 2014 SAPA, the Company also entered into an amended intellectual property license agreement with Alipay ("amended Alipay
IPLA"), pursuant to which the Company licenses certain intellectual property and provides certain software technology services to Alipay and the
Transferred Business. Under the amended Alipay IPLA, the Company will receive royalty streams and a service fee (collectively, the "Profit Share
Payments") which will be paid at least annually, amounting to the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant
Financial Services, subject to certain adjustments. In addition, if the Company acquires any equity interest in Ant Financial Services, the Company will
transfer an agreed portion of the underlying intellectual property to Ant Financial Services at the time of such equity issuance. At the same time, the Profit
Share Payments will also be reduced in proportion to such equity issuances made to the Company.
Income in connection with the royalty fee and software technology services fee under the Intellectual Property License and Software Technology Services
Agreement and the Profit Share Payments, net of costs incurred by the Company, of RMB1,764 million, RMB1,667 million and RMB1,122 million were
recorded in other income, net in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively (Note 23).
Pursuant to the terms of the 2014 SAPA, in the event of an initial public offering of Ant Financial Services or Alipay at an implied equity value exceeding
US$25.0 billion which results in gross proceeds of at least US$2.0 billion (a "Qualified IPO"), if the Company's total ownership of equity interests in Ant
Financial Services has not reached 33%, the Company would be entitled at its election to receive a one-time payment equal to 37.5% of the equity value of
Ant Financial Services as determined immediately prior to such Qualified IPO. There is no cap on the maximum value of such liquidity event payment. If
the Company acquires equity interests in Ant Financial Services in an aggregate amount less than 33%, the percentage of Ant Financial Services' equity
value used to calculate such liquidity event payment will be reduced proportionately.
In lieu of receiving such liquidity event payment, the Company may elect to continue to receive the Profit Share Payments in perpetuity, subject to the
receipt of regulatory approvals. In connection with a Qualified IPO and if the Company so elects, Ant Financial Services must use its commercially
reasonable efforts to obtain the required approvals for continued payments under the amended Alipay IPLA. If such approvals are not obtained, Ant
Financial Services will pay the liquidity event payment as described above to the Company.
The 2014 SAPA provides for future potential equity issuances to the Company by Ant Financial Services. In the event that Ant Financial Services applies
for and receives certain PRC regulatory approvals in the future, Ant Financial Services will issue and the Company will purchase newly issued equity
interests in Ant Financial
F-38
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
Services up to a 33% equity interest, or such lesser equity interest as may be permitted by the regulatory approvals. If the liquidity event payment described
above has not become payable upon a Qualified IPO of Ant Financial Services, the Company's right to acquire equity interests up to the full 33% equity
interest will continue after such Qualified IPO. However, the maximum equity interest that the Company is entitled to acquire will be reduced in proportion
to any dilutive equity issuances by Ant Financial Services in and following such Qualified IPO. If the Company acquires an equity interest in Ant Financial
Services pursuant to this arrangement which is below 33%, the liquidity event payment amount and the profit sharing arrangement under the amended
Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by the Company.
Concurrently with the 2014 SAPA, the Company entered into other ancillary agreements, including a data sharing agreement, an SME loan cooperation
agreement, a trademark agreement, and an amended and restated shared services agreement. The Company also entered into a binding term sheet in respect
of a technology services agreement, pursuant to which the Company agreed to provide certain cloud computing, database service and storage, large-scale
computing services and certain other services to Ant Financial Services on a cost-plus basis. In addition, the existing Alipay Commercial Agreement will
continue as currently in effect.
The terms of the 2014 SAPA, the amended Alipay IPLA and other ancillary agreements took effect immediately upon their execution in August 2014. The
transfer of the Transferred Business was completed in February 2015, a gain on disposal of RMB306 million was recorded in interest and investment
income, net of the consolidated financial statements for the year ended March 31, 2015. Certain assets and liabilities, such as restricted cash and escrow
receivables of RMB3,495 million, loan receivables, net of RMB23,363 million, secured borrowings of RMB15,417 million and escrow money payable of
RMB3,495 million were derecognized from the consolidated balance sheet of the Company upon the completion of the transfer of the Transferred Business.
For accounting purposes, the fair value of the restructured arrangement exceeded the fair value of the pre-existing arrangement with Ant Financial Services
by RMB1.3 billion. As Ant Financial Services is controlled by a director and major shareholder of the Company, the excess value provided to the Company
in this related party transaction is accounted for as an equity contribution by the shareholder as restructuring reserve in the statement of changes in
shareholders' equity. Given the nature of this transaction, the corresponding asset representing the excess value receivable by the Company is accounted for
as a deduction from equity and amortized as an expense in the consolidated income statements over the expected term of the restructured arrangement
which is estimated to be 5 years. The amortization of the excess value of RMB166 million and RMB264 million were recorded in the other income, net in
the consolidated income statements for the years ended March 31, 2015 and 2016, respectively. Furthermore, the Company accounts for the Profit Share
Payments and the SME Annual Fee in the periods when the services are provided, where such payments are expected to approximate the estimated fair
values of the services provided.
F-39
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
Mergers and acquisitions
(c) Acquisition of Alibaba Health Information Technology Limited ("Alibaba Health")
In April 2014, the Company and Yunfeng Capital, of which the executive chairman of the Company has a 40% interest in its general partner, completed an
acquisition of newly issued ordinary shares representing a total equity and voting interest of approximately 54% in Alibaba Health through their
investments in a special purpose entity. Alibaba Health, a company that is listed on the Hong Kong Stock Exchange, is primarily engaged in the business of
developing the technology for product identification, authentication and tracking system for pharmaceutical and medical products in the PRC. The
Company holds a 70% equity interest in the special purpose entity and Yunfeng Capital holds the remaining 30% equity interest. Cash consideration of
HK$932 million (RMB741 million) was paid upon the closing of the transaction by the Company to acquire its equity interest in the special purpose entity.
Although the Company controls the board of the special purpose entity, the investment and shareholders agreement provided that the underlying shares in
Alibaba Health are voted by the Company and Yunfeng Capital separately based on their respective effective equity interest, including voting rights. The
Company had an effective equity and voting interest of approximately 38% in Alibaba Health, exercised significant influence over and accounted for
Alibaba Health as an equity method investee.
In July 2015, in preparation of the transfer of the Tmall online pharmacy business operations of the Company to Alibaba Health (of which the agreement
was subsequently terminated), the investment and shareholders agreement was amended under which Yunfeng Capital agreed to irrevocably give up its
separate voting rights with respect to its indirect interest in Alibaba Health at no consideration. Such control is important for the Company to execute its
digital and data-driven healthcare strategy through Alibaba Health as its flagship vehicle in this sector, indirectly economically benefiting all shareholders
including Yunfeng Capital. As a result of the amendment, the Company obtained control over the entire 54% equity interest in Alibaba Health through its
control over the board of the special purpose entity. Consequently, Alibaba Health became a consolidated subsidiary while the Company's effective equity
interest in Alibaba Health remains at approximately 38%.
The equity value of Alibaba Health of HK$64,319 million (RMB50,723 million), estimated based on the market price of the issued shares of Alibaba
Health listed on the Hong Kong Stock Exchange which was the more readily ascertainable fair value as of the deemed acquisition date, was used to allocate
the fair value of net assets acquired, the fair value of noncontrolling interests and calculate the gain of RMB18,603 million which was recognized in relation
to the revaluation of previously held equity interest relating to obtaining control of Alibaba Health in interest and investment income, net in the consolidated
income statement for the year ended March 31, 2016.
F-40
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(c) Acquisition of Alibaba Health Information Technology Limited ("Alibaba Health") (Continued)
The allocation of the equity value of Alibaba Health at the date of the deemed acquisition is summarized as follows:
Net assets acquired
Amortizable intangible assets (i)
User base and customer relationships
Trade names, trademarks and domain names
Developed technology and patents
Goodwill
Deferred tax assets
Deferred tax liabilities
Total
The equity value comprised of:
- fair value of previously held equity interests
- fair value of noncontrolling interests
Total
Amounts
(in millions of RMB)
1,290
8
35
70
49,320
19
(19)
50,723
19,264
31,459
50,723
(i)
Acquired amortizable intangible assets have estimated amortization periods not exceeding three years and a weighted-average amortization period
of 2.6 years.
The rationale for this transaction is to enable the Company to expand its products and services. This transaction will enable the Company to benefit from the
focused healthcare expertise of Alibaba Health in the operation of the online pharmacy business and foster consumer trust through the sale of genuine
pharmaceuticals through Alibaba Health's verification and authentication technology. Goodwill arising from this acquisition was attributable to the
synergies expected from the combined business which will create a technology enabled solution provider to consumers and other participants in the
healthcare industry in the PRC.
Subsequent to March 31, 2016, the Company and Alibaba Health entered into a services agreement under which Alibaba Health will provide outsourced
services in relation to certain product categories in Tmall online pharmacy.
(d) Acquisition of AutoNavi Holdings Limited ("AutoNavi")
In May 2013, the Company completed an investment of newly issued ordinary shares and convertible preferred shares in AutoNavi representing a 28%
equity interest on a fully-diluted basis. AutoNavi is a provider of digital map content and navigation and location based solutions in the PRC that was listed
on the Nasdaq Global Select Stock Market ("Nasdaq"). The investment in convertible preferred shares of RMB1,285 million was accounted for under the
cost method given that the convertible preferred shares were not considered in-substance common stock due to the existence of certain terms such as
liquidation preference over ordinary shares, and the investment in ordinary shares of RMB533 million was accounted for under the equity method given the
existence of significant influence.
F-41
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(d) Acquisition of AutoNavi Holdings Limited ("AutoNavi") (Continued)
In July 2014, the Company completed an acquisition of all of the issued and outstanding shares of AutoNavi that the Company did not already own.
Following the completion of the transaction, AutoNavi became a wholly-owned subsidiary of the Company and the listing of the ADS of AutoNavi on the
Nasdaq was withdrawn.
The total cash consideration of US$1,032 million (RMB6,348 million) was paid upon the closing of the transaction. The allocation of the purchase price at
the date of acquisition is summarized as follows:
Net assets acquired
Amortizable intangible assets (i)
User base and customer relationships
Trade names, trademarks and domain names
Developed technology and patents
Goodwill
Deferred tax assets
Deferred tax liabilities
Total
Total purchase price comprised of:
- cash consideration
- fair value of previously held equity interests
Total
Amounts
(in millions of RMB)
2,236
255
249
1,387
4,380
72
(284)
8,295
Amounts
(in millions of RMB)
6,348
1,947
8,295
(i)
Acquired amortizable intangible assets have estimated amortization periods not exceeding four years and a weighted-average amortization period of
3.0 years.
A gain of RMB284 million was recognized in relation to the revaluation of previously held equity interest relating to the step acquisition of AutoNavi in
interest and investment income, net in the consolidated income statement for the year ended March 31, 2015. As AutoNavi was a publicly listed company
prior to this step acquisition, the fair value of the previously held equity interest was estimated with reference to the market price upon the completion of the
transaction, with an adjustment made to reflect other factors that may affect such fair value estimation.
The rationale for this transaction is to enable the Company to expand its products and services. The Company believes the acquisition will help to develop
and provide online-to-offline/offline-to-online commerce and location-based services to its mobile commerce user base. Goodwill arising from this
acquisition was attributable to the synergies expected from the combined operations of AutoNavi and the Company, the assembled workforce and the future
development initiatives of the assembled workforce to enhance the mobile offerings of the Company beyond e-commerce.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(e) Acquisition of Alibaba Pictures Group Limited ("Alibaba Pictures")
In June 2014, the Company acquired control of Alibaba Pictures by completing an investment in newly issued ordinary shares representing an
approximately 60% equity interest in Alibaba Pictures for a total cash consideration of HK$6,244 million (RMB4,955 million). Alibaba Pictures is a
producer of movies and television programs in the PRC that is listed on the Hong Kong Stock Exchange.
The allocation of the purchase price at the date of acquisition is summarized as follows:
Net assets acquired (i)
Amortizable intangible assets (ii)
User base and customer relationships
Trade names, trademarks and domain names
Others
Goodwill
Deferred tax assets
Deferred tax liabilities
Noncontrolling interests
Total
Amounts
(in millions of RMB)
5,899
4
95
38
9,759
13
(17)
(10,836)
4,955
(i)
(ii)
Net assets include the cash consideration of RMB4,955 million.
Acquired amortizable intangible assets have estimated amortization periods not exceeding three years and a weighted-average amortization period
of 2.5 years.
The rationale for this transaction is to enable the Company to expand its products and services. The Company believes the acquisition will help to advance
the Company's vision of making media entertainment available to its customers. Goodwill arising from this acquisition was attributable to the synergies
expected from the combined operations of Alibaba Pictures and the Company, the assembled workforce and their knowledge and experience in the
entertainment and media industry in the PRC.
In June 2015, Alibaba Pictures placed newly issued ordinary shares to unrelated third-party investors with aggregate gross proceeds of HK$12,179 million
(RMB9,647 million). The Company's equity interest in Alibaba Pictures was therefore diluted to 49.5% upon completion of the placing.
As a result of the dilution, the Company deconsolidated the financial results of Alibaba Pictures and accounted for the investment in the remaining equity
interest under the equity method. A gain of RMB24,734 million arising from the revaluation of the Company's remaining equity interest in Alibaba Pictures
was recognized in interest and investment income, net in the consolidated income statement for the year ended March 31, 2016. As Alibaba Pictures is a
publicly listed company, the fair value of the remaining equity interest was estimated with reference to the market price upon the completion of the placing.
In addition, during the year ended March 31, 2016, the Company disposed of its online movie ticketing business and movie and TV series financing
platform to Alibaba Pictures at a cash consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts. A disposal gain of
RMB2,214 million was recognized in interest and investment income, net in the consolidated income statement for the year ended March 31, 2016.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(f) Acquisition of UCWeb Inc. ("UCWeb")
In June 2014, the Company exchanged all of the issued and outstanding shares in UCWeb held by the other shareholders that the Company did not already
own. Prior to this transaction, UCWeb was an equity investee which was accounted for under the cost method and was 66% owned by the Company with a
carrying amount of RMB4,394 million. UCWeb is a developer of leading mobile web browsers in the PRC, India and Indonesia.
The total exchange consideration consisted of 12.3 million restricted shares and RSUs of the Company and US$458 million (RMB2,826 million) in cash.
Out of the total exchange consideration, 3.4 million restricted shares and RSUs which is classified as equity, as well as cash consideration of
US$126 million (RMB777 million) are settled on a deferred basis. The fair value of restricted shares and RSUs approximate US$613 million
(RMB3,782 million) as of the acquisition date.
The allocation of the purchase price at the date of acquisition is summarized as follows:
Net assets acquired (i)
Amortizable intangible assets (ii)
User base and customer relationships
Trade names, trademarks and domain names
Developed technology and patents
Non-compete agreements
Goodwill
Deferred tax liabilities
Total
Total purchase price comprised of:
- cash consideration
- share-based consideration
- fair value of previously held equity interests
Total
Amounts
(in millions of RMB)
1,159
106
591
561
1,823
10,376
(21)
14,595
2,826
3,782
7,987
14,595
(i)
(ii)
Net assets acquired included noncontrolling interests of RMB220 million that is classified as mezzanine equity.
Acquired amortizable intangible assets have estimated amortization periods not exceeding four years and a weighted-average amortization period of
3.4 years.
A gain of RMB3,593 million was recognized in relation to the revaluation of previously held equity interest relating to the step acquisition of UCWeb in
interest and investment income, net in the consolidated income statement for the year ended March 31, 2015. The fair value of the previously held equity
interest was measured using an income approach determined by the Company. As UCWeb is a private company, the fair value of the previously held equity
interest is estimated based on significant inputs that market participants would consider, which mainly include revenue growth rate, operating margin,
discount rate and other factors that may affect such fair value estimation.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(f) Acquisition of UCWeb Inc. ("UCWeb") (Continued)
UCWeb is an important part of the Company's ecosystem to offer mobile services to users from the PRC as well as other parts of the world, thereby
strengthening user engagement as well as enabling a new marketing channel for the merchants in the Company's ecosystem. Furthermore, UCWeb creates
additional revenue sources for the Company from mobile search and advertising and others. Goodwill arising from this acquisition was attributable to the
synergies expected from the combined operations of UCWeb and the Company, the assembled workforce and the future development initiatives of the
assembled workforce to enhance the mobile offerings of the Company beyond e-commerce.
(g) Acquisition of Shenzhen OneTouch Business Services Ltd. ("OneTouch")
In May 2014, the Company completed an acquisition of the remaining interests of OneTouch. The total purchase price consisted of cash consideration of
RMB790 million and contingent consideration with a fair value of RMB1,094 million. Prior to this transaction, the Company had previously invested 65%
interest in OneTouch by cash consideration and contingent consideration in 2011 and OneTouch was an equity investee which was accounted for under the
equity method with a carrying amount of RMB196 million. OneTouch is a provider of comprehensive export-related services tailored to the needs of small
businesses in the PRC, including customs clearance, logistics, cargo insurance, currency exchange, tax refund, financing and certification.
The allocation of the purchase price at the date of acquisition is summarized as follows:
Net assets acquired
Amortizable intangible assets (i)
User base and customer relationships
Trade names, trademarks and domain names
Developed technology and patents
Non-compete agreements
Goodwill
Deferred tax liabilities
Total
Total purchase price comprised of:
- cash consideration
- contingent cash consideration
- fair value of previously held equity interests
Total
Amounts
(in millions of RMB)
105
25
196
4
703
3,998
(232)
4,799
790
1,094
2,915
4,799
(i)
Acquired amortizable intangible assets have estimated amortization periods not exceeding five years and a weighted-average amortization period of
4.5 years
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(g) Acquisition of Shenzhen OneTouch Business Services Ltd. ("OneTouch") (Continued)
The amount of the contingent consideration will be determined based on a formula tied to certain future operating targets of OneTouch for the year ending
March 31, 2017, which will not exceed RMB3,420 million. The fair value of the contingent consideration included in the total purchase price represents a
probability-weighted outcome based on the Company's analysis of the likelihood of the various scenarios underlying this arrangement. A gain of
RMB2,719 million was recognized in relation to the revaluation of previously held equity interest relating to the step acquisition of OneTouch in interest
and investment income, net in the consolidated income statement for the year ended March 31, 2015.
The fair value of the previously held equity interest was measured using an income approach determined by the Company. As OneTouch is a private
company, the fair value of the previously held equity interest is estimated based on significant inputs that market participants would consider, which mainly
include revenue growth rate, operating margin, discount rate and other factors that may affect such fair value estimation.
The rationale for this transaction is to enable the Company to expand its products and services. The Company believes the acquisition will help to serve the
wholesale sellers on the international wholesale marketplace by adding a wide range of export-related value-added services. Goodwill arising from this
acquisition was attributable to the synergies expected from the combined operations of OneTouch and the Company, the assembled workforce and their
knowledge and experience surrounding export-related services to small businesses in the PRC.
As of March 31, 2014, 2015 and 2016, the Company assessed the operating and financial targets in connection with the previous and current contingent
consideration arrangements, and revised the fair value of the contingent consideration payable. As a result, the Company recognized in the consolidated
income statements an increase in fair value of contingent consideration of RMB178 million, RMB85 million and RMB17 million for the years ended
March 31, 2014, 2015 and 2016.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(h) Other acquisitions
Other acquisitions that constitute business combinations are summarized in the following table:
Net assets
Identifiable intangible assets
Deferred tax assets
Deferred tax liabilities
Noncontrolling interests
Net identifiable assets acquired
Goodwill
Total purchase consideration
Fair value of previously held equity interests
Purchase consideration settled
Contingent/deferred consideration as of year end
Total purchase consideration comprised of:
- cash consideration
- fair value of previously held equity interests
- share-based consideration
Total
2014
2016
Year ended March 31,
2015
(in millions of RMB)
24
486
—
266
421
5
(95)
597
(269)
328
1,806
2,134
350
876
—
(198)
1,028
(10)
1,018
1,403
2,421
(107) —
(731) (1,927) (2,360)
61
100
293
(29)
481
—
481
543
1,024
—
843
—
181
1,024
2,027
107
—
2,134
2,421
—
—
2,421
A loss of nil, RMB61 million and nil in relation to the revaluation of previously held equity interest was recognized in the consolidated income statements
for the years ended March 31, 2014, 2015 and 2016, respectively, for the above business combinations.
Pro forma results of operations for the acquisitions described above have not been presented because they are not material to the consolidated income
statements, either individually or in aggregate.
Equity investments and others
(i) Investment in Rajax Holding ("Ele.me")
In March 2016, the Company and Ant Financial Services completed a portion of the subscription for newly issued convertible preferred shares in Ele.me
based on a total combined commitment of US$1,250 million, of which the Company's total commitment is US$900 million (RMB5,891 million). Ele.me is
an operator of one of the largest mobile food ordering and delivery services in the PRC. Ele.me complements the Company's investment in Koubei
(Note 4(n)) in local services, focusing on food ordering and delivery characterized by high-frequency usage and last-mile logistics within a city.
The total cash consideration paid was US$540 million (RMB3,512 million). The effective equity interest in Ele.me that is held by the Company will be
approximately 22% on a fully-diluted basis once the full
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(i) Investment in Rajax Holding ("Ele.me") (Continued)
commitment is funded. The convertible preferred shares are not considered in-substance common stock given that such shares contain certain terms such as
dividend and liquidation preferences over ordinary shares. As a result, the investment in Ele.me is accounted for under the cost method (Note 14).
(j) Investment in Magic Leap, Inc. ("Magic Leap")
In December 2015, the Company completed an investment in newly issued convertible preferred shares of Magic Leap, representing an approximately 10%
equity interest on a fully-diluted basis. Magic Leap is a technological company that focuses on the development of augmented reality technology. The total
cash consideration paid was US$430 million (RMB2,775 million). Such investment is accounted for under the cost method (Note 14).
(k) Investment in CMC Holdings Limited ("CMC")
In December 2015, the Company completed an investment in preferred shares, representing a 21% equity interest, of CMC. CMC is a new investment
platform that focuses on the media and entertainment sectors. The total cash consideration paid was US$197 million (RMB1,270 million). The preferred
shares are not considered in-substance common stock given that such shares contain certain terms such as dividend and liquidation preferences over
ordinary shares. As a result, the investment in preferred shares is accounted for under the cost method (Note 14).
In addition, the Company acquired in a 20% equity interest in a limited partnership in the PRC which is managed by the founder of CMC. The objective of
the limited partnership is consistent with that of CMC. Total cash consideration of RMB1,250 million was paid upon the closing of the transaction in
December 2015. Such investment is accounted for under the equity method (Note 14).
(l) Investment in Beijing Shiji Information Technology Co., Ltd. ("Shiji Information")
In November 2015, the Company completed an investment in newly issued ordinary shares of Shiji Information, representing an approximately 13% equity
interest in Shiji Information. Shiji Information, a company that is listed on the Shenzhen Stock Exchange, is primarily engaged in the development and sale
of hotel information management system software, system integration and technical service. The total cash consideration of RMB2,389 million was paid
upon the closing of the transaction. Such investment is accounted for as an available-for-sale security (Note 12).
(m) Investment in Huayi Brothers Media Corporation ("Huayi Brothers")
In August 2015, the Company completed an investment in newly issued ordinary shares of Huayi Brothers, representing an approximately 4% equity
interest in Huayi Brothers. Yunfeng Capital is also one of the minority shareholders of Huayi Brothers. Huayi Brothers, a company that is listed on the
Shenzhen Stock Exchange, is primarily engaged in the production of television programs and movies in the PRC. The total cash consideration of
RMB1,533 million was paid upon the closing of the transaction. Such investment is accounted for as an available-for-sale security (Note 12).
F-48
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(n) Investment in Koubei Holding Limited ("Koubei")
In June 2015, the Company and Ant Financial Services agreed to set up Koubei, a joint venture in which the Company and Ant Financial Services each hold
a 49.6% equity interest, while an unrelated third party affiliated with a major Chinese restaurant chain holds the remaining minority equity interest. Koubei
integrates the convenience aspects of mobile commerce and big data to provide consumers with information and promotional benefits from local restaurants
in the PRC.
The capital injection from the Company includes cash of RMB3.0 billion as well as the injection of certain related businesses. The cash and businesses
injection were completed as of March 31, 2016. A gain of RMB128 million which approximated the fair value of the businesses being injected, was
recognized in relation to the contribution of the businesses of which the carrying amount was insignificant to Koubei in interest and investment income, net
in the consolidated income statement for the year ended March 31, 2016. For accounting purposes, the investment in Koubei is accounted for under the
equity method (Note 14).
(o) Investment in YTO Express (Logistics) Co., Ltd. ("YTO Express")
In May 2015, the Company made a contribution to the registered capital representing an ownership interest of 12% in YTO Express. YTO Express is one of
the leading express courier companies in the PRC. YTO Express is one of the strategic express courier companies participating in the data system of
Cainiao Network to fulfill orders from the Company's core commerce business. The cash consideration of RMB1,500 million was paid upon the closing of
the transaction. Yunfeng Capital is also a co-investor of YTO Express. Such investment is accounted for under the cost method (Note 14).
During the year ended March 31, 2016, a company listed on the Shanghai Stock Exchange filed an application to purchase all of the equity interest in YTO
Express through an asset swap and share issue, resulting in a reverse takeover of the company by YTO Express. The completion of the reverse takeover is
subject to the approval by certain regulatory authorities.
(p) Investment in wealth management products in relation to a founder's investment in Wasu Media Holding Co., Ltd. ("Wasu")
In April 2015, the Company entered into an arrangement with a bank in the PRC to invest in wealth management products with an aggregate principal
amount of RMB7.3 billion. The wealth management products carry an interest rate of 5% per annum, with a maturity of five years and the return of
principal and interest income on the products is guaranteed by the bank. The wealth management products have been served as collateral to the issuing bank
for the issuance of a financing amounting to RMB6.9 billion to one of the founders of the Company to support his minority investment through a PRC
limited partnership in Wasu, a company listed on the Shenzhen Stock Exchange which is engaged in the business of digital media broadcasting and
distribution in the PRC. The financing has also been collateralized by the equity interests of Wasu held by such PRC limited partnership. The founder has
also pledged his interest in the PRC limited partnership to the Company. The founder is exposed to the risks and rewards of the Wasu shares held by the
PRC limited partnership. The Company does not have the power to direct the activities of the PRC limited partnership. The Company entered into strategic
cooperation agreements with a major shareholder of Wasu in order to enhance the Company's capabilities and profile in the entertainment sector in the
PRC. Such investment in the wealth management products is accounted for as a held-to-maturity security (Note 12).
F-49
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(p) Investment in wealth management products in relation to a founder's investment in Wasu Media Holding Co., Ltd. ("Wasu") (Continued)
In addition, the Company entered into a loan agreement for a principal amount of up to RMB2.0 billion with the founder in April 2015 to finance the
repayment by the founder of the interest under the above financing.
(q) Investment in Meizu Technology Corporation Limited ("Meizu")
In February 2015, the Company completed an investment in convertible preferred shares of Meizu representing an equity interest of approximately 29% on
a fully-diluted basis. Meizu is one of the leading smart phone manufacturers in the PRC. The total cash consideration of US$590 million
(RMB3,619 million) was paid upon the closing of the transaction. The convertible preferred shares are not considered in-substance common stock given
that such shares contain certain terms such as dividend and liquidation preferences over ordinary shares. As a result, the investment in convertible preferred
shares is accounted for under the cost method (Note 14).
(r) Investment in Intime Retail (Group) Company Limited ("Intime")
In July 2014, the Company completed the subscription for newly issued ordinary shares representing a 9.9% equity interest in Intime. Intime is one of the
leading department store operators in the PRC that is listed on the Hong Kong Stock Exchange. In addition, the Company completed a subscription for a
convertible bond which is convertible into ordinary shares of Intime and upon conversion would increase the Company's equity interest in Intime to
approximately 26%. The convertible bond has a maturity date which is the third anniversary of the issue date of the bond unless previously converted or
redeemed upon the occurrence of certain redemption events, and bears an interest of 1.5% per annum on the principal amount of the bond. The total cash
consideration of HK$5,368 million (RMB4,264 million) was paid upon the closing of the transaction. The investment in ordinary shares in Intime is
accounted for as an available-for-sale security and the investment in the convertible bond is accounted for under the fair value option and recorded under
investment securities (Note 12).
(s) Investment in Singapore Post Limited ("SingPost")
In July 2014, the Company completed the acquisition of ordinary shares in SingPost, which consists of newly issued ordinary shares and existing ordinary
shares held in treasury by SingPost, representing approximately 10% of the issued share capital of SingPost. SingPost is a national post service provider in
Singapore and a leading provider of e-commerce logistics solutions in the Asia-Pacific region that is listed on the Singapore Exchange. The total purchase
price of S$313 million (RMB1,548 million) has been paid upon the closing of the transaction. Such investment is accounted for as an available-for-sale
security (Note 12).
In July 2015, the Company entered into a joint venture agreement with SingPost, pursuant to which the Company will invest up to S$92 million
(RMB440 million) for a 34% equity interest in a wholly-owned subsidiary of SingPost, which provides end-to-end e-commerce logistics and fulfillment
services across the Asia Pacific region. The completion of this transaction is subject to a number of customary closing conditions.
In addition, the Company agreed to subscribe for newly issued ordinary shares of SingPost, representing approximately 5% of the existing issued share
capital of SingPost. Upon completion, the Company's equity interest in SingPost would increase to approximately 15%. The total cash consideration for the
subscription is
F-50
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(s) Investment in Singapore Post Limited ("SingPost") (Continued)
S$187 million (RMB895 million). The completion of this transaction is subject to a number of conditions including the approval by the shareholders of
SingPost and certain regulatory authorities.
(t) Investment in Youku Tudou Inc. ("Youku Tudou")
In May 2014, the Company completed an acquisition of ordinary shares representing an effective equity interest of 16.5% on a fully-diluted basis in Youku
Tudou. Youku Tudou, a company that was previously listed on the New York Stock Exchange, is a leading multi-screen entertainment and media company
in the PRC. The cash consideration of US$1,090 million (RMB6,723 million) was paid upon the closing of the transaction. The Company made this
investment on the same terms together with Yunfeng Capital, which is also a co-investor in Youku Tudou. The Company appointed one director to the
board of Youku Tudou and the investment in Youku Tudou is accounted for under the equity method (Note 14). Out of the total purchase consideration,
RMB918 million was allocated to amortizable intangible assets, RMB4,158 million was allocated to goodwill, RMB230 million was allocated to deferred
tax liabilities and RMB1,877 million was allocated to net assets acquired.
In April 2016, the Company completed an acquisition of all of the issued and outstanding shares of Youku Tudou that the Company or Yunfeng Capital did
not already own, at a purchase price of US$27.60 per ADS. Following the completion of the transaction, Youku Tudou became a consolidated subsidiary of
the Company, with Yunfeng Capital holding an approximately 2% minority interest and the management of Youku Tudou retaining an option to purchase
up to 15% of its equity. The listing of the ADS of Youku Tudou on the New York Stock Exchange was withdrawn.
Youku Tudou is a core part of the Company's strategy to offer digital entertainment to consumers in the Company's ecosystem, thereby strengthening user
engagement as well as enabling a new marketing channel for the merchants in the Company's ecosystem. Further, Youku Tudou creates additional revenue
sources for the Company from advertising and membership subscriptions.
The total cash consideration of US$4.4 billion (RMB28.4 billion) was paid upon the closing of the transaction. Upon the issuance of the consolidated
financial statements, the accounting for such business combination, including the purchase price allocation and the gain or loss arising from this transaction,
has not been finalized.
(u) Investment in Weibo Corporation ("Weibo")
In April 2014, in connection with Weibo's initial public offering, the Company acquired additional shares of Weibo for an aggregate purchase price of
US$449 million (RMB2,764 million) pursuant to the option to increase the equity interest by the Company in Weibo to approximately 30% on a fully-
diluted basis (including the shares to be issued in connection with Weibo's initial public offering). Weibo is a social media platform in the PRC that is listed
on the Nasdaq. All preferred shares previously held by the Company were automatically converted into ordinary shares upon completion of Weibo's initial
public offering. Prior to the transaction, Weibo was an equity investee accounted for under the cost method in which the Company initially acquired an 18%
equity interest on a fully-diluted basis for a cash consideration of US$586 million (RMB3,645 million) in April 2013. After the transaction in April 2014,
such investment is accounted for under the equity method (Note 14). Out of the total purchase consideration, which included the cash purchase price and the
carrying amount of the previously held interest in Weibo, RMB1,126 million was allocated to amortizable intangible
F-51
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(u) Investment in Weibo Corporation ("Weibo") (Continued)
assets, RMB3,978 million was allocated to goodwill, RMB282 million was allocated to deferred tax liabilities and RMB1,548 million was allocated to net
assets acquired.
(v) Investment in Haier Electronics Group Co., Ltd. ("Haier")
In March 2014, the Company completed an acquisition of ordinary shares representing an approximately 2% equity interest in Haier, a company that is
listed on the Hong Kong Stock Exchange, which is principally engaged in the research, development, manufacture and sale of electrical appliances,
especially home electrical appliances such as refrigerators and air conditioners. The purchase price consisted of cash consideration of HK$965 million
(RMB763 million). Such investment is accounted for as an available-for-sale security (Note 12).
In addition, the Company completed an acquisition of a 9.9% equity interest in a wholly-owned subsidiary of Haier that is engaged in the logistics business
in the PRC for cash consideration of HK$540 million (RMB427 million). Such investment is accounted for under the equity method given the existence of
significant influence (Note 14). RMB252 million of the purchase price was allocated to amortizable intangible assets and goodwill, RMB20 million was
allocated to deferred tax liabilities and RMB195 million was allocated to net assets acquired.
Furthermore, the Company completed the subscription for a convertible bond for a purchase price of HK$1,316 million (RMB1,044 million) which is either
convertible into ordinary shares of Haier or exchangeable into a 24% equity interest in the logistics business of Haier, subject to the receipt of certain
regulatory approvals. The entire convertible bond is accounted for under the fair value option and recorded under investment securities (Note 12).
(w) Investment in Cainiao Smart Logistics Network Limited ("Cainiao Network")
During the year ended March 31, 2014, the Company took part in establishing Cainiao Network Technology Co. Ltd. together with other parties with
significant operational experience in logistics, retail, and real estate in the PRC. Cainiao Network Technology Co. Ltd. is a joint venture which is a logistics
data platform that leverages the capacity and capabilities of a network of logistics partners to fulfill the logistics needs of the Company's core commerce
business. A total amount of RMB2,400 million was invested in the joint venture, in which the Company owned a 48% equity interest as of March 31, 2014
and 2015.
In March 2016, Cainiao Network Technology Co. Ltd. completed a restructuring process to establish a new holding company and it became a wholly
owned subsidiary of Cainiao Network. In March 2016, the Company participated in Cainiao Network's equity financing round, after which the Company's
investment increased from RMB2,400 million initially in Cainiao Network Technology Co. Ltd. to RMB6,992 million in Cainiao Network, the Company's
equity interest in Cainiao Network was diluted to approximately 47%. A gain of RMB448 million arising from such deemed disposal was recognized in
share of results of equity investees in the consolidated income statement for the year ended March 31, 2016.
For accounting purpose, the investment in Cainiao Network is accounted for under the equity method (Note 14).
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
Equity transactions and acquisitions that were not completed as of March 31, 2016
(x) Investment in Lazada Group S.A. ("Lazada")
In April 2016, the Company completed an acquisition of a controlling stake in Lazada for a total cash consideration of US$1.0 billion (RMB6.5 billion).
Lazada operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, with local language websites and mobile
apps in each of the six markets.
Lazada offers third-party brands and merchants a marketplace solution with simple and direct access to consumers in these six countries through one retail
channel. It also sells products owned by its retail operations and has developed its own logistics infrastructure with warehouses and a last-mile delivery fleet
to offer quick and reliable delivery to its customers. The Company intends that Lazada will be the vehicle for expansion into the Southeast Asia consumer
market, including potential cross-border opportunities introducing Chinese merchants and international brands to Southeast Asian consumers.
Lazada became a consolidated subsidiary of the Company after the completion of the transaction. In connection with the transaction, the Company entered
into a put and call arrangement with certain Lazada shareholders, giving the Company the right to purchase, and the shareholders the right to sell
collectively, their remaining equity interest in Lazada at fair market value during a six-month period after the first anniversary of the closing of the
transaction. Upon the issuance of these consolidated financial statements, the accounting for such business combination, including the purchase price
allocation, has not been finalized.
(y) Investment in media business of SCMP Group Limited
In April 2016, the Company completed an acquisition of the media business of SCMP Group Limited, a company that is listed on the Hong Kong Stock
Exchange, at a cash consideration of HK$2.1 billion (RMB1.8 billion). Apart from the flagship South China Morning Post, the premier English newspaper
in Hong Kong, the Company also acquired the magazine, recruitment, outdoor media, events and conferences, education and digital media businesses of
SCMP Group Limited. The acquired companies became wholly-owned subsidiaries of the Company after the completion of the transaction. Upon the
issuance of these consolidated financial statements, the accounting for such business combination, including the purchase price allocation, has not
been finalized.
(z) Investment in AGTech Holdings Limited ("AGTech")
In March 2016, an investment vehicle which is 60% owned by the Company and 40% owned by Ant Financial Services, entered into a subscription
agreement to subscribe for newly issued ordinary shares of AGTech representing an approximately 51% equity interest in AGTech. AGTech is an
integrated lottery technology and services company in the PRC that is listed on the Hong Kong Growth Enterprise Market. The total cash consideration is
expected to approximate HK$1,675 million (RMB1,397 million). In addition, the investment vehicle will subscribe for convertible bonds for a purchase
price of approximately HK$713 million (RMB595 million), which are convertible into ordinary shares of AGTech. Upon the conversion of the convertible
bonds, the investment vehicle's equity interest in AGTech would be increased to approximately 59%. The completion of this transaction is subject to a
number of customary closing conditions including the approval by shareholders and certain regulatory authorities.
F-53
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(aa) Investment in Suning Commerce Group Co., Ltd. ("Suning")
In August 2015, the Company entered into an investment agreement with Suning, pursuant to which the Company agreed to invest in newly issued ordinary
shares which represent a 19.99% equity interest in Suning. Suning, a company that is listed on the Shenzhen Stock Exchange, is one of the largest consumer
electronics retail chains in the PRC. The total cash consideration is expected to approximate RMB28.2 billion.
Concurrent with the Company's investment in Suning, Suning will subscribe for approximately 26.3 million newly issued ordinary shares of the Company
which represent a 1.1% equity interest in the Company for a cash consideration of US$81.51 per ordinary share. As part of the transaction, the Company
and Suning have entered into a strategic collaboration agreement to build on synergies in e-commerce, logistics and incremental business through joint
omni-channel initiatives. The completion of these transactions is subject to a number of customary closing conditions.
5. Revenue
Revenue breakdown is as follows:
China commerce
Retail (i)
Online marketing services
Commission
Others
Wholesale (ii)
Total China commerce
International commerce
Retail (iii)
Wholesale (iv)
Total international commerce
Cloud computing (v)
Others (vi)
Total
Year ended March 31,
2014
2015
2016
(in millions of RMB)
29,729
12,023
1,080
42,832
2,300
45,132
938
3,913
4,851
773
1,748
52,504
37,509
21,201
1,022
59,732
3,205
62,937
1,768
4,718
6,486
1,271
5,510
76,204
52,396
25,829
1,808
80,033
4,288
84,321
2,204
5,425
7,629
3,019
6,174
101,143
(i)
(ii)
(iii)
(iv)
Revenue from China commerce retail is primarily generated from the Company's China retail marketplaces.
Revenue from China commerce wholesale is primarily generated from 1688.com and includes fees from memberships and value-added services and
online marketing services revenue.
Revenue from International commerce retail is primarily generated from AliExpress.
Revenue from International commerce wholesale is primarily generated from Alibaba.com and includes fees from memberships and value-added
services and online marketing services revenue.
F-54
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
5. Revenue (Continued)
(v)
(vi)
Revenue from cloud computing is primarily generated from the provision of services, such as data storage, elastic computing, database and large
scale computing services, as well as web hosting and domain name registration.
Other revenue mainly represents revenue from online marketing and other services provided by UCWeb and AutoNavi, SME Annual Fee received
from Ant Financial Services and interest income generated from micro loans before the completion of the restructuring of Payment Services during
the year ended March 31, 2015 (Note 4(b)).
Revenue by type of service is as follows:
Online marketing services
P4P and display marketing
Other online marketing services
Total online marketing services
Commission
Membership fees and value-added services
Others (i)
Total
Year ended March 31,
2014
2015
2016
(in millions of RMB)
27,869
3,059
30,928
12,778
5,135
3,663
52,504
36,197
3,938
40,135
22,705
6,431
6,933
76,204
53,185
3,963
57,148
27,793
7,627
8,575
101,143
(i)
Other revenue mainly represents revenue from cloud computing, revenue from other services provided by UCWeb and AutoNavi, storefront fees,
SME Annual Fee received from Ant Financial Services and interest income generated from micro loans before the completion of the restructuring of
Payment Services during the year ended March 31, 2015 (Note 4(b)).
6. Other income, net
2014
Year ended March 31,
2015
(in millions of RMB)
2016
Royalty fee and software technology services fee charged to Ant Financial Services and Alipay
(Note 23)
Government grants (i)
Amortization of the excess value in relation to the restructuring of Payment Services (Note 4(b))
Others
Total
1,764
252
—
413
2,429
1,667
327
(166)
658
2,486
1,122
401
(264)
799
2,058
(i)
Government grants mainly represent amounts received from central and local governments in connection with the Company's investments in local
business districts and contributions to technology development.
F-55
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses
Composition of income tax expenses
Current income tax expense
Deferred taxation
2016
2014
Year ended March 31,
2015
(in millions of RMB)
4,757
1,659
6,416
1,730
1,466
3,196
7,223
1,226
8,449
Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, upon payments of dividends by
the Company to its shareholders, no Cayman Islands withholding tax is imposed. The Company's subsidiaries incorporated in Hong Kong were subject to
the Hong Kong profits tax rate at 16.5% for the years ended March 31, 2014, 2015 and 2016. The Company's subsidiaries incorporated in other jurisdictions
such as the United States, Singapore and Japan were subject to income tax charges calculated on the basis of the tax laws enacted or substantially enacted in
the countries where the Company's subsidiaries operate and generate income.
Current income tax expense primarily represents the provision for PRC Enterprise Income Tax ("EIT") for subsidiaries operating in the PRC. These
subsidiaries are subject to EIT on their taxable income as reported in their respective statutory financial statements adjusted in accordance with the relevant
tax laws, rules and regulations in the PRC.
Under the PRC Enterprise Income Tax Law (the "EIT Law"), the standard enterprise income tax rate for domestic enterprises and foreign invested
enterprises is 25%. In addition, the EIT Law provides for, among others, a preferential tax rate of 15% for enterprises qualified as High and
New Technology Enterprises. Further, certain subsidiaries were recognized as having status as a Software Enterprise and thereby entitled to enjoy full
exemption from EIT for two years beginning with their first profitable year and a 50% reduction for the subsequent three years. In addition, a duly
recognized Key Software Enterprise within China's national plan can enjoy a preferential EIT rate of 10%. The Key Software Enterprise status is subject to
review by the relevant authorities every two years. The timing of the annual review and notification by the relevant authorities may vary from year to year,
and the related tax adjustments in relation to the change in applicable EIT rate are accounted for in the period in which the Key Software Enterprise status
is recognized.
The tax status of the subsidiaries of the Company with major taxable profits is described below:
•
•
Alibaba (China) Technology Co., Ltd. ("Alibaba China"), an entity primarily engaged in the operations of the Company's wholesale marketplaces,
was recognized as a High and New Technology Enterprise and Key Software Enterprise during the taxation years of 2013 and 2014, and was
thereby entitled to an EIT rate of 10% during these taxation years.
Taobao (China) Software Co., Ltd. ("Taobao China"), an entity primarily engaged in the operations of Taobao Marketplace, was recognized as a
High and New Technology Enterprise and has been recognized as a Key Software Enterprise during the taxation years of 2013 and 2014 and was
thereby subject to an EIT rate of 10% during such taxation years.
F-56
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses (Continued)
•
Zhejiang Tmall Technology Co., Ltd. ("Tmall China"), an entity primarily engaged in the operations of Tmall, was recognized as a High and
New Technology Enterprise and has been granted the Software Enterprise status and is thereby entitled to enjoy an income tax exemption for two
years beginning with its first profitable year in taxation year of 2012, and a 50% reduction for the subsequent three years starting in taxation year of
2014. Accordingly, Tmall China was exempted from EIT during the taxation year of 2013 and entitled to an EIT rate of 12.5% during the taxation
years of 2014, 2015 and 2016 and 15% thereafter for so long as Tmall China continues to qualify as a High and New Technology Enterprise.
The consolidated financial statements did not reflect the potential tax rate adjustments that may arise from the renewal of the Key Software Enterprises
status by Alibaba China and Taobao China for the taxation years of 2015 and 2016 because the annual review and notification has not yet been obtained up
to March 31, 2016. Accordingly, Alibaba China and Taobao China, which continued to qualify as a High and New Technology Enterprise, applied an EIT
rate of 15% in the consolidated financial statements during these periods.
Most of the remaining PRC entities of the Company are subject to EIT at 25% for the years ended March 31, 2014, 2015 and 2016.
Pursuant to the EIT Law, a 10% withholding tax is levied on dividends declared by PRC companies to their foreign investors. A lower withholding tax rate
of 5% is applicable if direct foreign investors with at least 25% equity interest in the PRC company are incorporated in Hong Kong and meet the relevant
requirements pursuant to the tax arrangement between the PRC and Hong Kong. Since the equity holders of the major PRC subsidiaries of the Company are
Hong Kong incorporated companies, the Company has used 5% to provide for deferred tax liabilities on retained earnings which are anticipated to be
distributed. As of March 31, 2016, the Company had fully accrued the withholding tax on the earnings distributable by all of the subsidiaries of the
Company in the PRC, except for those undistributed earnings that the Company intends to invest indefinitely in the PRC of RMB13.6 billion.
F-57
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses (Continued)
Composition of deferred tax assets and liabilities
Deferred tax assets
Current:
Deferred revenue and customer advances
Tax losses carried forward and others (i)
Less: Valuation allowance
Total deferred tax assets, current portion (Note 13)
Non-current:
Deferred revenue and customer advances
Property and equipment
Tax losses carried forward and others (i)
Less: Valuation allowance
Total deferred tax assets, non-current portion (Note 13)
Total deferred tax assets
Deferred tax liabilities
Current:
Others
Non-current:
Withholding tax on undistributed earnings (ii)
Identifiable intangible assets
Available-for-sale securities
Others
Total deferred tax liabilities, non current portion
Total deferred tax liabilities
Net deferred tax liabilities
As of March 31,
2015
2016
(in millions of RMB)
24
381
405
(149)
256
31
14
1,139
1,184
(1,027)
157
413
15
767
782
(331)
451
17
25
1,021
1,063
(1,033)
30
481
(17)
(9)
(3,891)
(575)
—
(27)
(4,493)
(4,510)
(4,097)
(5,452)
(508)
(488)
(23)
(6,471)
(6,480)
(5,999)
(i)
(ii)
Others primarily represent accrued expenses which are not deductible until paid under PRC tax laws.
The related deferred tax liabilities as of March 31, 2015 and 2016 were provided on the assumption that 100% of the distributable reserves of the
major PRC subsidiaries will be distributed as dividends, except for those undistributed earnings that the Company intends to invest indefinitely in
the PRC of RMB13.6 billion.
Valuation allowances have been provided on the deferred tax assets mainly related to the tax losses carried forward due to the uncertainty surrounding their
realization. If events occur in the future that improve the certainty of realization, an adjustment to the valuation allowances will be made and consequently
reduce the income tax expenses.
F-58
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses (Continued)
As of March 31, 2016, the accumulated tax losses of subsidiaries incorporated in Hong Kong, the United States and Singapore, subject to the agreement of
the relevant tax authorities, of RMB1,175 million, RMB696 million and RMB220 million, respectively, are allowed to be carried forward to offset against
future taxable profits. Such carry forward of tax losses in Hong Kong and Singapore has no time limit, while the tax losses in the United States will expire,
if unused, in the years ending March 31, 2019 through 2036. The accumulated tax losses of subsidiaries incorporated in PRC, subject to the agreement of
the PRC tax authorities, of RMB2,917 million as of March 31, 2016 will expire, if unused, in the years ending March 31, 2017 through 2021.
Reconciliation of the differences between the statutory EIT rate applicable to profits of the consolidated entities and the income tax expenses of
the Company:
Income before income tax and share of results of equity investees
Income tax computed at statutory EIT rate (25%)
Effect of different tax rates available to different jurisdictions
Effect of tax holiday and preferential tax benefit on assessable profits of subsidiaries
incorporated in the PRC
Non-deductible expenses and non-taxable income, net (i)
Tax savings from additional deductions on certain research and development expenses
available for subsidiaries incorporated in the PRC (ii)
Withholding tax on the earnings remitted and anticipated to be remitted
Change in valuation allowance, deduction of certain share-based compensation expense
and others
Income tax expenses
Effect of tax holidays inside the PRC on basic earnings per share/ADS (RMB)
Year ended March 31,
2014
2016
2015
(in millions of RMB, except per
share data)
32,326
8,082
33
81,468
20,367
(869)
26,802
6,701
(9)
(6,414) (5,881) (6,680)
(4,994)
3,368
1,657
(483) (1,096) (1,205)
1,573
1,898
1,445
299
3,196
2.95
12
6,416
2.57
257
8,449
2.72
(i)
(ii)
Expenses not deductible for tax purposes and non-taxable income primarily represent investment income (loss), share-based compensation expense,
equity-settled donation expense, interest expense, exchange differences. Investment income (loss) during the year ended March 31, 2016 included
gains from the revaluation of the Company's remaining equity interest in Alibaba Pictures (Note 4(e)) and from the revaluation of previously held
equity interest relating to obtaining Control of Alibaba Health (Note 4(c)).
This amount represents tax incentives relating to the research and development expenses of certain major operating subsidiaries in the PRC. This tax
incentive enables the Company to claim an additional tax deduction amounting to 50% of the qualified research and development expenses incurred.
8. Share-based awards
Share-based awards such as incentive and non-statutory options, restricted shares, RSUs, dividend equivalent rights, share appreciation rights and share
payments may be granted to any directors, employees and consultants of the Company or affiliated companies under the employee share option plans
adopted in 1999, 2004, 2005, the incentive plan adopted in 2007 and the equity incentive plan adopted in 2011, which govern the terms of the awards. In
September 2014, the Company adopted a post-IPO equity incentive plan
F-59
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(the "2014 Plan"). Share-based awards are only available for issuance under our 2014 Plan. If an award under the previous plan terminates, expires
or lapses, or is cancelled for any reason, ordinary shares subject to the award become available for the grant of a new award under the 2014 Plan. On
April 1, 2015 and each anniversary thereof, an additional amount equal to the lesser of (A) 25,000,000 ordinary shares, and (B) such lesser number
of ordinary shares determined by the board of directors will become available for the grant of a new award under the 2014 Plan. The 2014 Plan has a
ten-year term. All share awards granted under the 2014 Plan are subject to dilution protection should the capital structure of the Company be
affected by a share split, reverse share split, share dividend or other dilutive action. The 2014 Plan has substantially similar terms as the plan
adopted in 2011 and other previous plans except that (i) the 2014 Plan is administered by the compensation committee of the board (or a
subcommittee thereof), or such other committee of the board to which the board has delegated power to act, or the board in absence of any such
committee and some definitions, and (ii) certain terms are adjusted for the purposes of compliance with the Sarbanes-Oxley Act of 2002,
U.S. Securities Act of 1933 and the regulations thereunder, as amended from time to time and U.S. Securities Exchange Act of 1934 and the
regulations thereunder, as amended from time to time, among others. As of March 31, 2016, the number of shares authorized but unissued was
23,050,439 ordinary shares.
Share options and RSUs granted are generally subject to a four-year vesting schedule as determined by the administrator of the plans. Under the four-year
vesting schedule, depending on the nature and the purpose of the grant, share options and RSUs in general vest 25% or 50% upon the first or second
anniversary of the vesting commencement date, respectively, as defined in the grant agreement, and thereafter 25% every year. No outstanding share
options or RSUs will be exercisable or subject to vesting after the expiry of a maximum of six years from the date of grant. Starting from the year ended
March 31, 2015, certain share options and RSUs granted to senior management members of the Company were subject to a six-year pro rata vesting
schedule. No outstanding share options or RSUs will be exercisable or subject to vesting after the expiry of a maximum of eight years from the date
of grant.
Early exercise of share options is allowable under all the aforementioned plans; however, any unvested shares are subject to repurchase by the Company at
the lower of the original exercise price or the fair market value upon termination of service contracts with the grantees.
F-60
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(a) Share options relating to ordinary shares of the Company
A summary of changes in the share options relating to ordinary shares granted by the Company during the year ended March 31, 2016 is as follows:
Outstanding at April 1, 2015
Granted
Exercised
Cancelled/forfeited/expired
Outstanding at March 31, 2016 (i)
Vested and exercisable at March 31, 2016
Vested and expected to vest at March 31, 2016 (ii)
Number
of share
options
Weighted
average
exercise
price
US$
42.29
21,339,410
5,159,400
81.55
(3,091,919) 15.23
(5,699,563) 54.99
54.37
17,707,328
50.21
4,062,743
54.68
17,255,700
Weighted
average
remaining
contractual
life
(in years)
6.0
5.6
5.8
5.8
(i)
(ii)
Outstanding options as of March 31, 2016 include 2,699,250 unvested options early exercised.
The share options expected to vest are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding share options, including
early exercised options.
As of March 31, 2015 and 2016, 605,340 and 384,116 outstanding share options were held by non-employees, respectively. These share options are subject
to re-measurement through each vesting date to determine the appropriate share-based compensation expense.
As of March 31, 2016, the aggregate intrinsic value of all outstanding options was RMB2,964 million. As of the same date, the aggregate intrinsic value of
options that were vested and exercisable and options that were vested and expected to vest is RMB757 million and RMB2,801 million, respectively.
During the years ended March 31, 2014, 2015 and 2016, the weighted average grant date fair value of share options granted was US$6.14, US$23.07 and
US$28.65, respectively, and the total grant date fair value of options vested during the same years was RMB123 million, RMB134 million and
RMB602 million, respectively. During the same years, the aggregate intrinsic value of share options exercised was RMB1,698 million, RMB488 million
and RMB556 million, respectively.
Cash received from option exercises under the share option plans, including repayment of loans and interest receivable on employee loans for the exercise
of vested options, for the years ended March 31, 2014, 2015 and 2016 was RMB1,543 million, RMB313 million and RMB693 million, respectively.
F-61
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(a) Share options relating to ordinary shares of the Company (Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model and the assumptions below:
Risk-free interest rate (i)
Expected dividend yield (ii)
Expected life (years) (iii)
Expected volatility (iv)
2014
Year ended March 31,
2015
0.69% - 1.52% 1.38% - 1.99% 1.24% - 1.79%
0%
0%
0%
2016
4.25 - 4.38
4.25 - 5.75
4.25 - 5.75
37.0% - 39.3% 35.0% - 40.8% 33.4% - 35.7%
(i)
(ii)
(iii)
(iv)
Risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expected life of the share options in
effect at the time of grant.
Expected dividend is assumed to be 0% as the Company has no history or expectation of paying a dividend on its ordinary shares.
Expected life of share options is based on the average between the vesting period and the contractual term for each grant.
Expected volatility is assumed based on the historical volatility of the Company's comparable companies in the period equal to the expected life of
each grant.
As of March 31, 2016, there were RMB1,021 million of unamortized compensation costs related to these outstanding share options, net of expected
forfeitures and after re-measurement applicable to share options granted to non-employees. These amounts are expected to be recognized over a weighted
average period of 2.8 years.
During the years ended March 31, 2014, 2015 and 2016, the Company recognized share-based compensation expense of RMB417 million,
RMB1,152 million and RMB578 million, respectively, in connection with the above share options, net of reimbursement from Ant Financial Services
(Note 23).
(b) Restricted shares and RSUs relating to ordinary shares of the Company
A summary of the changes in the restricted shares and RSUs related to ordinary shares granted by the Company during the year ended March 31, 2016 is
as follows:
Awarded and unvested at April 1, 2015
Granted
Vested
Cancelled/forfeited
Awarded and unvested at March 31, 2016
Expected to vest at March 31, 2016 (i)
Number
of restricted
shares and
RSUs
Weighted-
average
grant date
fair value
US$
45.68
72.30
34.60
52.35
59.75
58.25
67,981,170
30,865,598
(20,813,741)
(6,196,662)
71,836,365
62,144,018
(i)
Restricted shares and RSUs expected to vest are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding restricted
shares and RSUs.
F-62
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(b) Restricted shares and RSUs relating to ordinary shares of the Company (Continued)
As of March 31, 2015 and 2016, 6,447,715 and 5,880,443 outstanding RSUs were granted to non-employees, respectively. These awards are subject to re-
measurement through each vesting date to determine the appropriate share-based compensation expense.
As of March 31, 2016, there were RMB12,688 million of unamortized compensation costs related to these outstanding restricted shares and RSUs, net of
expected forfeitures and after re-measurement applicable to these awards granted to non-employees. These amounts are expected to be recognized over a
weighted average period of 2.1 years.
During the years ended March 31, 2014, 2015 and 2016, the Company recognized share-based compensation expense of RMB2,378 million,
RMB7,767 million and RMB9,915 million, respectively, in connection with the above restricted shares and RSUs, net of reimbursement from Ant Financial
Services (Note 23).
(c) Partner Capital Investment Plan relating to ordinary shares of the Company
During the years ended March 31, 2014 and 2015, the Company offered selected members of the Alibaba Partnership subscription rights to acquire
restricted shares of the Company. These rights and the underlying restricted shares are only subject to a non-compete provision but not other vesting
conditions (employment or otherwise) and they entitle the holders to purchase restricted shares at US$14.50 per share during a four-year period. Upon the
exercise of such rights, the underlying ordinary shares may not be transferred for a period of eight years from the date of subscription of the relevant rights.
The number of ordinary shares underlying these rights is 18,000,000 shares of which the rights to subscribe 14,500,000 shares were offered and subscribed
up to March 31, 2016. These rights were accounted for as a noncontrolling interest of the Company as such rights were issued by the subsidiaries and
classified as equity at the subsidiary level. Share-based compensation expense of nil, RMB211 million and nil was recognized in connection with these
rights for the years ended March 31, 2014, 2015 and 2016, respectively.
The fair value of each right to acquire restricted shares is estimated on the subscription date using the Black-Scholes model and the assumptions below:
Risk-free interest rate (i)
Expected dividend yield (ii)
Expected life (years) (iii)
Expected volatility (iv)
Discount for post-vesting sale restrictions (v)
Year ended
March 31,
2014
2015
1.03%
0%
4.00
36.9%
38.0%
1.50%
0%
4.00
38.1%
35.0%
(i)
(ii)
(iii)
Risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expected life of the share-based
awards in effect at the time of grant.
Expected dividend is assumed to be 0% as the Company has no history or expectation of paying a dividend on its ordinary shares.
Expected life of the rights is based on management's estimate on timing of redemption for ordinary shares by the participants.
F-63
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(c) Partner Capital Investment Plan relating to ordinary shares of the Company (Continued)
(iv)
(v)
Expected volatility is assumed based on the historical volatility of the Company's comparable companies in the period equal to expected life of
each right.
Discount for post-vesting sale restrictions applied on the underlying ordinary shares takes into consideration the restriction on sales of eight years.
(d) Share-based awards relating to Ant Financial Services
Junhan, the general partner of which is controlled by the executive chairman of the Company and a major equity holder of Ant Financial Services, made
grants of certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to a substantial number of
employees of the Company. The vesting of such awards is conditional upon the fulfillment of requisite service conditions to the Company, and such awards
will be settled in cash by Junhan upon the disposal by the holders. Junhan has the right to repurchase the vested awards from the holders upon an initial
public offering of Ant Financial Services or the termination of the employment of the employees with the Company at a price to be determined based on the
then fair market value of Ant Financial Services. The Company has no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost
associated with these awards.
For accounting purposes, the cost relating to such share-based awards granted by the shareholder through Junhan is recognized by the Company as a
shareholder contribution as the award will ultimately be settled in cash by Junhan. The award is accounted for as a financial derivative and initially
measured at its fair value, and the related expense will be recognized over the requisite service period in the consolidated income statements with a
corresponding credit to additional paid-in capital. Subsequent changes in the fair value of the award are recorded in the consolidated income statements
through the date on which the underlying award is settled by Junhan.
As of March 31, 2016, there were RMB2,542 million of unamortized compensation costs related to these outstanding share-based awards of Ant Financial
Services granted by Junhan, net of expected forfeitures. These amounts are expected to be recognized over a weighted average period of 1.7 years.
During the years ended March 31, 2015 and 2016, the Company recognized expenses of RMB3,788 million and RMB5,506 million in respect of the share-
based awards relating to Ant Financial Services granted by Junhan, respectively. The expenses recognized for the year ended March 31, 2014 were
insignificant.
(e) Share-based compensation expense by function
Cost of revenue
Product development expenses
Sales and marketing expenses
General and administrative expenses
Total
F-64
Year ended March 31,
2014
2015
2016
1,154
795
189
706
2,844
(in millions of RMB)
4,176
3,876
1,235
3,741
13,028
4,003
5,703
1,963
4,413
16,082
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
9. Equity-settled donation expense
During the year ended March 31, 2014, the Company granted 50,000,000 share options to a non-profit organization designated by two members of
management of the Company, subject to irrevocable instructions to designate and transfer these share options to the separate charitable trusts to be
established by these two members of management of the Company. These share options were approved by the directors of the board and such options are
not subject to any vesting conditions and are exercisable for a period of four years starting from the grant date. The exercise price of these options is
US$25.00 per share and was determined with reference to the fair market value of the ordinary shares of the Company at the time of the grant. For each of
the eight years beginning one year after the date of listing of the ordinary shares of the Company on a recognized stock exchange, the charitable trusts are
permitted to sell only up to 6,250,000 ordinary shares per year excluding such number of unsold ordinary shares carried forward from previous years.
The fair value of each share option is estimated on the grant date using the Black-Scholes model and the assumptions below:
Risk-free interest rate (i)
Expected dividend yield (ii)
Expected life (years) (iii)
Expected volatility (iv)
Discount for post-vesting sale restrictions (v)
Year ended
March 31,
2014
1.02%
0%
4.00
37.2%
18.0% - 38.0%
(i)
(ii)
(iii)
(iv)
(v)
Risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expected life of these options at the
time of grant.
Expected dividend is assumed to be 0% as the Company has no history or expectation of paying a dividend on its ordinary shares.
Expected life of the options is based on management's estimate on timing of exercise.
Expected volatility is assumed based on the historical volatility of the Company's comparable companies in the period equal to expected life of
the options.
Discount for post-vesting sale restrictions applied on the underlying ordinary shares takes into consideration of the restriction on sales of two to
eight years.
As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full and
recorded in general and administrative expenses during the year ended March 31, 2014.
10. Earnings per share
Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of outstanding ordinary
shares, adjusted for outstanding ordinary shares that are subject to repurchase.
For the calculation of diluted earnings per share, net income attributable to ordinary shareholders for basic earnings per share is adjusted by the effect of
dilutive securities, including share-based awards, under the treasury stock method. In addition, the computation of the diluted earnings per share assumes
the conversion of Convertible Preference Shares (Note 22) since their issuance. Potentially dilutive securities, of which the amounts are insignificant, have
been excluded from the computation of diluted net income per share if their inclusion is anti-dilutive.
F-65
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
10. Earnings per share (Continued)
The following table sets forth the computation of basic and diluted net income per share/ADS for the following periods:
Numerator:
Net income attributable to ordinary shareholders for computing net income per ordinary
share — basic
Reversal of accretion of Convertible Preference Shares
Reversal of dividend of Convertible Preference Shares
Net income attributable to ordinary shareholders for computing net income per ordinary
share — diluted
Shares (denominator):
Weighted average number of shares used in calculating net income per ordinary
share — basic (million shares)
Adjustments for dilutive share options and RSUs (million shares)
Conversion of Convertible Preference Shares (million shares)
Weighted average number of shares used in calculating net income per ordinary
share — diluted (million shares)
Net income per ordinary share/ADS — basic (RMB)
Net income per ordinary share/ADS — diluted (RMB)
Year ended March 31,
2014
2016
2015
(in millions of RMB, except share
data and per share data)
23,076
31
208
24,149
15
97
71,460
—
—
23,315
24,261
71,460
2,175
66
91
2,337
120
43
2,458
104
—
2,332
2,500
2,562
10.61
10.00
10.33
9.70
29.07
27.89
11. Restricted cash
Cash pledged for a bank in connection with its loan facilities for option exercise in favor of employees
of the Company and its related companies
Cash pledged for treasury management activities
Others
F-66
As at March 31,
2015
2016
(in millions of RMB)
997
1,013
287
2,297
302
760
284
1,346
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
12. Investment securities and fair value disclosure
Original
cost
Gross
unrealized
gains
As of March 31, 2015
Gross
unrealized
losses
(in millions of RMB)
Provision
for decline
in value
Fair
value
Assets
Trading securities:
Listed equity securities
Financial derivatives
Available-for-sale securities:
Listed equity securities and other treasury investments
Equity fund
Held-to-maturity securities
Convertible bonds accounted for under the fair value option
619
86
115
532
(58) —
(1) —
676
617
8,261
184
1,384
3,983
14,517
3,822
52
—
150
4,671
—
—
(446) —
—
—
(414) —
(919) —
11,637
236
1,384
3,719
18,269
Original
cost
Gross
unrealized
gains
As of March 31, 2016
Gross
unrealized
losses
(in millions of RMB)
Provision
for decline
in value
Fair
value
Assets
Trading securities:
Listed equity securities
Financial derivatives
Available-for-sale securities:
646
7
230
171
(105) —
—
—
771
178
Listed equity securities and other treasury investments
Held-to-maturity securities
Convertible bonds accounted for under the fair value option
12,701
10,760
4,256
28,370
5,940
—
366
6,707
(438)
—
—
(543)
(957) 17,246
(7) 10,753
4,622
(964) 33,570
—
During the years ended March 31, 2015 and 2016, the Company completed several investments accounted for as investment securities. Details of these
significant investments are summarized in Note 4.
During the years ended March 31, 2014, 2015 and 2016, gross realized gain of RMB148 million, RMB141 million and RMB1,012 million and gross
realized loss of RMB160 million, RMB97 million and RMB410 million from disposals of investment securities were recognized in the consolidated income
statements, respectively. During the years ended March 31, 2014, 2015 and 2016, impairment loss of nil, nil and RMB962 million were charged in the
consolidated income statements, respectively, as a result of other than temporary decline in values related to a listed equity security and a held-to-maturity
security.
As of March 31, 2014, 2015 and 2016, net unrealized gains of RMB299 million, RMB3,384 million and RMB5,502 million on available-for-sale securities
were recorded in accumulated other comprehensive income, respectively. For available-for-sale securities with unrealized loss, their related aggregate fair
values amounted
F-67
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
12. Investment securities and fair value disclosure (Continued)
to RMB4,929 million and RMB1,751 million as of March 31, 2015 and 2016, respectively. The carrying amounts of available-for-sale securities that were
in a loss position over twelve months were insignificant as of the same dates.
The carrying amount of long-term held-to-maturity investments approximates their fair value due to the fact that the related interest rates approximate rates
currently offered by financial institutions for similar debt instruments of comparable maturities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used
to measure fair value:
Level 1
Level 2
- Valuations based on unadjusted quoted prices for identical assets and liabilities in active markets.
- Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3
- Valuations based on unobservable inputs reflecting assumptions, consistent with reasonably available
assumptions made by other market participants. These valuations require significant judgment.
Fair value of short-term investments and listed equity securities are based on quoted prices in active markets for identical assets or liabilities. All other
financial instruments, such as derivative instruments and forward exchange contracts, are valued based on quoted market prices of similar instruments and
other significant inputs derived from or corroborated by observable market data. Convertible bonds are valued using binomial model with unobservable
inputs including risk-free interest rate, expected volatility and dividend yield. Contingent consideration is valued using an expected cashflow method with
unobservable inputs including the probability to achieve the operating and financial targets, which is assessed by the Company, in connection with the
contingent consideration arrangements.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
12. Investment securities and fair value disclosure (Continued)
The following table summarizes the Company's assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair
value hierarchy:
Assets
Short-term investments
Restricted cash
Trading securities:
Listed equity securities
Financial derivatives
Available-for-sale securities:
Listed equity securities
Equity fund
Convertible bond accounted for under the fair value option
Level 1
As of March 31, 2015
Level 2 Level 3
(in millions of RMB)
Total
14,148
2,297
—
—
—
—
14,148
2,297
676
—
—
617
—
—
676
617
11,637
236
—
28,994
—
—
—
617
—
—
3,719
3,719
11,637
236
3,719
33,330
Liabilities
Contingent consideration in relation to investments and acquisitions
—
—
1,278
1,278
Assets
Short-term investments
Restricted cash
Trading securities:
Listed equity securities
Financial derivatives
Available-for-sale securities:
Listed equity securities
Convertible bond accounted for under the fair value option
Liabilities
Forward exchange contracts
Contingent consideration in relation to investments and acquisitions
F-69
Level 1
As of March 31, 2016
Level 2 Level 3
(in millions of RMB)
Total
4,700
1,346
—
—
—
—
4,700
1,346
771
—
—
178
—
—
771
178
17,246
—
24,063
—
—
178
—
4,622
4,622
17,246
4,622
28,863
—
—
—
461
—
461
—
1,264
1,264
461
1,264
1,725
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
12. Investment securities and fair value disclosure (Continued)
Convertible bonds accounted for under the fair value option:
Balance at April 1, 2014
Additions (Note 4(r))
Decrease in fair value
Foreign currency translation adjustments
Balance at March 31, 2015
Increase in fair value
Foreign currency translation adjustments
Balance at March 31, 2016
Contingent consideration in relation to investments and acquisitions:
Balance at April 1, 2014
Repayment
Additions (Note 4(g))
Increase in fair value
Balance at March 31, 2015
Decrease in fair value
Balance at March 31, 2016
Amounts
(in millions of RMB)
1,044
2,944
(264)
(5)
3,719
630
273
4,622
Amounts
(in millions of RMB)
326
(227)
1,094
85
1,278
(14)
1,264
Other than contingent cash consideration disclosed in Note 4(g), items included in contingent consideration as of March 31, 2016 are individually
insignificant.
F-70
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
13. Prepayments, receivables and other assets
Current:
VAT receivables (i)
Amounts due from related companies (ii)
Prepaid cost of revenue, sales and marketing expenses and others
Accounts receivable, net of allowance
Deferred direct selling costs (iii)
Deferred tax assets (Note 7)
Advances to customers and merchants
Loan receivables, net
Interest receivables
Employee loans and advances (iv)
Others
Non-current:
Prepayment for acquisition of property and equipment
Employee loans (iv)
Prepaid upfront fees and debt issuance costs related to long-term borrowings and unsecured senior
notes
Deferred direct selling costs (iii)
Deferred tax assets (Note 7)
Prepayment for film rights, script agreements and in-production movies and TV episodes
Others
As of March 31,
2016
2015
(in millions of RMB)
3,457
4,842
433
1,067
809
256
373
835
561
153
1,027
13,813
6,589
3,236
1,242
1,209
948
451
435
390
314
124
2,090
17,028
1,883
534
4,358
451
311
149
157
375
676
4,085
354
148
30
—
666
6,007
(i)
(ii)
(iii)
VAT receivables as of March 31, 2016 mainly represent VAT receivable from relevant PRC tax authorities arising from OneTouch's VAT refund
service. OneTouch provides advance settlement of relevant VAT refund amount to its customers prior to receiving such VAT refund from tax
authorities. To provide this service, OneTouch relies on short term banking facilities and takes on credit risk if OneTouch fails to recover the
prepaid VAT amount.
Amounts due from related parties primarily represent balances arising from transactions with Ant Financial Services and its subsidiaries (Note 4(b)
and 23). The balances are unsecured, interest free and repayable within the next twelve months.
The Company is obligated to pay certain costs upon the receipt of membership fees from merchants or other customers, which primarily consist of
sales commissions. The membership fees are initially deferred and recognized as revenue in the consolidated income statements in the period in
which the services are rendered. As such, the related costs are also initially deferred and recognized in the consolidated income statements in the
same period as the related service fees are recognized.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
13. Prepayments, receivables and other assets (Continued)
(iv)
Employee loans mainly represent full recourse, interest-bearing share purchase, option exercise and tax loans, with a term of four to five years, to
employees of the Company and its related companies in order to finance their purchase of ordinary shares, exercise of options underlying the
ordinary shares as well as payment of related personal taxes. Such employee loans are pledged by ordinary shares owned by the employees and
carried interest at market rates. The balance also includes an interest-free loan program, with a term of five years, to eligible employees for purchase
of their first residential properties.
14. Investment in equity investees
Balance at April 1, 2014
Additions
Share of results and other comprehensive income (i)
Less: disposals and transfers (ii)
Less: impairment loss
Foreign currency translation adjustments
Balance at March 31, 2015
Additions (iii)
Share of results and other comprehensive income (i)
Less: disposals and transfers (ii)
Less: impairment loss
Foreign currency translation adjustments
Balance at March 31, 2016
Cost
method
Equity
method
(in millions of RMB)
Total
13,589
12,304
—
(9,818)
(419)
17
15,673
19,764
—
(2,150)
4,077
16,518
(1,148)
(806)
(438)
1
18,204
41,968
(1,296)
(751)
(902) —
72
879
58,197
33,264
17,666
28,822
(1,148)
(10,624)
(857)
18
33,877
61,732
(1,296)
(2,901)
(902)
951
91,461
(i)
(ii)
Share of results and other comprehensive income includes the share of results of the equity investees, the gain arising from the deemed disposal of
the equity investees and the amortization of basis differences. The balance excludes the gain arising from fair value adjustments of contingent
consideration related to an equity investee and the expenses in connection with the share-based awards relating to ordinary shares of the Company
and Ant Financial Services granted to employees of certain equity investees (Note 8(d)).
During the year ended March 31, 2015, transfers under the equity method were primarily related to the step acquisitions of OneTouch (Note 4(g)),
UCWeb (Note 4(f)), AutoNavi (Note 4(d)), as well as an additional investment in Weibo (Note 4(u)).
During the year ended March 31, 2016, disposals under the cost method were primarily related to the partial disposal of the Company's investment
in an equity investee. A gain of approximately US$471 million (RMB3,078 million) arising from such disposal was recognized in interest and
investment income, net in the consolidated income statement. Transfers under the equity method were primarily related to the consolidation of
Alibaba Health upon which the control was obtained by the Company (Note 4(c)).
(iii)
Additions during the year ended March 31, 2016 included the fair value of the retained noncontrolling investment in Alibaba Pictures which is
accounted for as an equity method investee after the deconsolidation (Note 4(e)).
F-72
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
14. Investment in equity investees (Continued)
During the years ended March 31, 2015 and 2016, the Company completed several investments accounted for as equity investees. Details of the significant
investments are summarized in Note 4.
The Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other than
temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the
Company's carrying value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information
such as recent financing rounds. If the decline in fair value is deemed to be other than temporary, the carrying value of the equity investee is written down
to fair value. Impairment charges in connection with the equity method investments of nil, RMB438 million and nil were recorded in share of results of
equity investees in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively. Impairment charges in connection
with the cost method investments of RMB119 million, RMB419 million and RMB902 million were recorded in interest and investment income, net in the
consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively. The fair value measurements with respect to such
impairment losses were individually insignificant and utilized a number of different unobservable inputs not subject to meaningful aggregation.
As of March 31, 2016, the equity method investments with an aggregate carrying amount of RMB42,395 million that are publicly traded have decreased in
value and the total open market values of these investments amounted to RMB38,344 million. A decline in the quoted market price below the carrying
amount is not necessarily indicative of a loss in value that is other than temporary. The Company evaluated all factors and no impairment charge was
recognized for these publicly traded equity method investments.
As of March 31, 2015 and 2016, the cost method investments with an aggregate carrying amount of RMB6,046 million and RMB9,223 million have
appreciated in value and the Company estimated the fair value to approximate RMB14,965 million and RMB25,639 million, respectively. As of the same
dates, for certain other cost method investments with carrying amounts of RMB9,627 million and RMB24,041 million, the Company identified no events or
changes in circumstances that may have a significant adverse effect on the fair values of the investments and determined that it is not practicable to estimate
their fair values, respectively.
15. Property and equipment, net
Computer equipment and software
Buildings and leasehold improvements
Construction in progress
Furniture, office and transportation equipment
Less: accumulated depreciation and amortization
Net book value
As of March 31,
2016
2015
(in millions of RMB)
13,289
9,829
6,155
2,828
1,883
1,818
483
430
14,905
21,810
(5,766) (8,181)
13,629
9,139
Depreciation and amortization expenses recognized for the years ended March 31, 2014, 2015 and 2016 were RMB1,295 million, RMB2,282 million and
RMB3,699 million, respectively.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
16. Intangible assets
Non-compete agreements
Developed technology and patents
Trade names, trademarks and domain names
User base and customer relationships
Licenses and copyrights and others
Less: accumulated amortization and impairment
Net book value
As of March 31,
2016
2015
(in millions of RMB)
3,630
3,331
2,007
855
295
4,284
3,652
2,222
1,234
787
(3,543) (6,809)
5,370
6,575
Amortization expenses for the years ended March 31, 2014, 2015 and 2016 amounted to RMB315 million, RMB2,089 million and RMB2,931 million,
respectively. During the same periods, no impairment charge was recognized in the consolidated income statements.
The estimated aggregate amortization expenses for each of the five succeeding fiscal years and thereafter are as follows:
For the year ending March 31,
2017
2018
2019
2020
2021
Thereafter
F-74
Amounts
(in millions of RMB)
3,103
1,734
449
71
8
5
5,370
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
17. Goodwill
The changes in the carrying amount of goodwill for the years ended March 31, 2015 and 2016 were as follows:
Balance as of April 1, 2014
Additions
Deconsolidation of a subsidiary
Impairment
Foreign currency translation adjustments
Balance as of March 31, 2015
Additions
Deconsolidation of a subsidiary (Note 4(e))
Impairment
Foreign currency translation adjustments
Balance as of March 31, 2016
Amounts
(in millions of RMB)
11,793
30,319
(4)
(175)
—
41,933
50,723
(10,556)
(455)
—
81,645
Gross goodwill balances were RMB44,928 million and RMB85,095 million as of March 31, 2015 and 2016, respectively. Accumulated impairment losses
were RMB2,995 million and RMB3,450 million as of the same dates, respectively.
In the annual impairment assessment of goodwill, the Company concluded that the carrying amounts of respective reporting units exceeded its fair value
and recorded an impairment charge of RMB44 million, RMB175 million and RMB455 million during the years ended March 31, 2014, 2015 and 2016,
respectively. The impairment losses were resulted from a revision of long-term financial outlook and the change in business model of those reporting units.
The impairment charge was determined by comparing the carrying amount of goodwill associated with that reporting unit with the implied fair value of
the goodwill.
18. Deferred revenue and customer advances
Deferred revenue and customer advances primarily represent service fees prepaid by merchants for which the relevant services have not been provided. The
respective balances are as follows:
Deferred revenue
Customer advances
Less: current portion
Non-current portion
As of March 31,
2016
(in millions of RMB)
2015
5,781
2,578
8,359
(7,914)
445
7,236
3,479
10,715
(10,297)
418
All service fees received in advance are initially recorded as customer advances. These amounts are transferred to deferred revenue upon commencement of
the provision of services by the Company and are recognized in the consolidated income statements in the period in which the services are provided. In
general, service fees received in advance are non-refundable after such amounts are transferred to deferred revenue.
F-75
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
19. Accrued expenses, accounts payable and other liabilities
Current:
Accrued cost of revenue and sales and marketing expenses
Accrued bonus and staff costs, including sales commission
Other deposits received in rendering services on e-commerce marketplaces
Amounts due to related companies (i)
Accruals for purchases of property and equipment
Payable to third party marketing affiliates
Other taxes payable (ii)
Accrued professional services expenses
Accrual for interest expense
Accrued donations
Liabilities arising from treasury management activities
Contingent and deferred consideration in relation to investments and acquisitions
Unvested share options exercised
Others
Non-current:
Contingent and deferred consideration in relation to investments and acquisitions
Others
As of March 31,
2016
2015
(in millions of RMB)
5,158
6,377
1,391
927
701
667
635
302
535
339
776
329
518
1,179
19,834
8,328
8,210
1,503
1,456
1,248
1,051
943
603
571
549
539
322
321
1,690
27,334
1,953
197
2,150
1,851
315
2,166
(i)
(ii)
Amounts due to related companies primarily represent balances arising from the transactions with Ant Financial Services and its subsidiaries
(Note 23). The balances are unsecured, interest free and repayable within the next twelve months.
Other taxes payable represents business tax, value-added tax and related surcharges and PRC individual income tax of employees withheld by
the Company.
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
20. Bank borrowings
Bank borrowings are analyzed as follows:
Long-term borrowings (i)
Short-term borrowings (ii)
As of March 31
2015
2016
(in millions of RMB)
1,609
1,990
3,599
1,871
4,304
6,175
(i)
(ii)
The weighted average interest rate for all long-term borrowings for the years ended March 31, 2014, 2015 and 2016 was approximately 6.7%, 5.9%
and 4.9%, respectively. Other loans are collateralized by a pledge of certain land use rights and construction in progress with carrying values of
RMB2,216 million and RMB3,583 million in the PRC as of March 31, 2015 and 2016, respectively. Such borrowings are all denominated
in Renminbi.
As of March 31, 2015 and 2016, the Company had short-term borrowings from banks which were repayable within one year or on demand and
charged at interest rates ranging from 2.0% to 11.6% and 4.0% to 7.1% per annum, respectively. Such borrowings are all denominated in Renminbi.
In August 2014, the Company entered into a revolving credit facility agreement with certain financial institutions for an amount of US$3.0 billion which
has not yet been drawn down. The interest rate on any outstanding utilized amount under this credit facility is calculated based on LIBOR plus 120 basis
points. This facility is reserved for general corporate and working capital purposes.
In March 2016, the Company signed a five-year US$3.0 billion syndicated loan agreement with a group of eight lead arrangers which has been
subsequently drawn down in April 2016. The loan was upsized from US$3.0 billion to US$4.0 billion in May 2016 through a general syndication, which the
upsized portion of the loan has not yet been drawn down. The loan has a five-year bullet maturity and is priced at 110 basis points over LIBOR. The
proceeds of the loan will be used for general corporate and working capital purposes (including acquisitions).
As of March 31, 2016, the borrowings will be due according to the following schedule:
Within 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
F-77
Principal amounts
(in millions of RMB)
4,304
682
520
502
167
6,175
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
21. Unsecured senior notes
In November 2014, the Company issued unsecured senior notes included floating rate and fixed rate notes with varying maturities for an aggregate principal
amount of US$8.0 billion. These notes are senior unsecured obligations and interest is payable in arrears, quarterly for the floating rate notes and
semiannually for the fixed-rate notes, which are listed on the Hong Kong Stock Exchange.
The following table provides a summary of the Company's unsecured senior notes as of March 31, 2016:
US$300 million floating rate notes due 2017
US$1,000 million 1.625% notes due 2017
US$2,250 million 2.500% notes due 2019
US$1,500 million 3.125% notes due 2021
US$2,250 million 3.600% notes due 2024
US$700 million 4.500% notes due 2034
Carrying value
Unamortized discount and debt issuance costs
Total principal amounts of unsecured senior notes
Effective
interest rate
1.22%
1.73%
2.64%
3.24%
3.66%
4.59%
Amounts
(in millions of RMB)
1,940
6,462
14,506
9,662
14,524
4,502
51,596
130
51,726
The unsecured senior notes were issued at a discount amounting to US$24 million (RMB150 million). The debt issuance costs of US$29 million
(RMB175 million) were presented as a direct deduction from the principal amount of the unsecured senior notes on the consolidated balance sheets. The
effective interest rates for the unsecured senior notes include the interest charged on the notes as well as amortization of the debt discounts and debt
issuance costs.
The unsecured senior notes contain covenants including, among others, limitation on liens, consolidation, merger and sale of the Company's assets. In
addition, the notes rank senior in right of payment to all of the Company's existing and future indebtedness expressly subordinated in right of payment to the
notes and rank at least equally in right of payment with all of the Company's existing and future unsecured unsubordinated indebtedness (subject to any
priority rights pursuant to applicable law).
The proceeds from issuance of the unsecured senior notes were used in full to refinance a previous syndicated loan in the same amount. The related
unamortized upfront fees of RMB830 million of such syndicated loan were charged to interest expenses on the consolidated income statements upon the
repayment of the syndicated loan during the year ended March 31, 2015.
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Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
21. Unsecured senior notes (Continued)
As of March 31, 2016, the future principal payments for the Company's unsecured senior notes will be due according to the following schedule:
Within 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Thereafter
Principal amounts
(in millions of RMB)
—
—
—
8,405
14,548
28,773
51,726
As of March 31, 2016, the fair value of the Company's unsecured senior notes, based on Level 2 inputs, was US$8,111 million (RMB52,443 million).
22. Convertible Preferences Shares
As part of the arrangement for the repurchase of ordinary shares from Yahoo in 2012, the Company issued convertible preference shares ("Convertible
Preference Shares") to Yahoo with a liquidation preference of US$1.7 billion (RMB10.7 billion) (the "Convertible Preference Shares"), net of issuance cost
of RMB157 million.
The Convertible Preference Shares were redeemable at an amount equal to their liquidation preference plus accrued and unpaid dividends at the Company's
option at any time subsequent to the first anniversary of the issue date if certain conditions were met, and were mandatorily redeemable on the fifth
anniversary of the issue date unless previously redeemed. The holders of the Convertible Preference Shares were entitled to semi-annual dividends at a pre-
determined rate until such shares were redeemed. Such dividend rate shall be 2.0% per annum prior to the second anniversary of the issuance date, 5.0% per
annum commencing on the second anniversary of the issuance date until the mandatory redemption date, and 8.0% per annum thereafter until the
Convertible Preference Shares were redeemed or converted into ordinary shares. The Convertible Preference Shares were convertible at the holder's option
at any time at an initial conversion price of US$18.50 per share subject to certain adjustments, and shall be mandatorily converted concurrently with the
closing of a qualified IPO as defined in the Convertible Preference Share purchase agreement. The holders of such shares had no voting rights. The
Convertible Preference Shares were classified in the mezzanine section between liabilities and equity on the consolidated balance sheets due to their
mandatory redemption provision. Costs incurred in connection with the issuance of the Convertible Preference Shares were recorded as a reduction of the
related proceeds received, and the related accretion was charged against additional paid-in capital over the period from the issuance date until the
mandatory redemption date of such shares. The Convertible Preference Shares were converted into ordinary shares of the Company upon the closing of the
Company's initial public offering in September 2014 (Note 4(a)).
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Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions
During the years ended March 31, 2014, 2015 and 2016, other than disclosed elsewhere, the Company had the following material related party transactions:
Transactions with Yahoo
Amount incurred or disbursed by the Company
Royalty fee (i)
Purchase of patents (ii)
Year ended
March 31,
2014 2015 2016
(in millions of RMB)
748
430
448
144
—
—
(i)
(ii)
The Company and Yahoo entered into a Technology and Intellectual Property Licensing Agreement in October 2005 whereby Yahoo granted to the
Company the use of certain intellectual property and the Company agreed to pay Yahoo a royalty fee equal to 2%, until December 31, 2012 and
equal to 1.5% thereafter, of revenues recognized on a consolidated basis under U.S. GAAP, less traffic acquisition costs incurred in connection with
third-party distribution partners, business tax, value-added tax or similar sales tax based on revenue paid to governments. The arrangement was
terminated upon the completion the Company's initial public offering in September 2014. Such royalty expense was recognized in product
development expenses.
The Company and Yahoo entered into a patent sale and assignment agreement during the years ended March 31, 2014 and 2015 pursuant to which
the Company acquired ownership of certain patents for aggregate consideration of US$70 million and US$24 million, respectively.
Transactions with Ant Financial Services, Alipay, Koubei and their affiliates
2014
Year ended March 31,
2015
(in millions of RMB)
2016
Amount earned by the Company
Royalty fee and software technology services fee (i)
SME Annual Fee (ii)
Reimbursement on options and RSUs (iii)
Other services (iv)
Amount incurred by the Company
Payment processing fee (v)
Other services (iv)
1,764
—
266
46
2,076
1,667
90
206
158
2,121
1,122
708
113
1,086
3,029
2,349
21
2,370
3,853
306
4,159
4,898
299
5,197
(i)
In 2011, the Company entered into an Intellectual Property License and Software Technology Services Agreement with Alipay whereby the
Company licenses certain intellectual properties and provides certain software technology services to Alipay in exchange for a royalty fee and
software technology services fee
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ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions (Continued)
in an amount equal to the costs incurred by the Company in providing the software technology services plus 49.9% of the consolidated pre-tax
income of Alipay and its subsidiaries (Note 4(b)), effective from December 2011. In 2014, the Intellectual Property License and Software
Technology Services Agreement were terminated and the Company entered into the amended Alipay IPLA with Ant Financial Services. Under the
amended Alipay IPLA, the Company will receive the Profit Share Payments amounting to the sum of an expense reimbursement plus 37.5% of the
consolidated pre-tax income of Ant Financial Services, subject to certain adjustments (Note 4(b)), effective from August 2014.
Royalty fee and software technology services fee under the Intellectual Property License and Software Technology Services Agreement and the
Profit Share Payments were recognized in consolidated income statements, net of the costs incurred for the provision of the software technology
services reimbursed by Alipay. The amounts reimbursed by Ant Financial Services to the Company were RMB275 million, RMB486 million and
RMB274 million for the years ended March 31, 2014, 2015 and 2016, respectively.
The Company entered into software system use and service agreements with Ant Financial Services in 2014. In calendar years 2015 to 2017, the
Company received or will receive the SME Annual Fee equal to 2.5% of the average daily book balance of the micro loans made by Ant Financial
Services and its affiliates. In calendar years 2018 to 2021, the Company will receive the SME Annual Fee equal to the amount paid for the calendar
year 2017 (Note 4(b)).
The Company entered into agreements with Ant Financial Services in 2012 and 2013 under which the Company will receive a reimbursement for
options and RSUs relating to the ordinary shares granted to the employees of Ant Financial Services and its subsidiaries during the period from
December 14, 2011 to March 31, 2014. Pursuant to the agreements, the Company will, upon vesting of such options and RSUs, receive a cash
reimbursement equal to their respective grant date fair value. As this arrangement relates to share-based awards previously granted by the Company,
the reimbursement is recognized as a reduction of share-based compensation expense.
The Company also has other commercial arrangements, treasury management arrangements and cost sharing arrangements with Ant Financial
Services, its subsidiaries and affiliates as well as Koubei on various technical, treasury management and other administrative services.
The Company and Alipay, among others, entered into a Commercial Agreement in 2011 whereby the Company receives payment processing
services in exchange for a Payment Processing Fee (Note 4(b)), which was recognized in cost of revenue.
(ii)
(iii)
(iv)
(v)
As of March 31, 2015 and 2016, the Company had certain amounts of cash and short-term investments held in accounts managed by Alipay (Note 2(p)
and 2(q)). In addition, as of March 31, 2015 and 2016, the Company had certain assets and liabilities with a net amount of RMB1,428 million and
RMB1,517 million, respectively, are managed by a subsidiary of Ant Financial Services which primarily comprised of cash and investment securities.
F-81
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions (Continued)
Transactions with management of the Company
Certain members of management of the Company have purchased their own aircraft for both business and personal use. The use of the these managements'
own aircraft in connection with the performance of their duties as employees is free of charge, and the Company has agreed to assume the cost of
maintenance, crew and operations of the aircraft where such cost is allocated for business purposes. Such reimbursement of the maintenance and incidental
costs was insignificant for the years ended March 31, 2014, 2015 and 2016.
During the year ended March 31, 2014, the Company granted 50,000,000 share options to a non-profit organization designated by two members of
management of the Company, subject to irrevocable instructions to designate and transfer these share options to the separate charitable trusts to be
established by these two members of management of the Company (Note 9).
Transactions with Cainiao Network
The Company entered into agreements with Cainiao Network during the year ended March 31, 2014 whereby the Company disposed of two wholly-owned
subsidiaries to a subsidiary of Cainiao Network for cash consideration of RMB524 million. The major assets of the disposed subsidiaries consist of land use
rights in the PRC. The gain on disposals for the year ended March 31, 2014 amounted to RMB74 million. The Company also entered into an agreement
with Cainiao Network during the year ended March 31, 2016 whereby the Company disposed of a wholly-owned subsidiary to Cainiao Network for cash
consideration of US$33 million (RMB204 million). The major asset of the disposed subsidiary consist of a land use right in the PRC. The gain on disposals
for the year ended March 31, 2016 amounted to RMB3 million.
The Company has commercial arrangements with Cainiao Network to receive certain logistics services. Expenses incurred in connection with the logistics
services provided by Cainiao Network of RMB785 million and RMB2,370 million were recorded in the consolidated income statements for the years ended
March 31, 2015 and 2016, respectively.
The Company also has cost sharing and other services arrangements with Cainiao Network and its subsidiaries primarily related to various administrative
services and cloud computing services. In connection with these services provided by the Company, RMB20 million and RMB86 million were recorded in
the consolidated income statements for the years ended March 31, 2015 and 2016, respectively.
Transactions with Weibo
The Company entered into a strategic collaboration agreement and a marketing cooperation agreement with Weibo during the year ended March 31, 2014.
Expenses incurred in connection with the marketing services provided by Weibo of RMB154 million, RMB654 million and RMB715 million were recorded
in the traffic acquisition cost and sales and marketing expenses in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016,
respectively.
The Company also has other commercial arrangements with Weibo primarily related to cloud computing services. In connection with such services
provided by the Company, nil, RMB2 million and RMB38 million were recorded in revenue in the consolidated income statements for the years ended
March 31, 2014, 2015 and 2016, respectively.
F-82
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions (Continued)
Other transactions
The Company's ecosystem offers different platforms on which different enterprises operate and the Company believes that all transactions on the
Company's platforms are conducted on terms obtained in arms-length transations with similar unrelated parties.
Other than the transactions disclosed above or elsewhere in the consolidated financial statements, the Company has commercial arrangements with
SoftBank, Yahoo, its equity investees and other related parties to provide and receive certain marketing, logistics, traffic acquisition, cloud computing and
other services. The amounts relating to these services provided and received represent less than 1% of the Company's revenue and total expenses,
respectively, for the years ended March 31, 2014, 2015 and 2016.
In addition, the Company has made certain acquisitions and equity investments together with related parties from time to time during the years ended
March 31, 2014, 2015 and 2016. The acquisitions and equity investments agreements were entered into by the parties involved and conducted on fair value
basis. The significant acquisitions and equity investments together with related parties are included in Note 4.
24. Restricted net assets
PRC laws and regulations permit payments of dividends by the Company's subsidiaries and VIEs incorporated in the PRC only out of their retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Company's subsidiaries and VIEs
incorporated in the PRC are required to annually appropriate 10% of their net income to the statutory reserve prior to payment of any dividends, unless such
reserve have reached 50% of their respective registered capital. 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 subsidiary and VIE. As a result of the restrictions described above and elsewhere under
PRC laws and regulations, the Company's subsidiaries and VIEs incorporated in the PRC are restricted in their ability to transfer a portion of their net assets
to the Company in the form of dividends. Such restriction amounted to RMB39,116 million as of March 31, 2016. Even though the Company currently does
not require any such dividends, loans or advances from the PRC entities for working capital and other funding purposes, the Company may in the future
require additional cash resources from them due to changes in business conditions, funding of future acquisitions and development, or merely to declare and
pay dividends or distributions to its shareholders. Except for the above or disclosed elsewhere, there is no other restriction on the use of proceeds generated
by the Company's subsidiaries and VIEs to satisfy any obligations of the Company.
F-83
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
25. Commitments
(a) Capital commitments
Capital expenditures contracted for are analyzed as follows:
Contracted but not provided for:
Purchase of property and equipment
Construction of corporate campuses
As of March 31,
2015
2016
(in millions of RMB)
908
2,181
3,089
803
1,688
2,491
(b) Operating lease commitments for office facility and transportation equipment
The Company has leased office premises and transportation equipment under non-cancellable operating lease agreements. These leases have varying terms
and renewal rights. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
More than 5 years
Total
As of March 31,
2015
2016
(in millions of RMB)
400
623
33
1,056
394
441
65
900
For the years ended March 31, 2014, 2015 and 2016, the Company incurred rental expenses under operating leases of RMB217 million, RMB322 million
and RMB451 million, respectively.
(c) Commitments for co-location, bandwidth fees and marketing expenses
No later than 1 year
Later than 1 year and no later than 5 years
More than 5 years
Total
F-84
As of March 31,
2015
2016
(in millions of RMB)
2,089
3,045
—
5,134
2,680
4,919
823
8,422
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
25. Commitments (Continued)
(d) Investment commitments
The Company was obligated to pay up to RMB5,364 million and RMB65,597 million for the acquisition of investment securities and equity investees under
various arrangements as of March 31, 2015 and 2016, respectively. The commitment balance as of March 31, 2016 primarily includes the considerations for
the acquisitions of Youku Tudou (Note 4(t)) and Suning (Note 4(aa)).
(e) Commitments for licenses and copyrights
The Company has entered into non-cancellable licensing agreements with third-party vendors to acquire certain licenses and copyrights for mobile media
and entertainment business. The future aggregate minimum payments under non-cancellable licensing agreements are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Total
26. Risks and contingencies
As of
March 31,
2015
2016
(in millions of
RMB)
280
2
282
885
2,885
3,770
(a)
(b)
The Company is incorporated in the Cayman Islands and considered as a foreign entity under PRC laws. Due to the restrictions on foreign
investment and ownership on the business related to Internet content provision, telecom value-added services, financial services and others, the
Company conducts its business through various contractual arrangements with VIEs that are generally owned and controlled by certain management
members or founders of the Company. The VIEs hold the licenses and approvals that are essential for their business operations in the PRC and the
Company has entered into various agreements with the VIEs and their equity holders such that the Company has the right to benefit from their
licenses and approvals and generally has control of the VIEs. In the Company's opinion, the current ownership structure and the contractual
arrangements with the VIEs and their equity holders as well as the operations of the VIEs are in substantial compliance with all existing PRC laws,
rules and regulations. However, there may be changes and other developments in PRC laws, rules and regulations. Accordingly, the Company gives
no assurance that PRC government authorities will not take a view in the future that is contrary to the opinion of the Company. If the current
ownership structure of the Company and its contractual arrangements with the VIEs and their equity holders were found to be in violation of any
existing or future PRC laws or regulations, the Company's ability to conduct its business could be impacted and the Company may be required to
restructure its ownership structure and operations in the PRC to comply with the changes in the PRC laws which may result in deconsolidation of
the VIEs.
The PRC market in which the Company operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to
the ability of the Company to operate or invest in online and mobile commerce or other Internet related businesses, representing the principal
services provided by the Company, in the PRC. The information and technology industries are highly regulated. Restrictions are currently in place
or are unclear regarding what specific segments of these industries foreign owned
F-85
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
26. Risks and contingencies (Continued)
(c)
(d)
(e)
(f)
enterprises, like the Company, may operate. If new or more extensive restrictions were imposed on the segments in which the Company is permitted
to operate, the Company could be required to sell or cease to operate or invest in some or all of its current businesses in the PRC.
The Company's sales, purchase and expense transactions are generally denominated in RMB and a significant portion of the Company's assets and
liabilities are denominated in RMB. The RMB is not freely convertible into foreign currencies. In the PRC, foreign exchange transactions are
required by law to be transacted only by authorized financial institutions at exchange rates set by the PBOC. Remittances in currencies other than
RMB by the Company in the PRC must be processed through the PBOC or other PRC foreign exchange regulatory bodies and require certain
supporting documentation in order to effect the remittance. If such foreign exchange control system prevents the Company from obtaining sufficient
foreign currencies to satisfy its currency demands, the Company may not be able to pay dividends in foreign currencies and the Company's ability to
fund its business activities that are conducted in foreign currencies could be adversely affected.
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash
equivalents, short-term investments, restricted cash and investment securities. As of March 31, 2014, 2015 and 2016, substantially all of the
Company's cash and cash equivalents, short-term investments, restricted cash and investment securities were held by major financial institutions
located worldwide, including Hong Kong and the PRC. If the banking system or the financial markets deteriorate or remain volatile, the financial
institutions and other issuers of financial instruments held by the Company could become insolvent and the markets for these instruments could
become illiquid, in which case the Company could lose some or all of the value of its investments.
During the years ended March 31, 2015 and 2016, the Company offered a trade assurance program on the international wholesale marketplaces at
no charge to the wholesale buyers and sellers. If the wholesale sellers who participate in this program do not deliver the products in their stated
specifications to the wholesale buyers on schedule, the Company may compensate the wholesale buyers for their losses on behalf of the wholesale
sellers up to a pre-determined amount following a review of each particular case. In turn, the Company will seek a full reimbursement from the
wholesale sellers for the prepaid reimbursement amount yet the Company is exposed to a risk over the collectability of such reimbursement from the
wholesale sellers. During the years ended March 31, 2015 and 2016, the Company did not incur any material losses with respect to the
compensation provided under this program. Given that the maximum compensation for each wholesale seller is the pre-determined based on their
individual risk assessments by the Company based on their credit profile or other relevant information, the Company determined that the likelihood
of material default on such payments are not probable and therefore no provisions have been made in relation to this program.
In the ordinary course of business, the Company makes strategic investments in privately held companies and listed securities to increase the service
offerings and expand capabilities. The Company continually reviews its investments to determine whether a decline in fair value below the carrying
value is other than temporary. The primary factors which the Company considers in its determination include the length of time that the fair value of
the investment is below the Company's carrying value; post-balance sheet date fair value of the investment; the financial condition, operating
performance, strategic collaboration with and the prospects of the investee; the economic or technological environment in which the investee
operates; and other entity specific information such as recent financing rounds completed by the investee companies. Fair value of the listed
securities is subject to volatility and may be materially affected by
F-86
Table of Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
26. Risks and contingencies (Continued)
market fluctuations. If the decline in fair value is significant and other than temporary, the carrying value of the investment is written down to its
fair value and this may negatively impact the results of operations of the Company.
(g)
In the ordinary course of business, the Company is from time to time involved in legal proceedings and litigation relating to disputes relating to
trademarks and other intellectual property, among others. There are no legal proceedings and litigations that have in the recent past had, or to the
Company's knowledge, are reasonably possible to have, a material impact on the Company's financial positions, results of operations or cash flows.
The Company did not accrue any loss contingencies in this respect as of March 31, 2014, 2015 and 2016 as the Company did not consider an
unfavorable outcome in any material respects in these legal proceedings and litigations to be probable.
F-87
Exhibit
4.46
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
among
ALI YK INVESTMENT HOLDING LIMITED,
ALI YK SUBSIDIARY HOLDING LIMITED,
YOUKU TUDOU INC.,
and
solely for purposes of Section 9.08, Section 9.09 and Section 9.10 hereof,
ALIBABA INVESTMENT LIMITED
Dated as of November 6, 2015
TABLE
OF
CONTENTS
Article I
THE MERGER
SECTION 1.01
SECTION 1.02
SECTION 1.03
SECTION 1.04
SECTION 1.05
The Merger
Closing; Closing Date
Effective Time
Memorandum and Articles of Association of Surviving Company
Directors and Officers
Article II
EFFECT ON ISSUED SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01
SECTION 2.02
SECTION 2.03
SECTION 2.04
SECTION 2.05
SECTION 2.06
SECTION 2.07
Effect of Merger on Issued Securities
Share Incentive Plans and Outstanding Company Share Awards
Dissenting Shares
Exchange of Share Certificates, etc.
No Transfers
Termination of Deposit Agreement
Agreement of Fair Value
Article III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01
SECTION 3.02
SECTION 3.03
SECTION 3.04
SECTION 3.05
SECTION 3.06
SECTION 3.07
SECTION 3.08
SECTION 3.09
SECTION 3.10
SECTION 3.11
SECTION 3.12
SECTION 3.13
SECTION 3.14
SECTION 3.15
SECTION 3.16
SECTION 3.17
SECTION 3.18
SECTION 3.19
SECTION 3.20
Organization and Qualification
Memorandum and Articles of Association
Capitalization
Authority Relative to this Agreement; Fairness
No Conflict; Required Filings and Consents
Permits; Compliance with Laws
SEC Filings; Financial Statements
Absence of Certain Changes or Events
Absence of Litigation
Labor and Employment Matters; Employee Plans
Real Property
Intellectual Property
Taxes
Indebtedness and Security
Material Contracts
Environmental Matters
Operating Subsidiaries
Interested Party Transactions
Insurance
Anti-Takeover Provisions
Page
1
2
2
2
2
3
3
4
5
8
8
8
9
9
9
11
12
13
14
16
17
17
19
19
21
22
23
25
25
25
26
26
SECTION 3.21
SECTION 3.22
Brokers
No Other Representations and Warranties
Article IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
SECTION 4.01
SECTION 4.02
SECTION 4.03
SECTION 4.04
SECTION 4.05
SECTION 4.06
SECTION 4.07
SECTION 4.08
SECTION 4.09
SECTION 4.10
Corporate Organization
Capitalization of Merger Sub; No Prior Activities
Authority Relative to This Agreement
No Conflict; Required Filings and Consents
Sufficient Funds
Brokers
Absence of Litigation
Non-Reliance on Company Estimates
Independent Investigation
No Other Representations and Warranties
Article V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01
Conduct of Business by the Company Pending the Merger
Article VI
ADDITIONAL AGREEMENTS
SECTION 6.01
SECTION 6.02
SECTION 6.03
SECTION 6.04
SECTION 6.05
SECTION 6.06
SECTION 6.07
SECTION 6.08
SECTION 6.09
SECTION 6.10
SECTION 6.11
SECTION 6.12
SECTION 6.13
SECTION 6.14
Proxy Statement and Schedule 13E-3
Company Shareholders’ Meeting
Access to Information
No Solicitation of Transactions
Directors’ and Officers’ Indemnification and Insurance
Notification of Certain Matters
Further Action; Reasonable Best Efforts
Participation in Litigation
Resignations
Public Announcements
Stock Exchange Delisting
Takeover Statutes
SAFE Registration
Other Actions
Article VII
CONDITIONS TO THE MERGER
SECTION 7.01
SECTION 7.02
SECTION 7.03
SECTION 7.04
Conditions to the Obligations of Each Party
Conditions to the Obligations of Parent and Merger Sub
Conditions to the Obligations of the Company
Frustration of Closing Conditions
ii
26
26
26
26
27
27
28
28
28
28
29
29
29
33
34
35
36
39
40
41
42
42
42
42
43
43
43
43
43
44
44
Article VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01
SECTION 8.02
SECTION 8.03
SECTION 8.04
SECTION 8.05
SECTION 8.06
Termination
Effect of Termination
Fees and Expenses
Limitations on Liabilities
Amendment
Waiver
Article IX
GENERAL PROVISIONS
SECTION 9.01
SECTION 9.02
SECTION 9.03
SECTION 9.04
SECTION 9.05
SECTION 9.06
SECTION 9.07
SECTION 9.08
SECTION 9.09
SECTION 9.10
SECTION 9.11
SECTION 9.12
Non-Survival of Representations, Warranties and Agreements
Notices
Certain Definitions and Interpretations
Severability
Entire Agreement; Assignment
Parties in Interest
Specific Performance
Guarantee
Governing Law; Jurisdiction
Waiver of Jury Trial
Headings
Counterparts
ANNEX A Form of Plan of Merger
Company Disclosure Schedule
iii
45
46
46
48
48
49
49
49
50
59
60
60
60
60
60
61
61
61
AGREEMENT AND PLAN OF MERGER, dated as of November 6, 2015 (this “ Agreement ”), among Ali YK Investment Holding Limited, an
exempted company with limited liability incorporated under the laws of the Cayman Islands (“ Parent ”), Ali YK Subsidiary Holding Limited, an exempted
company with limited liability incorporated under the laws of the Cayman Islands and a wholly-owned subsidiary of Parent (“ Merger Sub ”), Youku Tudou Inc.,
an exempted company with limited liability incorporated under the laws of the Cayman Islands (the “ Company ”), and, solely for purposes of Section 9.08,
Section 9.09 and Section 9.10 hereof, Alibaba Investment Limited, a business company incorporated under the laws of the British Virgin Islands (“ AIL ”).
WHEREAS, upon the terms and subject to the conditions of this Agreement and in accordance with the Companies Law (2013 Revision, as
amended from time to time) of the Cayman Islands (the “ CICL ”), Parent and the Company will enter into a business combination transaction pursuant to which
Merger Sub will merge with and into the Company (the “ Merger ”), with the Company being the surviving company in the Merger and becoming a wholly-owned
subsidiary of Parent as a result of the Merger;
WHEREAS, the board of directors of the Company (the “ Company Board ”), acting upon the unanimous recommendation of the special
committee of independent directors of the Company Board (the “ Special Committee ”), has (i) determined that it is in the best interests of the Company and its
shareholders (other than Parent), and declared it advisable, to enter into this Agreement and the Plan of Merger, (ii) approved the execution, delivery and
performance of this Agreement and the Plan of Merger and the consummation of the transactions contemplated hereby and thereby, including the Merger
(collectively, the “ Transactions ”), and (iii) resolved to recommend the approval of this Agreement, the Plan of Merger and the Transactions by the shareholders of
the Company at the Shareholders’ Meeting;
WHEREAS, the boards of directors of each of Parent and Merger Sub have (i) approved the execution, delivery and performance by Parent and
Merger Sub, respectively, of this Agreement, the Plan of Merger and the consummation of the Transactions, and (ii) declared it advisable for Parent and Merger
Sub, respectively, to enter into this Agreement and the Plan of Merger; and
Merger Sub of this Agreement, the Plan of Merger and the consummation of the Transactions.
WHEREAS, Parent, acting in the capacity as the sole shareholder of Merger Sub, has approved the execution, delivery and performance by
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
with the CICL, at the Effective Time, Merger Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of
SECTION 1.01 The Merger . Upon the terms of this Agreement and subject to the conditions set forth in Article VII, and in accordance
ARTICLE
I
THE
MERGER
Merger Sub shall cease and the Company shall continue as the
surviving company of the Merger (the “ Surviving Company ”) under the Laws of the Cayman Islands as a wholly-owned subsidiary of Parent.
SECTION 1.02 Closing; Closing Date . The closing of the Merger (the “ Closing ”) shall take place at 9:00 p.m. (Hong Kong time) on
the fifth (5th) Business Day immediately following the satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions), or another date or time agreed in writing by the Company and
Parent (the “ Closing Date ”) at the offices of Simpson Thacher & Bartlett, 35/F ICBC Tower, 3 Garden Road, Central, Hong Kong, or at another place agreed in
writing by the Company and Parent; provided that notwithstanding the satisfaction or waiver of the conditions set forth in Article VII, if Parent has made a
Specified Filing for which it has not received consent or approval for the Merger from the applicable Governmental Authority, Parent and Merger Sub shall not be
required to effect the Closing until the earlier of the date that is (a) the fifth (5th) Business Day immediately following receipt by Parent of approval or consent to
the Merger from the applicable Governmental Authority pursuant to such Specified Filing and (b) one (1) Business Day prior to the Termination Date (as extended
pursuant to Section 8.01(b)(i), if applicable).
SECTION 1.03 Effective Time . Subject to the provisions of this Agreement, on the Closing Date, Merger Sub and the Company shall
execute a plan of merger (the “ Plan of Merger ”) substantially in the form set out in Annex A and the parties shall file the Plan of Merger and other documents
required under the CICL to effect the Merger with the Registrar of Companies of the Cayman Islands as provided by Section 233 of the CICL. The Merger shall
become effective on the date specified in the Plan of Merger (the “ Effective Time ”).
SECTION 1.04 Memorandum and Articles of Association of Surviving Company . At the Effective Time, the memorandum and articles
of association of the Surviving Company shall be amended to read in their entirety the same as the memorandum and articles of association of Merger Sub as in
effect immediately prior to the Effective Time (which shall include the provisions required by Section 6.05(a)), until thereafter amended as provided by Law and
such memorandum and articles of association; provided , however , that, at the Effective Time, (a) all references in the memorandum and articles of association to
the name of the Surviving Company shall be amended to refer to “Youku Tudou Inc.” and (b) references therein to the authorized share capital of the Surviving
Company shall be amended to refer to the authorized share capital of the Surviving Company as approved in the Plan of Merger.
SECTION 1.05 Directors and Officers . The parties hereto shall take all actions necessary so that (a) the directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of the Surviving Company as set out in the Plan of Merger, and (b) the officers (other than the
directors) of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Company, in each case, unless otherwise determined
by Parent prior to the Effective Time, and until their respective successors are duly elected or appointed and qualified or until the earlier of their death, resignation
or removal in accordance with the memorandum and articles of association of the Surviving Company.
2
ARTICLE
II
EFFECT
ON
ISSUED
SECURITIES;
EXCHANGE
OF
CERTIFICATES
SECTION 2.01 Effect of Merger on Issued Securities . At the Effective Time, by virtue of the Merger and without any action on the part
of Parent, Merger Sub, the Company or the holders of any securities of the Company:
(a) (i) Each Class A ordinary share, par value US$0.00001 per share, of the Company (a “ Class A Ordinary Share ” or, collectively, the “
Class A Ordinary Shares ”), including Class A Ordinary Shares represented by American Depositary Shares, each representing eighteen (18) Class A Ordinary
Shares (the “ ADSs ”), issued and outstanding immediately prior to the Effective Time, and each Class B ordinary share, par value US$0.00001 per share, of the
Company (a “ Class B Ordinary Share ” or, collectively, the “ Class B Ordinary Shares ”, and together with Class A Ordinary Shares, each an “ Ordinary Share ”
and, collectively, the “ Ordinary Shares ”), other than (A) any Parent Shares, (B) any Dissenting Shares, (C) any Ordinary Shares owned by any Group Company (if
any), and (D) any Ordinary Shares (including Ordinary Shares held by the Depositary in respect of ADSs) reserved (but not yet allocated) by the Company,
immediately prior to the Effective Time, for issuance and allocation upon exercise of any Company Share Awards (collectively, the “ Excluded Shares ”), shall be
cancelled and shall thereafter represent the right to receive an amount in cash (in United States dollars) per Ordinary Share equal to one eighteenth of the Per ADS
Merger Consideration (as defined below) without interest (the “ Per Share Merger Consideration ”) pursuant to the terms and conditions set forth in this Agreement,
and as each ADS represents eighteen (18) Ordinary Shares, each ADS issued and outstanding immediately prior to the Effective Time (other than ADSs that
represent Excluded Shares) shall represent the right to surrender the ADS in exchange for US$27.60 in cash per ADS without interest (the “ Per ADS Merger
Consideration ”), pursuant to the terms and conditions set forth in this Agreement and the Deposit Agreement; and (ii) the register of members of the Company will
be amended accordingly.
(b) Each Excluded Share (other than the Dissenting Shares), including Excluded Shares represented by ADSs (other than ADSs that
represent the Dissenting Shares), issued and outstanding immediately prior to the Effective Time, by virtue of the Merger and without any action on the part of its
holder, shall be cancelled and cease to exist without payment of any consideration or distribution therefor, and the register of members of the Company shall be
amended accordingly.
(c) Each ordinary share, par value US$1.00 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into one (1) validly issued, fully paid and non-assessable ordinary share, par value US$1.00 per share, of the Surviving Company. Such ordinary
shares shall be the only issued and outstanding share capital of the Surviving Company, and the Surviving Company shall make entries in its register of members to
reflect the holder of ordinary shares of Merger Sub immediately prior to the Effective Time as the holder of the ordinary shares of the Surviving Company
immediately after the Effective Time.
SECTION 2.02 Share Incentive Plans and Outstanding Company Share Awards . (a) As soon as practicable following the date hereof, the
Company, the Company Board or the compensation committee of the Company Board, as applicable, shall (i) terminate the Share Incentive Plans, and any relevant
award agreements applicable to the
3
Share Incentive Plans, as of the Effective Time, (ii) cancel each Company Share Award that is outstanding and unexercised, whether or not vested or exercisable, as
of the Effective Time, and (iii) otherwise effectuate the provisions of this Section 2.02. From and after the Effective Time, neither Parent nor the Surviving
Company shall be required to issue any Ordinary Shares, other share capital of the Company or the Surviving Company or any other consideration (other than as
required by this Section 2.02) to any person pursuant to or in settlement of any Company Share Award.
(b) Each former holder of a Vested Company Option that is cancelled at the Effective Time shall, in exchange therefor, be paid by or at the
direction of the Surviving Company or one of its Subsidiaries, as soon as practicable after the Effective Time (without interest), a cash amount equal to the product
of (i) the excess, if any, of the Per Share Merger Consideration over the Exercise Price of such Vested Company Option and (ii) the number of Ordinary Shares
underlying such Vested Company Option, net of any applicable withholding taxes; provided that if the Exercise Price of any such Vested Company Option is equal
to or greater than the Per Share Merger Consideration, such Vested Company Option shall be cancelled without any payment therefor.
(c) Each former holder of an Unvested Company Option and/or Company Restricted Share Award that is cancelled at the Effective Time
shall, in exchange therefor, receive as soon as practicable after the Effective Time, a restricted cash award (“ RCA ”) in an amount in cash that is the equivalent of,
(i) in the case of an Unvested Company Option, the product of (A) the excess, if any, of the Per Share Merger Consideration over the Exercise Price of such
Unvested Company Option and (B) the number of Ordinary Shares, underlying such Unvested Company Option, and (ii) in the case of a Company Restricted Share
Award, the product of (A) the Per Share Merger Consideration and (B) the number of Ordinary Shares underlying such Company Restricted Share Award; provided
that, if the Exercise Price of any such Unvested Company Option is equal to or greater than the Per Share Merger Consideration, such Unvested Company Option
shall be cancelled without any payment therefor. Any RCA issued by Parent or the Surviving Company in respect of any Unvested Company Option or Company
Restricted Share Award shall be subject to the same vesting conditions and schedules applicable to such Unvested Company Option or Company Restricted Share
Award without giving effect to the Transactions, and on the date, and to the extent, that any Unvested Company Option or Company Restricted Share Award would
have become vested without giving effect to the Transactions, such corresponding portion of the RCA shall be delivered to the holder of such RCA, net of any
applicable withholding taxes, as soon as practicable thereafter.
(d) As of the Effective Time, all Company Share Awards shall automatically cease to exist, and each holder of a Company Share Award
shall cease to have any rights with respect thereto, except the right to receive the cash payment and/or the RCAs as provided in this Section 2.02. Promptly
following the date hereof, the Company shall deliver written notice to each holder of each Share Award informing such holder of the effect of the Merger on such
Share Award.
SECTION 2.03 Dissenting Shares . (a) Notwithstanding any provision of this Agreement to the contrary and to the extent available
under the CICL, Shares that are issued and outstanding immediately prior to the Effective Time and that are held by shareholders who shall have validly exercised
and not effectively withdrawn or lost their rights to dissent from the Merger (“ dissenter’s rights ”) in accordance with Section 238 of the CICL (collectively, the “
Dissenting Shares ”; holders of Dissenting Shares being referred to as
4
“ Dissenting Shareholders ”) shall at the Effective Time be cancelled and cease to exist, and each such Dissenting Shareholder shall be entitled to receive only the
payment of the fair value of such Dissenting Shares held by them in accordance with the provisions of Section 238 of the CICL, except that all Shares held by
Dissenting Shareholders who shall have failed to exercise or who effectively shall have withdrawn or lost their dissenter’s rights in respect of such Shares under
Section 238 of the CICL shall thereupon (i) not be deemed to be Dissenting Shares and (ii) be and be deemed to have been cancelled and cease to exist, as of the
Effective Time, in consideration for the right of the holder thereof to receive the Per Share Merger Consideration, without any interest thereon, in the manner
provided in Section 2.04.
(b) The Company shall give Parent (i) prompt notice of any objection or dissent to the Merger or demands for appraisal received by the
Company, attempted withdrawals of such dissenter’s rights or demands, and any other instruments or proceedings served pursuant to the CICL or applicable Law
and received by the Company relating to the Transactions or its shareholders’ dissenter’s rights, and (ii) the opportunity to direct all negotiations and proceedings
with respect to any exercise of dissenter’s rights or any demands for appraisal under the CICL or applicable Law. The Company shall not, except with the prior
written consent of Parent, make any payment with respect to any exercise of dissenter’s rights or any demands for appraisal or offer to settle or settle any such
dissenter’s rights or any demands or approve any withdrawal of any such dissenter’s rights or demands.
(c) In the event that any written notices of objection to the Merger are served by any shareholders of the Company pursuant to
Section 238(2) of the CICL, the Company shall serve written notice of the authorization of the Merger on such shareholders pursuant to Section 238(4) of the CICL
within two (2) days of the approval of the Merger by shareholders of the Company at the Shareholders’ Meeting.
SECTION 2.04 Exchange of Share Certificates, etc. (a) Paying Agent. Prior to the Effective Time, Parent shall appoint a bank or trust
company that is reasonably satisfactory to the Company (such consent not to be unreasonably withheld, conditioned or delayed) to act as paying agent (the “ Paying
Agent ”) for all payments required to be made pursuant to Section 2.01(a) and the exception set forth in Section 2.03(a) (collectively, the “ Merger Consideration
”). Prior to the Effective Time, Parent shall deposit, or cause to be deposited, with the Paying Agent, for the benefit of the holders of Ordinary Shares and ADSs
(other than Excluded Shares), cash in an amount sufficient to pay the Merger Consideration (such cash being hereinafter referred to as the “ Exchange Fund ”).
(b) Exchange Procedures . As promptly as practicable after the Effective Time, the Surviving Company shall cause the Paying Agent to
mail (or in the case of the Depositary, deliver) or otherwise disseminate to each person who was, at the Effective Time, a registered holder of Ordinary Shares
entitled to receive the Per Share Merger Consideration pursuant to Section 2.01(a): (i) a letter of transmittal (which shall be in customary form for a company
incorporated in the Cayman Islands reasonably acceptable to Parent and the Company, and shall specify the manner in which the delivery of the Exchange Fund to
registered holders of Ordinary Shares (other than Excluded Shares) shall be effected and contain such other provisions as Parent and the Company may mutually
agree); and (ii) instructions for use in effecting the surrender of any issued share certificates representing Ordinary Shares (the “ Share Certificates ”) (or affidavits
and indemnities of loss in lieu of the Share Certificates as provided in Section 2.04(c)) and/or such other documents as may be required in exchange for the Per
Share Merger Consideration. Upon surrender of, if
5
applicable, a Share Certificate (or affidavit and indemnity of loss in lieu of the Share Certificate as provided in Section 2.04(c)) and/or such other documents as
may be required pursuant to such instructions to the Paying Agent in accordance with the terms of such letter of transmittal, duly executed in accordance with the
instructions thereto, each registered holder of Ordinary Shares represented by such Share Certificate and each registered holder of Ordinary Shares which are not
represented by a Share Certificate (the “ Uncertificated Shares ”) shall be entitled to receive in exchange therefor a check, in the amount equal to (x) the number of
Ordinary Shares represented by such Share Certificate (or affidavit and indemnity of loss in lieu of the Share Certificate as provided in Section 2.04(c)) or the
number of Uncertificated Shares multiplied by (y) the Per Share Merger Consideration, and the Share Certificate so surrendered shall forthwith be marked as
cancelled. Prior to the Effective Time, Parent and the Company shall establish procedures with the Paying Agent and the Depositary to ensure that (A) the Paying
Agent will transmit to the Depositary as promptly as reasonably practicable following the Effective Time (but in any event not later than five (5) Business Days
thereafter) an amount in cash in immediately available funds equal to the product of (x) the number of ADSs issued and outstanding immediately prior to the
Effective Time (other than ADSs representing the Excluded Shares) and (y) the Per ADS Merger Consideration, and (B) the Depositary will distribute the Per ADS
Merger Consideration to holders of ADSs pro rata to their holdings of ADSs (other than ADSs representing the Excluded Shares) upon surrender by them of the
ADSs. The holders of ADSs shall bear any applicable fees, charges and expenses of the Depositary and government charges due to or incurred by the Depositary
in connection with distribution of the Per ADS Merger Consideration to holders of ADSs, including applicable ADS cancellation fees, and any such fees, charges
and expenses incurred by the Depositary shall be treated for all purposes of this Agreement as having been paid to the holders of ADSs. No interest shall be paid or
will accrue on any amount payable in respect of the Ordinary Shares or ADSs pursuant to the provisions of this Article II. In the event of a transfer of ownership of
Ordinary Shares that is not registered in the register of members of the Company, the Per Share Merger Consideration in respect of such Ordinary Shares may be
paid to such transferee upon delivery of evidence to the satisfaction of Parent (or any agent designated by Parent) of such transferee’s entitlement to the relevant
Ordinary Shares and to receive the Per Share Merger Consideration, to the exclusion of the applicable transferor and evidence that any applicable share transfer
taxes have been paid or are not applicable.
(c) Lost Certificates . If any Share Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Share Certificate to be lost, stolen or destroyed and, if required by the Surviving Company, the posting by such person of a bond, in such
reasonable amount as the Surviving Company may direct, as indemnity against any claim that may be made against it with respect to such Share Certificate, the
Paying Agent will pay in respect of the Ordinary Shares represented by such lost, stolen or destroyed Share Certificate an amount equal to the Per Share Merger
Consideration multiplied by the number of Ordinary Shares represented by such Share Certificate to which the holder thereof is entitled pursuant to Section 2.01(a).
(d) Untraceable Shareholders . Remittances for the Per Share Merger Consideration shall not be sent to holders of Ordinary Shares who
are untraceable unless and until, except as provided below, they notify the Paying Agent of their current contact details prior to the Effective Time. A holder of
Ordinary Shares will be deemed to be untraceable if (i) such person has no registered address in the register of members maintained by the Company or, (ii) on the
last two consecutive occasions on which a dividend has been paid by
6
the Company a check payable to such person either (x) has been sent to such person and has been returned undelivered or has not been cashed or, (y) has not been
sent to such person because on an earlier occasion a check for a dividend so payable has been returned undelivered, and in any such case no valid claim in respect
thereof has been communicated in writing to the Company or, (iii) notice of the Shareholders’ Meeting convened to vote on the Merger has been sent to such
person and has been returned undelivered. Dissenting Shareholders and holders of Ordinary Shares who are untraceable who subsequently wish to receive any
monies otherwise payable in respect of the Merger within applicable time limits or limitation periods will be advised to contact the Surviving Company.
(e) Adjustments to Merger Consideration . The Per Share Merger Consideration and the Per ADS Merger Consideration shall be adjusted
to reflect appropriately the effect of any share split, reverse share split, share dividend (including any dividend or distribution of securities convertible into Ordinary
Shares), extraordinary cash dividends, reorganization, recapitalization, reclassification, combination, exchange of shares, change or readjustment in the ratio of
Ordinary Shares represented by each ADS or other like change with respect to Ordinary Shares occurring, or with a record date, on or after the date hereof and prior
to the Effective Time.
(f) Investment of Exchange Fund . The Exchange Fund, pending its disbursement to the holders of Ordinary Shares and ADSs, shall be
invested by the Paying Agent as directed by Parent or, after the Effective Time, the Surviving Company in (a) short-term direct obligations of the United States of
America, (b) short-term obligations for which the full faith and credit of the United States of America is pledged to provide for the payment of principal and
interest, or (c) short-term commercial paper rated the highest quality by either Moody’s Investors Service, Inc. or Standard & Poor’s Corporation or certificates of
deposit, bank repurchase agreements or banker’s acceptances of commercial banks acceptable to Parent. Earnings from investments shall be the sole and exclusive
property of Parent and the Surviving Company.
(g) Termination of Exchange Fund . Any portion of the Exchange Fund (including any income or proceeds thereof or of any investment
thereof) that remains undistributed to the holders of Ordinary Shares or ADSs for nine (9) months after the Effective Time shall automatically and promptly be
delivered to the Surviving Company, and any holders of Ordinary Shares or ADSs (other than Excluded Shares) that were issued and outstanding immediately prior
to the Effective Time who have not theretofore complied with this Article II, shall thereafter look only to the Surviving Company for the cash to which they are
entitled pursuant to Sections 2.01(a). Any portion of the Exchange Fund remaining unclaimed by holders of Ordinary Shares or ADSs as of a date which is
immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Authority shall, to the extent permitted by
applicable Law, become the property of the Surviving Company free and clear of any claims or interest of any person previously entitled thereto.
(h) No Liability . None of the Paying Agent, Parent or the Surviving Company shall be liable to any holder of Ordinary Shares in respect
of any such Ordinary Shares (including Ordinary Shares represented by ADSs) or Company Share Awards (or dividends or distributions with respect thereto) for
which payment was delivered to a public official pursuant to any abandoned property, escheat or similar Law.
7
(i) Withholding Rights . Each of Parent, the Surviving Company, the Paying Agent and the Depositary (and any other Person that has a
payment obligation pursuant to this Agreement), as applicable, shall be entitled to deduct and withhold from any amounts payable pursuant to this Agreement such
amounts as it reasonably determines it is required to deduct and withhold with respect to the making of such payment under any provisions of applicable Law. In
the event that Parent or Merger Sub determines that any deduction or withholding is required to be made from any Merger Consideration payable pursuant to this
Agreement, Parent or Merger Sub, as applicable, shall promptly inform the Company in writing of such determination and consult with the Company in good faith
regarding such determination. To the extent that any such amounts are deducted, withheld and remitted to the applicable Governmental Authority by Parent, the
Surviving Company, the Paying Agent or the Depositary, as the case may be, such amounts shall be treated for all purposes of this Agreement as having been paid
to the recipients in respect of which such deduction and withholding was made by Parent, the Surviving Company, the Paying Agent or the Depositary, as the case
may be. Each former holder of Ordinary Shares, ADSs or Company Share Awards shall be personally responsible for the proper reporting and payment of all
Taxes related to any Merger Consideration or amounts paid under Section 2.02, as applicable, payable by such holder under this Agreement.
SECTION 2.05 No Transfers . From and after the Effective Time, (a) no transfers of Ordinary Shares shall be effected in the register of
members of the Company, and (b) the holders of Ordinary Shares (including Ordinary Shares represented by ADSs) outstanding immediately prior to the Effective
Time shall cease to have any rights with respect to such Ordinary Shares, except as otherwise provided in this Agreement or by Law. On or after the Effective
Time, any Share Certificates presented to the Paying Agent, Parent or Surviving Company for transfer or any other reason shall be canceled and (except for the
Excluded Shares) exchanged for the cash consideration to which the holders thereof are entitled pursuant to Section 2.01(a).
SECTION 2.06 Termination of Deposit Agreement . As soon as reasonably practicable after the Effective Time, the Surviving Company
shall provide notice to Citibank, N.A. (the “ Depositary ”) to terminate the deposit agreement, dated as of December 8, 2010 between the Company, the Depositary
and the Holders and Beneficial Owners of American Depositary Shares issued thereunder (the “ Deposit Agreement ”) in accordance with its terms.
SECTION 2.07 Agreement of Fair Value . Parent, Merger Sub and the Company agree that the Per Share Merger Consideration
represents the fair value of the Ordinary Shares for the purposes of Section 238(8) of the CICL.
ARTICLE
III
REPRESENTATIONS
AND
WARRANTIES
OF
THE
COMPANY
Except as set forth in (a) the section of the Company Disclosure Schedule that corresponds to a section of this Article III or any other section of
the Company Disclosure Schedule to the extent that it is readily apparent that such information qualifies a section of this Article III, or (b) the Company SEC
Reports filed prior to the date hereof (without giving effect to any amendment to any such Company SEC Reports filed on or after the date hereof and excluding
disclosures in the Company SEC Reports contained in the “Risk Factors” or “Forward Looking Statements” sections or any other forward-looking statements or
other disclosures to the extent they are general, non-specific, forward-looking or cautionary in
8
nature, in each case, other than specific factual information contained therein), the Company hereby represents and warrants to Parent and Merger Sub that:
SECTION 3.01 Organization and Qualification . (a) The Company is an exempted company duly organized, validly existing and in good
standing under the Laws of the Cayman Islands and has the requisite corporate or similar power and authority to own, lease, operate and use its properties and
assets and to carry on its business as it is now being conducted. Each Subsidiary of the Company is a legal entity duly organized, validly existing and, where such
concept is recognized, in good standing under the laws of the jurisdiction of its organization and has the requisite corporate or similar power and authority to own,
lease, operate and use its properties and assets and to carry on its business as it is now being conducted, except to the extent the failure of any such Subsidiary to be
so organized, existing or in good standing has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse
Effect. Each of the Company and each Subsidiary of the Company is duly qualified or licensed to do business, and is in good standing, where such concept is
recognized, in each jurisdiction where the character of the properties and assets owned, leased, operated or used by it or the nature of its business makes such
qualification or licensing necessary, except to the extent such failures to be so qualified or licensed or in good standing has not had and would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse Effect.
(b) A true and complete list of all Subsidiaries of the Company and any other entities in which any Group Company owns any equity
interest, together with (i) the jurisdiction of organization of each such Subsidiary or entity, (ii) the outstanding issued share capital or registered capital, as the case
may be, of each such Subsidiary or entity, and (iii) a list of shareholders or other equity holders of, and their respective percentage ownership in, each such
Subsidiary or entity, is set forth in Section 3.01(b) of the Company Disclosure Schedule. There are no other entities in which any Group Company controls or owns,
of record or beneficially, any direct or indirect equity or other interest or right (contingent or otherwise) to acquire the same, and neither the Company nor any of its
Subsidiaries is a participant in (nor is any part of their businesses conducted through) any joint venture, partnership or similar arrangement that is material to the
business of the Company and its Subsidiaries, taken as a whole.
SECTION 3.02 Memorandum and Articles of Association . The Company has heretofore furnished or otherwise made available to Parent
a complete and correct copy of (a) the memorandum and articles of association or equivalent organizational documents, each as amended or modified as of the date
hereof, of the Company and (b) the memorandum and articles of association or equivalent organizational documents of each Subsidiary of the Company, and all
material amendments and modifications thereto as of the date hereof. Such memorandum and articles of association or equivalent organizational documents are in
full force and effect as of the date hereof. No Group Company is in violation of any of the provisions of its memorandum and articles of association or equivalent
organizational documents in any material respect.
SECTION 3.03 Capitalization . (a) (i) The authorized share capital of the Company is US$100,000 divided into 9,340,238,793 Class A
Ordinary Shares of a par value US$0.00001 per share and 659,761,207 Class B Ordinary Shares of a par value $0.00001 per share. As of the date of this
Agreement, (1) 2,880,578,665 Class A Ordinary Shares are issued and outstanding, all of which have been duly authorized and are validly issued, fully paid and
non-assessable, (2) 36,749,878 Class A Ordinary Shares are represented by ADSs
9
held by the Depositary in the name of the Company and have been reserved for future grant of Company Share Awards under the Share Incentive Plans,
(3) 289,472,400 Ordinary Shares are held in the treasury of the Company, (4) 645,691,903 Class B Ordinary Shares are issued and outstanding, all of which have
been duly authorized and are validly issued, fully paid and non-assessable, (5) Company Options with respect to 87,708,060 Class A Ordinary Shares are issued
and outstanding, and (6) Company Restricted Share Awards with respect to 207,870,444 Class A Ordinary Shares are outstanding. As of the date of this
Agreement, (x) no Ordinary Shares are held by any Group Company, and, (y) other than as set forth in clause (a)(i)(2) above, no Ordinary Shares are held in
brokerage accounts in a Group Company’s name.
(ii) The outstanding share capital or registered capital, as the case may be, of each Subsidiary of the Company is duly authorized,
validly issued, fully paid and non-assessable, and except as set forth in Section 3.03(a)(ii) of the Company Disclosure Schedule, all of the outstanding
share capital or registered capital, as the case may be, of each such Subsidiary is owned by a Group Company free and clear of all Liens or controlled by a
Group Company pursuant to the Control Agreements. Subject to limitations imposed by applicable Law and the applicable Control Agreements, each
Group Company has the unrestricted right to vote, and to receive dividends and distributions on, all equity securities of its Subsidiaries.
(iii) Except as set forth in this Section 3.03(a) or in Section 3.03(a)(iii) of the Company Disclosure Schedule, there is no share
capital or other equity interest in the Company or any options, warrants, convertible debt, other convertible instruments, share appreciation rights,
performance units, restricted share units, contingent value rights, “phantom” share units or similar securities or rights that are derivative of, or provide
economic benefits based, directly or indirectly, on the value or price of, any share capital of or other equity interest in, the Company or any of its
Subsidiaries, or any preemptive, conversion, redemption or other rights, agreements, arrangements or commitments of any character to which the
Company or any of its Subsidiaries is a party relating to the issued or unissued share capital of the Company or any of its Subsidiaries or obligating the
Company or any of its Subsidiaries to issue or sell any share capital, or other equity interests in, the Company or any of its Subsidiaries. All Ordinary
Shares subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be
duly authorized, validly issued, fully paid and non-assessable. There are no outstanding contractual obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any Ordinary Shares or other equity interests in, the Company or any of its Subsidiaries or to provide funds to,
or make any investment (in the form of a loan, capital contribution or otherwise) in, the Company or any of its Subsidiaries or any other Person. Each
grant of Company Share Awards was properly approved by the Company Board (or a duly authorized committee or subcommittee thereof) and issued in
compliance with all applicable Laws and the terms set forth in the applicable Share Incentive Plan, and the per share exercise price of each Company
Option requiring exercise was equal to or greater than the fair market value (within the meaning of Section 422 of the Code, in the case of each Company
Option intended to qualify as an “incentive stock option”, and within the meaning of Section 409A of the Code, in the case of each other Company Option
awarded to a U.S. person). There are no commitments or agreements of any character to which any Group Company is bound obligating any
10
Group Company to accelerate or otherwise alter the vesting of any Company Share Award as a result of the Transactions, and each Company Share
Award may, by its terms, be treated at the Effective Time as set forth in Section 2.02.
to vote (or convertible into or exercisable for securities having the right to vote) with the shareholders of the Company on any matter.
(iv) The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right
(b) Section 3.03(b) of the Company Disclosure Schedule sets forth the following information with respect to each Company Share Award
outstanding as of the date hereof: (i) the name of the Company Share Award recipient; (ii) the particular Share Incentive Plan pursuant to which such Company
Share Award was granted and the type of such Company Share Award; (iii) the number and type of Ordinary Shares subject to such Company Share Award;
(iv) the exercise or purchase price of such Company Share Award; (v) the date on which such Company Share Award was granted; (vi) the vesting schedule or
other vesting conditions, if any, of each such Company Share Award; and (vii) the date on which such Company Share Award expires.
(c) The Company has made available to Parent accurate and complete copies of (x) the Share Incentive Plans pursuant to which the
Company has granted the Company Share Awards that are currently outstanding, (y) the form of all award agreements evidencing such Company Share Awards
and (z) any award agreements evidencing any Company Share Award with terms that are materially different from those set forth in the form of award agreement.
SECTION 3.04 Authority Relative to this Agreement; Fairness . (a) The Company has the requisite corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and, subject to receipt of the Requisite Company Vote, to consummate the Transactions. The
execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Transactions have been duly authorized by
the Company Board, and no other corporate action on the part of the Company is necessary to authorize the execution and delivery by the Company of this
Agreement and the Plan of Merger and the consummation by it of the Transactions, in each case, subject only to the approval of this Agreement, the Plan of Merger
and the Merger by the affirmative vote of holders of Ordinary Shares representing at least two-thirds of the Ordinary Shares present and voting in person or by
proxy as a single class at the Shareholders’ Meeting (the “ Requisite Company Vote ”) in accordance with Section 233(6) of the CICL and the memorandum and
articles of association of the Company. This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization,
execution and delivery by Parent and Merger Sub, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting
creditors’ rights and to general principles of equity (the “ Bankruptcy and Equity Exception ”).
(b) The Company Board, acting upon the unanimous recommendation of the Special Committee, has (i) determined that this Agreement
and the Transactions, on the terms and subject to the conditions set forth herein, are fair to and in the best interests of the Company and its shareholders (other than
Parent), (ii) approved and declared advisable this Agreement, the Plan of Merger and the Transactions, and (iii) subject to Section 6.04(c),
11
resolved to recommend approval of this Agreement, the Plan of Merger and the Transactions to the holders of Ordinary Shares (the “ Company Recommendation
”). The Company Board, acting upon the unanimous recommendation of the Special Committee, has directed that this Agreement, the Plan of Merger and the
Transactions be submitted to the holders of Ordinary Shares for approval.
(c) The Special Committee has received the written opinion of J.P. Morgan Securities (Asia Pacific) Limited (the “ Financial Advisor ”),
dated the date of this Agreement, to the effect that, subject to the limitations, qualifications and assumptions set forth therein and as of the date hereof, the Per
Share Merger Consideration to be paid to the holders of Ordinary Shares and the Per ADS Merger Consideration to be paid to the holders of ADSs (in each case,
other than holders of Excluded Shares, including Excluded Shares represented by ADSs) in the Merger is fair, from a financial point of view, to such holders, a
copy of which opinion will be delivered to Parent for its information promptly after the date of this Agreement. The Financial Advisor has consented to the
inclusion of a copy of its opinion in the Proxy Statement. It is agreed and understood that such opinion may not be relied on by Parent or any of its affiliates.
SECTION 3.05 No Conflict; Required Filings and Consents . (a) The execution and delivery of this Agreement by the Company do not,
and the performance of this Agreement by the Company and the consummation of the Transactions will not, (i) assuming (solely with respect to performance of
this Agreement and consummation of the Transactions) that the Requisite Company Vote is obtained, conflict with or violate the memorandum and articles of
association of the Company or any equivalent organizational documents of any other Group Company, (ii) assuming (solely with respect to performance of this
Agreement and consummation of the Transactions) that the matters referred to in Section 3.05(b) are complied with and the Requisite Company Vote is obtained,
conflict with or violate any Law applicable to any Group Company or by which any property or asset of any Group Company is bound or affected, or (iii) result in
any breach of or constitute a default (or an event which, with notice or lapse of time or both, would become a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any property or asset of any Group Company pursuant to, any
Contract to which any Group Company is a party or by which any properties or assets of any Group Company are bound, except, with respect to clauses (ii) and
(iii), for any such conflict, violation, breach, default, right or other occurrences which would not, individually or in the aggregate, reasonably be expected to
(x) prevent or materially delay the consummation of the Transactions or (y) have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement by the Company and the
consummation by the Company of the Transactions will not, require any consent, approval, authorization or permit of, or filing with or notification to, any
Governmental Authority, except (i) for compliance with the applicable requirements of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”),
and the rules and regulations promulgated thereunder (including the joining of the Company in the filing of a Schedule 13E-3, the furnishing of a Form 6-K with
the Proxy Statement, and the filing or furnishing of one or more amendments to the Schedule 13E-3 and such Form 6-K to respond to comments of the Securities
and Exchange Commission (the “ SEC ”), if any, on such documents), (ii) for compliance with the rules and regulations of the New York Stock Exchange (“ NYSE
”), (iii) for the filing of the Plan of Merger and related documentation with the Registrar of Companies of the Cayman Islands
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pursuant to the CICL, (iv) for the consents, approvals, authorizations or permits of, or filings with or notifications to, the Governmental Authorities set forth in
Section 3.05(b) of the Company Disclosure Schedule and Governmental Authorities with authority over the enforcement of applicable antitrust or competition
Laws in any jurisdiction that is material to the business of Parent or the Company, and (v) where the failure to obtain or make, as applicable, any such consent,
approval, authorization or permit of, or filing with or notification to, any Governmental Authority would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
SECTION 3.06 Permits; Compliance with Laws . (a) Each Group Company is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Authority necessary for such Group Company
to own, lease, operate and use its properties and assets or to carry on its business as it is now being conducted other than those the lack thereof would not,
individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect (the “ Material Company Permits ”). As of the date hereof, no
suspension or cancellation of any of the Material Company Permits is pending or, to the knowledge of the Company, threatened. All such Material Company
Permits are valid and in full force and effect, except for any failure to be valid or in full force and effect that would not, individually or in the aggregate, reasonably
be expected to have a Company Material Adverse Effect.
(b) No Group Company is in default, breach or violation of any Material Company Permit, in each case except for any such default, breach
or violation that individually, or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(c) Each Group Company is in compliance in all material respects with applicable Law (including, without limitation, (i) any Laws
applicable to its business and (ii) any Laws related to the protection of personal data). To the knowledge of the Company, no Group Company has received any
written notice or communication from any applicable Governmental Authority of any material non-compliance with any applicable Laws or Material Company
Permits that has not been cured. This section shall not apply to infringement of any patent, trademark or copyright.
(d) All approvals of, and filings and registrations and other requisite formalities with, Governmental Authorities in the People’s Republic
of China (“ PRC ”) that are material to the Group Companies taken as a whole and required to be made by the Company or its Subsidiaries in respect of the
Company and its Subsidiaries and their capital structure and operations, including but not limited to registrations with the State Administration for Industry and
Commerce, the State Administration of Foreign Exchange (“ SAFE ”), the State Administration of Taxation, the State Administration of Press, Publication, Radio,
Film and Television, the National Health and Family Planning Commission, and the Ministry of Industry and Information Technology and their respective local
counterparts, have been duly completed in accordance with applicable PRC Laws in all material respects. Each Onshore Subsidiary has complied in all material
respects with all applicable PRC Laws regarding the contribution and payment of its registered capital.
(e) The directors, officers and employees of the Group Companies, and to the knowledge of the Company, any other ultimate beneficial
owners of the Company who are PRC residents subject to the requirements of SAFE Circular 37 or any other SAFE Rules
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and Regulations, have complied in all material respects with the requirements of the SAFE Rules and Regulations. The relevant Onshore Subsidiaries have
complied in all material respects with the filing and registration requirements of SAFE Circular 7 and any other applicable SAFE Rules and Regulations in respect
of the Share Incentive Plans.
(f) Neither the Company, any of its Subsidiaries or any director, officer or employee of the Company or any of its Subsidiaries, nor, to the
knowledge of the Company, any agent of the Company or any of its Subsidiaries acting on behalf of the Company or any of its Subsidiaries, have offered, paid,
promised to pay or authorized the payment of any money or anything else of value, whether directly or through another person, to any person in any manner that
would constitute official or commercial bribery or an illegal kickback, or would otherwise violate any Applicable Anti-Bribery Law.
(g) The Company has maintained complete and accurate books and records and effective internal controls in accordance with the
Applicable Anti-Bribery Laws.
(h) Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, employee, representative,
agent or affiliate of the Company or any of its Subsidiaries, or any person or company acting on behalf of the Company (i) is currently subject to or the target of
any U.S. sanctions administered by the office of Foreign Assets Control of the U.S. Treasury Department or the U.S. Department of State, the United Nations
Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority; or pursuant to the Comprehensive Iran Sanctions and
Divestment Act, the Iran Threat Reduction and Syria Human Rights Act of 2012, the National Defense Authorization Act for Fiscal Year 2012, the Iran Freedom
and Counter-Proliferation Act of 2012, each as amended, or any executive order, directive or regulation pursuant to the authority of any of the foregoing, or any
orders or licenses issued pursuant to such authority (collectively, “ Sanctions ”); or (ii) has violated any applicable Sanctions or anti-money laundering Law, anti-
terrorism Law, export restrictions, anti-boycott regulations or embargo regulation.
(i) No action, suit or proceeding by or before any Governmental Authority involving the Company or any of its Subsidiaries with respect
to anti-money laundering Law is pending or, to the knowledge of the Company, threatened in writing.
SECTION 3.07 SEC Filings; Financial Statements . (a) The Company has filed or otherwise furnished (as applicable) all forms, reports
and documents required to be filed with or furnished to the SEC by the Company since January 1, 2013 (the “ Applicable Date ”) (the forms, reports and other
documents filed or furnished since the Applicable Date and those filed or furnished subsequent to the date hereof as have been supplemented, modified or amended
since the time of filing or furnishing, collectively, the “ Company SEC Reports ”). As of the date of filing, in the case of Company SEC Reports filed pursuant to
the Exchange Act (and to the extent such Company SEC Reports were amended, then as of the date of filing of such amendment), and as of the date of
effectiveness in the case of Company SEC Reports filed pursuant to the Securities Act of 1933, as amended (the “ Securities Act ”) (and to the extent such
Company SEC Reports were amended, then as of the date of effectiveness of such amendment), the Company SEC Reports (i) complied as to form in all material
respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations promulgated thereunder, each as in
effect on the date so filed or effective, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements
14
made therein, in the light of the circumstances under which they were made, not misleading as of its filing date or effective date (as applicable).
(b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in or incorporated by reference into
the Company SEC Reports was prepared in accordance with United States generally accepted accounting principles (“ GAAP ”) applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes thereto) and each fairly presents, in all material respects, the consolidated financial
position, results of operations, changes in shareholders’ equity and cash flows of the Group Companies, as applicable, as at the respective dates thereof and for the
respective periods indicated therein (subject, in the case of unaudited interim statements, to normal year-end audit adjustments which are not material in the
aggregate and the exclusion of certain notes in accordance with the rules of the SEC relating to unaudited financial statements), in each case, in accordance with
GAAP.
(c) No Group Company has any liabilities of any nature (whether accrued, absolute, determined, determinable, fixed, contingent or
otherwise) which would be required to be reflected or reserved against on a consolidated balance sheet of the Company prepared in accordance with GAAP, except
liabilities (i) reflected or reserved against in the consolidated balance sheet for the period ended December 31, 2014 (including the notes thereto) included in the
Company SEC Reports, (ii) incurred pursuant to this Agreement or in connection with the Transactions, (iii) incurred since December 31, 2014 in the ordinary
course of business and in a manner consistent with past practice, or (iv) that would not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
(d) The Company has timely filed and made available to Parent all certifications and statements required by (x) Rule 13a-14 or Rule 15d-
14 under the Exchange Act or (y) 18 U.S.C. Section 1350 (Section 906 of the United States Sarbanes-Oxley Act of 2002) with respect to any Company SEC
Report. The Company is in compliance, in all material respects, with all provisions of the United States Sarbanes-Oxley Act of 2002 which are applicable to it. The
Company maintains disclosure controls and procedures (as defined in Rule 13a-15 or Rule 15d-15 under the Exchange Act) that are designed to ensure that all
material information relating to the Company and its Subsidiaries is made known on a timely basis to its Chief Executive Officer and Chief Financial Officer or
other persons performing similar functions. The Company’s Chief Executive Officer and Chief Financial Officer (the “ Certifying Officers ”) have evaluated the
effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed annual report under
the Exchange Act (such date, the “ Evaluation Date ”). The Company presented in its most recently filed annual report under the Exchange Act the conclusions of
the Certifying Officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date, including any change
in the Company’s internal control over financial reporting that occurred during the period ending on the Evaluation Date that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting. Since the Evaluation Date, to the knowledge of the Company, there
has been no change in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting. To the knowledge of the Company, there is no reason to believe that
the matters certified by the Certifying Officers are not true and correct in all material respects.
15
(e) Neither the Company nor, to the knowledge of the Company, the Company’s independent registered public accounting firm, has
identified or been made aware of “significant deficiencies” or “material weaknesses” (as defined by the Public Company Accounting Oversight Board) in the
design or operation of the Company’s internal controls and procedures which could reasonably adversely affect the Company’s ability to record, process,
summarize or report financial data, in each case which has not been subsequently remediated.
(f) The Group Companies maintain a system of internal accounting controls designed to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(g) The Company is in compliance in all material respects with the applicable listing and corporate governance rules and regulations of the
NYSE, subject to availing itself of any “home country” exemption from such rules and regulations available to a “foreign private issuer” (as defined under the
Exchange Act and under the relevant rules and regulations of the NYSE).
(h) There are no unconsolidated Subsidiaries of the Company or any off-balance sheet arrangements of any type (including any off-balance
sheet arrangement required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K promulgated under the Securities Act) that have not been so described in
the Company SEC Reports nor any obligations to enter into any such arrangements.
SECTION 3.08 Absence of Certain Changes or Events . Since December 31, 2014 to the date hereof, except as expressly contemplated
by this Agreement, (a) the Company and its Subsidiaries have conducted their businesses in all material respects in the ordinary course and in a manner consistent
with past practice, (b) there has not been any Company Material Adverse Effect, (c) the Company has not taken or permitted any of its Subsidiaries to take any of
the following actions (i) declare, set aside or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of the
Ordinary Shares (other than dividends or other distributions from any Subsidiary of the Company to the Company or to another wholly-owned Subsidiary of the
Company), or redeem, purchase or otherwise acquire, directly or indirectly, any of its shares or other securities (other than in connection with the settlement of any
Company Share Awards in accordance with the appropriate Share Incentive Plans and this Agreement) or (ii) adopt, pass any resolution to approve or make any
petition or similar proceeding or order in relation to, a plan of complete or partial liquidation, dissolution, scheme of arrangement, merger, consolidation,
restructuring, recapitalization or other reorganization of any Group Company (other than the Merger or any merger or consolidation among wholly-owned
Subsidiaries of the Company), (d) there has not been any material change by the Company or any of its Subsidiaries in its method of accounting or accounting
practice, except as may be appropriate to conform to changes in statutory or regulatory accounting rules or GAAP or regulatory requirements with respect thereto,
(e) other than in the ordinary course of business and consistent with past practice (including with respect to amount and timing), there has not been any material
increase in the compensation or benefits payable or to become payable to
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its officers or key employees, (f) none of the Group Companies has incurred any Indebtedness, other than Indebtedness receivable or payable solely between or
among the Company’s wholly-owned Subsidiaries (including, for the purposes of this Section 3.08(f), the Operating Subsidiaries) or between or among the
Company and any of its wholly-owned Subsidiaries (including, for the purposes of this Section 3.08(f), the Operating Subsidiaries) and accounts receivable and
payable incurred in the ordinary course of business consistent with past practice, (g) none of the Group Companies has (i) acquired or made any capital
contributions to or investments in any business or entity or (ii) acquired any assets outside of the ordinary course of business consistent with past practice, (h) no
receiver, trustee, administrator or other similar person has been appointed in relation to the affairs of any Group Company or its property or any part thereof
material to the Company and its Subsidiaries taken as a whole, (i) there has not been any making or revocation of any material Tax election, any settlement or
compromise of any material Tax liability, or any change (or request to any taxing authority to change) in any material aspect of the method of accounting of the
Company or any of its Subsidiaries for Tax purposes, and (j) there has not been any adoption of resolution to approve or petition or similar proceeding or order in
relation to a plan of complete or partial liquidation, dissolution, scheme of arrangement, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its Subsidiaries.
SECTION 3.09 Absence of Litigation . (a) There is no litigation, suit, claim, action, demand letter, or any judicial, criminal,
administrative or regulatory proceeding, hearing, investigation, or formal or informal regulatory document production request proceeding (an “ Action ”) pending
or, to the knowledge of the Company, threatened against any Group Company, or any property or asset of any Group Company, before any Governmental
Authority, except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(b) Neither the Company nor any Subsidiary of the Company nor any property or asset of the Company or any Subsidiary of the Company
is subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of the Company, any
continuing investigation by, any Governmental Authority, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Authority,
except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.10 Labor and Employment Matters; Employee Plans . (a) No Group Company is a party to or bound by any collective
bargaining agreement or other labor union contract applicable to persons employed by any Group Company as of the date hereof, and no labor union has requested
or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of any Group Company. There are no unfair labor
practice complaints pending or, to the knowledge of the Company, threatened against any Group Company before any Governmental Authority, and there is no
pending dispute with any director, employee or former employee of any Group Company, in each case, except as would not, individually or in the aggregate, have a
Company Material Adverse Effect. There is no organized strike, slowdown, work stoppage or lockout, or similar activity currently occurring or, to the knowledge
of the Company, threatened against or involving any Group Company, in each case, except as would not, individually or in the aggregate, have a Company Material
Adverse Effect.
17
(b) Except as would not, individually or in the aggregate, have a Company Material Adverse Effect, (i) each Group Company is in
compliance with all applicable Laws relating to employment and employment practices, including those related to wages, work hours, shifts, overtime, Social
Security Benefits, holidays and leave, collective bargaining terms and conditions of employment and the payment and withholding of taxes and other sums as
required by the appropriate Governmental Authority, (ii) each Group Company has withheld and paid in full to the appropriate Governmental Authority, or is
holding for payment not yet due to such Governmental Authority, all amounts required to be withheld from or paid with respect to each Group Company’s
employees (including the withholding and payment of all individual income taxes and contributions to Social Security Benefits payable), (iii) no Group Company is
liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing, (iv) there is no claim with respect to payment of
wages, salary or overtime pay that has been asserted or is now pending or, to the knowledge of the Company, threatened before any Governmental Authority with
respect to any persons currently or formerly employed by any Group Company, and (v) there is no charge or proceeding with respect to a violation of any
occupational safety or health standards that is now pending or, to the knowledge of the Company, threatened with respect to any Group Company.
(c) Section 3.10(c) of the Company Disclosure Schedule contains a list of each Company Employee Plan. The Company has provided or
otherwise made available to Parent true and complete copies of each Company Employee Plan (other than any Company Employee Plan mandated by applicable
Law to which the sole liability of the Company and its Subsidiaries is to make contributions required by Law, including plans or programs maintained by a
Government Authority requiring the payment of social insurance taxes or similar contributions by the Company or its Subsidiaries to a fund of a Governmental
Authority with respect to wages of an employee), including (i) a copy of each trust agreement or other funding arrangement, (ii) each summary or other document
delivered to participants, (iii) all forms of participation agreement, share purchase agreement, share option agreement or other agreement with participants, (iv) all
documents filed with any Governmental Authority and (v) all documents received from any Governmental Authority.
(d) No Company Employee Plans is subject to the U.S. Employee Retirement Income Security Act of 1974, as amended or is a defined
benefit pension plan. Each Company Employee Plan is now and always has been operated in all material respects in accordance with its terms and the
requirements of all applicable Laws. Except as would not, individually or in the aggregate, have a Company Material Effect, (i) all contributions or other amounts
payable by a Group Company with respect to each Company Employee Plan in respect of current or prior plan years have been paid or accrued in accordance with
GAAP, and (ii) there are no claims (other than for benefits incurred in the ordinary course) or, to the knowledge of the Company, threatened with respect to any
Company Employee Plan or against the assets thereof, and no fact or event exists that could give rise to any such lawsuit, action, proceeding or claim. The
Company does not maintain any funded Company Employee Plans (other than any Company Employee Plan mandated by applicable Law to which the sole
liability of the Company and its Subsidiaries is to make contributions required by Law, including plans or programs maintained by a Government Authority
requiring the payment of social insurance taxes or similar contributions by the Company or its Subsidiaries to a fund of a Governmental Authority with respect to
wages of an employee).
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(e) Except as otherwise specifically provided in this Agreement regarding the Company Share Awards, neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby (either alone or in conjunction with another event, such as a termination of
employment) will (i) result in any payment becoming due to any current or former director or current or former employee of the Company or any of its Subsidiaries
under any of the Company Employee Plans, (ii) increase any benefits otherwise payable under any of the Company Employee Plans or (iii) result in any
acceleration of the time of payment or vesting of any such benefits or result in the payment of any amount under any Company Employee Plan that would be,
individually or in combination with any other such payment, an “excess parachute payment” within the meaning of Section 280G of the Code. The Company is not
obligated, pursuant to any of the Company Employee Plans, to grant any options or other rights to purchase or acquire Shares to any employees, consultants or
directors of the Company after the date hereof.
SECTION 3.11 Real Property . (a) The Group Companies do not own any real property.
(b) All current leases and subleases of real property entered into by any Group Company (the “ Leased Real Property ”) are in full force
and effect, are valid and effective in accordance with their respective terms, subject to the Bankruptcy and Equity Exception, and there is not, under any of such
leases, any existing material default or event of default (or event which, with notice or lapse of time, or both, would constitute a default) by such Group Company
or, to the knowledge of the Company, by the other party to such lease or sublease, except in each case, as would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect. The applicable Group Company has good and valid leasehold or subleasehold interests in each parcel of
Leased Real Property, free and clear of any Liens other than Permitted Property Liens, except as would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
SECTION 3.12 Intellectual Property .
(a) Section 3.12(a) of the Company Disclosure Schedule sets forth an accurate and complete list of all material (i) registered Intellectual
Property owned by any Group Company and (ii) pending applications (whether or not published) for the registration of Intellectual Property owned by any Group
Company (the “ Registered Intellectual Property ”).
(b) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (i) the
Group Companies exclusively own, free and clear of all Liens, their proprietary Intellectual Property, and own or have a valid and enforceable right or license to
use all other Intellectual Property that is used in or necessary for the conduct of the Group Companies’ businesses as presently conducted or as presently planned to
be conducted, (ii) no interference, opposition, reissue, reexamination, or other proceeding is or has been pending or, to the knowledge of the Company, threatened
against the Group Companies, in which the scope, validity, or enforceability of any Intellectual Property owned by a Group Company is being or has been
contested or challenged, (iii) (A) the Group Companies (1) are not subject to any agreement with any person pursuant to which they have deposited, or would be
required to deposit into escrow the source code of any Software owned by them and (2) have not disclosed to or provided any person with past, current or
contingent access to, or possession of, the source code of any
19
Software owned by them to any third party or pursuant to duties and obligations arising by operation of applicable Law, and (B) no Software owned or used by the
Group Companies is subject to any obligation that would require any Group Company to disclose to any person (other than non-employee contractors, consultants
and other persons engaged by any Group Company who are subject to valid and enforceable written confidentiality obligations) any proprietary source code or
Trade Secret that is part of any Software, (iv) all Registered Intellectual Property is subsisting and, to the knowledge of the Company, is valid and enforceable,
(v) all Intellectual Property disclosed as owned by a Group Company belongs to such Group Company and is not the property of a third party customer, (vi) (A) all
current and former employees, consultants, contractors, and any other persons who have participated in the creation or development of any proprietary Intellectual
Property created or developed by, for or under the direction or supervision of any Group Company, have executed and delivered to such Group Company valid and
enforceable agreements (1) providing for the non-disclosure by such person of confidential information, and (2) providing for the assignment by such person to
such Group Company of their rights in any Intellectual Property developed or arising out of such person’s employment by, engagement by or contract with such
Group Company and (B) no such current or former employees, consultants, contractors, or any other persons have excluded works or inventions from their
assignment of their rights in any such Intellectual Property pursuant to any such agreements and no such employee or consultant is in violation thereof, (vii) the
Group Companies have paid all such rewards and remuneration that are either legally required or due and payable to such persons pursuant to such valid
agreements, and no Actions pending or, to the knowledge of the Company, threatened, regarding the payment of such legally required rewards and remuneration to
such persons, (viii) there are no (A) Actions pending or, to the knowledge of the Company, threatened against a Group Company (including cease-and-desist letters
or offers to license any Intellectual Property), by any person alleging infringement, dilution, unauthorized disclosure, or misappropriation by any Group Company
of the Intellectual Property rights of such person, or (B) challenges to the validity, enforceability or ownership of, or the right to use, any Intellectual Property
owned by a Group Company, (ix) the conduct of the business of the Group Companies does not infringe, dilute, or misappropriate and has not infringed, diluted, or
misappropriated any Intellectual Property rights of any person, (x) no Group Company has interfered with, infringed upon, disclosed without authorization,
misused, misappropriated or otherwise violated any Intellectual Property rights, any rights of privacy (including personal data privacy and related Laws), name,
portrait, reputation, or personality under applicable Law or any personal or sensitive information (including personally identifiable information) owned by any
other person, and (xi) no person is infringing, diluting or misappropriating, or has infringed, diluted or misappropriated, any Intellectual Property owned by any
Group Company.
(c) None of the material Software (including Software embodied in any material products and services) of the Company or any of its
Subsidiaries is subject to any “open source”, “copyleft” or analogous license (including any GPL, AGPL or other open source software license) in a manner or
relation which has or would require any licensing, availability or distribution of the source code to any such material Software or impose any material economic
limitations on the Company’s and its Subsidiaries’ commercial exploitation thereof if such Software were licensed, distributed, conveyed or made available to any
person.
(d) The Group Companies have taken commercially reasonable measures to protect the confidentiality, integrity, and security of (i) the
material confidential or
20
proprietary information, of the Group Companies (or third parties for which the Group Companies have a legal or contractual obligation of protection),
(ii) personally identifiable information, material confidential or proprietary information, and material Trade Secrets entrusted to any Group Company by its
customers, clients, or other persons to whom the such Group Company owes a duty or obligation under applicable Law or any written Contract to maintain the
security or confidentiality thereof, (iii) their material Trade Secrets and (iv) the IT Assets (and all material information and transactions stored or contained therein
or transmitted thereby), and there have been no material outages, malfunctions, or unauthorized intrusions or breaches of security with respect to any Group
Company system or IT Asset, other than those that were resolved without material liability or the obligation to disclose same to any third party.
(e) Except as would not, individually or in the aggregate, reasonably be expected to have or result in a Company Material Adverse Effect,
no Group Company is in breach of any requirements for or restrictions regarding subcontracting, sublicensing, or disclosure of Intellectual Property, Trade Secrets,
or personally identifiable information of the Company, its Subsidiaries, or of their clients or customers to any person (including the Company’s Subsidiaries),
contained in any applicable Contracts with any of the Company’s or its Subsidiaries’ customers or clients or under applicable Law. No proceedings before any
Governmental Authority are pending, or, to the knowledge of the Company, threatened, against a Group Company by any person alleging a violation of such
person’s, or any other person’s, privacy, publicity, personal or confidentiality rights by such Group Company under applicable Laws, or a breach or other violation
of any of the Group Companies’ internal rules, policies and procedures with respect to privacy, publicity, data protection, collection, storage, transfer, use or
disclosure of personally identifiable information by such Group Company, in each case, except as would not, individually or in the aggregate, reasonably be
expected to have or result in a Company Material Adverse Effect.
Group Company and all such Tax Returns are true, accurate and complete in all material respects.
SECTION 3.13 Taxes . (a) Each Group Company has timely filed all material Tax Returns required to be filed by or with respect such
(b) Each Group Company has paid and discharged all material Taxes due and payable (whether or not shown to be due on any Tax
Return), and where payment is not yet due, each Group Company has made adequate provision for all material Taxes in its financial statements in accordance with
GAAP.
(c) There are no material Liens with respect to Taxes upon any of the assets or properties of any Group Company, other than with respect
to Taxes not yet due and payable or which are being contested in good faith and by appropriate proceedings and for which adequate reserves have been established
in accordance with GAAP.
against any Group Company any deficiency or claim for any material Taxes.
(d) As of the date hereof, no Governmental Authority has asserted in writing or, to the knowledge of the Company, is threatening to assert
collected and deposited under applicable Law, and to the extent required, such Taxes have been paid to the relevant taxing authority.
(e) Each Group Company has properly and timely withheld, collected and deposited all material Taxes that are required to be withheld,
21
(f) There is no outstanding audit, assessment, dispute or claim concerning any material Tax liability of any Group Company, nor is one
pending to the knowledge of any Group Company.
(g) No Group Company has granted any waiver of any statute of limitations with respect to, or any extension of a period for the
assessment of, any material Tax.
(h) There are no unresolved claims by any Governmental Authority in a jurisdiction where any Group Company does not file Tax Returns
that any Group Company is or may be subject to Taxes in such jurisdiction.
(i) No Group Company (i) is or has ever been a member of a combined, consolidated, unitary, affiliated or similar Tax group (other than a
group the common parent of which is or was one of the Group Companies) or (ii) has any material liability for Taxes of any person as a result of being a member of
such a Tax group or arising from the application of any provision of Tax Law, or as a transferee or successor, by contract, or otherwise.
(j) No Group Company has been either a “distributing corporation” or a “controlled corporation” in a distribution occurring during the last
three (3) years in which the parties to such distribution treated the distribution as one to which Section 355 of the Code is applicable.
(k) Neither the Company nor any Subsidiary that is not an Onshore Subsidiary takes the position for tax purposes that it is a “resident
enterprise” of the PRC.
(l) No Group Company is a party to, is bound by or has any obligation under any Tax sharing or Tax indemnity agreement or similar
contract or arrangement, other than any such agreement or arrangement (A) solely between the Group Companies or (B) entered into in the ordinary course of
business and for which the primary purpose does not relate to Taxes.
(m) Each Group Company is in material compliance with all terms and conditions of, any Tax exemption, Tax holiday, Tax incentive or
other Tax reduction agreement or order of a Governmental Authority. Any submissions made on behalf of any Group Company to any Governmental Authority in
connection with obtaining Tax exemptions, Tax holidays, Tax incentives or other Tax reduction agreement or order of a Government Authority are accurate and
complete in all material respects. As of the date hereof, no suspension, revocation or cancellation of any Tax exemption, Tax holiday, Tax incentive or other Tax
reduction agreement or order of a Governmental Authority is pending or, to the knowledge of the Company, threatened.
SECTION 3.14 Indebtedness and Security . No Group Company has any Indebtedness nor any secured creditors holding fixed or floating
security interests, other than (x) Indebtedness receivable or payable solely between or among the Company’s wholly-owned Subsidiaries (including, for the
purposes of this Section 3.14, the Operating Subsidiaries) or between or among the Company and any of its wholly-owned Subsidiaries (including, for the purposes
of this Section 3.14, the Operating Subsidiaries) and (y) accounts receivable and payable incurred in the ordinary course of business consistent with past practice.
No Group Company has taken any steps to seek protection pursuant to any bankruptcy law, nor does the Company have any knowledge or reason to believe that its
22
creditors intend to initiate involuntary bankruptcy proceedings or any knowledge of any fact which would reasonably lead a creditor to do so. The Group
Companies on a consolidated basis are not Insolvent.
SECTION 3.15 Material Contracts . (a) Except for this Agreement, the Contracts filed as exhibits to the Company SEC Reports filed
with the SEC prior to the date of this Agreement and as set forth on Section 3.15(a) of the Company Disclosure Schedule, no Group Company is a party to, and no
Group Company’s properties or assets are bound by, any of the types of Contracts listed in clauses (i) through (xi) of this Section 3.15(a) (such types of Contracts
being the “ Material Contracts ”):
(i) each Contract that would be required to be filed by the Company pursuant to Item 4 of the Instructions to Exhibits to the
Company’s most recently filed annual report on Form 20-F;
(ii) each Contract relating to any Indebtedness in respect of any counterparty involving actual or potential liability to the Group
Companies in excess of US$7,000,000 during any 12-month period, other than (x) Indebtedness receivable or payable solely between or among the
Company’s wholly-owned Subsidiaries (including, for the purposes of this Section 3.15(a)(ii), the Operating Subsidiaries) or between or among the
Company and any of its wholly-owned Subsidiaries (including, for the purposes of this Section 3.15(a)(ii), the Operating Subsidiaries) and (y) accounts
receivable and payable incurred in the ordinary course of business consistent with past practice;
(iii) each Contract in respect of any (A) joint venture, strategic cooperation or collaboration arrangement, joint sales or marketing
agreement, or partnership arrangement, in each case, that is material to the business of the Group Companies taken as a whole or (B) other agreement
involving a sharing of profits, losses, costs or liabilities by any Group Company that is material to the business of the Group Companies taken as a whole;
(iv) each of the Contracts described under the caption “Item 4. Information on the Company—C. Organizational Structure” in the
Company’s most recently filed annual report on Form 20-F, which (A) provide the Company with effective control over any of its Subsidiaries in respect
of which it does not, directly or indirectly, own a majority of the equity interests (each, an “ Operating Subsidiary ”), (B) provide any Group Company the
right or option to purchase the equity interests in any Operating Subsidiary, or (C) transfer economic benefits from any Operating Subsidiary to any other
Subsidiary of the Company (the contracts and agreements described in (A), (B) and (C), together, the “ Control Agreements ”);
(v) each Contract pursuant to which the Company or any of its Subsidiaries (A) receives or is granted any license to any material
Intellectual Property (other than any non-exclusive license to off-the-shelf Software generally available on non-discriminatory pricing terms and other
than a non-exclusive license granted in the ordinary course of the grantor’s business) or (B) grants any license to any material Intellectual Property (other
than a non-exclusive license granted in the ordinary course of the grantor’s business), or each other Contract relating to Intellectual Property or IT Assets
not covered by the foregoing (A) or (B) that is material to the Company and its Subsidiaries, taken as a whole;
23
(vi) each Contract that involves the acquisition or disposition, directly or indirectly (by merger, license or otherwise), of any
securities of any person (other than a Company Share Award) or any assets that have a fair market value or purchase price of more than US$3,000,000;
(vii) each Contract (including any distribution agreements) that limits, or purports to limit, the ability of any Group Company to
compete in any line of business in any geographic area or during any period of time in a manner that is material to the Group Companies, taken as a
whole, or any Contract that grants any exclusive rights to any third party (including any exclusive license or exclusive distribution or usage arrangements)
if such Contract, exclusive rights or restrictions resulting therefrom are material to the Group Companies, taken as a whole;
(viii) each Contract between any Group Company, on the one hand, and any directors or officers of any Group Company or their
immediate family members or shareholders (other than Parent) of any Group Company holding more than 5% of the voting securities of any Group
Company, on the other hand, under which there are material rights or obligations outstanding;
(ix) each Contract providing for any earn-out or similar payment payable by any Group Company to any person (other than to
another Group Company);
(x) each Contract providing for any change of control or similar payments to any Third Party in excess of US$2,500,000;
(xi) each Contract involving payments by the Company or any of its Subsidiaries in excess of US$7,000,000 in the aggregate
under each Contract, other than payments between or among the Company’s wholly-owned Subsidiaries (including, for the purposes of this
Section 3.15(a)(xi), the Operating Subsidiaries) or between or among the Company and any of its wholly-owned Subsidiaries (including, for the purposes
of this Section 3.15(a)(xi), the Operating Subsidiaries);
(xii) each Contract relating to any capital expenditure or any disbursement Contract with a contract value exceeding
US$7,000,000;
(xiii) each Contract relating to a royalty or dividend arrangement that involves payment by the Company of more than
US$5,000,000 annually based on revenues or profits of the Company or any of its Subsidiaries or based on the revenues or profits derived from any
material Contract;
(xiv) each share or stock redemption or purchase or other Contract affecting or relating to the share capital of the Company or any
of its Subsidiaries, including each Contract with any shareholder of the Company or any of its Subsidiaries which includes anti-dilution rights, voting
arrangements or operating covenants;
(xv) each Contract under which the Company or any of its Subsidiaries has granted any Person any registration rights, or any right
of first refusal, first offer or first negotiation with respect to any Ordinary Shares or securities of any Subsidiaries of the Company; and
24
(xvi) each Contract that contains a put, call or similar right pursuant to which the Company or any of its Subsidiaries could be
required to purchase or sell, as applicable, any equity interests of any Person.
(b) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (i) each
Material Contract is a legal, valid and binding obligation of a Group Company, as applicable, in full force and effect and enforceable against the such Group
Company in accordance with its terms, subject to the Bankruptcy and Equity Exception, (ii) to the Company’s knowledge, each Material Contract is a legal, valid
and binding obligation of the counterparty thereto, in full force and effect and enforceable against such counterparty in accordance with its terms, subject to the
Bankruptcy and Equity Exception, (iii) no Group Company and, to the Company’s knowledge, no counterparty, is or is alleged to be in breach or violation of, or
default under, any Material Contract, (iv) to the Company’s knowledge, no person intends to terminate any Material Contract and (v) neither the execution of this
Agreement nor the consummation of any Transaction shall constitute a material default under, give rise to cancellation rights under, or otherwise adversely affect
any of the material rights of any Group Company under any Material Contract. The Company has furnished or made available to Parent true and complete copies
of all Material Contracts, including any amendments thereto.
SECTION 3.16 Environmental Matters . Except as would not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect, (i) each Group Company is in compliance with all applicable Environmental Laws and has obtained and possess all permits,
licenses and other authorizations currently required for their establishment and their operation under any Environmental Law (the “ Environmental Permits ”), and
all such Environmental Permits are in full force and effect, (ii) to the knowledge of the Company, no property currently or formerly owned or operated by any
Group Company has been contaminated with or is releasing any Hazardous Substance in a manner that would reasonably be expected to require remediation or
other action pursuant to any Environmental Law, (iii) no Group Company has received any written notice, demand, letter, claim or request for information alleging
that any Group Company is in violation of or liable under any Environmental Law, which remains unresolved, and (iv) no Group Company is subject to any Order
with any Governmental Authority or agreement with any person concerning liability under any Environmental Law or relating to Hazardous Substances.
SECTION 3.17 Operating Subsidiaries . The Company controls its Operating Subsidiaries through the Control Agreements, and there is
no enforceable written agreement to rescind, amend or change the material terms of such Control Agreements other than as contemplated by this Agreement.
SECTION 3.18 Interested Party Transactions . None of the officers or directors of any Group Company is presently a party to any
transaction with the Company or any of its Subsidiaries which would be required to be reported under Item 404 of Regulation S-K of the SEC (other than for
services as officers, directors and employees of a Group Company), other than for (a) payment of salary or fees for services rendered in the capacity of an officer,
director or employee of the Company or any of its Subsidiaries), (b) reimbursement for expenses incurred on behalf of the Company or any of its Subsidiaries and
(c) other employee benefits, including Company Share Awards, in each case, in the ordinary course of business and consistent with past practice.
25
SECTION 3.19 Insurance . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material
Adverse Effect, as of the date of this Agreement, (i) all insurance policies and all self-insurance programs and arrangements relating to the business, assets,
liabilities and operations of the Group Companies are in full force and effect, (ii) the Company has no reason to believe that any Group Company will not be able to
(A) renew its existing insurance policies as and when such policies expire or (B) obtain comparable coverage from comparable insurers as may be necessary to
continue its business without a significant increase in cost, (iii) no Group Company has received any written notice of any threatened termination of, premium
increase with respect to, or alteration of coverage under, any of its respective insurance policies, and (iv) no Group Company has been denied any insurance
coverage which it has sought or for which it has applied.
SECTION 3.20 Anti-Takeover Provisions . The Company is not party to a shareholder rights agreement, “poison pill” or similar
agreement or plan. The Company Board has taken all necessary action so that any takeover, anti-takeover, moratorium, “fair price”, “control share” or other
similar Laws enacted under any Laws applicable to the Company (each, a “ Takeover Statute ”) does not, and will not, apply to this Agreement or the Transactions
other than the CICL.
SECTION 3.21 Brokers . Except for the Financial Advisor, no broker, finder or investment banker is entitled to any brokerage, finder’s
or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of the Company.
SECTION 3.22 No Other Representations and Warranties . Except for the representations and warranties made by the Company in
Article III and Section 6.01(c), neither the Company nor any other person on behalf of the Company makes any other express or implied representation or warranty
with respect to the Company or any of its Subsidiaries or their respective business, operations, assets, liabilities, condition (financial or otherwise) or prospects or
any information provided to Parent, Merger Sub or any of their respective affiliates or Representatives, notwithstanding the delivery or disclosure to Parent, Merger
Sub or any of their respective affiliates or Representatives of any documentation, forecasts or other information in connection with the Transactions, and each of
Parent and Merger Sub acknowledges the foregoing.
REPRESENTATIONS
AND
WARRANTIES
OF
PARENT
AND
MERGER
SUB
Parent and Merger Sub hereby, jointly and severally, represent and warrant to the Company that:
ARTICLE
IV
SECTION 4.01 Corporate Organization . Each of Parent and Merger Sub is an exempted company duly organized, validly existing and in
good standing under the laws of the Cayman Islands and has the requisite corporate or similar power and authority to own, lease and operate its properties and
assets to carry on its business as it is now being conducted.
SECTION 4.02 Capitalization of Merger Sub; No Prior Activities . As of the date of this Agreement, the authorized share capital of
Merger Sub consists solely of
26
50,000 ordinary shares, par value US$1.00 per share, one (1) ordinary share of which is validly issued and outstanding. All of the issued and outstanding share
capital of Merger Sub is, and at the Effective Time will be, solely owned by Parent. Merger Sub was formed solely for the purpose of engaging in the Transactions,
and it has not conducted any business prior to the date hereof and has no, and prior to the Effective Time, will have no, assets, liabilities or obligations of any
nature other than in connection with those incident to its formation and capitalization pursuant to this Agreement and the Transactions. Merger Sub has no secured
creditors holding any fixed or floating security interests.
SECTION 4.03 Authority Relative to This Agreement . Each of Parent and Merger Sub has all necessary corporate power and authority
to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions. The execution, delivery and performance by
Parent and Merger Sub of this Agreement and the consummation by Parent and Merger Sub of the Transactions have been duly and validly authorized by all
necessary corporate action, and no other corporate action on the part of Parent or Merger Sub are necessary to authorize the execution and delivery of this
Agreement by Parent and Merger Sub and the Plan of Merger by Merger Sub and the consummation by them of the Transactions (other than the filings,
notifications and other obligations and actions described in Section 4.04(b)). This Agreement has been duly and validly executed and delivered by Parent and
Merger Sub and, assuming due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of each of Parent and
Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms, subject to the Bankruptcy and Equity Exception.
SECTION 4.04 No Conflict; Required Filings and Consents . (a) The execution and delivery of this Agreement by Parent and Merger
Sub do not, and the performance of this Agreement by Parent and Merger Sub and consummation of the Transactions will not, (i) conflict with or violate the
memorandum and articles of association of either Parent or Merger Sub, (ii) assuming (solely with respect to performance of this Agreement and the consummation
of the Transactions) that all consents, approvals, authorizations and other actions described in Section 4.04(b) have been obtained and all filings and obligations
described in Section 4.04(b) have been made, conflict with or violate any Law applicable to Parent or Merger Sub or by which any property or asset of either of
them is bound or affected, or (iii) result in any breach of, or constitute a default (or an event which, with notice or lapse of time or both, would become a default)
under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Lien or other encumbrance on any
property or asset of Parent or Merger Sub pursuant to, any Contract or obligation to which Parent or Merger Sub is a party or by which any property or asset of
either of them is bound, except, with respect to clauses (ii) and (iii), for any such conflict, violation, breach, default, right or other occurrence which would not,
individually or in the aggregate, reasonably be expected to prevent or materially delay consummation of the Transactions by Parent or Merger Sub.
(b) The execution and delivery of this Agreement by Parent and Merger Sub do not, and the performance of this Agreement by Parent and
Merger Sub and the consummation by Parent and Merger Sub of the Transactions will not, require any consent, approval, authorization or permit of, or filing with
or notification to, any Governmental Authority, except (i) for compliance with the applicable requirements of Section 13 of the Exchange Act and the rules and
regulations promulgated thereunder (including the filing of a Schedule 13E-3 and furnishing of the Proxy Statement, and the filing or furnishing of one or
27
more amendments to the Schedule 13E-3 and Proxy Statement to respond to comments of the SEC, if any, on such documents), (ii) for compliance with the
rules and regulations of NYSE, (iii) for the filing of the Plan of Merger and related documentation with the Registrar of Companies of the Cayman Islands pursuant
to the CICL, (iv) for the consents, approvals, authorizations or permits of, or filings with or notifications to the Governmental Authorities with authority over the
enforcement of applicable antitrust or competition Laws in any jurisdiction that is material to the business of Parent or the Company, and (v) where the failure to
obtain or make, as applicable, any such consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority would not,
individually or in the aggregate, be expected to, prevent or materially delay consummation of any of the Transactions by Parent or Merger Sub.
SECTION 4.05 Sufficient Funds . At the Closing, Parent will have available sufficient funds to pay the Merger Consideration in
accordance with and subject to the terms and conditions of this Agreement.
SECTION 4.06 Brokers . Except for Morgan Stanley Asia Limited, no broker, finder or investment banker is entitled to any brokerage,
finder’s or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of Parent or Merger Sub.
SECTION 4.07 Absence of Litigation . As of the date of this Agreement, there is no Action pending or, to the knowledge of Parent and
Merger Sub, threatened against Parent, Merger Sub or AIL that, individually or in the aggregate, would prevent or materially delay consummation of the
Transactions by Parent or Merger Sub. As of the date of this Agreement, none of Parent, Merger Sub or AIL is subject to any continuing order of, consent decree,
settlement agreement or other similar written agreement with, or, to the knowledge of Parent and Merger Sub, continuing investigation by, any Governmental
Authority, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Authority that, individually or in the aggregate, would
prevent or materially delay consummation of the Transactions by Parent or Merger Sub.
SECTION 4.08 Non-Reliance on Company Estimates . The Company has made available to Parent, Merger Sub or their respective
affiliates and Representatives, and may continue to make available, certain estimates, projections and other forecasts for the business of the Company and its
Subsidiaries and certain plan and budget information. Each of Parent and Merger Sub hereby acknowledges and agrees that (a) these estimates, projections,
forecasts, plans and budgets and the assumptions on which they are based were prepared for specific purposes and may vary significantly from each other, (b) there
are uncertainties inherent in attempting to make such estimates, projections, forecasts, plans and budgets, (c) Parent and Merger Sub are making their own
evaluation of the adequacy and accuracy of all estimates, projections, forecasts, plans and budgets so furnished to them (including the reasonableness of the
assumptions underlying such estimates, projections, forecasts, plans or budgets), and (d) except to the extent expressly set forth in Article III, the Company does
not make any representations or warranties with respect to any estimates, projections, forecasts, plans or budgets furnished by the Company, its Subsidiaries or their
respective affiliates and Representatives; provided that, nothing contained in this Section 4.08 shall be deemed to limit in any way the representations and
warranties of the Company set forth in this Agreement.
28
SECTION 4.09 Independent Investigation . Parent and Merger Sub have conducted their own independent investigation, review and
analysis of the business, operations, assets, liabilities, results of operations, financial condition and prospects of the Company and its Subsidiaries, which
investigation, review and analysis was performed by Parent, Merger Sub, their respective affiliates and Representatives. Each of Parent and Merger Sub
acknowledges that as of the date of this Agreement, it, its affiliates and their respective Representatives have been provided sufficient access to the personnel,
properties, facilities and records of the Company and its Subsidiaries for such purpose.
SECTION 4.10 No Other Representations and Warranties . Except for the representations and warranties made by Parent and Merger
Sub in Article IV and Section 6.01(b), neither Parent nor Merger Sub nor any other person on behalf of Parent or Merger Sub makes any other express or implied
representation or warranty with respect to Parent or Merger Sub or any of their Subsidiaries or their respective business, operations, assets, liabilities, condition
(financial or otherwise) or prospects or any information provided to the Company or any of its affiliates or Representatives, notwithstanding the delivery or
disclosure to the Company or any of its affiliates or Representatives of any documentation, forecasts or other information in connection with the Transactions, and
the Company acknowledges the foregoing.
ARTICLE
V
CONDUCT
OF
BUSINESS
PENDING
THE
MERGER
SECTION 5.01 Conduct of Business by the Company Pending the Merger . (a) The Company agrees that, between the date of this
Agreement and the Effective Time, except as required by applicable Law or as set forth in Section 5.01 of the Company Disclosure Schedule, unless Parent shall
otherwise provide its prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed):
(i) the businesses of the Group Companies shall be conducted only in, and no Group Company shall take any action except in, a
lawfully permitted manner in the ordinary course of business consistent with past practice; and
(ii) the Company shall use its reasonable best efforts to preserve substantially intact the business organization of the Group
Companies, maintain in effect all Material Company Permits, keep available the services of the current officers, key employees, and key consultants and
contractors of the Group Companies and preserve the current material relationships and goodwill of the Group Companies with Governmental Authorities,
key customers and suppliers, and any other persons with which any Group Company has material business relations.
(b) In furtherance and without limitation of Section 5.01(a), except as set forth in Section 5.01(b) of the Company Disclosure Schedule, or
as required by applicable Law or as expressly provided in Section 6.14, the Company will not, and will not permit any of its Subsidiaries to, between the date of
this Agreement and the Effective Time, directly or indirectly, do, or propose to do, any of the following without the prior written consent of Parent (which consent
shall not be unreasonably withheld, conditioned or delayed):
(i) amend or otherwise change the memorandum and articles of association or equivalent organizational documents of the
Company, or make any
29
material amendments to the memorandum and articles of association or equivalent organizational documents of any other Group Company;
(ii) issue, sell, transfer, lease, sublease, license, pledge, dispose of, grant or encumber, or authorize the issuance, sale, transfer,
lease, sublease, license, pledge, disposition, grant or encumbrance of, (A) any shares of any class of any Group Company, or any options, warrants,
convertible securities or other rights of any kind (including any Company Share Award) to acquire any shares, or any other ownership interest (including,
without limitation, any phantom interest), of any Group Company (other than (x) in connection with the exercise or settlement of any Company Share
Awards outstanding on the date hereof in accordance with the applicable Share Incentive Plan and applicable award agreement or (y) in transactions solely
among the Company’s wholly-owned Subsidiaries or between the Company and any of its wholly-owned Subsidiaries), or (B) any material property or
assets (whether real, personal or mixed, and including leasehold interests, intangible property and Intellectual Property) of the Company or any Subsidiary
(other than (x) sale of such property or assets or non-exclusive licenses, in each case, in the ordinary course of business and consistent with past practice
or (y) in transactions solely among the Company’s wholly-owned Subsidiaries or between the Company and any of its wholly-owned Subsidiaries);
(iii) declare, set aside, make or pay any dividend or other distribution, payable in cash, shares, property or otherwise, with respect
to any of its shares, other than dividends or other distributions from any Group Company to the Company or another Group Company which is wholly-
owned by the Company;
(iv) reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any of its shares, or
any options, warrants, convertible securities or other rights exchangeable into or convertible or exercisable for any of its share capital, in each case other
than in connection with the settlement of any Company Share Awards in accordance with the applicable Share Incentive Plans and this Agreement;
(v) (A) effect or commence any liquidation, dissolution, scheme of arrangement, merger, consolidation, amalgamation,
recapitalization, restructuring, reorganization or similar transaction involving any Group Company (other than the Merger or any merger or consolidation
among wholly-owned Subsidiaries of the Company), or (B) create any new Subsidiaries;
(vi) (A) acquire (including, without limitation, by merger, consolidation, scheme of arrangement, amalgamation or acquisition of
stock or assets or any other business combination) or make any capital contribution or investment in any corporation, partnership, other business
organization or any division thereof (other than a wholly-owned Subsidiary of the Company), or (B) acquire any assets (other than (x) in the ordinary
course of business consistent with past practice or (y) assets of a wholly-owned Subsidiary of the Company);
(vii) (A) incur, assume, alter, amend or modify any Indebtedness, guarantee any Indebtedness, or issue any debt securities, in each
case, in excess of US$7,000,000 individually or US$15,000,000 in the aggregate, or (B) make (x) any loans or advances to any director or executive
officer of the Company or (y) any
30
loans or advances in excess of US$500,000 individually or US$2,000,000 in the aggregate to any other person, in each case, other than Indebtedness
receivable or payable solely between or among the Company’s wholly-owned Subsidiaries (including, for the purposes of this Section 5.01(b)(vii), the
Operating Subsidiaries) or between or among the Company and any of its wholly-owned Subsidiaries (including, for the purposes of this Section 5.01(b)
(vii), the Operating Subsidiaries);
of the Company other than in the ordinary course of business consistent with past practice;
(viii) create or grant any Lien on any material assets (including material Intellectual Property) of the Company or any Subsidiaries
(ix) (A) authorize, or make any commitment with respect to, any single capital expenditure which is in excess of US$3,000,000,
unless included in the Company’s current budget and operating plan approved by the Company Board, or (B) authorize or make any commitment with
respect to capital expenditures which are, in the aggregate (including capital expenditures included in the Company’s budget and operating plan), in excess
of US$20,000,000 for the Group Companies taken as a whole, in each case other than ordinary course expenditures necessary to maintain existing assets
in good repair; or
(x) guarantee the performance or other obligations of any person (other than guarantees in connection with any Indebtedness as
permitted by the foregoing clause (vii));
(xi) except as otherwise required by Law or pursuant to any Company Employee Plan in existence as of the date hereof, (A) enter
into any new employment or compensatory agreements in connection with employment or service (including the renewal of any such agreements), or
terminate or amend any such agreements, with any director or officer of any Group Company or any other employee or individual service provider of any
Group Company who has an annual base salary in excess of US$100,000, (B) grant or provide any severance or termination payments or benefits to any
director, officer, employee or individual service provider of any Group Company, (C) increase the compensation, bonus or pension, welfare, severance or
other benefits of, pay any bonus to, or grant, issue or make any new equity awards to any director, officer, employee or individual service provider of any
Group Company, except annual base salary increases to non-officer employees of any Group Company made in the ordinary course consistent with past
practice, (D) establish, adopt, amend or terminate any Company Employee Plan or any plan, agreement, program, policy, trust, fund or other arrangement
that would be a Company Employee Plan if it were in existence as of the date of this Agreement or amend the terms of any outstanding Company Share
Awards, (E) take any action to accelerate or otherwise alter the vesting or payment, or fund or in any other way secure the payment, of compensation or
benefits under the Company Employee Plan, to the extent not already required in any such plan, including voluntarily accelerating the vesting of any
Company Share Award in connection with the Merger, or (F) change any actuarial or other assumptions used to calculate funding obligations with respect
to any Company Employee Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are
determined, except as may be required by GAAP;
31
(xii) make any material changes with respect to any method of financial accounting, or financial accounting policies or procedures,
except as required by changes in GAAP or applicable Law;
(xiii) enter into, or materially amend or modify, or consent to the termination of any Material Contract (or any Contract that would
be a Material Contract if such Contract had been entered into prior to the date hereof), or amend, waive, modify or consent to the termination of the
Company’s or any Subsidiary’s material rights thereunder, or fail to comply with or breach in any material respect the Investment Documents;
(xiv) enter into any Contract between any of the Group Companies, on the one hand, and any of their respective directors or
officers, on the other hand, in each case required to be disclosed pursuant to Item 7B or Item 19 of Form 20-F under the Exchange Act (except as
permitted under Section 5.01(b)(xi));
(xv) terminate or cancel, let lapse, or amend or modify in any material respect, other than renewals in the ordinary course of
business, any material insurance policies maintained by it which is not promptly replaced by a comparable amount of insurance coverage with reputable
independent insurance companies or underwriters;
(xvi) commence any material Action (other than in respect of collection of amounts owed in the ordinary course of business) or
settle any Action other than any settlement involving only the payment of monetary damages not in excess of US$1,000,000 not relating to this Agreement
or the Transactions;
(xvii) engage in the conduct of any new line of business material to the Group Companies, taken as a whole;
(xviii) permit any item of material Intellectual Property to lapse or to be abandoned, dedicated, or disclaimed, other than (i) with
respect to such Intellectual Property that is no longer used or useful in any of the Company’s or its Subsidiaries’ respective businesses and (ii) as required
pursuant to Contracts in effect prior to the date hereof which have been provided or otherwise made available to Parent, fail to perform or make any
applicable filings, recordings or other similar actions or filings with respect to material Intellectual Property, or fail to pay all required fees and taxes
required or advisable to maintain and protect its interest in material Intellectual Property;
(xix) fail to make in a timely manner any filings or registrations with the SEC required under the Securities Act or the Exchange
Act or the rules and regulations promulgated thereunder;
(xx) make or change any material Tax election, amend any material Tax Return, enter into any material closing agreement with
respect to Taxes, surrender any right to claim a material refund of Taxes, settle or finally resolve any material controversy with respect to Taxes, consent
to any extension or waiver of the statute of limitations applicable to any Tax claim or assessment relating to the Group Companies, or change any method
of Tax accounting; or
32
(xxi) authorize or agree to take any of the foregoing actions, or enter into any letter of intent (binding or nonbinding) or similar
written agreement or arrangement with respect to any of the foregoing.
ARTICLE
VI
ADDITIONAL
AGREEMENTS
SECTION 6.01 Proxy Statement and Schedule 13E-3 . (a) Promptly following the date hereof, the Company, with the assistance of
Parent and Merger Sub, shall prepare and cause to be filed with the SEC a proxy statement relating to the approval of this Agreement, the Plan of Merger and the
Transactions by the shareholders of the Company (such proxy statement, as amended or supplemented, being referred to herein as the “ Proxy Statement ”).
Concurrently with the preparation of the Proxy Statement, the Company and Parent shall jointly prepare and cause to be filed a Schedule 13E-3 with the SEC. Each
of the Company and Parent shall use its reasonable best efforts so that the Schedule 13E-3 will comply as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations promulgated thereunder. Each of the Company and Parent shall use its reasonable best efforts to respond promptly
to any comments of the SEC with respect to the Proxy Statement and Schedule 13E-3. Each of the Company and Parent shall furnish all information concerning
such party to the other as may be reasonably requested in connection with the preparation, filing and distribution of the Proxy Statement and Schedule 13E-3. The
Company shall promptly notify Parent upon the receipt of any comments from the SEC or its staff or any request from the SEC or its staff for amendments or
supplements to the Proxy Statement and Schedule 13E-3 and shall provide Parent with copies of all correspondence between it and its representatives, on the one
hand, and the SEC and its staff, on the other hand. Prior to filing or mailing the Proxy Statement and Schedule 13E-3 (or any amendment or supplement thereto) or
responding to any comments of the SEC with respect thereto, the Company (i) shall provide Parent a reasonable opportunity to review and comment on such
document or response, (ii) shall include in such document or response all comments reasonably proposed by Parent and (iii) shall not file or mail such document or
respond to the SEC prior to receiving the approval of Parent (which approval shall not be unreasonably withheld, conditioned or delayed). If at any time prior to
the Shareholders’ Meeting, any information relating to the Company, Parent or any of their respective affiliates, officers or directors, is discovered by the Company
or Parent which should be set forth in an amendment or supplement to the Proxy Statement and Schedule 13E-3 so that the Proxy Statement and Schedule 13E-3
shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading, the party which discovers such information shall promptly notify the other parties
hereto and an appropriate amendment or supplement describing such information shall be filed with the SEC and, to the extent required by applicable Law,
disseminated to the shareholders of the Company.
(b) Parent represents and covenants that the information supplied by Parent for inclusion in the Proxy Statement and Schedule 13E-3 will
not, at (i) the time the Proxy Statement and Schedule 13E-3 (or any amendment thereof or supplement thereto) are filed with the SEC, (ii) the time the Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed to the shareholders of the Company, and (iii) the time of the Shareholders’ Meeting,
contain any untrue statement of a material fact or fail to state any
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material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not
misleading; provided , however , that no representation or warranty is made by Parent or Merger Sub with respect to information supplied by or on behalf of the
Company for inclusion or incorporation by reference in the Proxy Statement or Schedule 13E-3.
(c) The Company represents and covenants that the information supplied by the Company for inclusion in the Proxy Statement and
Schedule 13E-3 will not, at (i) the time the Proxy Statement and Schedule 13E-3 (or any amendment thereof or supplement thereto) are filed with the SEC, (ii) the
time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the shareholders of the Company, and (iii) the time of the
Shareholders’ Meeting, contain any untrue statement of a material fact or fail to state any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were made, not misleading; provided , however , that no representation or warranty is made
by the Company with respect to information supplied by or on behalf of Parent or Merger Sub for inclusion or incorporation by reference in the Proxy Statement or
Schedule 13E-3. The Company covenants that all documents that the Company is responsible for filing with and/or furnishing to the SEC in connection with any
of the Transactions will comply as to form and substance in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder, other than with respect to any information supplied by Parent or Merger Sub.
SECTION 6.02 Company Shareholders’ Meeting . (a) As soon as reasonably practicable following the date of this Agreement, the
Company shall cause a definitive Proxy Statement, letter to shareholders, notice of meeting and form of proxy accompanying the definitive Proxy Statement that
will be provided to the holders of Ordinary Shares in connection with the solicitation of proxies for use at the Shareholders’ Meeting, to be mailed to the holders of
Ordinary Shares at the earliest practicable date after the date that the SEC confirms it has no further comments, and, if necessary in order to comply with applicable
Laws, after the Proxy Statement shall have been so mailed, promptly circulate amended, supplemental or supplemented proxy material, and, if required in
connection therewith, re-solicit proxies.
(b) As promptly as reasonably practicable after the SEC confirms that it has no further comments on the Schedule 13E-3 and Proxy
Statement, the Company shall take, in accordance with applicable Law and its memorandum and articles of association, regardless of whether the Company Board
determines at any time that this Agreement is no longer advisable or recommends that the shareholders of the Company reject it or any other Change in the
Company Recommendation has occurred at any time, all actions reasonably necessary to (i) call, give notice of, set a record date for, and convene the shareholders’
meeting for the purpose of obtaining the Requisite Company Vote (the “ Shareholders’ Meeting ”), (ii) instruct or otherwise cause the Depositary to (A) fix the
record date established by the Company for the Shareholders’ Meeting as the record date for determining the holders of ADSs who shall be entitled to give
instructions for the exercise of the voting rights pertaining to the Ordinary Shares represented by ADSs (the “ Record ADS Holders ”), (B) provide all proxy
solicitation materials to all Record ADS Holders and (C) vote all Ordinary Shares represented by ADSs in accordance with the instructions of such corresponding
Record ADS Holders. Except with the prior written consent of Parent, the only matter (other than procedural matters) that shall be proposed to be acted upon by
the
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shareholders of the Company at the Shareholders’ Meeting shall be approval of this Agreement, the Plan of Merger and the Merger.
(c) The Company may, and Parent may request that the Company, adjourn the Shareholders’ Meeting for up to thirty (30) days (but in any
event no later than five (5) Business Days prior to the Termination Date) (x) if as of the time for which the Shareholders’ Meeting is originally scheduled (as set
forth in the Proxy Statement) there are insufficient Shares represented (either in person or by proxy) voting in favor of approval of this Agreement and the
Transactions to obtain the Requisite Company Vote or (y) at the reasonable request of any party hereto, in order to allow reasonable additional time for the filing
and, if necessary or desirable, mailing of any supplemental or amended disclosure to be reviewed by the Company’s shareholders prior to the Shareholders’
Meeting, in which event the Company shall, in each case, cause the Shareholders’ Meeting to be adjourned.
(d) Once the Company has established the record date, the Company shall not change such record date or establish a different record date
for the Shareholders’ Meeting without the prior written consent of Parent, unless required to do so by applicable Law, the memorandum and articles of association
of the Company, or if the Board has determined (based on the advice of outside legal counsel) that failure to do so would be reasonably likely to violate the
directors’ fiduciary duties under applicable Law. In the event that the date of the Shareholders’ Meeting as originally called is for any reason adjourned or
otherwise delayed, the Company agrees that, unless Parent shall have otherwise approved in writing, it shall implement such adjournment or other delay in such a
way that the Company does not establish a new record date for the Shareholders’ Meeting, as so adjourned or delayed, except as required by applicable Law or the
memorandum and articles of association of the Company, or if the Board has determined (based on the advice of outside legal counsel) that failure to do so would
be reasonably likely to violate the directors’ fiduciary duties under applicable Law.
(e) Subject to Section 6.04(c), the Company Board shall recommend to holders of the Ordinary Shares that they approve and authorize this
Agreement, the Plan of Merger and the Transactions, and shall include such recommendation in the Proxy Statement. The Company shall use its reasonable best
efforts to solicit from its shareholders proxies in favor of the approval of this Agreement, the Plan of Merger and the Transactions and shall take all other actions
reasonably necessary or advisable to secure the Requisite Company Vote. Notwithstanding anything to the contrary contained in this Agreement, the obligations of
the Company under this Section 6.02 shall not be limited or otherwise affected by the commencement, disclosure, announcement or submission to it of any
Acquisition Proposal, or by any Change in the Company Recommendation.
(f) Unless this Agreement has been terminated in accordance with its terms or the Company Board has effected a change in the Company
Recommendation, Parent shall, at the Shareholders’ Meeting, vote all Ordinary Shares for which Parent has voting power (including, without limitation, to the
extent permitted under AIL’s proxy pursuant to the Support Agreement), in favor of the authorization and approval of this Agreement, the Plan of Merger and the
Transactions.
SECTION 6.03 Access to Information . (a) From the date hereof until the Effective Time and subject to applicable Law, upon reasonable
advance notice from Parent, the Company shall (i) provide to Parent and its Representatives reasonable access during normal business hours to the offices,
properties, books and records of the Group Companies,
35
(ii) furnish to Parent and its Representatives such existing financial and operating data and other existing information as such persons may reasonably request, and
(iii) instruct the Representatives of the Group Companies to reasonably cooperate with Parent and its Representatives in its investigation; provided that the
Company shall not be required to (A) furnish, or provide access to, any information to any person not a party to, or otherwise covered by, the Confidentiality
Agreement with respect to such information, or (B) provide access to or furnish any information if doing so would (x) violate any Contract with any third party or
any applicable Law, or (y) cause any Group Company, upon advice of outside legal counsel, to waive any privilege with respect to such information, provided that
the Company shall take all commercially reasonable steps to permit inspection of or to disclose such information on a basis that does not waive such Group
Company’s privilege with respect thereto, including, without limitation, by means of a joint interest or defense agreement.
(b) No investigation pursuant to this Section 6.03 shall affect any representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
SECTION 6.04 No Solicitation of Transactions . (a) The Company agrees that no Group Company and none of the directors or officers
of any Group Company shall, and that it shall direct its and its Subsidiaries’ Representatives (including, without limitation, any investment banker, attorney or
accountant retained by it or any Group Company), not to, in each case, directly or indirectly, (i) solicit, initiate or knowingly encourage (including by way of
furnishing information in a manner designed to encourage), or take any other action to facilitate, any inquiries or the making of any Acquisition Proposal
(including, without limitation, any proposal or offer to its shareholders) that constitutes, or would reasonably be expected to lead to, any Acquisition Proposal, or
(ii) enter into, maintain or continue discussions or negotiations with, or provide any nonpublic information relating to any Group Company or the Transactions to,
any person or entity in connection with, or in order to obtain, an Acquisition Proposal, or (iii) agree to, approve, adopt, endorse or recommend (or publicly propose
to agree to approve, adopt, endorse or recommend) any Acquisition Proposal, or enter into any letter of intent, Contract, commitment or obligation contemplating
or otherwise relating to, or consummate, any Acquisition Proposal , or (iv) authorize or permit any of the officers, directors or Representatives of any Group
Company to take any action set forth in clauses (a)(i) — (a)(iii) of this Section 6.04 (in each case, other than to the extent expressly permitted pursuant to
Section 6.04(b) or Section 6.04(c)). The Company shall notify Parent in writing as promptly as practicable (and in any event within forty-eight (48) hours after the
Company has knowledge thereof), of any proposal or offer, or any request for information or other inquiry or request, that could reasonably be expected to lead to
an Acquisition Proposal, specifying (x) the material terms and conditions thereof (including material amendments or proposed material amendments) and
providing, if applicable, copies of any written requests, proposals or offers, including proposed agreements, (y) the identity of the party making such proposal or
offer or inquiry or contact, and (z) whether the Company has determined to provide confidential information to such person. The Company shall keep Parent
informed, on a reasonably current basis (and in any event within forty-eight (48) hours of the occurrence of any material changes, developments, discussions or
negotiations) of the status and terms of any such proposal, offer, inquiry, contact or request and of any material changes in the status and terms of any such
proposal, offer, inquiry, contact or request (including the material terms and conditions thereof) and providing, if applicable, copies of any written requests,
proposals or offers, including proposed agreements. The Company immediately shall cease and cause to be terminated all
36
existing discussions or negotiations with any parties conducted heretofore with respect to an Acquisition Proposal. The Company shall not, and shall cause its
Subsidiaries not to, enter into any confidentiality agreement with any Third Party which prohibits the Company from providing such information to Parent, or
release any Third Party from, or waive any provision of, any confidentiality or standstill agreement in connection with an Acquisition Proposal.
(b) Subject to compliance with the other provisions of this Section 6.04, prior to obtaining the Requisite Company Vote, the Company
Board may directly or indirectly through the Company’s Representatives (i) contact any Third Party that has made an unsolicited, written, bona fide proposal or
offer regarding an Acquisition Proposal that was not initiated or solicited in breach of Section 6.04(a) solely in order to clarify the terms and conditions thereof so
as to assess whether such proposal or offer constitutes or is reasonably expected to result in a Superior Proposal, and (ii) furnish information to, and enter into
discussions with, such Third Party to the extent the Special Committee has (A) determined in good faith (after consultation with a financial advisor who shall be an
internationally recognized investment banking firm and outside legal counsel, as applicable) that such proposal or offer constitutes or is reasonably likely to result
in a Superior Proposal, and that, in light of such Superior Proposal, failure to furnish such information to or enter into discussions with such Third Party would be
reasonably likely to violate the directors’ fiduciary duties under applicable Law, and (B) obtained from such person an executed confidentiality agreement on terms
no less favorable to the Company in the aggregate than those contained in the Confidentiality Agreement (it being understood that such confidentiality agreement
and any related agreements shall not include any provision for any exclusive right to negotiate with such party or having the effect of prohibiting the Company
from satisfying its obligations under this Agreement); provided that the Company shall provide written notice to Parent at least one (1) Business Day prior to taking
any action set forth in clauses (b)(i) of this Section 6.04, provide written notice to Parent at least forty-eight (48) hours prior to taking any action set forth in (b)
(ii) of this Section 6.04 and shall concurrently make available to Parent any material information concerning any Group Company that is provided to any such
person and that was not previously made available to Parent or its Representatives.
(c) Except as set forth in this Section 6.04(c), neither the Company Board nor any committee thereof shall (i) (A) withhold, withdraw,
qualify, amend or modify in a manner adverse to Parent or Merger Sub, or propose (publicly or otherwise) to withhold, withdraw, qualify, amend or modify in a
manner adverse to Parent or Merger Sub, the Company Recommendation or (B) if a tender offer or exchange offer that constitutes an Acquisition Proposal is
commenced, fail to recommend against acceptance of such tender offer or exchange offer by its shareholders within ten (10) Business Days after commencement
(any of such actions described in the foregoing clause (A) or (B), a “ Change in the Company Recommendation ”) or (C) adopt, approve, endorse or recommend, or
propose (publicly or otherwise) to adopt, approve, endorse or recommend any Acquisition Proposal, provided that a “stop, look and listen” communication by the
Company Board or the Special Committee pursuant to Rule 14d-9(f) of the Exchange Act, or any substantially similar communication with respect to an
Acquisition Proposal, which did not result from any breach of this Section 6.04(c) shall not be deemed to be a Change in the Company Recommendation, nor
(ii) cause or permit the Company or any of its Subsidiaries to enter into any letter of intent, Contract, commitment or obligation with respect to any Acquisition
Proposal. Notwithstanding the foregoing but subject to compliance by the Company and the Company Board with this Section 6.04, from the date of this
Agreement and at any time prior
37
to the receipt of the Requisite Company Vote, if the Company has received an unsolicited, bona fide written Acquisition Proposal and the Special Committee
determines, in its good faith judgment, upon advice by a financial advisor who shall be an internationally recognized investment banking firm and outside legal
counsel, that such proposal or offer constitutes a Superior Proposal and failure to make a Change in the Company Recommendation would be reasonably likely to
violate the directors’ fiduciary duties under applicable Law, the Company Board may, upon the unanimous recommendation of the Special Committee, effect a
Change in the Company Recommendation with respect to such Superior Proposal but only if:
(1) prior to effecting a Change in the Company Recommendation, the Company shall have complied with the requirements of
Sections 6.04(a) and 6.04(b) and shall (x) provide at least thirty (30) days’ prior written notice to Parent (the “ Notice Period ”) advising Parent that the
Company Board has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person
making such Superior Proposal and indicating that the Company Board intends to effect a Change in the Company Recommendation and the manner in
which it intends (or may intend) to do so, it being understood that such notice or any amendment or update thereto or the determination to so deliver such
notice shall not constitute a Change in the Company Recommendation, (y) negotiate with and cause its financial and legal advisors to negotiate with
Parent and its Representatives in good faith (to the extent Parent desires to negotiate) to make such adjustments in the terms and conditions of this
Agreement so that such Superior Proposal would cease to constitute a Superior Proposal or so that a failure to effect a Change in the Company
Recommendation would no longer be reasonably likely to violate the directors’ fiduciary duties under applicable Law, and (z) permit Parent and its
Representatives to make a presentation to the Company Board and the Special Committee regarding this Agreement and any proposed modifications or
adjustments with respect thereto (to the extent Parent desires to make such presentation) and consider in good faith any modifications or adjustments
regarding this Agreement proposed by Parent; provided that any material modifications to such Acquisition Proposal that the Special Committee
previously determined to be a Superior Proposal shall be deemed a new Acquisition Proposal and the Company shall be required to again comply with the
requirements of this Section 6.04(c);
(2) Parent has not exercised its right of first offer under the Investor Documents with respect to such Superior Proposal prior to
the end of the Notice Period; and
(3) following the end of the Notice Period (and any renewed period thereof), the Special Committee shall have unanimously
determined in good faith (after consultation with a financial advisor who shall be an internationally recognized investment banking firm and outside legal
counsel, as applicable) after considering the terms of any modifications or adjustments to this Agreement proposed by Parent, that (x) such Acquisition
Proposal continues to constitute a Superior Proposal and (y) with respect to a Change in the Company Recommendation, failure to effect a Change in the
Company Recommendation would be reasonably likely to violate the directors’ fiduciary duties under applicable Laws, and shall have communicated its
unanimous recommendation to the Company Board
38
to effect a Change in the Company Recommendation with respect to such Superior Proposal.
SECTION 6.05 Directors’ and Officers’ Indemnification and Insurance . (a) The memorandum and articles of association of the
Surviving Company shall contain provisions no less favorable with respect to exculpation and indemnification than are set forth in the memorandum and articles of
association of the Company in effect as of the date hereof, which provisions shall not be amended, repealed or otherwise modified for a period of six (6) years from
the Effective Time in any manner that would affect adversely the rights thereunder of individuals who, at or prior to the Effective Time, were directors or officers
of the Company, unless such modification shall be required by Law.
(b) The Surviving Company shall maintain in effect for six (6) years from the Effective Time, the current directors’ and officers’ liability
insurance policies maintained by the Company as of the date hereof with respect to matters occurring prior to the Effective Time, including acts or omissions
occurring in connection with this Agreement and the consummation of the Transactions (the parties covered thereby, the “ Indemnified Parties ”); provided ,
however , that the Surviving Company may substitute therefor policies of at least the same coverage containing terms and conditions that are no less favorable, and
provided , further , that in no event shall the Surviving Company be required to expend pursuant to this Section 6.05(b) more than an amount per year equal to
300% of current annual premiums paid by the Company for such insurance. In addition, the Company may and, at Parent’s request, the Company shall, purchase a
six (6)-year “tail” prepaid policy prior to the Effective Time on terms and conditions no less advantageous to the Indemnified Parties than the existing directors’
and officers’ liability insurance maintained by the Company. If such “tail” prepaid policies have been obtained by the Company prior to the Effective Time, the
Surviving Company shall, and Parent shall cause the Surviving Company to, maintain such policies in full force and effect, and continue to honor the respective
obligations thereunder, and all other obligations of Parent or Surviving Company under this Section 6.05(b) shall terminate.
(c) Subject to the terms and conditions of this Section 6.05, from and after the Effective Time, the Surviving Company shall comply with
all of the Company’s obligations, and shall cause its Subsidiaries to comply with their respective obligations to indemnify and hold harmless (including any
obligations to advance funds for expenses) the present and former officers and directors thereof against any and all costs or expenses (including reasonable
attorneys’ fees and expenses), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any actual or threatened
claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of, relating to or in connection with (i) the fact
that such person is or was a director or officer of the Company or such Subsidiary or (ii) any acts or omissions occurring or alleged to have occurred prior to or at
the Effective Time, to the extent provided under the Company’s or such Subsidiaries’ respective organizational and governing documents or agreements in effect
on the date hereof (true and complete copies of which shall have been delivered to Parent prior to the date hereof) and to the fullest extent permitted by the CICL or
any other applicable Law, including the approval of this Agreement, the Merger or the other Transactions or arising out of or pertaining to the Transactions and
actions to enforce this provision or any other indemnification or advancement right of any such person; provided that this Section 6.05(c) is not intended to confer
any new or additional rights on any such person, and the indemnification and other
39
obligations of the Company set forth above shall be subject to any limitation imposed from time to time under applicable Law and the Company’s and its
Subsidiaries’ respective organizational and governing documents in effect as of the date hereof.
(d) In the event the Surviving Company or any of its successors or assigns (i) consolidates with or merges into any other person and shall
not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, proper provision shall be made so that the successors and assigns of the Surviving Company or at Parent’s option, Parent, shall
assume the obligations set forth in this Section 6.05.
(e) The provisions of this Section 6.05 shall survive the consummation of the Merger and are intended to be for the benefit of, and shall be
enforceable by, each of the Indemnified Parties and their heirs and legal representatives, each of which shall be a third-party beneficiary of the provisions of this
Section 6.05.
(f) Nothing in this Agreement is intended to, shall be construed to or shall release, waive or impair any rights to directors’ and officers’
insurance claims under any policy that is or has been in existence with respect to the Company or any of its Subsidiaries or their respective officers, directors and
employees, it being understood and agreed that the indemnification provided for in this Section 6.05 is not prior to or in substitution for any such claims under any
such policies.
SECTION 6.06 Notification of Certain Matters . Each of the Company and Parent shall promptly notify the other in writing of:
(a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with
the Transactions;
(b) any notice or other communication from any Governmental Authority in connection with the Transactions;
(c) any Actions commenced or, to the knowledge of the Company or the knowledge of Parent, threatened against the Company or any of
its Subsidiaries or Parent and any of its Subsidiaries, as the case may be, that, if pending on the date of this Agreement, would have been required to have been
disclosed by such party pursuant to any of such party’s representations and warranties contained herein, or that relate to such party’s ability to consummate the
Transactions; and
(d) if a breach of any representation or warranty or failure to perform any covenant or agreement on the part of such party set forth in this
Agreement shall have occurred that would cause the conditions set forth in Sections 7.01, 7.02 and 7.03 not to be satisfied;
together, in each case, with a copy of any such notice, communication or Action; provided , that the delivery of any notice pursuant to this Section 6.06 shall not
(A) cure any breach of, or non-compliance with, any other provision of this Agreement, (B) be deemed to amend or supplement the Company Disclosure Schedule,
or (C) limit or otherwise affect the remedies available hereunder to the party receiving such notice.
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SECTION 6.07 Further Action; Reasonable Best Efforts . (a) Upon the terms and subject to the conditions of this Agreement, Parent
shall as promptly as practicable make any filings, and thereafter make any other required submissions, with respect to the Transactions with or to each
Governmental Authority with jurisdiction over enforcement of the antitrust or competition Laws if such filing is specified by Parent to the Company in writing (the
“ Specified Filings ”), and each party shall reasonably coordinate and cooperate with the other parties in exchanging such information and providing such
assistance as Parent may reasonably request in connection therewith. In addition, each of the parties hereto shall (i) notify the other parties as promptly as
practicable of any communication (whether oral or written) it or any of its affiliates receives from any Governmental Authority in connection with the Transactions,
(ii) permit the other parties to review in advance, and consult with the other parties on (and obtain the prior written consent of Parent with respect to), any proposed
filing, submission or communication (whether oral or written) by such party with or to any Governmental Authority in connection with the Transactions (including,
for the avoidance of doubt, the Specified Filings), and (iii) to the extent permitted by such Governmental Authority, give the other parties the opportunity to attend
and participate at (and obtain the prior written consent (not to be unreasonably withheld, conditioned or delayed) of the Company or Parent, as applicable, with
respect to agreeing to or scheduling) any meeting or conference with any Governmental Authority in connection with the Transactions. Notwithstanding the
foregoing or anything contained herein to the contrary, neither the Company nor Parent or Merger Sub shall make any filings or submissions with respect to the
Transactions with or to, or seek any approvals from, any Governmental Authority with jurisdiction over enforcement of antitrust or competition Laws other than the
Specified Filings.
(b) Notwithstanding anything in this Agreement to the contrary, with respect to the matters covered in this Section 6.07, Parent shall, after
consulting with the Company and considering the Company’s views in good faith, to the extent permitted by applicable Law, take the lead in communicating with
any Governmental Authority with respect to the Transactions and developing strategy for responding to any investigation or other inquiry by any Governmental
Authority related to the Transactions, and, subject to its obligations under Section 6.07, shall make all final decisions with respect to any requests that may be made
by, or any actions, consents, undertakings, approvals, or waivers that may be sought by or from, any Governmental Authority related to the Transactions, including
determining the manner in which to contest or otherwise respond, by litigation or otherwise, to objections to, or proceedings or other actions by any Governmental
Authority related to the Transactions.
(c) Each party hereto shall, upon request by any other party, furnish such other party with all information concerning itself, its
Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with the Proxy Statement, the
Schedule 13E-3, or any other statement, filing, notice or application made by or on behalf of Parent, Merger Sub, the Company or any of their respective affiliates
to any Governmental Authority in connection with the Merger and the Transactions.
perform, or cause to be done and performed, all such further acts and things as may be necessary or desirable in order to consummate the Transactions.
(d) Subject to the restrictions and other provisions of this Section 6.07, each party hereto shall use its reasonable best efforts to do and
41
SECTION 6.08 Participation in Litigation . Prior to the Effective Time, (a) each of Parent and the Company shall give prompt notice to
the other of any Actions by shareholders of the Company commenced or, to the knowledge of Parent or the Company, as the case may be, threatened, against the
Company and/or its directors which relate to this Agreement or the Transactions, and (b) the Company shall give Parent the opportunity to participate in the
defense or settlement of any such shareholder Action against the Company and/or its directors relating to this Agreement or the Transactions, and, no such Action
shall be settled or compromised, and the Company shall not take any action to adversely affect or prejudice any such Action, without Parent’s prior written consent
(which consent shall not be unreasonably withheld, conditioned or delayed).
SECTION 6.09 Resignations . To the extent requested by Parent in writing at least three (3) Business Days prior to Closing, on the
Closing Date, the Company shall use reasonable best efforts to cause to be delivered to Parent duly signed resignations, which shall include a waiver of any claims
against the Group Companies in respect of such resignations, effective as of the Effective Time, of the directors of any Group Company designated by Parent.
SECTION 6.10 Public Announcements . Except as may be required by applicable Law, the press release announcing the execution of this
Agreement shall be issued only in such form as shall be mutually agreed upon by the Company and Parent. Thereafter, Parent and the Company shall consult with
each other before issuing any press release, having any communication with the press (whether or not for attribution), making any other public statement or
scheduling any press conference or conference call with investors or analysts with respect to this Agreement or the Transactions and shall not, without the prior
written consent of the other party (such consent to not be unreasonably withheld), issue any such press release, have any such communication, make any such other
public statement or schedule any such press conference or conference call prior to such consultation; provided , however, that, in the event a party is required by
applicable Law to make any press release, communication, other public statement, press conference or conference call, as the case may be, such party may do so
without Parent’s (if the Company is the disclosing Party) or the Company’s (if Parent or Merger Sub is the disclosing party) prior written consent provided such
party (i) individually notifies Parent (if the Company is the disclosing Party) or the Company (if Parent or Merger Sub is the disclosing party), in each case, in
writing, of such press release, communication, other public statement, press conference or conference call to the extent legally permissible, (ii) only discloses
information in respect of this Agreement and the Transactions to the extent required by applicable Law, upon the advice of outside counsel, and (iii) incorporates
all reasonable comments of Parent (if the Company is the disclosing party) or the Company (if Parent or Merger Sub is the disclosing party), to the extent legally
permissible. Notwithstanding the foregoing, the restrictions set forth in this Section 6.10 shall not apply to any release or announcement made or proposed to be
made by the Company pursuant to Section 6.04(c).
SECTION 6.11 Stock Exchange Delisting . Prior to the Effective Time, the Company shall cooperate with Parent and use reasonable best
efforts to take, or cause to be taken, all actions, and do or cause to be done all things, reasonably necessary, proper or advisable on its part under applicable Laws
and rules and policies of NYSE to enable the delisting by the Surviving Company from NYSE and the deregistration of the Class A Ordinary Shares under the
Exchange Act as promptly as practicable after the Effective Time.
42
SECTION 6.12 Takeover Statutes . If any Takeover Statute other than the CICL is or may become applicable to any of the Transactions,
the parties shall use their respective reasonable best efforts (a) to take all action necessary so that no Takeover Statute is or becomes applicable to any of the
Transactions and (b) if any such Takeover Statute is or becomes applicable to any of the foregoing, to take all action necessary (including, in the case of the
Company and the Company Board, grant all necessary approvals) so that the Transactions may be consummated as promptly as practicable on the terms
contemplated by this Agreement, including all actions to eliminate or lawfully minimize the effects of such Takeover Statute on the Merger and the other
Transactions.
SECTION 6.13 SAFE Registration . The Company shall as soon as practicable after the date hereof, (a) assist in the preparation of
applications to SAFE by management members of the Company who are PRC residents for the registration of their respective holdings of Ordinary Shares (whether
directly or indirectly) in accordance with the requirements of the SAFE Rules and Regulations (or any successor PRC Law), including by promptly providing such
management members with such information relating to any Group Company as is required for such application, and (b) cause its Onshore Subsidiaries (to the
extent applicable) to comply with the requirements of the SAFE Rules and Regulations (or any successor PRC Law), including without limitation the required
filings with SAFE in respect of the termination of any Share Incentive Plan, as applicable, at the Effective Time.
SECTION 6.14 Other Actions . Prior to the Effective Time, the Company shall take the actions set forth in Section 6.14 of the Company
Disclosure Schedule.
ARTICLE
VII
CONDITIONS
TO
THE
MERGER
SECTION 7.01 Conditions to the Obligations of Each Party . The obligations of the Company, Parent and Merger Sub to consummate
the Merger are subject to the satisfaction or waiver (where permissible) of the following conditions:
(a) Shareholder Approval . The Requisite Company Vote shall have been obtained in accordance with the CICL and the Company’s
memorandum and articles of association.
(b) No Injunction . No Governmental Authority of competent jurisdiction shall have issued any injunction, restraining order or judgment
which is then in effect that prohibits the consummation of the Transactions.
SECTION 7.02 Conditions to the Obligations of Parent and Merger Sub . The obligations of Parent and Merger Sub to consummate the
Merger are subject to the satisfaction or waiver (where permissible) of the following additional conditions:
(a) Representations and Warranties . (i) Other than the representations and warranties of the Company contained in Sections 3.03(a) (
Capitalization
), 3.04 (Authority
Relative
to
this
Agreement;
Fairness)
, 3.05(a)(i) ( No
Conflict;
Required
Filings
and
Consents
) and 3.21 (Brokers)
, the
representations and warranties of the Company contained in this Agreement (disregarding for this purpose any limitation or qualification by “materiality” or
“Company Material Adverse Effect” or any words of similar import set forth therein) shall be true and correct in all respects as of the date hereof and as of the
Closing, as
43
though made on and as of such date and time (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except to the extent
such failures to be true and correct, would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect; and (ii) the
representations and warranties set forth in Sections 3.03(a), 3.04, 3.05(a)(i) and 3.21 shall be true and correct in all respects as of the date hereof and as of the
Closing, as though made on and as of such date and time (except to the extent expressly made as of an earlier date, in which case as of such earlier date and except,
with respect to Section 3.03(a), de
minimis
inaccuracies that do not, individually or in the aggregate, increase the aggregate amount of the Merger Consideration by
more than US$200,000).
(b) Agreements and Covenants . The Company shall have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it on or prior to the Closing.
(c) Officer Certificate . The Company shall have delivered to Parent a certificate, dated the Closing Date, signed by a senior executive
officer of the Company, certifying as to the satisfaction of the conditions specified in Sections 7.02(a), 7.02(b) and 7.02(d).
(d) Material Adverse Effect . Since the date of this Agreement, there shall not have occurred and be continuing a Company Material
Adverse Effect.
SECTION 7.03 Conditions to the Obligations of the Company . The obligations of the Company to consummate the Merger are subject
to the satisfaction or waiver (where permissible) of the following additional conditions:
(a) Representations and Warranties . The representations and warranties of Parent and Merger Sub contained in this Agreement
(disregarding for this purpose any limitation or qualification by “materiality”) shall be true and correct in all material respects as of the date hereof and as of the
Closing, as though made on and as of such date and time (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except to
the extent such failures to be true and correct, would not, individually or in the aggregate, reasonably be expected to prevent the consummation of any of the
Transactions.
(b) Agreements and Covenants . Parent and Merger Sub shall have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it on or prior to the Closing.
(c) Officer Certificate . Parent shall have delivered to the Company a certificate, dated the Closing Date, signed by an executive officer of
Parent, certifying as to the satisfaction of the conditions specified in Sections 7.03(a) and 7.03(b).
SECTION 7.04 Frustration of Closing Conditions . Prior to the Termination Date, none of the Company, Parent or Merger Sub may rely
on the failure of any condition set forth in Article VII to be satisfied if such failure was caused by such party’s failure to act in good faith to comply with this
Agreement and consummate the Transactions.
44
ARTICLE
VIII
TERMINATION,
AMENDMENT
AND
WAIVER
SECTION 8.01 Termination . This Agreement may be terminated and the Merger and the other Transactions may be abandoned at any
time prior to the Effective Time ( provided that, in the case of the Company, any such action must be authorized by a unanimous recommendation of the Special
Committee), as follows:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company, if:
(i) the Effective Time shall not have occurred on or before May 6, 2016 (such date as may be extended in accordance with this
Section 8.01(b)(i), the “ Termination Date ”), provided that the right to terminate this Agreement pursuant to this Section 8.01(b)(i) shall not be available
to any party if the circumstances described in this Section 8.01(b)(i) are primarily caused by such party’s failure to comply with its obligations under this
Agreement; and provided , further , that the Termination Date may be extended by Parent or the Company (by written notice to the other party) to a date
which is no later than August 8, 2016 in the event that, on the Termination Date, (x) all of the conditions to Closing (other than those that by their terms
are to be satisfied at the Closing) have been satisfied or waived ( provided that the conditions to Closing that by their terms are to be satisfied at the
Closing would be satisfied as of the Termination Date if the Closing were to occur on the Termination Date), (y) Parent has made a Specified Filing for
which it has not received consent or approval for the Merger from the applicable Governmental Authority and (z) the Closing has not occurred pursuant to
the proviso in Section 1.02, and following any such extension, the “ Termination Date ” for all purposes hereunder shall be deemed to be such extended
date;
(ii) an Injunction shall have been issued; or
(iii) if the Requisite Company Vote is not obtained at the Shareholders’ Meeting or any adjournment thereof at which this
Agreement has been voted upon;
(c) by the Company if there shall have been a breach of any representation, warranty, covenant or agreement on the part of Parent and
Merger Sub set forth in this Agreement (including a failure by Parent and Merger Sub to complete the Closing subject to and in accordance with Section 1.02), or if
any representation or warranty of Parent and Merger Sub shall have become untrue, in either case such that the conditions set forth in Section 7.03(a) or
Section 7.03(b) would not be satisfied; provided , however , that, the Company shall not have the right to terminate this Agreement pursuant to this
Section 8.01(c) if the Company is then in material breach of any of its representations, warranties, covenants or other agreements hereunder; or
(d) by Parent:
(i) if there shall have been a breach of any representation, warranty, covenant or agreement on the part of the Company set forth
in this
45
Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in
Section 7.02(a) or Section 7.02(b) would not be satisfied; provided , however , that, Parent shall not have the right to terminate this Agreement pursuant to
this Section 8.01(d)(i) if either Parent or Merger Sub is then in material breach of any of its representations, warranties, covenants or other agreements
hereunder; or
(ii) if (A) there shall have been a Change in the Company Recommendation, (B) the Company Board shall have adopted,
approved, endorsed or recommended, or shall have proposed publicly to adopt, approve, endorse or recommend, an Acquisition Proposal, (C) the
Company or any of its Subsidiaries shall have consummated or entered into any letter of intent, Contract, commitment or obligation with respect to any
Acquisition Proposal (other than a confidentiality agreement entered into in compliance with Section 6.04(b)), (D) the Company shall have failed to
include the Company Recommendation in the Proxy Statement, or (E) a tender offer or exchange offer by a Third Party for any Ordinary Shares
representing ten percent (10%) or more of the outstanding Ordinary Shares is commenced, and the Company Board fails to recommend against acceptance
of such tender offer or exchange offer by its shareholders (including by taking no position with respect to the acceptance of such tender offer or exchange
offer by its shareholders) within ten (10) Business Days after the public announcement of such tender offer or exchange offer.
SECTION 8.02 Effect of Termination . In the event of the termination of this Agreement pursuant to Section 8.01, this Agreement shall
forthwith become void, and there shall be no liability under this Agreement on the part of any party hereto (or any Representatives of any party hereto); provided ,
however , that the terms of Section 6.10, this Article VIII and Article IX shall survive any termination of this Agreement.
SECTION 8.03 Fees and Expenses .
(a) Subject to Section 8.03(b), all Expenses incurred in connection with this Agreement and the Transactions shall be paid by the party
incurring such expenses, whether or not the Transactions are consummated. “ Expenses ”, as used in this Agreement, shall include all reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts, financing sources and consultants to a party
hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance
of this Agreement, the preparation, printing and filing of the Proxy Statement and the Schedule 13E-3 and the mailing or other dissemination of the Proxy
Statement, the solicitation of shareholder approvals, the filing of any required notices under applicable Law and all other matters related to the consummation of the
Transactions.
(b) The Company agrees that:
(i) if Parent shall terminate this Agreement pursuant to Section 8.01(d)(i) or Section 8.01(d)(ii); or
(ii) if (A) either Parent or the Company shall terminate this Agreement pursuant to Section 8.01(b)(i) or Section 8.01(b)(iii),
(B) at or prior to the time of termination of this Agreement, a Third Party shall have publicly disclosed or communicated to the Company Board or Special
Committee an Acquisition Proposal,
46
that has not been withdrawn prior to the time of termination of this Agreement (in the case of termination pursuant to Section 8.01(b)(i)) or prior to the
time of the Shareholders’ Meeting or any adjournment thereof at which this Agreement has been voted upon (in the case of termination pursuant to
Section 8.01(b)(iii)), and (C) at any time prior to the date that is twelve (12) months after the date of such termination, the Company consummates or
enters into a definitive agreement with respect to an Acquisition Proposal; provided , that for purposes of this Section 8.03(b)(ii), all references to “ten
percent (10%)” in the definition of “Acquisition Proposal” shall be deemed to be references to “fifty percent (50%)”;
then the Company shall, subject to the next sentence, pay or cause to be paid to Parent promptly (but in any event, no later than two (2) Business Days after the first
of such events shall have occurred) a fee of US$160,000,000 (one hundred sixty million United States dollars) (the “ Company Termination Fee ”), by wire transfer
of same day funds to one or more accounts designated in writing by Parent. In addition, if (x) either Parent or the Company shall terminate this Agreement
pursuant to Section 8.01(b)(iii) under circumstances in which the Company Termination Fee is not then payable pursuant to this Section 8.03(b), the Company
shall, within twenty (20) Business Days following receipt of an invoice therefor, reimburse Parent and Merger Sub for all of their reasonably documented Expenses
incurred prior to such termination, which amount shall in no event exceed US$5,000,000 (five million United States dollars) in the aggregate, by wire transfer of
same day funds to one or more accounts designated in writing by Parent, regardless of the existence of circumstances which could require the Company thereafter
to pay or cause to be paid to Parent a Company Termination Fee pursuant to this Section 8.03(b); provided , that in the event the Company shall be required to pay
a Company Termination Fee pursuant to this Section 8.03(b), the Company shall be entitled to credit the aggregate amount of Expenses of Parent and Merger Sub
actually reimbursed by the Company to Parent (or an affiliate designated by Parent) pursuant to this Section 8.03(b) against the amount of such Company
Termination Fee.
(c) Parent agrees that if (i) (A) the Company or Parent shall terminate this Agreement pursuant to Section 8.01(b)(ii) as a result of an
Injunction having been issued and in effect by an applicable Governmental Authority of competent jurisdiction with authority over the enforcement of applicable
antitrust or competition Laws, (B) the Company has not breached in any material respect any of its covenants or other agreements hereunder and (C) all conditions
to Closing (other than the condition to Closing set forth in Section 7.01(b) and other than those conditions to Closing that by their terms are to be satisfied at the
Closing) have been satisfied or waived, (ii) the Company shall terminate this Agreement pursuant to Section 8.01(c), or (iii) (A) the Company or Parent shall
terminate this Agreement pursuant to Section 8.01(b)(i), (B) the Company has not breached in any material respect any of its covenants or other agreements
hereunder and (C) all conditions to Closing (other than those conditions to Closing that by their terms are to be satisfied at the Closing) have been satisfied or
waived, then Parent shall pay or cause to be paid to the Company promptly (but in any event no later than two (2) Business Days after the date of such termination)
a fee of US$380,000,000 (three hundred eighty million United States dollars) (the “ Parent Termination Fee ”), by wire transfer of same day funds to one or more
accounts designated in writing by the Company.
(d) In the event that the Company shall fail to pay the Company Termination Fee, or Parent shall fail to pay the Parent Termination Fee,
when due and in accordance with the requirements of this Agreement, the Company or Parent, as the case may
47
be, shall reimburse the other party for all costs and expenses actually incurred or accrued by the other party (including, without limitation, fees and expenses of
counsel) in connection with the collection under and enforcement of this Section 8.03, together with interest on such unpaid Company Termination Fee or Parent
Termination Fee, as the case may be, commencing on the date that the Company Termination Fee or Parent Termination Fee, as the case may be, became due, at
the prime rate established by the Wall Street Journal Table of Money Rates on such date plus 2.00%. Such collection expenses shall not otherwise diminish in any
way the payment obligations hereunder.
(e) Each party acknowledges that (i) the agreements contained in this Section 8.03 are an integral part of the Transactions, (ii) the damages
resulting from termination of this Agreement under circumstances where a Company Termination Fee or Parent Termination Fee is payable are uncertain and
incapable of accurate calculation and therefore, the amounts payable pursuant to Section 8.03(b) or Section 8.03(c) are not a penalty but rather constitute amounts
akin to liquidated damages in a reasonable amount that will compensate Parent or the Company, as the case may be, for the efforts and resources expended and
opportunities foregone while negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the Transactions, and
(iii) without the agreements contained in this Section 8.03, the parties hereto would not have entered into this Agreement.
SECTION 8.04 Limitations on Liabilities . In no event shall any party or any of such party’s affiliates be entitled to seek the remedy of
specific performance of this Agreement other than as set forth in Section 9.07. For the avoidance of doubt, while the Company or Parent may pursue both a grant
of specific performance as permitted by Section 9.07 and the payment of the Parent Termination Fee pursuant to Section 8.03(c) or the Company Termination Fee
pursuant to Section 8.03(b), as applicable, and any amounts pursuant to Section 8.03(d) (if any), under no circumstances shall the Company or Parent be permitted
or entitled to receive both such grant of specific performance and the payment of the Parent Termination Fee, in the case of the Company, or the Company
Termination Fee, in the case of Parent. If Parent pays the Parent Termination Fee pursuant to Section 8.03(c), then such payment shall be the sole and exclusive
remedy of the Company, its Subsidiaries, its shareholders and holders of ADSs (collectively, the “ Company Related Parties ”) against Parent and Merger Sub and
any of their respective former, current or future officers, directors, partners, stockholders, managers, members, affiliates or successors (collectively, the “ Parent
Related Parties ”) and none of the Parent Related Parties shall have any further liability or obligation relating to or arising out of this Agreement or the
Transactions, including the failure of the Merger to be consummated or for a breach or failure to perform hereunder (whether intentionally, unintentionally,
knowingly, willfully or otherwise) or otherwise. If the Company pays the Company Termination Fee pursuant to Section 8.03(b), then such payment shall be the
sole and exclusive remedy of the Parent Related Parties against the Company Related Parties and none of the Company Related Parties shall have any further
liability or obligation relating to or arising out of this Agreement or the Transactions, including the failure of the Merger to be consummated or for a breach or
failure to perform hereunder (whether intentionally, unintentionally, knowingly, willfully or otherwise) or otherwise.
SECTION 8.05 Amendment . This Agreement may be amended by the parties hereto by action taken by Parent and the Company (
provided that, in the case of the Company, such action must be taken or authorized by the Special Committee) at any time
48
prior to the Effective Time; provided , however , that, after the approval of this Agreement and the Transactions by the shareholders of the Company, no
amendment may be made that would reduce the amount or change the type of consideration into which each Ordinary Share (including Ordinary Shares represented
by ADSs) shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by each of the
parties hereto.
SECTION 8.06 Waiver . At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any
obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties of any other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any agreement of any other party or any condition to its own obligations contained herein. Any
such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. No failure or delay by any party in
exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
ARTICLE
IX
GENERAL
PROVISIONS
SECTION 9.01 Non-Survival of Representations, Warranties and Agreements . The representations, warranties and agreements in this
Agreement and in any certificate delivered pursuant hereto shall terminate at the Effective Time, except that the agreements set forth in Articles I and II,
Section 6.05, Section 6.10 and this Article IX shall survive the Effective Time.
SECTION 9.02 Notices . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be
given (and shall be deemed to have been duly given upon receipt) by delivery in person, by telecopy or by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with
this Section 9.02):
if to Parent or Merger Sub, to:
Ali YK Investment Holding Limited
Ali YK Subsidiary Investment Holding Limited
49
with a copy to:
Simpson Thacher & Bartlett
if to the Company:
Youku Tudou Inc.
with a copy to:
Skadden Arps Slate Meagher & Flom
SECTION 9.03 Certain Definitions and Interpretations . (a) For purposes of this Agreement:
“ Acquisition Proposal ” means any proposal or offer relating to any of the following (other than the Transactions): (i) any merger,
reorganization, consolidation, share exchange, business combination, scheme of arrangement, amalgamation, recapitalization, liquidation, dissolution, joint venture
or other similar transaction involving the Company or any of its Subsidiaries whose assets, individually or in the aggregate, constitute ten percent (10%) or more of
the consolidated assets of the Company or to which ten percent (10%) or more of the total revenue or net income of the Company are attributable, (ii) any sale,
lease, license, exchange, transfer or other disposition of assets which would result in a Third Party acquiring assets, individually or in the aggregate, constituting ten
percent (10%) or more of the consolidated assets of the Company and its Subsidiaries or to which ten percent (10%) or more of the total revenue or net income of
the Company and its Subsidiaries are attributable, (iii) any sale, exchange, transfer or other disposition of ten percent (10%) or more of any class of equity
securities of the Company to any Third Party, (iv) any general offer, tender offer or exchange offer that, if consummated, would result in any Third Party
beneficially owning ten percent (10%) or more of any class of equity securities of the Company, (v) any public solicitation of proxies in opposition to approval and
adoption of this Agreement and approval of the Merger by the Company’s shareholders or (vi) any other transaction proposed in writing to the Special Committee
by any Third Party the consummation of which would reasonably be expected to prevent, impede or materially delay the Transactions.
50
“ affiliate ” of a specified person means a person who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such specified person. For the avoidance of doubt, prior to the Closing, the Company and its Subsidiaries, officers and directors are
not affiliates of Parent or Merger Sub.
“ Agreement ” has the meaning set forth in the Preamble, which shall, for the avoidance of doubt, include all annexes and schedules hereto.
“ Applicable Anti-Bribery Law ” means any anti-bribery or anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, as
amended, the PRC Law Criminal Law, the PRC Law on Anti-Unfair Competition adopted on September 2, 1993, the Interim Rules on Prevention of Commercial
Bribery issued by the PRC State Administration of Industry and Commerce on November 15, 1996, if applicable, and all other anti-bribery and anti-corruption laws
to which a Group Company is subject.
term under Rule 13d-3(a) of the Exchange Act.
“ beneficial owner ”, “ beneficially owned ” or “ beneficially owning ”, with respect to any Ordinary Shares, has the meaning ascribed to such
“ Business Day ” means any day on which the principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not required or authorized to close in the City of New York, the PRC or Hong Kong.
“ Code ” means the U.S. Internal Revenue Code of 1986, as amended.
date hereof.
“ Company Disclosure Schedule ” means the disclosure schedule delivered by the Company to, and accepted by, Parent and Merger Sub on the
“ Company Employee Plan ” means any written plan, program, policy, Contract or other arrangement providing for compensation, severance,
termination pay, deferred compensation, performance awards, share or share-related awards, housing funds, insurance arrangements, material fringe benefits,
material perquisites, superannuation funds retirement benefits, pension schemes or other employee benefits, that is maintained, contributed to or required to be
contributed to by the Company or any of its Subsidiaries for the benefit of any current or former employee, director, officer or independent contractor of the
Company or its Subsidiaries, or with respect to which the Company or any of its Subsidiaries has or would reasonably expect to have any liability or obligation,
other than, in each case, one that is sponsored and maintained by a Governmental Authority.
“ Company Material Adverse Effect ” means any event, circumstance, change or effect that, individually or in the aggregate with all other events,
circumstances, changes and effects, is or would reasonably be expected to (a) be materially adverse to the business, condition (financial or otherwise), assets,
properties, liabilities or results of operations of the Group Companies, taken as a whole, or (b) prevent or materially delay the consummation of the Transactions;
provided , however , that in no event shall any of the following, either alone or in combination, constitute or be taken into account in determining whether there has
been or would reasonably be expected to have a “Company Material Adverse Effect” under clause (a): (A) changes after the date hereof affecting general
economic conditions in the PRC or the United States; (B) changes in GAAP or any interpretation thereof after the date hereof, or changes to applicable Laws or the
interpretation thereof after the date hereof; (C) changes
51
after the date hereof generally affecting the industries or markets in which the Company and its Subsidiaries operate; (D) changes after the date hereof in financial,
credit or securities markets in the U.S. or the PRC, including changes in interest rates or foreign exchange rates; (E) effects resulting from the public announcement
of this Agreement, the pendency or the consummation of the Transactions (other than for purposes of any representation or warranty contained in Section 3.05), or
the identity of Parent as the acquirer of the Company, including the impact or effect thereof on the relationships, contractual or otherwise, of the Company or any of
its Subsidiaries with any employees, customers, suppliers or partners of the Company, (F) natural disasters, declarations of war, acts of sabotage or terrorism or
armed hostilities, in each case occurring after the date hereof, (G) any change in the price of the ADSs or trading volume as quoted on NYSE or any failure to meet
any financial projections, forecasts or forward-looking statements (provided that facts and circumstances giving rise to any such change or failure may constitute or
be taken into account in determining whether there has been or would reasonably be expected to have a “Company Material Adverse Effect”), or (H) actions taken
(or omitted to be taken) at the written request of Parent or Merger Sub; provided , further that events, circumstances, changes or effects set forth in clauses (A), (B),
(C), (D) and (F) above shall be taken into account in determining whether a “Company Material Adverse Effect” has occurred or reasonably would be expected to
occur if and to the extent any such events, circumstances, changes or effects, individually or in the aggregate, have a materially disproportionate impact on the
Group Companies, taken as a whole, relative to the other participants in the industry or geographic markets in which the Company and its Subsidiaries conduct
their businesses.
“ Company Option ” means each outstanding option award issued by the Company pursuant to any Share Incentive Plan that entitles the holder
thereof to purchase one (1) Class A Ordinary Share upon the vesting of such award.
“ Company Restricted Share Award ” means each outstanding restricted share unit issued by the Company pursuant to any Share Incentive Plan
that entitles the holder thereof to be issued one (1) Class A Ordinary Share upon the vesting of such award.
“ Company Share Award ” means each Company Option and each Company Restricted Share Award.
“ Confidentiality Agreement ” means the confidentiality agreement, dated as of October 28, 2015, between the Company and AIL.
“ Contract ” means any note, bond, mortgage, indenture, deed of trust, contract, agreement, lease, license, permit, franchise or other instrument.
“ control ” (including the terms “ controlled by ” and “ under common control with ”) means the possession, directly or indirectly, or as trustee or
executor, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities or the
possession of voting power, as trustee or executor, by contract (including, without limitation, contractual arrangements similar to those provided by the Control
Agreements) or credit arrangement or otherwise.
“ Environmental Law ” means any applicable local, provincial or national Laws relating to (a) the protection of health, safety or the environment
or (b) the handling, use, transportation, disposal, release or threatened release of any Hazardous Substance.
52
“ Exercise Price ” means, with respect to any Company Option, the exercise price per Class A Ordinary Share underlying such Company Option.
“ Governmental Authority ” means any nation or government, any agency, self-regulatory body, public, regulatory or taxing authority,
instrumentality, department, commission, court, arbitrator, ministry, tribunal or board of any nation or government or political subdivision thereof, in each case,
whether foreign or domestic and whether national, supranational, federal, provincial, state, regional, local or municipal.
“ Governmental Entity ” means (i) any national, federal, state, local or foreign government or any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government, (ii) any public international organization, (iii) any agency, division, bureau,
department or other sector of any government, entity or organization described in the foregoing clauses (i) or (ii) of this definition, or (iii) any company, business,
enterprise or other entity owned or controlled by any government, entity, organization described in the foregoing clauses (i), (ii) or (iii) of this definition.
“ Governmental Official ” means any employee, agent, or instrumentality of any government, including departments or agencies of a government
and businesses that are wholly or partially government-owned, and any employees of such businesses; departments or agencies of public international
organizations; and individuals who are members of political parties or hold positions in political parties, as well as candidates for political office.
“ Group Company ” means any of the Company and its Subsidiaries.
“ Hazardous Substance ” means any chemical, pollutant, waste or substance that is (a) listed, classified or regulated under any Environmental
Law as hazardous substance, toxic substance, pollutant, contaminant or oil or (b) any petroleum product or by product, asbestos containing material,
polychlorinated biphenyls or radioactive material.
“ Indebtedness ” means, with respect to any person, (a) all indebtedness of such person, whether or not contingent, for borrowed money, (b) all
obligations of such person for the deferred purchase price of property or services, (c) all obligations of such person evidenced by notes, bonds, debentures or other
similar instruments, (d) all obligations of such person under currency, interest rate or other swaps, and all hedging and other obligations of such person under other
derivative instruments, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such
person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such
property), (f) all obligations of such person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (g) all
obligations, contingent or otherwise, of such person under acceptance, letter of credit or similar facilities, (h) all obligations of such person to purchase, redeem,
retire, defease or otherwise acquire for value any share capital of such person or any warrants, rights or options to acquire such share capital, valued, in the case of
redeemable preferred shares, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (i) all Indebtedness of others
referred to in clauses (a) through (h) above guaranteed directly or indirectly in any manner by such person, and (j) all Indebtedness referred to in clauses (a) through
(h) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Liens on property
(including accounts and contract rights) owned by such person,
53
even though such person has not assumed or become liable for the payment of such Indebtedness.
“ Injunction ” means, as of any date, any final, non-appealable judgment, restraining order or permanent injunction, which is in effect as of such
date that prohibits the consummation of the Transactions and has been issued by any Governmental Authority in any jurisdiction that is material to the business of
Parent or the Company.
“ Insolvent ” means, with respect to any person (a) the present fair saleable value of such person’s assets is less than the amount required to pay
such person’s total Indebtedness, (b) such person is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities
become absolute and matured, (c) such person intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature, or
(d) such person has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be
conducted.
“ Intellectual Property ” means all U.S., PRC, and other foreign intellectual property and rights therein, including (a) patents, patent applications,
patent disclosures, provisionals, inventions (whether or not patentable and whether or not reduced to practice), and any reissues, continuations, continuations in
part, counterparts, divisions, extensions or reexaminations thereof, and any statutory invention registrations, (b) trademarks, service marks, trade dress, logos, trade
names, corporate names and other source identifiers, and all goodwill associated therewith, and all registrations and applications for registration thereof,
(c) copyrightable works, copyrights, moral rights, and registrations and applications for registration thereof, (d) Internet domain names and social and mobile media
identifiers, (e) confidential and proprietary information, including Trade Secrets, know-how, inventions (whether or not patentable and whether or not reduced to
practice), drawings, specifications, designs, techniques, technical information, algorithms, processes, methods net lists, and code modules, (f) Software, (g) all other
intellectual property rights, and (h) all income, royalties, damages and payments due or payable, the right to sue and recover for past or future infringements or
misappropriation thereof and any and all corresponding rights that, now or hereafter, may be secured throughout the world.
“ Investment Documents ” means (i) the Investment Agreement, dated as of April 28, 2014, by and among the Company, Parent and, solely for
purposes of Sections 11.4, 11.5 and 11.16 thereof, Alibaba Group Holding Limited, and (ii) the Investor Rights Agreement, dated as of April 28, 2014, by and
among the Company, Parent, and, solely for the purposes of Sections 7.1 and 7.2 and Article VIII therein, Alibaba Group Holding Limited and YF Venus Ltd.
“ IT Assets ” means computers, hardware, Software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications
lines, and all other information technology equipment, and all associated documentation, in each case, owned by the Group Companies or licensed or leased by the
Group Companies pursuant to written agreement.
“ knowledge ” means, with respect to the Company, the knowledge, after reasonable inquiry and investigation, of the individuals listed in
Section 9.03(a) of the Company Disclosure Schedule, and with respect to any other party hereto, the actual knowledge of any director of such party, in each case,
after due inquiry and investigation.
54
“ Law ” means any statute, law, ordinance, code or Order.
“ Liens ” means any security interest, pledge, hypothecation, mortgage, lien (including environmental and Tax liens), violation, charge, lease,
license, encumbrance, servient easement, adverse claim, reversion, reverter, preferential arrangement, restrictive covenant, condition or restriction of any kind,
including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.
“ Onshore Subsidiary ” means any Subsidiary incorporated within the PRC.
“ Order ” means any award, writ, injunction, determination, rule, regulation, judgment, decree or executive order.
“ Parent Shares ” means all Class A Ordinary Shares or ADSs owned by Parent.
“ Permitted Property Liens ” means (i) Taxes, assessments and other governmental levies, fees or charges imposed which are not yet due and
payable, or which are being contested in good faith and by appropriate proceedings, (ii) mechanics liens and similar liens arising or incurred in the ordinary course
of business relating to obligations as to which there is no default on the part of the Company or any of its Subsidiaries or that secure a liquidated amount, that are
being contested in good faith, (iii) zoning, building codes and other land use Laws regulating the use or occupancy of such real property or the activities conducted
thereon which are imposed by any Governmental Authority having jurisdiction over such real property which are not violated by the current use or occupancy of
such real property or the operation of the business thereon, (iv) easements, covenants, conditions, restrictions and other similar matters of record affecting title to
such real property which do not or would not materially impair the use or occupancy of such real property in the operation of the business conducted thereon,
(v) matters which would be disclosed by an accurate survey or physical inspection of such real property and (vi) any other Liens that have been incurred or suffered
in the ordinary course of business and that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
“ person ” means an individual, corporation, partnership, limited partnership, limited liability company, syndicate, person (including, without
limitation, a “person” as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or
instrumentality of a government.
“ Representatives ” means, with respect to any party, such party’s officers, directors, employees, accountants, consultants, financial and legal
advisors, agents and other representatives.
“ SAFE Circular 7 ” means the SAFE
Circular
on
Certain
Issues
on
Foreign
Exchange
Registration
on
Domestic
Individuals
Participation
in
Equity
Incentive
Plan
of
Foreign
Listed
Companies
issued by SAFE on March 16, 2012.
“ SAFE Circular 37 ” means the Notice
on
Relevant
Issues
Concerning
Foreign
Exchange
Control
of
Domestic
Residents’
Overseas
Investment
and
Financing
and
Roundtrip
Investment
Through
Offshore
Special
Purpose
Vehicles
issued by SAFE on July 4, 2014, and any implementation, successor rule or
regulation related thereto under the PRC law.
55
“ SAFE Rules and Regulations ” means, collectively, SAFE Circular 7, SAFE Circular 37 and any other applicable PRC foreign exchange Laws.
“ Share Incentive Plans ” means, collectively, the Company’s 2006 Stock Option Scheme (as amended), Youku Tudou Inc. Share Incentive Plan
(formerly named as Youku Inc. 2010 Share Incentive Plan, as amended), and 2014 Share Incentive Plan, and “ Share Incentive Plan ” means any one of the
foregoing plans.
“ Social Security Benefits ” means any social insurance, pension insurance benefits, medical insurance benefits, work-related injury insurance
benefits, maternity insurance benefits, unemployment insurance benefits and public housing reserve fund benefits or similar benefits, in each case as required by
any applicable Law or contractual arrangements.
“ Software ” means any and all (i) computer programs and software code, including any and all software implementations of algorithms,
applications, application programming interfaces, architecture, utilities, models and methodologies, whether in object code, interpreted code or source code,
(ii) databases and compilations, including any and all data and collections of data (including geospatial or mobile related data and rights thereto), whether machine
readable or otherwise, and (iii) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, including any and
all screens, user interfaces, report formats, firmware, middleware, software applications, development tools, templates, menus, diagnostics, files, records,
schematics, verilog files, netlists, emulation and simulation reports, test vectors, buttons and icons.
“ Subsidiary ” of any person means any legal entity (i) of which such person or any other Subsidiary of such person is a general or managing
partner, (ii) the outstanding voting securities or interests of which, having by their terms ordinary voting power to elect a majority of the board of directors or other
body performing similar functions with respect to such corporation or other organization, are directly or indirectly owned or controlled by such person or by any
one or more of its Subsidiaries or (iii) which such person controls through the Control Agreements or similar contractual arrangements.
“ Superior Proposal ” means any unsolicited bona fide written Acquisition Proposal (each reference to “ten percent (10%) or more” in the
definition of “Acquisition Proposal” shall be replaced with “more than fifty percent (50%)” on terms that the Special Committee shall have determined in good
faith (after receiving the advice of its financial advisor who shall be an internationally recognized investment banking firm and outside legal counsel) (i) would be
reasonably likely to be consummated in accordance with its terms, taking into account all legal, financial, regulatory, timing and other aspects of the proposal
(including conditionality) and the person making the proposal and (ii) if consummated, would result in a transaction more favorable to the holders of the Ordinary
Shares (other than the Parent Shares) and holders of ADSs from a financial point of view than the Merger, after giving effect to all adjustments to the terms thereof
which may be offered by Parent in writing (including pursuant to Section 6.04(c)(1)); provided , however , that any such offer shall not be deemed to be a “Superior
Proposal” if (A) the offer is subject to the conduct of any due diligence review or investigation of the Company or any of its Subsidiaries by the party making the
offer, (B) the consummation of the transactions contemplated by such offer is conditioned upon receipt of financing or (C) the consummation of the transactions
contemplated by such offer is conditioned upon obtaining any consent or approval of a Governmental Authority or other third party that is not required pursuant to
this Agreement
56
as a condition to the closing of the Merger (after giving effect to all modifications or adjustments to the terms thereof which may be offered by Parent in writing
(including pursuant to Section 6.04(c)(1)).
“ Support Agreement ” means the Support Agreement, dated as of October 16, 2015, by and among AIL, Victor Wing Cheung Koo, 1Verge
Holdings Ltd., 1Look Holdings Ltd., The Koo 2012 Irrevocable Children’s Trust, Chengwei Partners, L.P., Chengwei Evergreen Capital, L.P. and Chengwei
Ventures Evergreen Advisors Fund, LLC.
“ Taxes ” means any and all taxes of any kind or any other similar charges (together with any and all interest, penalties, additions to tax and
additional amounts imposed with respect thereto) imposed by any Governmental Authority, including, without limitation: taxes or other charges on or with respect
to income, franchise, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, environmental, employment (including withholding
obligations imposed on employer/payer), social security, workers’ compensation, unemployment compensation or net worth, excise, withholding, alternative or
add-on minimum, ad valorem, stamp, transfer, value-added or gains taxes, license, registration and documentation fees, customers’ duties, tariffs and other like
assessment or charge of any kind whatsoever, in each case, whether disputed or not.
“ Tax Return ” means any return, report or similar filing (including the attached schedules) filed or required to be filed with respect to Taxes,
including any information return, claim for refund, amended return or declaration of estimated Taxes.
“ Third Party ” means any person or “group” (as defined under Section 13(d) of the Exchange Act) of persons, other than Parent or the Company
or any of their respective affiliates or Representatives.
“ Trade Secrets ” means trade secrets and confidential and proprietary information, whether oral or written, including ideas, designs, concepts,
compilations of information, methods, techniques, procedures, processes and other know-how, whether or not patentable, of any nature in any form, including all
writings, memoranda, copies, reports, papers, surveys, analyses, drawings, letters, computer printouts, computer programs, computer applications, specifications,
business methods, business processes, business techniques, business plans, data (including customer data), graphs, charts, sound recordings and/or pictorial
reproductions.
“ Unvested Company Option ” means any Company Option that is not a Vested Company Option.
“ Vested Company Option ” means any Company Option that shall have become vested on or prior to the Closing Date in accordance with the
terms of such Company Option.
(b) The following terms have the meaning set forth in the Sections set forth below:
Defined
Term
Location
of
Definition
57
Action
ADSs
Agreement
AIL
Applicable Date
Bankruptcy and Equity Exception
Certifying Officers
Change in the Company Recommendation
CICL
Class A Ordinary Share
Class A Ordinary Shares
Class B Ordinary Share
Class B Ordinary Shares
Closing
Closing Date
Company
Company Board
Company Recommendation
Company Related Parties
Company SEC Reports
Company Termination Fee
Control Agreements
Deposit Agreement
Depositary
dissenter rights
Dissenting Shareholders
Dissenting Shares
Effective Time
Environmental Permits
Evaluation Date
Exchange Act
Exchange Fund
Excluded Shares
Expenses
Financial Advisor
GAAP
Indemnified Parties
Leased Real Property
Material Company Permits
Material Contracts
Merger
Merger Consideration
Merger Sub
Notice Period
NYSE
Operating Subsidiary
Ordinary Share
Ordinary Shares
Parent
58
3.09(a)
2.01(a)
Preamble
Preamble
3.07(a)
3.04(a)
3.07(d)
6.04(c)
Recitals
2.01(a)
2.01(a)
2.01(a)
2.01(a)
1.02
1.02
Preamble
Recitals
3.04(b)
8.04
3.07(a)
8.03(b)(ii)
3.15(a)(iv)
2.06
2.06
2.03(a)
2.03(a)
2.03(a)
1.03
3.16
3.07(d)
3.05(b)
2.04(a)
2.01(a)
8.03
3.04(c)
3.07(b)
6.05(b)
3.11(b)
3.06(a)
3.15(a)
Recitals
2.04(a)
Preamble
6.04(c)(1)
3.05(b)
3.15(a)(iv)
2.01(a)
2.01(a)
Preamble
Parent Related Parties
Parent Termination Fee
Paying Agent
Per ADS Merger Consideration
Per Share Merger Consideration
Plan of Merger
PRC
Proxy Statement
RCA
Record ADS Holders
Registered Intellectual Property
Requisite Company Vote
SAFE
Sanctions
SEC
Securities Act
Share Certificates
Shareholders’ Meeting
Special Committee
Specified Filings
Surviving Company
Takeover Statute
Termination Date
Transactions
Uncertificated Shares
8.04
8.03(c)
2.04(a)
2.01(a)
2.01(a)
1.03
3.06(d)
6.01(a)
2.02(c)
6.02(b)
Section 3.12(a)
3.04(a)
3.06(d)
Section 3.06(h)
3.05(b)
3.07(a)
2.04(b)
6.02(b)
Recitals
6.07(a)
1.01
3.20
8.01(b)(i)
Recitals
2.04(b)
(c) When a reference is made in this Agreement to a Section, Article or Exhibit such reference shall be to a Section, Article or Exhibit of
this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement or in any Exhibit are for convenience of reference
purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Any capitalized terms used in any Exhibit but not otherwise defined therein shall have the meaning set forth in this
Agreement. All Exhibits annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth herein. The word
“including” and words of similar import when used in this Agreement will mean “including, without limitation,” unless otherwise specified.
SECTION 9.04 Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any
rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner in order that the Transactions be consummated as originally contemplated to the fullest extent possible.
59
SECTION 9.05 Entire Agreement; Assignment . This Agreement constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject
matter hereof. This Agreement shall not be assigned (whether pursuant to a merger, by operation of law or otherwise), except that Parent and Merger Sub may
assign all or any of their rights and obligations hereunder to any affiliate of Parent, provided that no such assignment shall relieve the assigning party of its
obligations hereunder if such assignee does not perform such obligations.
SECTION 9.06 Parties in Interest . This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and
nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or
by reason of this Agreement, other than Sections 6.05 and 8.04 (which are intended to be for the benefit of the persons covered thereby and may be enforced by
such persons). For the avoidance of doubt, in no event shall any holders of Ordinary Shares (including Ordinary Shares represented by ADSs) or holders of
Company Share Awards, in each case in their capacity as such, have any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 9.07 Specific Performance . The parties hereto agree that irreparable damage would occur in the event that any provision of
this Agreement were not performed in accordance with the terms hereof and that, subject to Section 8.04, each party shall be entitled to specific performance of the
terms hereof (including the other parties’ obligation to consummate the Transactions, subject in each case to the terms and conditions of this Agreement), including
an injunction or injunctions to prevent breaches of this Agreement, in addition to any other remedy at law or equity. Each party hereby waives (i) subject to
Section 8.04, any defenses in any action for specific performance, including the defense that a remedy at law would be adequate, and (ii) any requirement under any
Law to post a bond or other security as a prerequisite to obtaining equitable relief.
SECTION 9.08 Guarantee . AIL hereby unconditionally and irrevocably guarantees to the Company the due and punctual performance
and payment of all obligations and liabilities of Parent and Merger Sub under this Agreement without offset or deduction. The guarantee by AIL hereunder is a
guarantee of payment, performance and compliance when due, and is not conditional or contingent upon any event, contingency or circumstance except as may be
set forth in this Agreement. This Section 9.08 shall terminate immediately after the Closing or payment of the Parent Termination Fee (if any).
SECTION 9.09 Governing Law; Jurisdiction . This Agreement shall be interpreted, construed and governed by and in accordance with
the Laws of the State of New York without regard to the conflicts of law principles thereof. Notwithstanding the foregoing, the following matters arising out of or
relating to this Agreement shall be construed, performed and enforced in accordance with the Laws of the Cayman Islands in respect of which the parties hereto
hereby irrevocably submit to the non-exclusive jurisdiction of the courts of the Cayman Islands: the Merger, the vesting of the rights, property, choses in action,
business, undertaking, goodwill, benefits, immunities and privileges, contracts, obligations, claims, debts and liabilities of the Merger Sub in the Company, the
cancellation of the Ordinary Shares, the rights provided in Section 238 of the CICL, the fiduciary or other duties of the Company Board and the board of directors
of Merger Sub and the internal corporate affairs of the Company and Merger Sub. All Actions arising under the laws of the State of New York out of or relating to
this Agreement shall be
60
heard and determined exclusively in any New York federal court sitting in the Borough of Manhattan of The City of New York; provided , however , that if such
federal court does not have jurisdiction over such Action, such Action shall be heard and determined exclusively in any New York state court sitting in the Borough
of Manhattan of The City of New York. Consistent with the preceding sentence, the parties hereto hereby (a) submit to the exclusive jurisdiction of any federal or
state court sitting in the Borough of Manhattan of The City of New York for the purpose of any Action arising under the laws of the State of New York out of or
relating to this Agreement brought by any party hereto and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such
Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution,
that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated by this
Agreement may not be enforced in or by any of the above-named courts.
SECTION 9.10 Waiver of Jury Trial . EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH OF THE PARTIES HERETO HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER
PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.10.
shall not affect in any way the meaning or interpretation of this Agreement.
SECTION 9.11 Headings . The descriptive headings contained in this Agreement are included for convenience of reference only and
SECTION 9.12 Counterparts . This Agreement may be executed and delivered (including by electronic or facsimile transmission) in one
or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
61
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
ALI YK INVESTMENT HOLDING LIMITED
/s/ Timothy A. Steinert
By
Name: Timothy A. Steinert
Title: Authorized Signatory
ALI YK SUBSIDIARY HOLDING LIMITED
/s/ Timothy A. Steinert
By
Name: Timothy A. Steinert
Title: Authorized Signatory
Solely for purposes of Section 9.08, Section 9.09 and Section 9.10 hereof:
ALIBABA INVESTMENT LIMITED
/s/ Timothy A. Steinert
By
Name: Timothy A. Steinert
Title: Authorized Signatory
[SIGNATURE PAGE — MERGER AGREEMENT]
YOUKU TUDOU INC.
/s/ Victor Wing Cheung Koo
By
Name: Victor Wing Cheung Koo
Title: Chairman of Board of Directors and Chief Executive Officer
[SIGNATURE PAGE — MERGER AGREEMENT]
ANNEX A
FORM OF PLAN OF MERGER
THIS
PLAN
OF
MERGER
is
made
on
[date].
BETWEEN
(1) Ali YK Subsidiary Holding Limited, an exempted company incorporated under the Laws of the Cayman Islands on November 3, 2015, with its
registered office situated at the offices of Trident Trust Company (Cayman) Limited, Fourth Floor, One Capital Place, P.O. Box 847, Grand Cayman, KY1-1103,
Cayman Islands (“ Merging
Sub
”); and
(2) Youku Tudou Inc., an exempted company incorporated under the Laws of the Cayman Islands on 20 September 2005, with its registered office
situated at the offices of c/o Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands (the “ Company
” or the
“ Surviving
Corporation
” and together with Merging Sub, the “ Constituent
Companies
”).
WHEREAS
(a) Merging Sub and the Company have agreed to merge (the “ Merger
”) on the terms and conditions contained or referred to in an Agreement and
Plan of Merger (the “ Agreement
”) dated as of November 6, 2015 among the Merging Sub, the Company and other parties thereto, a copy of which is attached as
Appendix I to this Plan of Merger and under the provisions of Part XVI of the Companies Law Cap.22 (Law 3 of 1961, as consolidated and revised) (the “
Companies
Law
”), pursuant to which the Merging Sub will merge with and into the Company and cease to exist and the Surviving Corporation will continue as
the surviving company in the Merger.
(b) This Plan of Merger is made in accordance with section 233 of the Companies Law.
(c) Terms used in this Plan of Merger and not otherwise defined in this Plan of Merger shall have the meanings given to them in the Agreement.
WITNESSETH
CONSTITUENT
COMPANIES
1. The constituent companies (as defined in the Companies Law) to the Merger are the Merging Sub and the Company.
NAME
OF
THE
SURVIVING
CORPORATION
2. The name of the surviving company (as defined in the Companies Law) shall be Youku Tudou Inc.
REGISTERED
OFFICE
3. The Surviving Corporation shall have its registered office at the offices of c/o Maples Corporate Services Limited, PO Box 309, Ugland House, Grand
Cayman, KY1-1104, Cayman Islands.
AUTHORISED
AND
ISSUED
SHARE
CAPITAL
4. Immediately prior to the Effective Time (as defined below) the authorized share capital of Merging Sub was US$50,000.00 divided into 50,000 shares
with a par value of US$1.00 each, of which one share has been issued and fully paid.
5. Immediately prior to the Effective Time the authorized share capital of the Company was US$100,000 divided into 9,340,238,793 Class A Ordinary
Shares of a par value US$0.00001 per share (“ Class
A
Ordinary
Shares
”) and 659,761,207 Class B Ordinary Shares of a par value $0.00001 per share (“ Class
B
Ordinary
Shares
”, together with Class A Ordinary Shares, “ Ordinary
Shares
”), of which 2,880,578,665 Class A Ordinary Shares and 645,691,903 Class B
Ordinary Shares have been issued and fully paid, respectively.
6. The authorized share capital of the Surviving Corporation shall be US$50,000.00 divided into 50,000 shares with a par value of US$1.00 each.
7. At the Effective Time, and in accordance with the terms and conditions of the Agreement:
(a) Each share in the Merging Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly
issued and fully paid share with a par value of US$1.00 each in the share capital of the Surviving Company.
(b) Each Ordinary Share in the Company issued and outstanding immediately prior to the Effective Time, other than the Excluded Shares, shall be
cancelled and cease to exist in exchange for the right to receive the Per Share Merger Consideration, being one-eighteenth of US$27.60 in cash per Ordinary Share
without interest.
(c) Each of the Excluded Shares (other than the Dissenting Shares) issued and outstanding immediately prior to the Effective Time shall be
cancelled and cease to exist without payment of any consideration or distribution therefor.
(d) Each of the Dissenting Shares of persons who have validly exercised and not withdrawn or lost their right to dissent from the Merger pursuant to
Section 238 of the Companies Law shall be cancelled in exchange for a payment resulting from the procedure in section 238 of the Companies Law of the fair
value of such shares.
8. At the Effective Time, the rights and restrictions attaching to the shares of the Surviving Corporation are set out in the Amended and Restated
Memorandum of Association and Articles of Association of the Surviving Corporation in the form attached as Appendix II to this Plan of Merger.
EFFECTIVE
TIME
9. The Merger shall take effect on [date] (the “ Effective
Time
”).
PROPERTY
10. At the Effective Time, the rights, property of every description including choses in action, and the business, undertaking, goodwill, benefits, immunities
and privileges of each of the Constituent Companies shall immediately vest in the Surviving Corporation which shall be liable for and subject, in the same manner
as the Constituent Companies, to all mortgages, charges, or security interests and all contracts, obligations, claims, debts and liabilities of each of the Constituent
Companies.
MEMORANDUM
OF
ASSOCIATION
AND
ARTICLES
OF
ASSOCIATION
11. The Memorandum of Association and Articles of Association of the Surviving Corporation shall be amended and restated in the form attached as
Appendix II to this Plan of Merger at the Effective Time.
DIRECTORS
BENEFITS
12. There are no amounts or benefits payable to the directors of the Constituent Companies on the Merger becoming effective.
DIRECTORS
OF
THE
SURVIVING
CORPORATION
13. The names and addresses of the directors of the Surviving Corporation are as follows:
NAME
[name]
SECURED
CREDITORS
ADDRESS
[address]
14. (a)the Merging Sub has no secured creditors and has granted no fixed or floating security interests that are outstanding as at the date of this Plan of
Merger, and
(b) the Company has no secured creditors and has granted no fixed or floating security interests that are outstanding as at the date of this Plan of Merger.
RIGHT
OF
TERMINATION
15. This Plan of Merger may be terminated pursuant to the terms and conditions of the Agreement at any time prior to the Effective Time.
APPROVAL
AND
AUTHORIZATION
16. This Plan of Merger has been approved by the board of directors of each of the Merging Sub and the Company pursuant to section 233(3) of the
Companies Law.
17. This Plan of Merger has been authorised by the shareholders of each of the Merging Sub and the Company pursuant to section 233(6) of the Companies
Law.
COUNTERPARTS
18. This Plan of Merger may be executed by facsimile and in one or more counterparts, each of which shall be deemed an original and all of which together
shall constitute one and the same instrument.
GOVERNING
LAW
19. This Plan of Merger shall be governed by and construed in accordance with the Laws of the Cayman Islands.
In witness whereof the parties hereto have caused this Plan of Merger to be executed on the day and year first above written.
Duly authorized for and on behalf of Ali YK Subsidiary Holding Limited:
[name]
Director
Duly authorized for and on behalf of Youku Tudou Inc.:
[name]
Director
Appendix
I
(The Agreement)
(Amended and Restated Memorandum and Articles of Surviving Corporation)
Appendix
II
Exhibit
4.47
9
March
2016
ALIBABA
GROUP
HOLDING
LIMITED
arranged
by
THE
FINANCIAL
INSTITUTIONS
NAMED
HEREIN
as
Mandated
Lead
Arrangers
THE
FINANCIAL
INSTITUTIONS
NAMED
HEREIN
as
Original
Lenders
with
CITICORP
INTERNATIONAL
LIMITED
acting
as
Agent
US$3,000,000,000
FACILITY
AGREEMENT
for
ALIBABA
GROUP
HOLDING
LIMITED
Clause
Page
CONTENT
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
DEFINITIONS AND INTERPRETATION
THE FACILITY
PURPOSE
CONDITIONS OF UTILISATION
UTILISATION
REPAYMENT
PREPAYMENT AND CANCELLATION
INTEREST
INTEREST PERIODS
CHANGES TO THE CALCULATION OF INTEREST
FEES
TAX GROSS UP AND INDEMNITIES
INCREASED COSTS
MITIGATION BY THE LENDERS
OTHER INDEMNITIES
COSTS AND EXPENSES
REPRESENTATIONS
INFORMATION UNDERTAKINGS
GENERAL UNDERTAKINGS
EVENTS OF DEFAULT
CHANGES TO THE LENDERS
ASSIGNMENT OR TRANSFER BY THE COMPANY
DISCLOSURE OF INFORMATION
ROLE OF THE ADMINISTRATIVE PARTIES
SHARING AMONG THE FINANCE PARTIES
PAYMENT MECHANICS
SET-OFF
NOTICES
CALCULATIONS AND CERTIFICATES
PARTIAL INVALIDITY
1
18
22
22
22
23
24
27
28
28
30
31
34
35
36
37
38
43
44
47
49
53
53
55
65
67
70
70
72
73
31.
32.
33.
34.
35.
REMEDIES AND WAIVERS
AMENDMENTS AND WAIVERS
COUNTERPARTS
GOVERNING LAW
ENFORCEMENT
SCHEDULE 1 THE ORIGINAL LENDERS
SCHEDULE 2 CONDITIONS PRECEDENT
SCHEDULE 3 REQUESTS
SCHEDULE 4 FORM OF TRANSFER CERTIFICATE
SCHEDULE 5 MATERIAL SUBSIDIARIES
SCHEDULE 6 FORM OF INCREASE CONFIRMATION
SCHEDULE 7 FORM OF CONFIDENTIALITY UNDERTAKING
SCHEDULE 8 ACCOUNT DETAILS
SCHEDULE 9 FORM OF ADDITIONAL COMMITMENT NOTICE
73
73
77
77
78
79
80
82
84
87
88
90
97
98
THIS
AGREEMENT
is dated 9 March 2016 and made between:
(1)
ALIBABA
GROUP
HOLDING
LIMITED
(the “ Company
”);
(2)
AUSTRALIA
AND
NEW
ZEALAND
BANKING
GROUP
LIMITED
; CITIGROUP
GLOBAL
MARKETS
ASIA
LIMITED
; CREDIT
SUISSE
AG,
SINGAPORE
BRANCH
; DEUTSCHE
BANK
AG,
SINGAPORE
BRANCH
; GOLDMAN
SACHS
BANK
USA
; JPMORGAN
CHASE
BANK,
N.A.,
HONG
KONG
BRANCH
; MIZUHO
BANK,
LTD.
and MORGAN
STANLEY
ASIA
LIMITED
(whether acting individually or
together, the “ Mandated
Lead
Arrangers
”);
(3)
THE
FINANCIAL
INSTITUTIONS
listed in Schedule 1 ( The
Original
Lenders
) as lenders (the “ Original
Lenders
”); and
(4)
CITICORP
INTERNATIONAL
LIMITED
as agent of the Finance Parties (other than itself) (the “ Agent
”).
IT
IS
AGREED
as follows:
1.
D
EFINITIONS
AND
I
NTERPRETATION
1.1 Definitions
In this Agreement:
“ Acceptable
Bank
” means:
(a) a bank or financial institution which has a rating for its long-term unsecured and non credit-enhanced debt obligations of BBB- or higher by Standard &
Poor’s Rating Services or Fitch Ratings Ltd or Baa3 or higher by Moody’s Investor Services Limited or a comparable rating from an internationally
recognised credit rating agency; or
(b) any other bank or financial institution approved by the Agent (acting on the instructions of the Majority Lenders).
“ Accordion
Lender
” has the meaning given to that term in Clause 2.3 ( Additional
Commitments
).
“ Accounting
Principles
” means, in relation to the Company, US GAAP or IFRS.
“ Additional
Commitment
” means:
(a) in relation to an entity identified as a Lender in an Additional Commitment Notice, the amount set opposite its name under the heading “Additional
Commitment” in such Additional Commitment Notice and the amount of any other Additional Commitment transferred to it under this Agreement; or
(b) in relation to any other Lender, the amount of any Additional Commitment transferred to it under this Agreement to the extent not cancelled, reduced or
transferred by it under this Agreement.
1
“ Additional
Commitment
Fee
Letter
” means each fee letter entered into between the Company and, if applicable, the Lenders or other banks which commit
Additional Commitments.
“ Additional
Commitment
Notice
” means a notice substantially in the form set out in Schedule 9 ( Additional
Commitment
Notice
) delivered by the Company to
the Agent in accordance with Clause 2.3 ( Additional
Commitments
).
“ Administrative
Party
” means each of the Agent and the Mandated Lead Arrangers.
“ Affiliate
” means, in relation to any person, a Subsidiary of that person or a Holding Company of that person or any other Subsidiary of that Holding Company.
“ APLMA
” means the Asia Pacific Loan Market Association Limited.
“ Authorisation
” means:
(a) an authorisation, consent, approval, resolution, licence, exemption, filing, notarisation, lodgement or registration; or
(b) in relation to anything which will be fully or partly prohibited or restricted by law if a Governmental Agency intervenes or acts in any way within a
specified period after lodgement, filing, registration or notification, the expiry of that period without intervention or action.
“ Availability
Period
” means the period from and including the date of this Agreement to and including the date falling 3 months after the date of this Agreement.
“ Available
Commitment
” means a Lender’s Commitment minus:
(a) the aggregate amount of its participation in any outstanding Loans; and
(b) in relation to any proposed Utilisation, the aggregate amount of its participation in any Loans that are due to be made on or before the proposed
Utilisation Date.
“ Available
Facility
” means the aggregate for the time being of each Lender’s Available Commitment.
“ Break
Costs
” means the amount (if any) by which:
(a) the interest (excluding the Margin) which a Lender should have received pursuant to the terms of this Agreement for the period from the date of receipt of
all or any part of the principal amount of a Loan or Unpaid Sum to the last day of the current Interest Period in respect of that Loan or Unpaid Sum, had
the principal amount or Unpaid Sum received been paid on the last day of that Interest Period;
exceeds:
(b) the amount of interest which that Lender would be able to obtain by placing an amount equal to the principal amount or Unpaid Sum received by it on
deposit with a leading bank in the Relevant Interbank Market for a period starting on the Business Day following receipt or recovery and ending on the
last day of the current Interest Period.
2
“ Business
Day
” means a day (other than a Saturday or Sunday) on which banks are open for general business in Hong Kong, Singapore and New York.
“ Capital
Stock
” of any person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in
(however designated) equity of such person, including any Preferred Shares and limited liability or partnership interests (whether general or limited), but excluding
any debt securities convertible or exchangeable into such equity.
“ Commitment
” means:
(a) in relation to an Original Lender, the amount set opposite its name under the heading Commitment in Schedule 1 ( The
Original
Lenders
) and the amount
of any other Commitment transferred to it under this Agreement or assumed by it in accordance with Clause 2.2 ( Increase
) or Clause 2.3 ( Additional
Commitments
); and
(b) in relation to any other Lender, the amount of any Commitment transferred to it under this Agreement or assumed by it in accordance with Clause 2.2 (
Increase
) or Clause 2.3 ( Additional
Commitments
),
to the extent not cancelled, reduced or transferred by it under this Agreement.
“ Competitors
” means Amazon (including Joyo.com), Baidu, eBay (including PayPal), Facebook, Google, Yahoo!, Microsoft, Tencent (including Tenpay),
JD.com (formerly, 360Buy), Wal-Mart Stores, Inc., Yihaodian, Xiaomi, 58.com, Yahoo! JAPAN (including SoftBank Group), Qihoo 360, Vipshop, Rakuten, Ping
An (including Lufax but excluding Ping An Bank), UnionPay and each of their controlled Affiliates.
“ Confidentiality
Undertaking
” means a confidentiality undertaking substantially in a recommended form of the APLMA as set out in Schedule 7 ( Form
of
Confidentiality
Undertaking
) or in any other form agreed between the Company and the Agent and in any event the benefit of which accrues to the Company as a
third party beneficiary.
“ Consolidated
Affiliated
Entity
” of any person means any corporation, association or other entity which is or is required to be consolidated with such person
under Accounting Standards Codification subtopic 810-10, Consolidation: Overall (including any changes, amendments or supplements thereto) or, if such person
prepares its financial statements in accordance with accounting principles other than U.S. GAAP, the equivalent of Accounting Standards Codification subtopic
810-10, Consolidation: Overall under such accounting principles.
“ Controlled
Entity
” of any person means a Subsidiary or a Consolidated Affiliated Entity of such person.
“ Default
” means an Event of Default or any event or circumstance specified in Clause 20 ( Events
of
Default
) which would (with the expiry of a grace period, the
giving of notice or the making of any determination (other than as to materiality) referred to in Clause 20 ( Events
of
Default
)) be an Event of Default.
“ Defaulting
Lender
” means any Lender:
(a) which has failed to make its participation in a Loan available or has notified the Agent or the Company (which has notified the Agent) that it will not
make its
3
participation in a Loan available by the Utilisation Date of that Loan in accordance with Clause 5.4 ( Lenders’
participation
);
(b) which has otherwise rescinded or repudiated a Finance Document; or
(c) with respect to which an Insolvency Event has occurred and is continuing,
unless, in the case of paragraph (a) above:
(i) its failure to pay is caused by:
(A) administrative or technical error; or
(B) a Disruption Event; and,
payment is made within two Business Days of its due date; or
(ii) the Lender is disputing in good faith whether it is contractually obliged to make the payment in question.
“ Disruption
Event
” means either or both of:
(a) a material disruption to those payment or communications systems or to those financial markets which are, in each case, required to operate in order for
payments to be made in connection with the Facility (or otherwise in order for the transactions contemplated by the Finance Documents to be carried out)
which disruption is not caused by, and is beyond the control of, any of the Parties; and
(b) the occurrence of any other event which results in a disruption (of a technical or systems-related nature) to the treasury or payments operations of a Party
preventing that, or any other Party:
(i) from performing its payment obligations under the Finance Documents; or
(ii) from communicating with other Parties in accordance with the terms of the Finance Documents,
and which (in either such case) is not caused by, and is beyond the control of, the Party whose operations are disrupted.
“ Distributable
Reserves
” means, in relation to an Onshore Group Member which is a WFOE, the retained earnings of such WFOE that may in accordance with
any applicable PRC law and regulation and PRC GAAP be distributed to its shareholders outside of the PRC after taking into account all Taxes payable under PRC
law and all statutory reserve requirements in the PRC.
“ Dormant
Subsidiary
” means a Group Member which does not trade (for itself or as agent for any person) and does not own, legally or beneficially, any material
assets (including, without limitation, indebtedness owed to it).
“ EBITDA
” means the consolidated income before income tax and share of net losses or gains of equity investees of the Group before taxation (including the
results from any discontinued operations):
4
(a) before
deducting
any interest, commission, fees, discounts, prepayment fees, premiums or charges and other finance payments whether paid, payable or
capitalised by any Group Member (calculated on a consolidated basis);
(b) not
including
any accrued interest owing to any Group Member;
(c) before
taking
into
account
any Exceptional Items;
(d) before
taking
into
account
any unrealised gains or losses on any derivative instrument or similar financial instrument (but excluding any derivative
instrument which is accounted for on a hedge accounting basis);
(e) before
taking
into
account
any gain or loss arising from an upward or downward revaluation of any other asset at any time after the date to which the
Original Financial Statements were made up;
(f) before
taking
into
account
the charge to profit represented by expensing of stock based compensation;
(g) after
adding
back
any amount attributable to the amortisation, depreciation or impairment of assets of the Group Members; and
(h) after
excluding
any Excluded Earnings,
in each case, to the extent added, deducted or taken into account, as the case may be, for the purposes of determining income before income tax and share of net
losses or gains of equity investees of the Group before taxation.
“ Event
of
Default
” means any event or circumstance specified as such in Clause 20 ( Events
of
Default
).
“ Exceptional
Items
” means any exceptional, one off, non-recurring or extraordinary items including those arising on:
(a) the restructuring of the activities of an entity and reversals of any provisions for the cost of restructuring;
(b) disposals, revaluations or impairment of non-current assets; and
(c) disposals of assets associated with discontinued operations.
“ Exchange
Act
” means the U.S. Securities Exchange Act of 1934, as amended.
“ Excluded
Earnings
” means any earnings (whether positive or negative) of the Finance Companies and the Project Companies.
“ Extended
Loan
” means a Loan or part of a Loan in respect of which the Company and the relevant Lender(s) have agreed to amend certain terms pursuant to an
Extension Agreement.
“ Extension
Agreement
” has the meaning given to that term in Clause 32.3 ( Extension
of
Commitments
).
5
“ Facility
” means the term loan facility made available under this Agreement as described in Clause 2.1 ( The
Facility
) as such facility may be increased pursuant
to Clause 2.3 ( Additional
Commitments
).
“ Facility
Office
” means the office or offices notified by a Lender to the Agent in writing on or before the date it becomes a Lender (or, following that date, by not
less than five Business Days’ written notice) as the office or offices through which it will perform its obligations under this Agreement.
“ Fee
Letter
” means any letter or letters referring to this Agreement or the Facility between one or more Administrative Parties and the Company setting out any
of the fees referred to in Clause 11 ( Fees
), and any Additional Commitment Fee Letter.
“ Final
Repayment
Date
” means the date falling sixty (60) months after the first Utilisation Date.
“ Finance
Company
” means:
(a) Alibaba Financial Holding Limited [F03]
and its Subsidiaries (which include, as at the date of this Agreement, Alibaba Financial Investment Holding
Limited [F04]
, Alibaba Financial China Holding Limited [F05]
and
Network Technology Co., Ltd.) [F80]
);
(Zhejiang Alibaba Finance Credit
(b)
(c)
(d)
(Zhejiang Alibaba Small Loan Co., Ltd.) [
F50]
;
(Shen Zhen One Touch Business Service Ltd.) [B69]
;
(Alibaba (Hangzhou) Central Innovation Co., Ltd.) [T68]
; and
(e) any other Group Member whose primary function is the provision of merchant, consumer or other credit finance and/or related credit services (including
provision of guarantees), which has obtained a small loans lending or other lending, credit, guarantee or comparable licence from the relevant regulator.
“ Finance
Document
” means this Agreement, any Fee Letter, the Syndication Letter, any Utilisation Request, any Additional Commitment Notice and any other
document designated as such by the Company and the Agent (or by the Company and the Lenders, provided that the Agent receives notification of such
designation).
“ Finance
Party
” means the Agent, a Mandated Lead Arranger or a Lender.
“ Governmental
Agency
” means any government or any governmental agency, semi-governmental or judicial entity or authority (including, without limitation,
any stock exchange or any self-regulatory organisation established under statute).
“ Group
” means the Company and its Subsidiaries from time to time.
“ Group
Member
” means a member of the Group.
6
“ Group
Structure
Chart
” means the summary group structure chart in the agreed form.
“ Holding
Company
” means, in relation to a person, any other person in respect of which it is a Subsidiary.
“ Hong
Kong
” means the Hong Kong Special Administrative Region of the People’s Republic of China.
“ IFRS
” means International Financial Reporting Standards as issued by the International Accounting Standards Board.
“ Impaired
Agent
” means the Agent at any time when:
(a) it has failed to make (or has notified a Party that it will not make) a payment required to be made by it under the Finance Documents by the due date for
payment;
(b) the Agent otherwise rescinds or repudiates a Finance Document;
(c) (if the Agent is also a Lender) it is a Defaulting Lender under paragraph (a) or (b) of the definition of “ Defaulting
Lender
”; or
(d) an Insolvency Event has occurred and is continuing with respect to the Agent;
unless, in the case of paragraph (a) above:
(i) its failure to pay is caused by:
(A) administrative or technical error; or
(B) a Disruption Event; and
(ii) payment is made within two Business Days of its due date; or
(iii) the Agent is disputing in good faith whether it is contractually obliged to make the payment in question.
“ Increase
Confirmation
” means a confirmation substantially in the form set out in Schedule 6 ( Form
of
Increase
Confirmation
).
“ Increase
Lender
” has the meaning given to that term in Clause 2.2 ( Increase
).
“ Indebtedness
” means any and all obligations of a person for money borrowed which, in accordance with US GAAP, would be reflected on the balance sheet of
such person as a liability on the date as of which Indebtedness is to be determined.
“ Indenture
” means the indenture dated as of 28 November 2014 in connection with the US$8,000,000,000 notes issued by the Company.
“ Indirect
Tax
” means any goods and services tax, consumption tax, value added tax or any tax of a similar nature.
“ Industrial
Competitor
” means any person which is, or is an Affiliate of, a Competitor, or any person that is acting on behalf of or fronting for any such person,
provided that a person will not be considered to be “fronting for” or “acting on behalf of” any such person if such
7
person has confirmed in writing to the relevant Finance Party with a copy to the Company that it is not fronting for or acting on behalf of a Competitor or an
Affiliate of a Competitor.
“ Insolvency
Event
” in relation to a Finance Party means that the Finance Party:
(a) is dissolved (other than pursuant to a consolidation, amalgamation or merger);
(b) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due;
(c) makes a general assignment, arrangement or composition with or for the benefit of its creditors;
(d) institutes or has instituted against it, by a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction
over it in the jurisdiction of its incorporation or organisation or the jurisdiction of its head or home office, a proceeding seeking a judgment of insolvency
or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its
winding-up or liquidation by it or such regulator, supervisor or similar official;
(e) has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other
similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition
instituted or presented against it, such proceeding or petition is instituted or presented by a person or entity not described in paragraph (d) above and:
(i) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation;
or
(ii) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
(f) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger);
(g) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official
for it or for all or substantially all its assets;
(h) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied,
enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed,
discharged, stayed or restrained, in each case within 30 days thereafter;
(i) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events
specified in paragraphs (a) to (h) above; or
(j) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts.
“ Intellectual
Property
” means:
8
(a) any patents, trade marks, service marks, designs, business names, copyrights, database rights, design rights, domain names, moral rights, inventions,
confidential information, knowhow and other intellectual property rights and interests (which may now or in the future subsist), whether registered or
unregistered; and
(b) the benefit of all applications and rights to use such assets of each Group Member (which may now or in the future subsist).
“ Interest
Period
” means, in relation to a Loan, the period determined in accordance with Clause 9 ( Interest
Periods
) and, in relation to an Unpaid Sum, each
period determined in accordance with Clause 8.3 ( Default
interest
).
“ Interpolated
Screen
Rate
” means, in relation to LIBOR for any Loan, the rate (rounded to the same number of decimal places as the two relevant Screen Rates)
which results from interpolating on a linear basis between:
(a) the applicable Screen Rate for the longest period (for which that Screen Rate is available) which is less than the Interest Period of that Loan; and
(b) the applicable Screen Rate for the shortest period (for which that Screen Rate is available) which exceeds the Interest Period of that Loan,
each as of 11.00 a.m. (London time) on the Quotation Day for the currency of that Loan.
“ Lender
” means:
(a) any Original Lender; and
(b) any bank or financial institution (or, with the prior written consent of the Company, other person) which has become a Party in accordance with Clause
2.2 ( Increase
), Clause 2.3 ( Additional
Commitments
) or Clause 21 ( Changes
to
the
Lenders
),
which in each case has not ceased to be a Party in accordance with the terms of this Agreement.
“ LIBOR
” means, in relation to any Loan:
(a) the applicable Screen Rate;
(b) (if no Screen Rate is available for the Interest Period of that Loan) the Interpolated Screen Rate for that Loan; or
(c) if:
(i) no Screen Rate is available for US Dollars; or
(ii) no Screen Rate is available for the Interest Period of that Loan and it is not possible to calculate an Interpolated Screen Rate for that
Loan,
the Reference Bank Rate,
9
as of, in the case of paragraphs (a) and (c) above, 11.00 a.m. (London time) on the Quotation Day for US Dollars and for a period comparable to the Interest Period
of that Loan and, in the case of paragraphs (a) to (c) above, if any such rate is below zero, LIBOR will be deemed to be zero.
“ Loan
” means a loan made or to be made under the Facility or the principal amount outstanding for the time being of that loan.
“ London
Business
Day
” means a day (other than a Saturday or Sunday) on which commercial banks are open for general business including dealings in interbank
deposits in London.
“ Majority
Lenders
” means a Lender or Lenders whose Commitments aggregate more than 50% of the Total Commitments (or, if the Total Commitments have
been reduced to zero, aggregated more than 50% of the Total Commitments immediately prior to the reduction).
“ Major
Material
Subsidiary
” has the meaning given to such term in the definition of Material Subsidiary.
“ Management
” means the chief executive officer, the chief financial officer and the group general counsel of the Company.
“ Margin
” means 1.1 per cent. per annum.
“ Material
Adverse
Effect
” means a material adverse effect on:
(a) the business, operations, property, condition (financial or otherwise) or results of operations of the Group taken as a whole;
(b) the ability of the Company to perform its payment obligations under the Finance Documents taking into account any support that it may reasonably
expect from any other Group Member; or
(c) the validity or enforceability of, or the rights or remedies of any Finance Party under, any of the Finance Documents other than to the extent not
materially adverse to the interests of the Finance Parties under the Finance Documents.
“ Material
Subsidiary
” means, at any time:
(a) a Group Member which:
(i) is listed in Schedule 5 ( Material
Subsidiaries
); or
(ii) has earnings before interest, tax, depreciation and amortisation calculated on the same basis as EBITDA representing five per cent. (5%) or
more of EBITDA, calculated on a consolidated basis (such Group Member, a “ Major
Material
Subsidiary
”); or
(b) each direct or indirect Holding Company (other than the Company) of the persons referred to in paragraph (a) above,
but excluding in each case any Project Company, any Finance Company (and any Holding Company thereof which would not qualify as a Major Material
Subsidiary under paragraph (a)(ii) above but for the earnings it receives from any Project Company or Finance Company
10
(as the case may be) in respect of which it is a Holding Company) and any Dormant Subsidiary.
“ Money
Laundering
” means:
(a) the conversion or transfer of property, knowing it is derived from a criminal offence, for the purpose of concealing or disguising its illegal origin or of
assisting any Person who is involved in the commission of the crime to evade the legal consequences of its actions;
(b) the concealment or disguise of the true nature, source, location, disposition, movement, right with respect to, or ownership of, property knowing that it is
derived from a criminal offence; or
(c) the acquisition, possession or use of property knowing at the time of its receipt that it is derived from a criminal offence.
“ Month
” means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that:
(a) (subject to paragraph (c) below) if the numerically corresponding day is not a Business Day, that period shall end on the next Business Day in that
calendar month in which that period is to end if there is one, or if there is not, on the immediately preceding Business Day;
(b) if there is no numerically corresponding day in the calendar month in which that period is to end, that period shall end on the last Business Day in that
calendar month; and
(c) if an Interest Period begins on the last Business Day of a calendar month, that Interest Period shall end on the last Business Day in the calendar month in
which that Interest Period is to end.
The above rules will apply only to the last Month of any period.
“ New
Lender
” has the meaning given to that term in Clause 21 ( Changes
to
the
Lenders
).
“ Non-recourse
Obligation
” means Indebtedness or other obligations substantially related to:
(a) the acquisition of assets not previously owned by the Company or any of its Controlled Entities; or
(b) the financing of a project involving the purchase, development, improvement or expansion of properties of the Company or any of its Controlled Entities,
as to which the obligee with respect to such Indebtedness or obligation has no recourse to the Company or any Controlled Entities of the Company or to the
Company’s or any such Controlled Entities’ assets other than the assets which were acquired with the proceeds of such transaction or the project financed with the
proceeds of such transaction (and the proceeds thereof).
“ OFAC
” means the Office of Foreign Assets Control of the U.S. Department of the Treasury.
11
“ Officer
” means the Executive Chairman of the Board, the Executive Vice Chairman, the Chief Executive Officer, the Chief Financial Officer or the Corporate
Secretary of the Company or, in the event that the Company is a partnership or a limited liability company that has no such officers, a person duly authorised under
applicable law by the general partner, managers, members or a similar body to act on behalf of the Company.
“ Officer’s
Certificate
” means a certificate signed by an Officer of the Company.
“ Onshore
Group
Member
” means a Group Member incorporated in the PRC.
“ Onshore
Material
Subsidiary
” means an Onshore Group Member which is a Material Subsidiary.
“ Original
Financial
Statements
” means the audited consolidated financial statements of the Group for the financial year ended 31 March 2015.
“ Participant
” means each person to whom a Lender has transferred all or any of its obligations, economic interest or other interest under the Finance Documents
by way of a Participation Agreement.
“ Participation
Agreement
” means each agreement or letter (including, without limitation, a fee letter) between a Lender and a Participant under which the
Lender has transferred all or any of its obligations, economic interest or other interest under the Finance Documents, directly or indirectly, whether by sub-
participation, credit derivative (including a credit default swap or credit linked note), total return swap or in any other way but excluding any transfer or novation of
any of a Lender’s Commitments and/or rights and/or obligations in accordance with Clause 21.1 ( Transfers
by
the
Lenders
).
“ Party
” means a party to this Agreement.
“ PRC
” means the People’s Republic of China, excluding for these purposes Hong Kong, the Macau Special Administrative Region and Taiwan.
“ PRC
GAAP
” means generally accepted accounting principles of the PRC.
“ Preferred
Shares
” applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the
payment of dividends upon liquidation, dissolution or winding up.
“ Principal
Controlled
Entities
” means one of the Company’s Controlled Entities:
(a) as to which one or more of the following conditions is/are satisfied:
(i) its total revenue or (in the case of one of the Company’s Controlled Entities which has one or more Controlled Entities) consolidated
total revenue attributable to the Group is at least 5% of the consolidated total revenue of the Group;
(ii) its net profit or (in the case of one of the Company’s Controlled Entities which has one or more Controlled Entities) consolidated net
profit attributable to the Group (in each case before taxation and exceptional items) is at least 5% of the consolidated net profit (before
taxation and exceptional items) of the Group; or
12
(iii) its net assets or (in the case of one of the Company’s Controlled Entities which has one or more Controlled Entities) consolidated net
assets attributable to the Group (in each case after deducting minority interests in Subsidiaries) are at least 10% of its consolidated net
assets of the Group (after deducting minority interests in Subsidiaries of the Company);
all as calculated by reference to the then latest audited financial statements (consolidated or, as the case may be, unconsolidated) of the Controlled Entity of the
Company and the then latest audited consolidated financial statements of the Company;
provided that, in relation to paragraphs (i), (ii) and (iii) above:
(A) for the purpose of this definition only, “ Group
” means the Company and its Controlled Entities; and
(B) (1) in the case of a corporation or other business entity becoming a Controlled Entity after the end of the financial period to which the
Company’s latest consolidated audited accounts relate, the reference to the then latest consolidated audited accounts of the Company and
the Controlled Entities for the purposes of the calculation above shall, until the Company consolidated audited accounts for the financial
period in which the relevant corporation or other business entity becomes a Controlled Entity are issued, be deemed to be a reference to
the then latest consolidated audited accounts of the Company and the Controlled Entities adjusted to consolidate the latest audited
accounts (consolidated in the case of a Controlled Entity which itself has Controlled Entities) of such Controlled Entity in such accounts;
(2) if at any relevant time in relation to the Company or any Controlled Entity which itself has Controlled Entities, no consolidated
accounts are prepared and audited, total revenue, net profit or net assets of the Company and/or any such Controlled Entity shall be
determined on the basis of pro forma consolidated accounts prepared for this purpose by or on behalf of the Company;
(3) if at any relevant time in relation to any Controlled Entity, no accounts are audited, its net assets (consolidated, if appropriate) shall
be determined on the basis of pro forma accounts (consolidated, if appropriate) of the relevant Controlled Entity prepared for this
purpose by or on behalf of the Company; and
(4) if the accounts of any Controlled Entity (not being a Controlled Entity referred to in proviso (1) above) are not consolidated with the
Company’s accounts, then the determination of whether or not such Controlled Entity is a Principal Controlled Entity shall be based on a
pro forma consolidation of its accounts (consolidated, if appropriate) with the Company’s consolidated accounts (determined on the basis
of the foregoing); or
13
(b) that Principal Controlled Entity merges with or into, or to which is transferred all or substantially all of the assets of a Controlled Entity which
immediately prior to the transfer was a Principal Controlled Entity; provided that, with effect from such transfer, the Controlled Entity which so transfers
its assets and undertakings shall cease to be a Principal Controlled Entity (but without prejudice to paragraph (a) above) and the Controlled Entity to
which the assets are so transferred shall become a Principal Controlled Entity.
“ Prohibited
Transferee
” means, in respect of any transfer or sub-participation:
(a) an Industrial Competitor; or
(b) any person which is not a bank or financial institution and which has not been specifically approved in writing by the Company.
“ Project
Company
” means:
(a) Alibaba Group Properties Limited [A08]
and each of its Subsidiaries as at the date of this Agreement; and
(b) any other Group Member which is (i) established or acquired after the date of this Agreement; (ii) capitalised with equity funded by equity or shareholder
loans from, or on behalf of, the Company or one of its Subsidiaries; and (iii) established or acquired to develop a specific asset or project.
“ Quotation
Day
” means:
(a) in relation to any period for which an interest rate is to be determined two London Business Days before the first day of that period, unless market
practice differs in the Relevant Interbank Market in which case the Quotation Day will be determined by the Agent in accordance with market practice in
the Relevant Interbank Market (and if quotations would normally be given by leading banks in the Relevant Interbank Market on more than one day, the
Quotation Day will be the last of those days); and
(b) in relation to any Interest Period the duration of which is selected by the Agent pursuant to Clause 8.3 ( Default
interest
), such date as may be determined
by the Agent (acting reasonably).
“ Reference
Bank
Rate
” means the arithmetic mean of the rates (rounded upwards to four decimal places) as supplied to the Agent at its request by the Reference
Banks as the rate at which the relevant Reference Bank could borrow funds in the Relevant Interbank Market, in US Dollars and for the relevant period, were it to
do so by asking for and then accepting interbank offers for deposits in reasonable market size in US Dollars and for that period.
“ Reference
Banks
” means, subject to Clause 24.18 ( Reference
Banks
), the principal London offices of any banks as may be appointed by the Agent with the
consent of the Company (such consent not to be unreasonably withheld).
“ Relevant
Indebtedness
” means any Indebtedness which is in the form of, or represented or evidenced by, bonds, notes, debentures, or other securities which for
the time being are, or are intended to be or are commonly, quoted, listed or dealt in or traded on any stock
14
exchange or over-the-counter or other securities market, but shall exclude any bank debt, bank loans or securitisations.
“ Relevant
Interbank
Market
” means the London interbank market.
“ Relevant
Jurisdiction
” means, in relation to the Company:
(a) its jurisdiction of incorporation; and
(b) any jurisdiction where it conducts a material part of its business.
“ Repeating
Representations
” means each of the representations set out in Clauses 17.1 ( Status
) to 17.6 ( Governing
law
and
enforcement
), Clause 17.9 ( No
default
), Clause 17.10 ( No
misleading
information
), paragraphs (a) and (b) of Clause 17.11 ( Financial
statements
), Clause 17.19 ( Good
title
to
assets
),
paragraph (b) of Clause 17.20 ( Bribery,
Anti-corruption
) and paragraph (b) of Clause 17.22 ( Money
Laundering
).
“ Representative
” means any delegate, agent, manager, administrator, nominee, attorney, trustee or custodian.
“ Sanctions
” means any sanctions, restrictions or embargoes imposed or enforced by the United Nations, the European Union, the State Secretariat for Economic
Affairs of Switzerland, OFAC, the State Department of the United States, HM Treasury of the United Kingdom, the Hong Kong Monetary Authority, the Monetary
Authority of Singapore and the Department of Foreign Affairs and Trade of Australia and any other sanctions administered by any governmental entity which is
notified to a Group Member by the Agent in accordance with Clause 19.4 ( Sanctions
).
“ Screen
Rate
” means the London interbank offered rate administered by the ICE Benchmark Administration Limited (or any other person which takes over the
administration of that rate) for US Dollars and the relevant period, displayed on pages LIBOR01 or LIBOR02 of the Reuters screen (or any replacement Reuters
page which displays that rate) or on the appropriate page of such other information service which publishes that rate from time to time in place of Reuters. If such
page or service ceases to be available, the Agent may specify another page or service displaying the relevant rate after consultation with the Company.
“ SEC
” means the United States Securities and Exchange Commission, as constituted from time to time.
“ Security
” means a mortgage, charge, pledge, lien or other security interest securing any obligation of any person.
“ Securities
Act
” means the Securities Act of 1933, as amended.
“ Selection
Notice
” means a notice substantially in the form set out in Part B of Schedule 3 ( Requests
) given in accordance with Clause 9 ( Interest
Periods
).
“ Separate
Loans
” has the meaning given to such term in Clause 6.2 ( Repayment
).
“ Subsidiary
” of any person means:
(a) any corporation, association or other business entity (other than a partnership, joint venture, limited liability company or similar entity) of which more
than 50% of the
15
total ordinary voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof (or persons performing similar functions); or
(b) any partnership, joint venture limited liability company or similar entity of which more than 50% of the capital accounts, distribution rights, total equity
and voting interests or general or limited partnership interests, as applicable,
is, in the case of (a) and (b), voting at the time owned or controlled, directly or indirectly, by (1) such person; (2) such person and one or more Subsidiaries of such
Person; or (3) one or more Subsidiaries of such person. For the avoidance of doubt, references to a Subsidiary or Subsidiaries exclude any Finance Company or
Project Company whose financial results are not consolidated with those of the Company in accordance with the Accounting Principles.
“ Syndication
Letter
” means the syndication letter dated the date of this Agreement between the Agent, the Mandated Lead Arrangers as of the date of this
Agreement and the Company.
“ Tax
” means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any penalty or interest payable in connection with any
failure by the Company to pay or any delay by the Company in paying any of the same).
“ Tax
Deduction
” has the meaning given to such term in Clause 12.1 ( Tax
definitions
).
“ Total
Commitments
” means the aggregate of the Commitments (being US$3,000,000,000 at the date of this Agreement).
“ Transfer
Certificate
” means a certificate substantially in the form set out in Schedule 4 ( Form
of
Transfer
Certificate
) or any other form agreed between the
Agent and the Company.
“ Transfer
Date
” means, in relation to a transfer, the later of:
(a) the proposed Transfer Date specified in the relevant Transfer Certificate; and
(b) the date on which the Agent executes the relevant Transfer Certificate.
“ Trust
Indenture
Act
” means the Trust Indenture Act of 1939 of the United States, as amended.
“ Unpaid
Sum
” means any sum due and payable but unpaid by the Company under the Finance Documents.
“ US
Dollar
” or “ US$
” denote the lawful currency of the United States of America.
“ US
GAAP
” means generally accepted accounting principles in the United States of America.
“ Utilisation
” means a utilisation of the Facility.
“ Utilisation
Date
” means the date of a Utilisation, being the date on which the relevant Loan is to be made.
16
“ Utilisation
Request
” means a notice substantially in the form set out in Part A of Schedule 3 ( Requests
).
“ WFOE
” means a wholly foreign owned enterprise incorporated in the PRC.
1.2 Construction
(a) Unless a contrary indication appears, any reference in this Agreement to:
(i) any “ Administrative
Party
”, the “ Agent
”, any “ Mandated
Lead
Arranger
”, any “ Finance
Party
”, any “ Lender
” or any “ Party
” shall
be construed so as to include its successors in title, permitted assigns and permitted transferees;
(ii) a document in “ agreed
form
” is a document which is in the form previously agreed in writing by or on behalf of the Company and the Mandated
Lead Arrangers prior to the date hereof or, on behalf of the Company and the Agent (acting on the instructions of the Majority Lenders);
(iii) “ assets
” includes present and future properties, revenues and rights of every description;
(iv) a “ Finance
Document
” or any other agreement or instrument is a reference to that Finance Document or other agreement or instrument as
amended, novated, supplemented, extended or restated;
(v) “ including
” shall be construed as “including without limitation” (and cognate expressions shall be construed similarly);
(vi) “ indebtedness
” includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or
future, actual or contingent;
(vii) a Lender’s “ participation
” in a Loan or Unpaid Sum includes an amount representing the fraction or portion (attributable to such Lender by
virtue of the provisions of this Agreement) of the total amount of such Loan or Unpaid Sum and the Lender’s rights under this Agreement in
respect thereof;
(viii) a “ person
” includes any individual, firm, company, corporation, government, state or agency of a state or any association, trust, joint venture,
consortium or partnership (whether or not having separate legal personality);
(ix) a “ regulation
” includes any regulation, rule, official directive, request or guideline (whether or not having the force of law, but if not having the
force of law, which is generally complied with by those to whom it is addressed) of any governmental, intergovernmental or supranational body,
agency, department or regulatory, self-regulatory or other authority or organisation;
(x) any notation after the name of a Group Member refers to the number for that Group Member as specified in the Group Structure Chart;
(xi) a provision of law is a reference to that provision as amended or re-enacted; and
17
(xii) a time of day is a reference to Hong Kong time.
(b) Section, Clause and Schedule headings are for ease of reference only.
(c) Unless a contrary indication appears, a term used in any other Finance Document or in any notice given under or in connection with any Finance
Document has the same meaning in that Finance Document or notice as in this Agreement.
(d) A Default or an Event of Default is “ continuing
” if it has not been remedied or waived.
(e) No person shall incur any personal liability whatsoever in connection with the issuance of a certificate, on behalf of the Company, pursuant to the terms
of a Finance Document.
1.3 Third party rights
(a) Unless expressly provided to the contrary in a Finance Document a person who is not a Party has no right under the Contracts (Rights of Third Parties)
Act 1999 (the “ Third
Parties
Act
”) to enforce or to enjoy the benefit of any term of this Agreement.
(b) Notwithstanding any term of any Finance Document, the consent of any third person who is not a Party is not required to rescind or vary this Agreement
at any time.
2.
T
HE
F
ACILITY
2.1 The Facility
Subject to the terms of this Agreement, the Lenders make available to the Company a US Dollar term loan facility in an aggregate amount equal to the Total
Commitments.
2.2 Increase
(a) The Company may by giving prior notice to the Agent after the effective date of a cancellation of:
(i) the Available Commitments of a Defaulting Lender in accordance with paragraph (g) of Clause 7.4 ( Right
of
prepayment
and
cancellation
in
relation
to
a
single
Lender
); or
(ii) the Commitments of a Defaulting Lender in accordance with paragraph (h) of Clause 7.4 ( Right
of
prepayment
and
cancellation
in
relation
to
a
single
Lender
); or
(iii) the Commitments of a Lender in accordance with:
(A) Clause 7.1 ( Illegality
); or
(B) paragraph (a) of Clause 7.4 ( Right
of
prepayment
and
cancellation
in
relation
to
a
single
Lender
),
18
request that the Commitments be increased (and the Commitments shall be so increased) in an aggregate amount of up to the amount of the Available
Commitments or Commitments so cancelled as follows:
(iv) the increased Commitments will be assumed by one or more Lenders or other banks or financial institutions (or any other person approved in
writing by the Company) (each an “ Increase
Lender
”) selected by the Company and each of which confirms in writing whether in the relevant
Increase Confirmation or otherwise its willingness to assume and does assume all the obligations of a Lender corresponding to that part of the
increased Commitments which it is to assume, as if it had been an Original Lender;
(v) the Company and any Increase Lender shall assume obligations towards one another and/or acquire rights against one another as the Company and
the Increase Lender would have assumed and/or acquired had the Increase Lender been an Original Lender;
(vi) each Increase Lender shall become a Party as a “ Lender
” and any Increase Lender and each of the other Finance Parties shall assume obligations
towards one another and acquire rights against one another as that Increase Lender and those Finance Parties would have assumed and/or acquired
had the Increase Lender been an Original Lender;
(vii) the Commitments of the other Lenders shall continue in full force and effect; and
(viii) any increase in the Commitments shall take effect on the date specified by the Company in the notice referred to above or any later date on which
the conditions set out in paragraph (b) below are satisfied.
(b) An increase in the Commitments will only be effective on:
(i) the execution by the Agent of an Increase Confirmation from the relevant Increase Lender; and
(ii) in relation to an Increase Lender which is not a Lender immediately prior to the relevant increase, the Agent being satisfied that it has complied
with all necessary “know your customer” or other similar checks under all applicable laws and regulations in relation to the assumption of the
increased Commitments by that Increase Lender. The Agent shall promptly notify the Company and the Increase Lender upon being so satisfied.
(c) Each Increase Lender, by executing the Increase Confirmation, confirms (for the avoidance of doubt) that the Agent has authority to execute on its behalf
any amendment or waiver that has been approved by or on behalf of the requisite Lender or Lenders in accordance with this Agreement on or prior to the
date on which the increase becomes effective.
(d) Clause 21.4 ( Limitation
of
responsibility
of
Existing
Lenders
) shall apply mutatis
mutandis
in this Clause 2.2 in relation to an Increase Lender as if
references in that Clause to:
19
(i) an “ Existing
Lender
” were references to all the Lenders immediately prior to the relevant increase;
(ii) the “ New
Lender
” were references to that “ Increase
Lender
”; and
(iii) a “ re-transfer
” were references to respectively a “ transfer
”.
2.3 Additional Commitments
(a) The Company may at any time confirm that one or more Lenders or any other bank(s) (each an “ Accordion
Lender
”) has agreed to commit Additional
Commitments by delivering an Additional Commitment Notice to the Agent.
(b) Each Additional Commitment Notice is irrevocable and will not be regarded as having been duly completed unless it has been countersigned by each
Accordion Lender named therein and it specifies:
(i) the date on which the Additional Commitments are confirmed;
(ii) the amount of the Additional Commitments; and
(iii) the amount of the Additional Commitments allocated to each Accordion Lender named in the Additional Commitment Notice.
(c) By countersigning the Additional Commitment Notice:
(i) each Accordion Lender agrees to commit the Additional Commitments set out against its name; and
(ii) each Accordion Lender which is not already a Lender, agrees to become a party to this Agreement as a Lender.
(d) An increase in the Commitments under this Clause 2.3 shall take effect on the date specified in the Additional Commitment Notice as the date on which
the Additional Commitments are confirmed or any later date on which the conditions set out in paragraph (e) below are satisfied.
(e) An increase in the Commitments under this Clause 2.3 will only be effective on:
(i) the execution by the Agent of the Additional Commitment Notice; and
(ii) in relation to an Accordion Lender which is not a Lender immediately prior to the relevant increase, the Agent being satisfied that it has complied
with all necessary “know your customer” or other similar checks under all applicable laws and regulations in relation to the assumption of the
Additional Commitments by that Accordion Lender. The Agent shall promptly execute the Additional Commitment Notice and notify the
Company and the Accordion Lender upon being so satisfied.
(f) No Additional Commitment Notice shall become effective at a time when a Utilisation Request has been delivered and the proposed Utilisation Date
under that Utilisation Request has not yet occurred.
20
(g) Upon receipt of a duly completed Additional Commitment Notice, the Agent shall inform the Lenders of such receipt.
(h) The Agent shall notify the Company and the Lenders of the increased amounts of the Commitments under the Facility promptly after an Additional
Commitment Notice takes effect in accordance with this Clause 2.3.
(i) For the avoidance of doubt: (i) the Additional Commitments shall have the same terms (other than as to upfront arrangement and underwriting fees and
conditions precedent) as the Facility; and (ii) the upfront arrangement and underwriting fees in respect of the Additional Commitments shall be set out in a
separate Additional Commitment Fee Letter entered into by the Company and the relevant Accordion Lender(s), provided that no Accordion Lender shall
be offered or paid any fees on better terms than those which have been offered to the Mandated Lead Arrangers.
2.4 Readjustment of participations in outstanding Loans
(a) If any Loan is outstanding on the date of accession of any Accordion Lender and the establishment of any Additional Commitment in accordance with
Clause 2.3 ( Additional
Commitments
), the amount of each Lender’s (including the acceding Accordion Lender’s) participation in each such outstanding
Loan shall be calculated by the Agent so that the amount of each Lender’s participation in each Loan will be equal to the proportion borne by its
Commitment to the Total Commitments as at such date. For the avoidance of doubt, in making such calculation the Agent shall take into account the
Additional Commitments.
(b) The Agent will notify in writing each Lender and the Company of the recalculated amount of each Lender’s participation in each outstanding Loan.
(c) Following receipt of such notice, the Accordion Lender(s) will make such balancing payments to the Agent (for the account of each other Lender) as may
be required so as to ensure that each Lender’s participation in outstanding Loans is as calculated by the Agent in accordance with paragraph (a) above.
Such payment in respect of each outstanding Loan shall be made to the Agent on the last day of the Interest Period for that Loan occurring after the date of
such notice or, if earlier, the first Utilisation Date to occur after the date of such notice.
(d) For the avoidance of doubt, no Break Costs will be payable as a result of the readjustment of participations in outstanding Loans pursuant to this Clause
2.4.
2.5 Finance Parties’ rights and obligations
(a) The obligations of the Finance Parties under the Finance Documents are several. Failure by a Finance Party to perform its obligations under the Finance
Documents does not affect the obligations of any other Party under the Finance Documents. No Finance Party is responsible for the obligations of any
other Finance Party under the Finance Documents.
(b) The rights of the Finance Parties under or in connection with the Finance Documents are separate and independent rights and any debt arising under the
Finance Documents to a Finance Party from the Company shall be a separate and independent debt.
21
(c) A Finance Party may, except as otherwise stated in the Finance Documents, separately enforce its rights under the Finance Documents.
3.
P
URPOSE
3.1 Purpose
The Company shall apply all amounts borrowed by it under the Facility towards general corporate and working capital purposes of the Group (including
acquisitions).
3.2 Monitoring
No Finance Party is bound to monitor or verify the application of any amount borrowed pursuant to this Agreement.
4.
C
ONDITIONS
OF
U
TILISATION
4.1 Initial conditions precedent
The Lenders will only be obliged to comply with Clause 5.4 ( Lenders’
participation
) in relation to any Utilisation if on or before the date of the initial Utilisation
Request the Agent has received all of the documents and other evidence listed in Schedule 2 ( Conditions
Precedent
) in form and substance satisfactory to the
Agent (acting reasonably), and the Agent shall notify the Company and the Lenders promptly upon being so satisfied.
4.2 Further conditions precedent
The Lenders will only be obliged to comply with Clause 5.4 ( Lenders’
participation
) if on the date of the Utilisation Request and on the proposed Utilisation
Date:
(a) no Default is continuing or would result from the proposed Loan; and
(b) the Repeating Representations to be made by the Company are true in all material respects.
4.3 Maximum number of Loans
(a) The Company may not deliver a Utilisation Request if as a result of the proposed Utilisation more than 12 Loans would be outstanding (or such greater
number of Loans as may be agreed by the Agent in its sole discretion).
(b) The Company may not request that a Loan be divided.
(c) No Extended Loan shall be taken into account in this Clause 4.3.
5.
U
TILISATION
5.1 Delivery of a Utilisation Request
The Company may utilise the Facility by delivery to the Agent of a duly completed Utilisation Request not later than 11.00 a.m. three (3) Business Days prior to
the proposed Utilisation Date or by such date as the Agent (acting on the instructions of all the Lenders) may agree with the Company.
22
5.2 Completion of a Utilisation Request
(a) Each Utilisation Request is irrevocable and will not be regarded as having been duly completed unless:
(i) the proposed Utilisation Date is a Business Day within the Availability Period; and
(ii) the proposed Interest Period complies with Clause 9 ( Interest
Periods
).
(b) Only one Loan may be requested in each Utilisation Request.
5.3 Currency and amount
(a) The currency specified in a Utilisation Request must be US Dollars.
(b) The amount of the proposed Loan must be a minimum of US$100,000,000, or, if less, the Available Facility.
5.4 Lenders’ participation
(a) If the conditions set out in Clause 4 ( Conditions
of
Utilisation
) and Clauses 5.1 ( Delivery
of
a
Utilisation
Request)
to 5.3 ( Currency
and
amount
) above
have been met, each Lender shall make its participation in each Loan available by the Utilisation Date through its Facility Office.
(b) The amount of each Lender’s participation in each Loan will be equal to the proportion borne by its Available Commitment to the Available Facility
immediately prior to making the Loan.
(c) The Agent shall notify each Lender of the amount of each Loan and the amount of its participation in that Loan and if different, the amount of that
participation to be made available in accordance with Clause 26.1 ( Payments
to
the
Agent
), in each case by no later than 11.00 a.m. two (2) Business
Days prior to the proposed Utilisation Date.
5.5 Cancellation of Available Facility
The Available Commitments which, at that time, are unutilised shall be immediately cancelled at 5.00 p.m. on the last day of the Availability Period.
6.
R
EPAYMENT
6.1 Subject to Clause 32.3 ( Extension
of
Commitments
), the Company shall repay each Loan on the Final Repayment Date.
23
6.2 At any time when a Lender becomes a Defaulting Lender, the participations of that Defaulting Lender in the Loans then outstanding will be treated as
separate Loans (the “ Separate
Loans
”).
6.3 The Company may prepay a Separate Loan by giving two Business Days’ prior notice to the Agent. The Agent will forward a copy of a prepayment
notice received in accordance with this Clause 6.3 to the Defaulting Lender concerned as soon as practicable on receipt.
6.4 Interest in respect of a Separate Loan will accrue for successive Interest Periods selected by the Company by the time and date specified by the Agent
(acting reasonably) and will be payable by the Company to the Agent (for the account of that Defaulting Lender) on the last day of each Interest Period of that
Loan.
6.5 The terms of this Agreement relating to Loans generally shall continue to apply to Separate Loans other than to the extent inconsistent with Clauses 6.2 to
6.4 above, in which case those paragraphs shall prevail in respect of any Separate Loan.
7.
P
REPAYMENT
AND
C
ANCELLATION
7.1 Illegality
If, at any time, it is or will become unlawful in any applicable jurisdiction for a Lender to perform any of its obligations as contemplated by this Agreement or to
fund or maintain its participation in any Loan:
(a) that Lender shall promptly notify the Agent upon becoming aware of that event;
(b) upon the Agent notifying the Company, the Commitment of that Lender will be immediately cancelled; and
(c) the Company shall repay that Lender’s participation in the Loans made to the Company on the last day of the Interest Period for each Loan occurring
after the Agent has notified the Company or, if earlier, the date specified by the Lender in the notice delivered to the Agent (being no earlier than the last
day of any applicable grace period permitted by law).
7.2 Voluntary cancellation
The Company may, if it gives the Agent not less than five (5) Business Days’ (or such shorter period as the Majority Lenders may agree) prior notice, reduce the
Available Facility to zero or by such amount (being a minimum amount of US$5,000,000) as the Company may specify in such notice. Any such reduction under
this Clause 7.2 shall reduce the Commitments of the Lenders rateably.
7.3 Voluntary Prepayment
The Company may, if it gives the Agent not less than five (5) Business Days’ (or such shorter period as the Majority Lenders may agree) prior notice, prepay the
whole or any part of a Loan (but if in part, being an amount that reduces the Loan by a minimum amount of US$5,000,000) together with any applicable Break
Costs.
24
7.4 Right of prepayment and cancellation in relation to a single Lender
(a) If:
(i) any sum payable to any Lender by the Company is required to be increased under paragraph (a) of Clause 12.2 ( Tax
gross-up
); or
(ii) any Lender claims indemnification from the Company under Clause 12.3 ( Tax
indemnity
) or Clause 13.1 ( Increased
costs
); or
(iii) the rate notified by a Lender in relation to a particular Interest Period under sub-paragraph (a)(ii) of Clause 10.2 ( Market
disruption
) is higher
than the lowest rate notified by a Lender under that sub-paragraph,
the Company may, whilst the circumstance giving rise to the requirement for that increase or indemnification continues, give the Agent notice of
cancellation of the Commitment of that Lender and/or its intention to procure the prepayment of that Lender’s participation in the Loans or give the Agent
notice of its intention to replace that Lender in accordance with paragraph (d) below.
(b) On receipt of a notice of cancellation referred to in paragraph (a) above, the Commitment of that Lender shall immediately be reduced to zero.
(c) On the last day of each Interest Period which ends after the Company has given notice of cancellation under paragraph (a) above (or, if earlier, the date
specified by the Company in that notice), the Company shall prepay that Lender’s participation in the relevant Loan.
(d) The Company may, in the circumstances set out in paragraph (a) above, on five Business Days’ prior notice to the Agent and that Lender, replace that
Lender by requiring that Lender to (and, to the extent permitted by law, that Lender shall) transfer pursuant to Clause 21 ( Changes
to
the
Lenders
) all
(and not part only) of its rights and obligations under this Agreement to a Lender or other bank, financial institution, trust, fund or other entity selected by
the Company which confirms its willingness to assume and does assume all the obligations of the transferring Lender in accordance with Clause 21 (
Changes
to
the
Lenders
) for a purchase price in cash or other cash payment payable at the time of the transfer equal to the outstanding principal amount
of such Lender’s participation in the outstanding Loans and all accrued interest (to the extent that the Agent has not given a notification under Clause
21.10 ( Pro-rata
interest
settlement
)), Break Costs and other amounts payable in relation thereto under the Finance Documents.
(e) The replacement of a Lender pursuant to paragraph (d) above shall be subject to the following conditions:
(i) the Company shall have no right to replace the Agent;
(ii) neither the Agent nor any Lender shall have any obligation to find a replacement Lender;
(iii) in no event shall the Lender replaced under paragraph (d) above be required to pay or surrender any of the fees received by such Lender pursuant
to the Finance Documents; and
25
(iv) no Lender shall be obliged to execute a Transfer Certificate unless it is satisfied that it has completed all “know your customer” and other similar
procedures that it is required (or deems desirable) to conduct in relation to the transfer to such replacement Lender.
(f) A Lender shall perform the procedures described in paragraph (e)(iv) above as soon as reasonably practicable following delivery of a notice referred to in
paragraph (d) above and shall notify the Agent and the Company when it is satisfied that it has completed those checks.
(g) (i) If any Lender becomes a Defaulting Lender, the Company may, at any time whilst the Lender continues to be a Defaulting Lender, give the Agent
two Business Days’ notice of cancellation of each Available Commitment of that Lender.
(ii) On the notice referred to in paragraph (i) above becoming effective, each Available Commitment of the Defaulting Lender shall immediately be
reduced to zero.
(iii) The Agent shall as soon as practicable after receipt of a notice referred to in paragraph (i) above, notify all the Lenders.
(h) (i) The Company may, at any time, give the Agent two Business Days’ notice of prepayment of any Separate Loan and cancellation of the
Commitment of a Defaulting Lender in respect of that Separate Loan.
(ii) On the notice referred to in paragraph (i) above becoming effective, the Commitment of the Defaulting Lender in respect of that Separate Loan
shall immediately be reduced to zero and the Company shall prepay that Defaulting Lender’s participation in such Separate Loan (together with any
applicable Break Costs).
(iii) The Agent shall as soon as practicable after receipt of a notice referred to in paragraph (i) above, notify all the Lenders.
7.5 Restrictions
(a) Any notice of cancellation or prepayment given by any Party under this Clause 7 shall be irrevocable and, unless a contrary indication appears in this
Agreement, shall specify the date or dates upon which the relevant cancellation or prepayment is to be made and the amount of that cancellation or
prepayment.
(b) Any prepayment under this Agreement shall be made together with accrued interest on the amount prepaid and, subject to any Break Costs, without
premium or penalty.
(c) Unless a contrary indication appears in this Agreement, any part of the Facility which is repaid or prepaid may not be reborrowed.
(d) The Company shall not repay or prepay all or any part of the Loans or reduce all or any part of the Commitments except at the times and in the manner
expressly provided for in this Agreement.
26
(e) Subject to Clause 2.2 ( Increase
), no amount of any Commitment that is reduced in accordance with this Agreement may be subsequently reinstated.
(f) If the Agent receives a notice under this Clause 7 it shall promptly forward a copy of that notice to either the Company or the affected Lender, as
appropriate.
(g) If all or part of a Loan is repaid or prepaid and is not available for redrawing, an amount of the Commitments (equal to the amount of the Loan which is
repaid or prepaid) will be deemed to be cancelled on the date of repayment or prepayment. Any cancellation under this paragraph (g) (save in connection
with any repayment or, as the case may be, prepayment under paragraph (c) of Clause 7.1 ( Illegality
) or paragraph (c), (g) or (h) of Clause 7.4 ( Right
of
prepayment
and
cancellation
in
relation
to
a
single
Lender
)) shall reduce the Commitments of the Lenders rateably.
8.
I
NTEREST
8.1 Calculation of interest
The rate of interest on each Loan for each Interest Period is the percentage rate per annum which is the aggregate of the:
(a) Margin; and
(b) applicable LIBOR.
8.2 Payment of interest
The Company shall pay accrued interest on each Loan on the last day of each Interest Period relating to that Loan (and, if the Interest Period is longer than six
Months, on the dates falling at six monthly intervals after the first day of the Interest Period).
8.3 Default interest
(a) If the Company fails to pay any amount payable by it under a Finance Document on its due date, interest shall accrue on the Unpaid Sum from the due
date to the date of actual payment (both before and after judgment) at a rate which is, subject to paragraph (b) below, two per cent. (2%) higher than the
rate which would have been payable if the Unpaid Sum had, during the period of non-payment, constituted a Loan in the currency of the Unpaid Sum for
successive Interest Periods, each of a duration selected by the Agent (acting reasonably). Any interest accruing under this Clause 8.3 shall be immediately
payable by the Company on demand by the Agent.
(b) If any Unpaid Sum consists of all or part of a Loan which became due on a day which was not the last day of an Interest Period relating to that Loan:
(i) the first Interest Period for that Unpaid Sum shall have a duration equal to the unexpired portion of the current Interest Period relating to that Loan;
and
(ii) the rate of interest applying to the Unpaid Sum during that first Interest Period shall be two per cent. (2%) higher than the rate which would have
applied if the Unpaid Sum had not become due.
27
(c) Default interest (if unpaid) arising on an Unpaid Sum will be compounded with the Unpaid Sum at the end of each Interest Period applicable to that
Unpaid Sum but will remain immediately due and payable.
8.4 Notification of rates of interest
The Agent shall promptly notify the relevant Lenders and the Company of the determination of a rate of interest under this Agreement.
9.
I
NTEREST
P
ERIODS
9.1 Selection of Interest Periods
(a) The Company shall select the Interest Period for a Loan in the Utilisation Request for that Loan or (if the Loan has already been borrowed) in a Selection
Notice.
(b) Each Selection Notice for a Loan is irrevocable and must be delivered to the Agent by the Company not later than 11.00 a.m. three (3) Business Days
prior to the first day of the relevant Interest Period.
(c) If the Company) fails to deliver a Selection Notice to the Agent in accordance with paragraph (b) above, the relevant Interest Period will be one Month.
(d) Subject to this Clause 9, the Company may select the Interest Period for a Loan of 1, 2, 3 or 6 Months or any other period agreed between the Company
and the Agent (acting on the instructions of all the Lenders in relation to the relevant Loan).
(e) An Interest Period for a Loan shall not, subject to Clause 32.3 ( Extension
of
Commitments
), extend beyond the Final Repayment Date.
(f) The Interest Period of a Loan shall start on the Utilisation Date of that Loan or (if already made) on the last day of its preceding Interest Period.
9.2 Non-Business Days
If an Interest Period would otherwise end on a day which is not a Business Day, that Interest Period will instead end on the next Business Day in that calendar
month (if there is one) or the preceding Business Day (if there is not).
10.
C
HANGES
TO
THE
C
ALCULATION
OF
I
NTEREST
10.1 Absence of quotations
Subject to Clause 10.2 ( Market
disruption
), if LIBOR is to be determined by reference to the Reference Banks but a Reference Bank does not supply a quotation
by noon (local time) on the Quotation Day, the applicable LIBOR shall be determined on the basis of the quotations of the remaining Reference Banks.
10.2 Market disruption
(a) Subject to any alternative basis agreed and consented to as contemplated by paragraphs (a) and (b) of Clause 10.3 ( Alternative
basis
of
interest
or
funding
), if a Market Disruption Event occurs in relation to a Loan for any Interest Period, then
28
the rate of interest on each Lender’s participation in that Loan for that Interest Period shall be the percentage rate per annum which is the sum of:
(i) the Margin; and
(ii) the percentage rate per annum notified to the Agent by that Lender, as soon as practicable and in any event not later than five Business Days
before interest is due to be paid in respect of that Interest Period, as the cost to that Lender of funding its participation in that Loan from whatever
source(s) it may reasonably select.
(b) In relation to a Market Disruption Event under paragraph (c)(ii) below, if the percentage rate per annum notified by a Lender pursuant to paragraph (a)
(ii) above shall be less than LIBOR or if a Lender shall fail to notify the Agent of any such percentage rate per annum, the cost to that Lender of funding
its participation in the relevant Loan for the relevant Interest Period shall be deemed, for the purposes of paragraph (a) above, to be LIBOR.
(c) In this Agreement “ Market
Disruption
Event
” means:
(i) at or about noon on the Quotation Day for the relevant Interest Period the Screen Rate is not available and none or only one of the Reference
Banks supplies a rate to the Agent to determine LIBOR for US Dollars and Interest Period; or
(ii) at 5.00 p.m. on the Business Day immediately following the Quotation Day for the relevant Interest Period, the Agent receives notifications from
a Lender or Lenders (whose participations in the relevant Loan exceed 50 per cent. of that Loan) that the cost to it of obtaining matching deposits
in the Relevant Interbank Market would be in excess of LIBOR.
(d) If a Market Disruption Event shall occur, the Agent shall promptly notify the Lenders and the Company thereof.
10.3 Alternative basis of interest or funding
(a) If a Market Disruption Event occurs and the Agent or the Company so requires, the Agent and the Company shall enter into negotiations (for a period of
not more than thirty days) with a view to agreeing a substitute basis for determining the rate of interest.
(b) Any alternative basis agreed pursuant to paragraph (a) above shall, with the prior consent of all the Lenders and the Company, be binding on all Parties.
(c) For the avoidance of doubt, in the event that no substitute basis is agreed at the end of the thirty day period, the rate of interest shall continue to be
determined in accordance with the terms of this Agreement.
10.4 Break Costs
(a) The Company shall, within five (5) Business Days of demand by a Finance Party, pay to that Finance Party its Break Costs attributable to all or any part
of a Loan or
29
Unpaid Sum being paid by the Company on a day other than the last day of an Interest Period for that Loan or Unpaid Sum.
(b) Each Lender shall, together with its demand, provide a certificate confirming the amount and the basis of calculation of its Break Costs for any Interest
Period in which they accrue.
11.
F
EES
11.1 Commitment fee
(a) The Company shall pay to the Agent (for the account of each Lender) a fee in US Dollars computed and accruing on a daily basis with effect from (but
excluding) the date falling 45 days after the date of this Agreement (the “ Commitment
Fee
Commencement
Date
”) at 0.25 per cent. per annum on that
Lender’s Available Commitment for the Availability Period at close of business (in New York) on each day of the Availability Period falling after the
Commitment Fee Commencement Date (or, if any such day shall not be a Business Day, at such close of business on the immediately preceding Business
Day).
(b) The accrued commitment fee is payable (but without double counting):
(i) on the last day of each successive period of three Months which ends during the Availability Period commencing with the period of three Months
starting on the Commitment Fee Commencement Date;
(ii) on the last day of the Availability Period; and
(iii) if a Lender’s Commitment is reduced to zero before the last day of the Availability Period, on the day on which such reduction to zero becomes
effective.
(c) No commitment fee is payable to the Agent (for the account of a Lender) on any Available Commitment of that Lender for any day on which that Lender
is a Defaulting Lender.
11.2 Upfront fee
(a) The Company shall pay to each Mandated Lead Arranger an upfront fee in the amount and at the times agreed in a Fee Letter.
(b) The Company shall pay to each Accordion Lender an upfront fee in the amount and at the times agreed in a Fee Letter.
11.3 Agency fee
The Company shall pay to the Agent (for its own account) an agency fee in the amount and at the times agreed in a Fee Letter.
30
12.
T
AX
G
ROSS
U
P
AND
I
NDEMNITIES
12.1 Tax definitions
(a) In this Clause 12:
“ FATCA
” means:
(i) sections 1471 to 1474 of the Code or any associated regulations or other official guidance;
(ii) any treaty, law or regulation of any other jurisdiction, or relating to an intergovernmental agreement between the US and any other jurisdiction,
which (in either case) facilitates the implementation of paragraph (i) above; or
(iii) any agreement pursuant to the implementation of any treaty, law or regulation referred to in paragraphs (i) or (ii) above with the US Internal
Revenue Service, the US government or any governmental or taxation authority in any other jurisdiction.
“ FATCA
Deduction
” means a deduction or withholding from a payment under a Finance Document required by FATCA.
“ Tax
Credit
” means a credit against, relief or remission for, or repayment of any Tax.
“ Tax
Deduction
” means a deduction or withholding for or on account of Tax from a payment under a Finance Document, other than a FATCA
Deduction.
“ Tax
Payment
” means an increased payment made by the Company to a Finance Party under Clause 12.2 ( Tax
gross-up
) or a payment under Clause
12.3 ( Tax
indemnity
).
(b) Unless a contrary indication appears, in this Clause 12 a reference to “ determines
” or “ determined
” means a determination made in the absolute
discretion of the person making the determination acting in good faith.
12.2 Tax gross-up
(a) All payments to be made by the Company to any Finance Party under the Finance Documents shall be made free and clear of and without any Tax
Deduction unless the Company is required to make a Tax Deduction, in which case the sum payable by the Company (in respect of which such Tax
Deduction is required to be made) shall be increased to the extent necessary to ensure that such Finance Party receives a sum net of any deduction or
withholding equal to the sum which it would have received had no such Tax Deduction been made or required to be made.
(b) The Company shall promptly upon becoming aware that it must make a Tax Deduction (or that there is any change in the rate or the basis of a Tax
Deduction) notify the Agent accordingly. Similarly, a Lender shall notify the Agent on becoming so aware in respect of a payment payable to that Lender.
If the Agent receives such notification from a Lender it shall notify the Company.
31
(c) If the Company is required to make a Tax Deduction, the Company shall make that Tax Deduction and any payment required in connection with that Tax
Deduction within the time allowed and in the minimum amount required by law.
(d) Within thirty days of making either a Tax Deduction or any payment required in connection with that Tax Deduction, the Company shall deliver to the
Agent for the Finance Party entitled to the payment evidence reasonably satisfactory to that Finance Party that the Tax Deduction has been made or (as
applicable) any appropriate payment paid to the relevant taxing authority.
12.3 Tax indemnity
(a) Without prejudice to Clause 12.2 ( Tax
gross-up
), if any Finance Party is required to make any payment of or on account of Tax on or in relation to any
sum received or receivable under the Finance Documents (including any sum deemed for purposes of Tax to be received or receivable by such Finance
Party whether or not actually received or receivable) or if any liability in respect of any such payment is asserted, imposed, levied or assessed against any
Finance Party, the Company shall, within five (5) Business Days of demand of the Agent, promptly indemnify the Finance Party which suffers a loss or
liability as a result against such payment or liability, together with any interest, penalties, costs and expenses payable or incurred in connection therewith,
provided
that
this Clause 12.3 shall not apply:
(i) to the extent a loss, liability or cost relates to a FATCA Deduction required to be made by a Party;
(ii) to any Tax imposed on and calculated by reference to the net income actually received or receivable by such Finance Party (but, for the avoidance
of doubt, not including any sum deemed for purposes of Tax to be received or receivable by such Finance Party but not actually receivable) by the
jurisdiction in which such Finance Party is incorporated; or
(iii) to any Tax imposed on and calculated by reference to the net income of the Facility Office of such Finance Party actually received or receivable by
such Finance Party (but, for the avoidance of doubt, not including any sum deemed for purposes of Tax to be received or receivable by such Finance
Party but not actually receivable) by the jurisdiction in which its Facility Office is located.
(b) A Finance Party intending to make a claim under paragraph (a) shall notify the Agent of the event giving rise to the claim, whereupon the Agent shall
notify the Company thereof.
(c) A Finance Party shall, on receiving a payment from the Company under this Clause 12.3, notify the Agent.
(d) Paragraph (a) shall not apply to the extent any Tax is not notified to the Agent by the relevant Finance Party within three (3) Months of the relevant
Finance Party becoming aware of the relevant Tax.
12.4 Tax credit
If the Company makes a Tax Payment and the relevant Finance Party determines that:
32
(a) a Tax Credit is attributable to an increased payment of which that Tax Payment forms part, to that Tax Payment or to a Tax Deduction in consequence of
which that Tax Payment was required; and
(b) that Finance Party has obtained and utilised that Tax Credit,
the Finance Party shall pay an amount to the Company which that Finance Party determines will leave it (after that payment) in no better and no worse position in
respect of its worldwide tax liabilities than it would have been in had the Company not been required to make the Tax Payment.
12.5 Stamp taxes
The Company shall:
(a) pay all stamp duty, registration and other similar Taxes payable in respect of any Finance Document, and
(b) within five (5) Business Days of demand, indemnify each Finance Party against any cost, loss or liability that Finance Party incurs in relation to any
stamp duty, registration or other similar Tax paid or payable in respect of any Finance Document.
12.6 Indirect tax
(a) All amounts set out or expressed in a Finance Document to be payable by any Party to a Finance Party shall be deemed to be exclusive of any Indirect
Tax. If any Indirect Tax is chargeable on any supply made by any Finance Party to any Party in connection with a Finance Document, that Party shall pay
to the Finance Party (in addition to and at the same time as paying the consideration) an amount equal to the amount of the Indirect Tax.
(b) Where a Finance Document requires any Party to reimburse a Finance Party for any costs or expenses, that Party shall also at the same time pay and
indemnify the Finance Party against all Indirect Tax incurred by that Finance Party in respect of the costs or expenses to the extent that the Finance Party
reasonably determines that it is not entitled to credit or repayment in respect of the Indirect Tax.
12.7 FATCA Deduction
(a) Each Party may make any FATCA Deduction it is required to make by FATCA, and any payment required in connection with that FATCA Deduction,
and no Party shall be required to increase any payment in respect of which it makes such a FATCA Deduction or otherwise compensate the recipient of
the payment for that FATCA Deduction.
(b) Each Party shall promptly, upon becoming aware that it must make a FATCA Deduction (or that there is any change in the rate or the basis of such
FATCA Deduction) notify the Party to whom it is making the payment and, in addition, shall notify the Company, the Agent and the other Finance
Parties.
33
13.
I
NCREASED
C
OSTS
13.1 Increased costs
(a) Subject to Clause 13.3 ( Exceptions
) the Company shall, within five (5) Business Days of a demand by the Agent, pay for the account of a Finance Party
the amount of any Increased Costs incurred by that Finance Party or any of its Affiliates as a result of (i) the introduction of or any change in (or in the
interpretation, administration or application of) any law or regulation by any governmental or regulatory authority or (ii) compliance with any law or
regulation made after the date of this Agreement. The terms “law” and “regulation” in this paragraph (a) shall include any law or regulation concerning
capital adequacy, prudential limits, liquidity, reserve assets or Tax.
(b) In this Agreement:
(i) “ Basel
III
” means:
(A) the agreements on capital requirements, a leverage ratio and liquidity standards contained in “Basel III: A global regulatory framework
for more resilient banks and banking systems”, “Basel III: International framework for liquidity risk measurement, standards and
monitoring” and “Guidance for national authorities operating the countercyclical capital buffer” published by the Basel Committee on
Banking Supervision in December 2010, each as amended supplemented or restated; and
(B) any further guidance or standards published by the Basel Committee on Banking Supervision relating to “Basel III”; and
(ii) “ Increased
Costs
” means:
(A) a reduction in the rate of return from the Facility or on a Finance Party’s (or its Affiliate’s) overall capital (including as a result of any
reduction in the rate of return on capital brought about by more capital being required to be allocated by such Finance Party);
(B) an additional or increased cost; or
(C) a reduction of any amount due and payable under any Finance Document,
which is incurred or suffered by a Finance Party or any of its Affiliates to the extent that it is attributable to the undertaking, funding or
performance by such Finance Party of any of its obligations under any Finance Document or any participation of such Finance Party in any Loan
or Unpaid Sum.
13.2 Increased cost claims
(a) A Finance Party intending to make a claim pursuant to Clause 13.1 ( Increased
costs
) shall notify the Agent of the event giving rise to the claim,
following which the Agent shall promptly notify the Company.
34
(b) Each Finance Party shall together with its demand provide a certificate confirming the amount and basis of calculation of its Increased Costs.
13.3 Exceptions
(a) Clause 13.1 ( Increased
costs
) does not apply to the extent any Increased Cost is:
(i) attributable to a Tax Deduction required by law to be made by the Company;
(ii) compensated for by Clause 12.3 ( Tax
indemnity
) (or would have been compensated for under Clause 12.3 ( Tax
indemnity
) but was not so
compensated solely because the exclusion in paragraph (a) of Clause 12.3 ( Tax
indemnity
) applied);
(iii) attributable to the breach by the relevant Finance Party or its Affiliates of any law or regulation or the negligence of any of them;
(iv) attributable to the implementation or application of or compliance with the “International Convergence of Capital Measurement and Capital
Standards, a Revised Framework” published by the Basel Committee on Banking Supervision in June 2004 in the form existing on the date of this
Agreement (but excluding any amendment arising out of Basel III unless published prior to the date of this Agreement) (“ Basel
II
”) or any other
law or regulation which implements Basel II (whether such implementation, application or compliance is by a government, regulator, Finance Party
or any of its Affiliates);
(v) attributable to a FATCA Deduction required to be made by a Party; or
(vi) not notified to the Agent by the relevant Finance Party within three (3) Months of such Finance Party becoming aware of the Increased Cost in
accordance with Clause 13.2(a) ( Increased
cost
claims
).
(b) In this Clause 13.3 references to a “ FATCA
Deduction
” or a “ Tax
Deduction
” have the same meaning given to such terms in Clause 12.1 ( Tax
definitions
).
14.
M
ITIGATION
BY
THE
L
ENDERS
14.1 Mitigation
(a) Each Finance Party shall, in consultation with the Company, take all reasonable steps to mitigate any circumstances which arise and which would result in
any amount becoming payable under or pursuant to, or cancelled pursuant to, any of Clause 7.1 ( Illegality
), Clause 12 (
Tax
Gross
Up
and
Indemnities
)
or Clause 13.1 ( Increased
costs
), including (but not limited to):
(i) providing such information as the Company may reasonably request in order to permit the Company to determine its entitlement to claim any
exemption or other relief (whether pursuant to a double taxation treaty or otherwise) from any obligation to make a Tax Deduction; and
(ii) in relation to any circumstances which arise following the date of this Agreement, transferring its rights and obligations under the Finance
Documents to another Affiliate or Facility Office.
35
(b) Paragraph (a) above does not in any way limit the obligations of the Company under the Finance Documents.
14.2 Limitation of liability
(a) The Company shall promptly indemnify each Finance Party for all costs and expenses reasonably incurred by that Finance Party as a result of steps taken
by it under Clause 14.1 ( Mitigation
).
(b) A Finance Party is not obliged to take any steps under Clause 14.1 ( Mitigation
) if, in the opinion of that Finance Party (acting reasonably), to do so
might reasonably be expected to be prejudicial to it.
14.3 Conduct of business by the Finance Parties
No provision of this Agreement will:
(a) interfere with the right of any Finance Party to arrange its affairs (tax or otherwise) in whatever manner it thinks fit;
(b) oblige any Finance Party to investigate or claim any credit, relief, remission or repayment available to it or the extent, order and manner of any claim;
(c) oblige any Finance Party to disclose any information relating to its affairs (tax or otherwise) or any computations in respect of Tax; or
(d) oblige any Finance Party to do or omit to do anything if it would, or might in its reasonable opinion, constitute a breach of any applicable anti-money
laundering, counter-terrorism financing, economic or trade Sanctions law or regulation.
15.
O
THER
I
NDEMNITIES
15.1 Currency indemnity
(a) If any sum due from the Company under the Finance Documents (a “ Sum
”), or any order, judgment or award given or made in relation to a Sum, has to
be converted from the currency (the “ First
Currency
”) in which that Sum is payable into another currency (the “ Second
Currency
”) for the purpose
of:
(i) making or filing a claim or proof against the Company; or
(ii) obtaining or enforcing an order, judgment or award in relation to any litigation or arbitration proceedings,
the Company shall as an independent obligation, within five (5) Business Days of demand, indemnify each Finance Party to whom that Sum is due against
any cost, loss or liability arising out of or as a result of the conversion including any discrepancy between (A) the rate of exchange used to convert that
Sum from the First Currency into the Second Currency and (B) the rate or rates of exchange available to that person at the time of its receipt of that Sum.
36
(b) The Company waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency or currency unit other than
that in which it is expressed to be payable.
15.2 Other indemnities
The Company shall, within five (5) Business Days of demand, indemnify each Finance Party against any cost, loss or liability incurred by that Finance Party as a
result of:
(a) the occurrence of any Event of Default;
(b) any written information produced or approved by the Company in connection with the Finance Documents being or being alleged to be misleading and/or
deceptive in any respect;
(c) any enquiry, investigation, subpoena (or similar order) or litigation with respect to the Company or with respect to the transactions contemplated or
financed under this Agreement;
(d) a failure by the Company to pay any amount due under a Finance Document on its due date or in the relevant currency, including without limitation, any
cost, loss or liability arising as a result of Clause 25 ( Sharing
among
the
Finance
Parties
);
(e) funding, or making arrangements to fund, its participation in a Loan requested by the Company in a Utilisation Request but not made by reason of the
operation of any one or more of the provisions of this Agreement (other than by reason of default or negligence by that Finance Party alone); or
(f) a Loan (or part of a Loan) not being prepaid in accordance with a notice of prepayment given by the Company.
15.3 Indemnity to the Agent
(a) The Company shall promptly indemnify the Agent against any cost, loss or liability incurred by the Agent (acting reasonably) as a result of:
(i) investigating any event which it reasonably believes is a Default; or
(ii) acting or relying on any notice, request or instruction which it reasonably believes to be genuine, correct and appropriately authorised.
(b) The indemnity to the Agent shall survive the termination or expiry of this Agreement and the resignation or replacement of the Agent.
16.
C
OSTS
AND
E
XPENSES
16.1 Transaction expenses
The Company shall, within five Business Days of demand, pay the Administrative Parties the amount of all reasonable costs and expenses (including legal fees of
law firms approved by the Company and subject to any agreed caps) reasonably incurred by any of them in connection with the negotiation, preparation, printing
and execution of:
37
(a) this Agreement and any other Finance Documents referred to in it; and
(b) any other Finance Documents executed after the date of this Agreement.
16.2 Amendment costs
If (a) the Company requests an amendment, waiver or consent or (b) an amendment is required pursuant to Clause 26.10 ( Change
of
currency
), the Company
shall, within five Business Days of demand, reimburse the Agent for the amount of all reasonable costs and expenses (including legal fees of law firms approved by
the Company and subject to any agreed caps) reasonably incurred by the Agent in responding to, evaluating, negotiating or complying with that request or
requirement.
16.3 Enforcement costs
The Company shall, within five Business Days of demand, pay to each Finance Party the amount of all costs and expenses (including legal fees) incurred by that
Finance Party in connection with the enforcement of, or the preservation of any rights under, any Finance Document.
17.
R
EPRESENTATIONS
The Company makes the representations and warranties set out in this Clause 17 to each Finance Party.
17.1 Status
(a) It is a corporation, duly incorporated, validly existing and, where applicable, in good standing under the laws of the Cayman Islands.
(b) It and each of its Subsidiaries has the power to own its assets and carry on its business in all material respects as it is being conducted.
(c) It is acting as principal for its own account and not as agent or trustee in any capacity on behalf of any person in relation to the Finance Documents.
17.2 Binding obligations
The obligations expressed to be assumed by it in each Finance Document are, subject to any general principles of law limiting its obligations which are generally
applicable, legal, valid, binding and enforceable obligations.
17.3 Non-conflict with other obligations
The entry into and performance by it of, and the transactions contemplated by, the Finance Documents do not and will not conflict with:
(a) any material law or regulation applicable to it;
(b) its constitutional documents; or
(c) any agreement or instrument binding upon it or any of its assets in a manner that might reasonably be expected to give rise to a Material Adverse Effect.
38
17.4 Power and authority
It has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, the Finance
Documents to which it is a party and the transactions contemplated by those Finance Documents.
17.5 Validity and admissibility in evidence
All Authorisations required:
(a) to enable it lawfully to enter into, exercise its rights and comply with its obligations in the Finance Documents to which it is a party;
(b) to make the Finance Documents to which it is a party admissible in evidence in its jurisdiction of incorporation; and
(c) for it to carry on its business, and which are material,
have been obtained or effected and are in full force and effect (or, in each case, will be when required).
17.6 Governing law and enforcement
(a) The choice of English law as the governing law of the Finance Documents will be recognised and enforced in its Relevant Jurisdiction.
(b) Any judgment obtained in England in relation to a Finance Document will be recognised and enforced in its jurisdiction of incorporation.
17.7 Deduction of Tax
It is not required under the law applicable where it is incorporated or resident or at the address specified in this Agreement to make any deduction for or on account
of Tax from any payment it may make under any Finance Document.
17.8 No filing or stamp taxes
Under the law of its jurisdiction of incorporation it is not necessary that the Finance Documents be filed, recorded or enrolled with any court or other authority in
that jurisdiction or that any stamp, registration or similar tax be paid on or in relation to the Finance Documents or the transactions contemplated by the Finance
Documents.
17.9 No default
(a) No Event of Default is continuing or could reasonably be expected to result from the making of any Utilisation.
(b) No other event or circumstance is outstanding which constitutes a default under any other agreement or instrument which is binding on it or any of its
Subsidiaries or to which its (or any of its Subsidiaries’) assets are subject which has or could reasonably be expected to have a Material Adverse Effect.
39
17.10 No misleading information
Save as disclosed in writing to the Agent on or prior to the date on which such information is provided, all written information provided by any Group Member to
the Agent after the date of this Agreement was true and accurate in all material respects as at the date it was provided and was not misleading in any material
respect as at such date.
17.11 Financial statements
(a) Its financial statements most recently supplied to the Agent or otherwise made available to the public (which, at the date of this Agreement, are the
Original Financial Statements) were prepared in accordance with the Accounting Principles consistently applied save to the extent expressly disclosed in
such financial statements.
(b) Its financial statements most recently supplied to the Agent or otherwise made available to the public (which, at the date of this Agreement, are the
Original Financial Statements) give a true and fair view of (if audited) or fairly represent (if unaudited) its consolidated financial condition and operations
as at the end of and for the relevant financial year save to the extent expressly disclosed in such financial statements.
(c) There has been no material adverse change in its business or financial condition (or the business or consolidated financial condition of the Group) since
31 March 2015.
17.12 Pari passu ranking
Its payment obligations under the Finance Documents rank at least pari
passu
with the claims of all of its other unsecured and unsubordinated creditors, except for
obligations mandatorily preferred by law applying to companies generally.
17.13 No proceedings pending or threatened
No litigation, arbitration or administrative proceedings of or before any court, arbitral body or agency which might reasonably be expected to be adversely
determined and, if adversely determined, might reasonably be expected to have a Material Adverse Effect have (to the best of its knowledge and belief) been started
or threatened against it or any of its Subsidiaries.
17.14 Taxation
(a) It is not (and none of its Subsidiaries is) overdue (taking into account any extension or grace period) in the payment of any material amount in respect of
Tax, in each case save to the extent that (i) such payment is being contested in good faith; and (ii) it has maintained adequate reserves for those Taxes.
(b) No claim or investigations are being, or to the actual knowledge of the Company, are reasonably likely to be, made or conducted against it (or any of its
Subsidiaries) with respect to Taxes which would have or are reasonably likely to have a Material Adverse Effect.
(c) It is resident for tax purposes only in the jurisdiction of its incorporation.
40
17.15 No insolvency
No event as described in Clause 20.5 ( Involuntary
proceedings
) or Clause 20.6 ( Voluntary
proceedings
) is continuing in relation to it or any Major Material
Subsidiary.
17.16 Intellectual Property
(a) It, or another Group Member, is the legal and beneficial owner of or has licensed to it all the material Intellectual Property which is required in order to
carry on the business of the Group as it is currently being conducted.
(b) It does not (nor does any of its Subsidiaries), in carrying on its businesses, infringe any Intellectual Property of any third party in any respect which has or
is reasonably likely to have a Material Adverse Effect.
(c) All formal or procedural actions (including payment of fees) required to maintain any Intellectual Property owned by it or any of its Subsidiaries have
been taken, except to the extent failure to take such actions does not or is not reasonably likely to have a Material Adverse Effect.
17.17 Immunity
(a) The entry into by it of each Finance Document constitutes, and the exercise by it of its rights and performance of its obligations under each Finance
Document will constitute, private and commercial acts performed for private and commercial purposes.
(b) It will not be entitled to claim immunity from suit, execution, attachment or other legal process in any proceedings taken in its Relevant Jurisdiction in
relation to any Finance Documents.
17.18 Authorised Signatures
Any person specified as its authorised signatory under Schedule 2 ( Conditions
precedent
) is authorised to sign Utilisation Requests, Selection Notices and other
notices on its behalf.
17.19 Good title to assets
It and each of its Subsidiaries has a good, valid and marketable title to, or valid leases or licences of, and all appropriate Authorisations to use, the assets necessary
to carry on its business as from time to time conducted the absence of which would have a Material Adverse Effect.
17.20 Bribery, Anti-corruption
(a) To the actual knowledge of Management, the business of the Group is carried on in all material respects in compliance with all, and no Group Member or
any of their directors, officers, agents (solely in their capacity as agents under, and in compliance with, a written contract with that Group Member),
affiliates or employees acts in breach of any, applicable laws relating to bribery and anti-corruption, including without limitation the UK Bribery Act 2010
and the United States Foreign Corrupt Practices Act of 1977 or any similar laws, rules or regulations issued, administered or enforced by any government
or governmental authority having jurisdiction over it.
41
(b) There are in place appropriate policies and procedures designed to promote and achieve compliance with all such applicable laws by each Group Member
and by its directors, officers and employees.
17.21 Sanctions
(a) To the actual knowledge of Management, after due and reasonable enquiry, the business of the Group is as at the date of this Agreement carried on in
compliance with all applicable Sanctions.
(b) None of the Company, any Group Member or any of its or their directors, officers, agents (solely in their capacity as agents under, and in compliance
with, a written contract with that Group Member), affiliates or employees is a person currently the subject of any Sanctions, and neither the Company nor
any Group Member is located, organised or resident in a country or territory that is the subject of any Sanctions.
17.22 Money Laundering
(a) To the actual knowledge of Management, after due and reasonable enquiry, no Group Member engages in Money Laundering or acts in breach of any
applicable laws or regulations relating to Money Laundering issued, administered or enforced by any governmental agency having jurisdiction over it.
(b) There are in place appropriate policies and procedures designed to promote and achieve compliance by each member of the Group with all applicable
laws or regulations relating to Money Laundering.
17.23 Dividends Repatriation
There is no legal or administrative hurdle (other than ordinary administrative procedures generally applicable) or contractual restriction for any WFOE which is an
Onshore Material Subsidiary to pay dividends out of its Distributable Reserves, or (subject to administrative and legal restrictions generally applicable) to make any
distribution to any of its shareholders or holders of any equity interest in it.
17.24 Times when representations made
(a) All the representations and warranties in this Clause 17 are made by the Company on the date of this Agreement.
(b) The Repeating Representations are deemed to be made by the Company on the date of each Utilisation Request and the first day of each Interest Period.
(c) Each representation or warranty deemed to be made after the date of this Agreement shall, except where the contrary is indicated, be deemed to be made
by reference to the facts and circumstances existing at the date the representation or warranty is deemed to be made.
42
18.
I
NFORMATION
U
NDERTAKINGS
The undertakings in this Clause 18 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or any
Commitment is in force.
18.1 Financial statements
In the event that the Company’s financial statements cease to be publicly available, the Company shall supply to the Agent:
(a) as soon as they become available but in any event within 120 days after the end of each of its financial years, its audited consolidated financial statements
for that financial year; and
(b) as soon as they become available but in any event within 60 days after the end of the first half of each of its financial years, its unaudited consolidated
financial statements for that financial half year.
18.2 Compliance Certificate
The Company shall supply to the Agent:
(a) annually, within 120 days after the end of each fiscal year of the Company; and
(b) upon written request by the Agent, within 14 days of such request,
a brief certificate from the principal execution officer, principal financial officer, principal account officer or treasurer as to his or her knowledge of the
Company’s compliance with all conditions and covenants under the Finance Documents (which compliance shall be determined without regarding to any
period of grace or requirement of notice provided under the Finance Documents), specifying if any Default has occurred and, in the event that any Default
has occurred, specifying each such Default and the nature and status thereof of which such person may have knowledge.
18.3 SEC filings
The Company shall supply to the Agent (in sufficient copies for all the Finance Parties, if the Agent so requests) such information, documents and other reports,
and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided in the Trust Indenture Act, provided
that, any such information, documents or reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the Exchange Act shall be supplied to the
Agent within 30 calendar days after the same is filed with the SEC, provided further that the filing of the reports specified in Section 13 or 15(d) of the Exchange
Act by an entity that is the direct or indirect parent of the Company shall satisfy the requirements of this Clause 18.3 so long as such entity is an obligor or
guarantor of the obligations under the Finance Documents, provided further that the reports of such entity shall not be required to include condensed consolidating
financial information for the Company in a footnote to the financial statements of such entity. Delivery of such reports, information and documents to the Agent is
for information purpose only and the Agent’s receipt of such shall not constitute actual or constructive notice or knowledge of any information contained therein or
determinable from information contained therein, including the Company’s compliance with any of its covenants under the Finance Documents (as to
43
which the Agent is entitled to rely exclusively on Officer’s Certificates). It is expressly understood that materials transmitted electronically by the Company to the
Agent or filed pursuant to the SEC’s EDGAR system (or any successor electronic filing system) shall be deemed supplied to the Agent for purposes of this Clause
18.3.
18.4 Notification of default
The Company shall deliver to the Agent promptly and in any event within 30 calendar days after the Company becomes aware of the occurrence of any Event of
Default or any event which, with the giving of notice of the lapse of time or both, would constitute an Event of Default, an Officer’s Certificate setting out the
details of such Event of Default or Default and the action which the Company proposes to take with respect thereto.
18.5 Rule 144A information
At any time when the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall furnish to the Lenders
and to prospective lenders, upon the requests of such Lender (through the Agent), any information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act so long as any Securities (as defined in the Indenture) are not freely transferable under the Securities Act. The Company also shall comply with the
other provisions of Section 314(a) of the Trust Indenture Act as if expressly set out herein ( mutatis
mutandis
) with references to the “indenture trustee” being
deemed as references to the Agent; references to the “indenture securities” being deemed as references to the Facility; and references to the “indenture” being
deemed as references to the Finance Documents.
18.6 “Know your customer” checks
(a) The Company shall promptly upon the request of the Agent supply, or procure the supply of, such documentation and other evidence as is reasonably
requested by the Agent (for itself or on behalf of any Lender (including for any Lender on behalf of any prospective new Lender)) in order for the Agent,
such Lender or any prospective new Lender to conduct any “know your customer” or other similar procedures under applicable laws and regulations.
(b) Each Lender shall promptly upon the request of the Agent supply, or procure the supply of, such documentation and other evidence as is reasonably
requested by the Agent (for itself) in order for the Agent to conduct any “know your customer” or other similar procedures under applicable laws and
regulations.
19.
G
ENERAL
U
NDERTAKINGS
The undertakings in this Clause 19 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or any
Commitment is in force.
44
19.1 Pari passu ranking
The Company shall ensure that its payment obligations under the Finance Documents rank and continue to rank at least pari
passu
with the claims of all of its other
unsecured and unsubordinated creditors, except for obligations mandatorily preferred by law applying to companies generally.
19.2 Negative pledge
(a) The Company shall not create or have outstanding, and shall ensure that none of the Principal Controlled Entities will create or have outstanding, any
Security upon the whole or any part of their respective present or future assets securing any Relevant Indebtedness, or create or have outstanding any
guarantee or indemnity in respect of any Relevant Indebtedness either of the Company or of any of the Company’s Principal Controlled Entities, without:
(i) at the same time or prior thereto securing or guarantee of the liabilities of the Company under the Finance Documents equally and ratably
therewith; or
(ii) providing such other Security or guarantee for the Facility as shall be approved by the Majority Lenders.
(b) Paragraph (a) above does not apply to:
(i) any Security arising or already arisen automatically by operation of law which is timely discharged or disputed in good faith by appropriate
proceedings;
(ii) any Security in respect of the obligations of any person which becomes a Principal Controlled Entity or which merges with or into the Company or
a Principal Controlled Entity after the date of the Indenture which is in existence at the date on which it becomes a Principal Controlled Entity or
merges with or into the Company or a Principal Controlled Entity;
(iii) any Security created or outstanding in favour of the Company or any Security created by any of the Controlled Entities of the Company in favour
of any of the Company’s other Controlled Entities;
(iv) any Security in respect of Relevant Indebtedness of the Company or any Principal Controlled Entity with respect to which the Company or such
Principal Controlled Entity has paid money or deposited money or securities with a paying agent, trustee or depository to pay or discharge in full the
obligations of the Company or such Principal Controlled Entity in respect thereof (other than the obligation that such money or securities so paid or
deposited, and the proceeds therefrom, be sufficient to pay or discharge such obligations in full);
(v) any Security created in connection with a project financed with, or created to secure, Non-recourse Obligations; or
(vi) any Security arising out of the refinancing, extension, renewal or refunding of any Relevant Indebtedness secured by any Security permitted by
paragraphs (ii), (v) or this paragraph (vi); provided that such Relevant Indebtedness is not increased beyond the principal amount thereof (together
with the costs of such refinancing, extension, renewal or refunding, including any accrued interest and
45
prepayment premiums or consent fees) and is not secured by any additional property or assets.
19.3 Merger, consolidation and sale of assets
The Company shall not consolidate with or merge into any other person in a transaction in which the Company is not the surviving entity, or convey, transfer or
lease its properties and assets substantially as an entirety to any person unless:
(a) any person formed by such consolidation or into or with which the Company is merged or to whom the Company has conveyed, transferred or leased its
properties and assets substantially as an entirety is a corporation, partnership, trust or other entity validly existing under the laws of the British Virgin
Islands, the Cayman Islands, the PRC or Hong Kong and such person expressly assumes, by an accession deed in form and substance reasonably
satisfactory to the Lenders, all of the Company’s obligations under the Finance Documents, including the obligations under Clause 12 ( Tax
Gross
Up
and
Indemnities
);
(b) immediately after given effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event
of Default, shall have occurred and be continuing; and
(c) the Company shall have delivered to the Agent an Officer’s Certificate and an opinion of independent legal firm of internationally recognised standing
that is reasonably acceptable to the Agent, each stating that such consolidation, merger, conveyance, transfer or lease and the accession deed referred in
paragraph (a) above comply with the Finance Documents and that all conditions precedent therein provided for relating to such transaction have been
complied with.
19.4 Sanctions
(a) No Group Member shall use any of the funds advanced under this Agreement directly or indirectly for the purpose of, or with the effect of, funding or
facilitating any activities or business activities in, with or relating to (a) Crimea, Cuba, Sudan, Iran, Myanmar (Burma), Syria or North Korea, unless such
countries are no longer the subject of Sanctions; and (b) any other countries that are, or become, the subject of Sanctions (as notified in writing by the
Agent (acting on behalf of any Lenders) to such Group Member from time to time) where such utilisation would be prohibited under Sanctions.
(b) No Group Member shall use any of the funds advanced under this Agreement directly or indirectly for the purpose of, or with the effect of, funding or
facilitating, any activities or business activities or dealings of or with any person that is/are the subject of Sanctions and/or subject to economic or trade
sanctions, restrictions or embargoes by any other governmental or supranational body notified in writing by the Agent (acting on behalf of any Lenders) to
such Group Member from time to time. This includes in particular (but without limitation) business activities involving persons named on any sanctions
lists issued by any of the aforementioned bodies.
19.5 Anti-corruption
No Group Member will directly or indirectly use the proceeds of the Facility in a manner, or lend, contribute or otherwise make available such proceeds to any
subsidiary, affiliate, joint
46
venture partner or other person or entity for the purpose of financing or facilitating any activity, that would violate applicable anti-corruption laws and regulations
including without limitation to the extent applicable the UK Bribery Act 2010 and the United States Foreign Corrupt Practices Act of 1977.
19.6 Anti-money laundering
The Company will procure that the Group will at all times have in place appropriate procedures and policies designed to promote and achieve compliance by Group
Members with all applicable laws and regulations relating to Money Laundering.
20.
E
VENTS
OF
D
EFAULT
Each of the events or circumstances set out in the following sub-clauses of this Clause 20 (other than Clause 20.8 ( Acceleration
)) is an Event of Default.
20.1 Non-payment of Principal Amount
The Company fails to pay the principal amount in respect of the Facility when due and payable (whether at the Final Repayment Date or upon acceleration or
otherwise).
20.2 Non-payment of Interest
The Company fails to pay interest in respect of any Loan within 30 days after such interest becomes due and payable.
20.3 Default under Clause 19.3 ( Merger,
consolidation
and
sale
of
assets
)
The Company defaults in the performance of or breaches its obligations under Clause 19.3 ( Merger,
consolidation
and
sale
of
assets
).
20.4 Other obligations
The Company defaults in the performance of or breaches any provision of the Finance Documents (other than a default specified in Clauses 20.1, 20.2 or 20.3
above) and such default or breach continues for a period of 30 consecutive days after written notice by the Agent.
20.5 Involuntary proceedings
A court having jurisdiction enters in the premises of:
(a) a decree or order for relief in respect of the Company or any of its Principal Controlled Entities in an involuntary case or proceeding under any applicable
bankruptcy, insolvency or other similar law; or
(b) a decree or order adjudging the Company or any of its Principal Controlled Entities bankrupt or insolvent, or approving as final and nonappealable a
petition seeking reorganisation, arrangement, adjustment, or composition of or in respect of the Company or any of its Principal Controlled Entities under
any applicable bankruptcy, insolvency or other similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator, or other similar
official of the Company or any of its Principal Controlled Entities or of any substantial part of its or their
47
respective property, or ordering the winding up or liquidation of their respective affairs (or any similar relief granted under any foreign laws),
and in any such case the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive
calendar days.
20.6 Voluntary proceedings
The Company or any of its Principal Controlled Entities:
(a) commence a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency or other similar law or of any other case
or proceeding to be adjudicated bankrupt or insolvent; or
(b) consent to the entry of a decree or order for relief in respect of the Company or any of its Principal Controlled Entities in an involuntary case or
proceeding under any applicable bankruptcy, insolvency or other similar law or the commencement of any bankruptcy or insolvency case or proceeding
against the Company or any Principal Controlled Entity; or
(c) file a petition or answer or consent seeking reorganisation or relief with respect to the Company or any of its Principal Controlled Entities under any
applicable bankruptcy, insolvency or other similar law, or consent to the filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator, or other similar official of the Company or any of its Principal Controlled Entities or of any
substantial part of its or their respective property pursuant to any such law; or
make a general assignment for the benefit of creditors in respect of any indebtedness as a result of an inability to pay such indebtedness as it becomes due,
or admit in writing of its inability to pay debts generally as they become due, or take corporate action that resolves to commence any such action.
20.7 Illegality
Any obligation of the Company under the Finance Documents or any Finance Document is or becomes or is claimed by the Company to be unenforceable, invalid
or ceases to be in full force and effect otherwise than is permitted by the terms of this Agreement.
20.8 Acceleration
2
At any time while an Event of Default is continuing the Agent may, and shall if so directed by a Lender or Lenders whose Commitments aggregate more than 66 /
% of the Total Commitments (or, if the Total Commitments have been reduced to zero, aggregated more than 66 / % of the Total Commitments immediately
2
3
3
prior to the reduction), by notice to the Company:
(a) without prejudice to the participations of any Lenders in any Loans then outstanding:
(i) cancel the Commitments (and reduce them to zero), whereupon they shall immediately be cancelled (and reduced to zero); or
48
(ii) cancel any part of any Commitment (and reduce such Commitment accordingly), whereupon the relevant part shall immediately be cancelled (and
the relevant Commitment shall be immediately reduced accordingly); and/or
(b) declare that all or part of the Loans, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be
immediately due and payable, whereupon they shall become immediately due and payable; and/or
(c) declare that all or part of the Loans be payable on demand, whereupon they shall immediately become payable on demand by the Agent on the
instructions of the Majority Lenders.
21.
C
HANGES
TO
THE
L
ENDERS
21.1 Transfers by the Lenders
(a) Subject to this Clause 21, a Lender (the “ Existing
Lender
”) may:
(i) transfer by novation any of its rights and obligations, under the Finance Documents to another bank or financial institution (the “ New
Lender
”);
and
(ii) sub-participate any of its rights and/or obligations under this Agreement.
(b) Subject to Clause 21.9 ( Security
over
Lender’s
rights
), an Existing Lender shall not be permitted to assign any of its rights under the Finance
Documents.
21.2 Conditions of transfer or sub-participation
(a) Subject to paragraph (b) below, the prior written consent of the Company is required for any transfer or sub-participation by an Existing Lender.
(b) The prior written consent of the Company is not required for a transfer by an Existing Lender if the relevant transfer is:
(i) to another Lender or an Affiliate of a Lender; or
(ii) made at a time when an Event of Default is continuing,
unless such transfer is to a Prohibited Transferee, in which case consent of the Company will be required in accordance with paragraph (a) above.
(c) Any transfer of a Lender’s rights or obligations under the Finance Documents must be in a minimum amount of US$25,000,000 (and following any such
transfer by a Lender, unless that Lender has transferred all of its rights and obligations under the Finance Documents, that Lender must retain rights and
obligations in a minimum amount of US$25,000,000 or, in each case, such lower amount with the consent of the Company.
(d) A transfer will be effective only if the procedure set out in Clause 21.5 ( Procedure
for
transfer
) is complied with.
(e) If:
49
(i) a Lender transfers any of its rights and obligations under the Finance Documents or changes its Facility Office; and
(ii) as a result of circumstances existing at the date the transfer occurs, the Company would be obliged to make a payment to the New Lender or
Lender acting through its new Facility Office under Clause 12 ( Tax
Gross
Up
and
Indemnities
) or Clause 13 ( Increased
Costs
),
then the New Lender or Lender acting through its new Facility Office is only entitled to receive payment under those clauses to the same extent as the
Existing Lender or Lender acting through its previous Facility Office would have been if the transfer had not occurred.
(f) Each New Lender, by executing the relevant Transfer Certificate, confirms, for the avoidance of doubt, that the Agent has authority to execute on its
behalf any amendment or waiver that has been approved by or on behalf of the requisite Lender or Lenders in accordance with this Agreement on or prior
to the date on which the transfer becomes effective in accordance with this Agreement and that it is bound by that decision to the same extent as the
Existing Lender would have been had it remained a Lender.
(g) The right of any Lender to make transfers and enter into sub-participations as provided by this Clause 21 is in any event subject to that Lender procuring
that Confidentiality Undertakings are entered into and delivered to the Company as provided by Clause 23 ( Disclosure
of
Information
).
21.3 Transfer fee
Unless the Agent otherwise agrees and excluding any transfer to an Affiliate of a Lender, the New Lender shall, on the date upon which a transfer takes effect, pay
to the Agent (for its own account) a fee of US$2,500.
21.4 Limitation of responsibility of Existing Lenders
(a) Unless expressly agreed to the contrary, an Existing Lender makes no representation or warranty and assumes no responsibility to a New Lender for:
(i) the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other documents;
(ii) the financial condition of the Company;
(iii) the performance and observance by the Company of its obligations under the Finance Documents or any other documents; or
(iv) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document or any other document,
and any representations or warranties implied by law are excluded.
(b) Each New Lender confirms to the Existing Lender and the other Finance Parties that it:
50
(i) has made (and shall continue to make) its own independent investigation and assessment of the financial condition and affairs of the Company and
its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the
Existing Lender in connection with any Finance Document; and
(ii) will continue to make its own independent appraisal of the creditworthiness of the Company and its related entities whilst any amount is or may be
outstanding under the Finance Documents or any Commitment is in force.
(c) Nothing in any Finance Document obliges an Existing Lender to:
(i) accept a re-transfer from a New Lender of any of the rights and obligations transferred under this Clause 21; or
(ii) support any losses directly or indirectly incurred by the New Lender by reason of the non-performance by the Company of its obligations under the
Finance Documents or otherwise.
21.5 Procedure for transfer
(a) Subject to the conditions set out in Clause 21.2 ( Conditions
of
transfer
or
sub-participation
) a transfer is effected in accordance with paragraph
(c) below when the Agent executes an otherwise duly completed Transfer Certificate delivered to it by the Existing Lender and the New Lender. The
Agent shall, subject to paragraph (b) below, as soon as reasonably practicable after receipt by it of a duly completed Transfer Certificate appearing on its
face to comply with the terms of this Agreement and delivered in accordance with the terms of this Agreement, execute that Transfer Certificate.
(b) The Agent shall not be obliged to execute a Transfer Certificate delivered to it by the Existing Lender and the New Lender unless it is satisfied that it has
completed all “know your customer” and other similar procedures that it is required (or deems desirable) to conduct in relation to the transfer to such New
Lender.
(c) Subject to Clause 21.10 ( Pro-rata
interest
settlement
), on the Transfer Date:
(i) to the extent that in the Transfer Certificate the Existing Lender seeks to transfer by novation its rights and obligations under the Finance
Documents, the Company and the Existing Lender shall be released from further obligations towards one another under the Finance Documents and
their respective rights against one another under the Finance Documents shall be cancelled (being the “ Discharged
Rights
and
Obligations
”);
(ii) the Company and the New Lender shall assume obligations towards one another and/or acquire rights against one another which differ from the
Discharged Rights and Obligations only insofar as the Company and the New Lender have assumed and/or acquired the same in place of the
Company and the Existing Lender;
(iii) the Agent, the Mandated Lead Arrangers, the New Lender and other Lenders shall acquire the same rights and assume the same obligations
between themselves as they would have acquired and assumed had the New Lender been an Original Lender with the rights and/or obligations
acquired or assumed by it
51
as a result of the transfer and to that extent the Agent, the Mandated Lead Arrangers and the Existing Lender shall each be released from further
obligations to each other under this Agreement; and
(iv) the New Lender shall become a Party as a “Lender”.
(d) The procedure set out in this Clause 21.5 shall not apply to any right or obligation under any Finance Document (other than this Agreement) if and to the
extent its terms, or any laws or regulations applicable thereto, provide for or require a different means of transfer of such right or obligation or prohibit or
restrict any transfer of such right or obligation, unless such prohibition or restriction shall not be applicable to the relevant transfer or each condition of
any applicable restriction shall have been satisfied.
21.6 Copy of Transfer Certificate or Increase Confirmation to Company
The Agent shall, as soon as reasonably practicable after it has executed a Transfer Certificate or an Increase Confirmation, send to the Company a copy of that
Transfer Certificate or Increase Confirmation.
21.7 Existing consents and waivers
A New Lender shall be bound by any consent, waiver, election or decision given or made by the relevant Existing Lender under or pursuant to any Finance
Document prior to the coming into effect of the relevant transfer to such New Lender.
21.8 Exclusion of Agent’s liability
In relation to any transfer pursuant to this Clause 21, each Party acknowledges and agrees that the Agent shall not be obliged to enquire as to the accuracy of any
representation or warranty made by a New Lender in respect of its eligibility as a Lender.
21.9 Security over Lenders’ rights
In addition to the other rights provided to Lenders under this Clause 21, each Lender may without consulting with or obtaining consent from the Company at any
time charge, assign or otherwise create Security in or over (whether by way of collateral or otherwise) all or any of its rights under any Finance Document to secure
obligations of that Lender including, without limitation, any charge, assignment or other Security to secure obligations to a federal reserve or central bank, except
that no such charge, assignment or Security shall:
(a) release a Lender from any of its obligations under the Finance Documents or substitute the beneficiary of the relevant charge, assignment or Security for
the Lender as a party to any of the Finance Documents; or
(b) require any payments to be made by the Company other than or in excess of, or grant to any person any more extensive rights than, those required to be
made or granted to the relevant Lender under the Finance Documents.
21.10 Pro-rata interest settlement
If the Agent has notified the Lenders and the Company (which it shall be under no obligation to do) that it is able to distribute interest payments on a “pro rata
basis” to Existing Lenders and New Lenders then (in respect of any transfer pursuant to Clause 21.5 ( Procedure
for
52
transfer
) the Transfer Date of which is after the date of such notification and is not on the last day of an Interest Period):
(a) any interest or fees in respect of the relevant participation which are expressed to accrue by reference to the lapse of time shall continue to accrue in
favour of the Existing Lender up to but excluding the Transfer Date (“ Accrued
Amounts
”) and shall become due and payable to the Existing Lender
(without further interest accruing on them) on the last day of the current Interest Period (or, if the Interest Period is longer than six Months, on the next of
the dates which falls at six Monthly intervals after the first day of that Interest Period); and
(b) the rights transferred by the Existing Lender will not include the right to the Accrued Amounts, so that, for the avoidance of doubt:
(i) when the Accrued Amounts become payable, those Accrued Amounts will be payable to the Existing Lender; and
(ii) the amount payable to the New Lender on that date will be the amount which would, but for the application of this Clause 21.10, have been
payable to it on that date, but after deduction of the Accrued Amounts.
22.
A
SSIGNMENT
OR
T
RANSFER
BY
THE
C
OMPANY
The Company may not assign or transfer any of its rights or obligations under any Finance Document, except with the prior written consent of all the Lenders.
23.
D
ISCLOSURE
OF
I
NFORMATION
23.1 Obligation to keep information confidential
(a) Each Finance Party must keep confidential all information relating to the Company, the Group, the Finance Documents or the Facility of which a Finance
Party becomes aware in its capacity as, or for the purpose of becoming, a Finance Party or which is received by a Finance Party in relation to, or for the
purpose of becoming a Finance Party under, the Finance Documents or the Facility from either (i) any Group Member or any of its advisers; or (ii) another
Finance Party, if the information was obtained by that Finance Party directly or indirectly from any Group Member or any of its advisers (regardless of the
form such information takes, and including information given orally and any document, electronic file or any other way of representing or recording
information which contains or is derived or copied from such information) and shall not use any such information except in connection with the Finance
Documents and the Facility.
(b) However, a Finance Party is entitled to disclose information referred to in paragraph (a) above:
(i) if such information is publicly available, other than as a direct or indirect result of a breach by that Finance Party of, or action by its Affiliates that
is contrary to the provisions of, this Clause;
(ii) if required to do so in connection with any legal, arbitration or regulatory proceedings or procedure;
53
(iii) if required to do so under any applicable law or regulation;
(iv) if required or requested to do so by any governmental, banking, taxation or other regulatory authority;
(v) to its professional advisers and any other person providing services to it (including, without limitation, any provider of administrative or settlement
services and external auditors) provided that such person is under a duty of confidentiality, contractual or otherwise, to that Finance Party;
(vi) to the head office, branches, representative offices, Subsidiaries, related corporations or Affiliate of any Finance Party (each a “ Finance
Party
Related
Party
”) and each Finance Related Party shall be permitted to disclose information as if it were a Finance Party;
(vii) to any other Finance Party;
(viii) to any person permitted in writing by the Company;
(ix) to the Company; or
(x) to the International Swaps and Derivatives Association, Inc. (“ ISDA
”) or any Credit Derivatives Determination Committee or sub-committee of
ISDA where such disclosure is required by them in order to determine whether the obligations under the Finance Documents will be, or in order for
the obligations under the Finance Documents to become, deliverable under a credit derivative transaction or other credit linked transaction which
incorporates the 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement Supplement or other provisions substantially
equivalent thereto.
(c) A Finance Party may disclose to an Affiliate or any potential transferee or Participant to which a transfer or sub-participation is not expressly prohibited
under Clause 21 ( Changes
to
the
Lenders
) but for the avoidance of doubt not to an Industrial Competitor:
(i) a copy of any Finance Document; and
(ii) any information which that Finance Party has acquired under or in connection with any Finance Document.
However, before a potential transferee or Participant may receive any confidential information, it must execute in favour of the relevant Finance Party a
Confidentiality Undertaking and deliver a copy of the same to the Company. A Participant may itself disclose the documents and information referred to
in sub-paragraphs (i) and (ii) to an Affiliate or any person with whom it may enter, or has entered into, any kind of transfer of an economic or other
interest in, or related to, this Agreement so long as the relevant Affiliate or transferee executes in favour of the relevant potential transferee or Participant a
Confidentiality Undertaking and delivers a copy of the same to the Company.
This Clause supersedes any previous agreement relating to the confidentiality of such information.
54
23.2 Relevant information
Without affecting the responsibility of the Company for information supplied by it or on its behalf in connection with any Finance Document, each of the Lenders
accepts and acknowledges that:
(a) some or all of the information (including, without limitations, financial projections and/or other financial data) that has or may be provided to the Lenders
(through the Agent or otherwise) is or may constitute relevant information in relation to the Company (the “ Price
Sensitive
Information
”) and that the
use of such information may be regulated or prohibited by applicable laws and regulations relating to, among other things, insider dealing and/or market
abuse;
(b) upon possession of the Price Sensitive Information, a Lender may be prohibited or restricted under the applicable laws and regulations from, among other
things, dealing in or counselling or procuring another person to deal in the listed securities of the Company or its derivatives, or the listed securities of a
related corporation of the Company or its derivatives, or otherwise from using or disclosing the Price Sensitive Information;
(c) none of the Agent nor the Mandated Lead Arrangers will be liable for any action taken by it under or in connection with distributing the information
provided that where it is required to act on the instructions of any Lender or Lenders, the Agent may ask for a confirmation or certificate (in form and
substance satisfactory to the Agent) confirming that the instructing Lender or Lenders is or are not in possession of any Price Sensitive Information and
that it is or they are not instructing the Agent, to act as a consequence of being in possession of any Price Sensitive Information; and
(d) any information received under or in connection with the Finance Documents shall not be used for any unlawful purpose, and each Lender shall make an
independent evaluation of, and ensure its compliance with, any legal and regulatory restrictions on the use and/or disclosure of such information.
24.
R
OLE
OF
THE
A
DMINISTRATIVE
P
ARTIES
24.1 Appointment of the Agent
(a) Each of the other Finance Parties appoints the Agent to act as its agent under and in connection with the Finance Documents.
(b) Each of the other Finance Parties authorises the Agent to exercise the rights, powers, authorities and discretions specifically given to the Agent under or
in connection with the Finance Documents together with any other incidental rights, powers, authorities and discretions.
24.2 Duties of the Agent
(a) Subject to paragraph (b) below, the Agent shall promptly forward to a Party the original or a copy of any document which is delivered to the Agent for
that Party by any other Party.
55
(b) Without prejudice to Clause 21.6 ( Copy
of
Transfer
Certificate
or
Increase
Confirmation
to
Company
), paragraph (a) above shall not apply to any
Transfer Certificate or any Increase Confirmation.
(c) Except where a Finance Document specifically provides otherwise, the Agent is not obliged to review or check the adequacy, accuracy or completeness
of any document it forwards to another Party.
(d) If the Agent receives notice from a Party referring to this Agreement, describing a Default and stating that the circumstance described is a Default, it shall
promptly notify the Finance Parties.
(e) If the Agent is aware of the non-payment of any principal, interest, commitment fee or other fee payable to a Finance Party (other than to any
Administrative Party) under this Agreement it shall promptly notify the other Finance Parties.
(f) The Agent shall provide to the Company within ten (10) Business Days of the last Business Day of each calendar month, a list (which may be in
electronic form) setting out the names of the Lenders as at that Business Day, their respective Commitments, the address and fax number (and the
department or office, if any, for whose attention any communication is to be marked) of each Lender for any communications to be made or document to
be delivered under or in connection with the Finance Documents, the electronic mail address and/or any other information required to enable the sending
and receipt by electronic mail or other electronic means to and by each Lender to whom any communication under or in connection with the Finance
Documents may be made by that means and the account details of each Lender for any payment to be distributed by the Agent to that Lender under the
Finance Documents.
(g) The Agent shall not be liable to account for interest on money paid to it by or recovered from the Company. Monies held by the Agent need not be
segregated except as required by law.
(h) The Agent’s duties under the Finance Documents are solely mechanical and administrative in nature.
24.3 Role of the Mandated Lead Arrangers
Except as specifically provided in the Finance Documents, the Mandated Lead Arrangers have no obligations of any kind to any other Party under or in connection
with any Finance Document.
24.4 No fiduciary duties
(a) The Administrative Parties shall not otherwise have, nor be deemed to have, assumed any obligations to, or trust or fiduciary relationship with, any other
party to this Agreement.
(b) None of the Agent or the Mandated Lead Arrangers shall be bound to account to any Lender for any sum or the profit element of any sum received by it
for its own account.
56
24.5 Business with the Group
(a) Any Administrative Party may accept deposits from, lend money to and generally engage in any kind of banking or other business with any Group
Member.
(b) Each of the Lenders hereby irrevocably waives, in favour of the Agent, any conflict of interest which may arise by virtue of the Agent acting in various
capacities under the Finance Documents or for other customers of the Agent. Each of the Lenders acknowledges that the Agent and its affiliates (together,
the “ Agent
Parties
”) may have interests in, or may be providing or may in the future provide financial or other services to other parties with interests
which a Lender may regard as conflicting with its interests and may possess information (whether or not material to the Lenders) other than as a result of
the Agent acting as Agent under the Finance Documents, that the Agent may not be entitled to share with any Lender.
(c) Consistent with its long-standing policy to hold in confidence the affairs of its customers, the Agent will not disclose confidential information obtained
from any Lender (without its consent) to any of the Agent’s other customers nor will it use on the Lender’s behalf any confidential information obtained
from any other customer. Without prejudice to the foregoing, each of the Lenders agrees that each of the Agent Parties may deal (whether for its own or its
customers’ account) in, or advise on, securities of any party and that such dealing or giving of advice, will not constitute a conflict of interest for the
purposes of the Finance Documents.
24.6 Rights and discretions of the Agent
(a) The Agent may rely on:
(i) any representation, notice or document believed by it to be genuine, correct and appropriately authorised; and
(ii) any statement made by a director, authorised signatory or employee of any person regarding any matters which may reasonably be assumed to be
within his knowledge or within his power to verify.
(b) The Agent may assume (unless it has received notice to the contrary in its capacity as agent for the Lenders) that:
(i) no Default has occurred (unless it has actual knowledge of a Default arising under Clause 20.1 ( Non-payment
));
(ii) any right, power, authority or discretion vested in any Party or the Majority Lenders has not been exercised; and
(iii) any notice or request made by the Company (other than a Utilisation Request) is made on behalf of and with the consent and knowledge of the
Company.
(c) The Agent may engage, pay for and rely on the advice or services of any lawyers, accountants, surveyors or other experts.
(d) The Agent may act in relation to the Finance Documents through its personnel and agents.
57
(e) The Agent may disclose to any other Party any information it reasonably believes it has received as agent under this Agreement.
(f) Without prejudice to the generality of paragraph (e) above, the Agent may disclose the identity of a Defaulting Lender to the other Finance Parties and the
Company and shall disclose the same upon the written request of the Company or the Majority Lenders.
(g) Notwithstanding any other provision of any Finance Document to the contrary, neither the Agent nor any Mandated Lead Arranger is obliged to do or
omit to do anything if it would or might in its reasonable opinion constitute a breach of any law or regulation or a breach of a fiduciary duty or duty of
confidentiality.
24.7 Majority Lenders’ instructions
(a) Unless a contrary indication appears in a Finance Document, the Agent shall (i) exercise any right, power, authority or discretion vested in it as Agent in
accordance with any instructions given to it by the Majority Lenders (or, if so instructed by the Majority Lenders, refrain from exercising any right, power,
authority or discretion vested in it as Agent) and (ii) not be liable for any act (or omission) if it acts (or refrains from taking any action) in accordance with
an instruction of the Majority Lenders.
(b) Unless a contrary indication appears in a Finance Document, any instructions given by the Majority Lenders will be binding on all the Finance Parties.
(c) The Agent may refrain from acting in accordance with the instructions of the Majority Lenders (or, if appropriate, the Lenders) or under paragraph
(d) below until it has received such security as it may require for any cost, loss or liability (together with any associated Indirect Tax) which it may incur
in complying with the instructions.
(d) In the absence of instructions from the Majority Lenders, (or, if appropriate, the Lenders) the Agent may act (or refrain from taking action) as it considers
to be in the best interest of the Lenders.
(e) The Agent is not authorised to act on behalf of a Lender (without first obtaining that Lender’s consent) in any legal or arbitration proceedings relating to
any Finance Document.
24.8 Responsibility for documentation No Administrative Party:
(a) is responsible for the adequacy, accuracy and/or completeness of any information (whether oral or written) supplied by any Administrative Party, the
Company or any other person given in or in connection with any Finance Document; or
(b) is responsible for the legality, validity, effectiveness, adequacy or enforceability of any Finance Document or any other agreement, arrangement or
document entered into, made or executed in anticipation of or in connection with any Finance Document;
58
(c) is responsible for any determination as to whether any information provided or to be provided to any Finance Party is non-public information the use of
which may be regulated or prohibited by applicable law or regulation relating to insider dealing or otherwise.
24.9 Exclusion of liability
(a) Without limiting paragraph (b) below, the Agent shall not be liable for any cost, loss or liability incurred by any Party as a consequence of:
(i) the Agent having taken or having omitted to take any action under or in connection with any Finance Document, unless directly caused by the
Agent’s gross negligence or wilful misconduct; or
(ii) any delay in the crediting to any account of an amount required under the Finance Documents to be paid by the Agent if the Agent shall have taken
all necessary steps as soon as reasonably practicable to comply with the regulations or operating procedures of any recognised clearing or settlement
system used by the Agent for the purpose of such payment.
(b) No Party (other than the Agent) may take any proceedings against any officer, employee or agent of the Agent in respect of any claim it might have
against the Agent or in respect of any act or omission of any kind by that officer, employee or agent in relation to any Finance Document and any officer,
employee or agent of the Agent may rely on this Clause subject to Clause 1.3 ( Third
party
rights
) and the provisions of the Third Parties Act.
(c) Nothing in this Agreement shall oblige any Administrative Party to conduct any “know your customer” or other procedures in relation to any person on
behalf of any Lender and each Lender confirms to each Administrative Party that it is solely responsible for any such procedures it is required to conduct
and that it shall not rely on any statement in relation to such procedures made by any Administrative Party.
(d) Notwithstanding anything to the contrary in this Agreement or in any other Finance Document, the Agent shall not in any event be liable for any loss or
damage, or any failure or delay in the performance of its obligations hereunder if it is prevented from so performing its obligations by any reason which is
beyond the control of the Agent, including, but not limited to, any existing or future law or regulation, any existing or future act of governmental
authority, Act of God, flood, war whether declared or undeclared, terrorism, riot, rebellion, civil commotion, strike, lockout, other industrial action,
general failure of electricity or other supply, aircraft collision, technical failure, accidental or mechanical or electrical breakdown, computer failure or
failure of any money transmission system or any event where, in the reasonable opinion of the Agent, performance of any duty or obligation under or
pursuant to this Agreement would or may be illegal or would result in the Agent being in breach of any law, rule, regulation, or any decree, order or
judgment of any court, or practice, request, direction, notice, announcement or similar action (whether or not having the force of law) of any relevant
government, government agency, regulatory authority, stock exchange or self-regulatory organisation to which the Agent is subject.
(e) Notwithstanding any other term or provision of this Agreement to the contrary, the Agent shall not be liable under any circumstances for special,
punitive, indirect or
59
consequential loss or damage of any kind whatsoever, whether or not foreseeable, or for any loss of business, goodwill, opportunity or profit, whether
arising directly or indirectly and whether or not forseeable, even if the Agent is actually aware of or has been advised of the likelihood of such loss or
damage and regardless of whether the claim for such loss or damage is made in negligence, for breach of contract, breach of trust, breach of fiduciary
obligation or otherwise. The provisions of this Clause shall survive the termination or expiry of this Agreement or the resignation or removal of the Agent.
24.10 Refrain from Illegality
The Agent may refrain from doing anything which in its opinion will or may be contrary to any relevant law, directive or regulation of any jurisdiction which
would or might otherwise render it liable to any person.
24.11 Lenders’ indemnity to the Agent
(a) Each Lender shall, in accordance with paragraph (b) below, indemnify the Agent within three Business Days of demand, against any cost, loss or liability
incurred by any of them (otherwise than by reason of the relevant Agent’s gross negligence or wilful misconduct) in acting as Agent under the Finance
Documents (unless the Agent has been reimbursed by the Company pursuant to a Finance Document).
(b) The proportion of such cost, loss or liability to be borne by each Lender shall be in proportion to its share of the Total Commitments or, if the Total
Commitments are then zero, to its share of the Total Commitments immediately prior to their reduction to zero.
(c) The Lenders’ indemnity to the Agent shall survive the termination or expiry of this Agreement and the resignation or replacement of the Agent.
24.12 Resignation of the Agent
(a) The Agent may resign and appoint one of its Affiliates as successor by giving notice to the other Finance Parties and the Company.
(b) Alternatively the Agent may resign by giving thirty (30) days’ notice to the other Finance Parties and the Company, in which case the Majority Lenders
(with the consent of the Company, such consent not to be unreasonably withheld) may appoint a successor Agent.
(c) If the Majority Lenders have not appointed a successor Agent in accordance with paragraph (b) above within thirty (30) days after notice of resignation
was given, the retiring Agent (with the consent of the Company, such consent not to be unreasonably withheld) may appoint a successor Agent.
(d) The retiring Agent shall make available to the successor Agent such documents and records and provide such assistance as the successor Agent may
reasonably request for the purposes of performing its functions as Agent under the Finance Documents.
(e) The Agent’s resignation notice shall take effect only upon the appointment of a successor, provided that notwithstanding any of the foregoing, the
resignation of the Agent otherwise in accordance with the provisions of this Clause 24 shall be effective immediately in the event that the Agent’s
continuing appointment would
60
conflict with (and such resignation would be required by) applicable law or the Agent’s internal policies (including without limitation with respect to
“know-your-client” and/or any conflict of interest) that in each case, cannot be resolved to the reasonable satisfaction of the Agent.
(f) Upon the appointment of a successor, the retiring Agent shall be discharged from any further obligation in respect of the Finance Documents but shall
remain entitled to the benefit of this Clause 24.12. Any successor and each of the other Parties shall have the same rights and obligations amongst
themselves as they would have had if such successor had been an original Party.
(g) After consultation with the Company, the Majority Lenders may, by notice to the Agent, require it to resign in accordance with paragraph (b) above. In
this event, the Agent shall resign in accordance with paragraph (b) above.
(h) The Agent shall resign in accordance with paragraph (b) above (and, to the extent applicable, shall use reasonable endeavours to appoint a successor
Agent pursuant to paragraph (c) above) if on or after the date which is three months before the earliest FATCA Application Date relating to any payment
to the Agent under the Finance Documents, either:
(i) the Agent fails to respond to a request under Clause 24.14 ( FATCA
information
) and the Company or a Lender reasonably believes that the
Agent will not be (or will have ceased to be) a FATCA Exempt Party on or after that FATCA Application Date;
(ii) any information supplied by the Agent pursuant to Clause 24.14 ( FATCA
information
) indicates that the Agent will not be (or will have ceased
to be) a FATCA Exempt Party on or after that FATCA Application Date; or
(iii) the Agent notifies the Company and the Lenders that the Agent will not be (or will have ceased to be) a FATCA Exempt Party on or after that
FATCA Application Date,
and (in each case) the Company or a Lender reasonably believes that a Party will be required to make a FATCA Deduction that would not be required if
the Agent were a FATCA Exempt Party, and the Company or that Lender, by notice to the Agent, requires it to resign.
For the purposes of this paragraph (h):
“
Code”
means the US Internal Revenue Code of 1986.
“
FATCA”
has the meaning given to that term in Clause 12.1 ( Tax
definitions
).
“
FATCA
Application
Date”
means:
(A) in relation to a “withholdable payment” described in section 1473(1)(A)(i) of the Code (which relates to payments of interest and certain other
payments from sources within the US), 1 July 2014;
(B) in relation to a “withholdable payment” described in section 1473(1)(A)(ii) of the Code (which relates to “gross proceeds” from the disposition
of property
61
of a type that can produce interest from sources within the US), 1 January 2019; or
(C) in relation to a “passthru payment” described in section 1471 (d)(7) of the Code not falling within paragraphs (A) or (B) above, 1 January 2019,
or, in each case, such other date from which such payment may become subject to a deduction or withholding required by FATCA as a result of any
change in FATCA after the date of this Agreement.
“
FATCA
Deduction”
has the meaning given to that term in Clause 12.1 ( Tax
definitions
).
“
FATCA
Exempt
Party”
means a Party that is entitled to receive payments free from any FATCA Deduction.
24.13 Replacement of the Agent
(a) After consultation with the Company, the Majority Lenders may, by giving thirty (30) days’ notice to the Agent (or, at any time the Agent is an Impaired
Agent, by giving any shorter notice determined by the Majority Lenders) replace the Agent or by appointing a successor Agent (acting through an office in
Hong Kong).
(b) The retiring Agent shall (at its own cost if it is an Impaired Agent and otherwise at the expense of the Lenders) make available to the successor Agent
such documents and records and provide such assistance as the successor Agent may reasonably request for the purposes of performing its functions as
Agent under the Finance Documents.
(c) The appointment of the successor Agent shall take effect on the date specified in the notice from the Majority Lenders to the retiring Agent. As from this
date, the retiring Agent shall be discharged from any further obligation in respect of the Finance Documents but shall remain entitled to the benefit of this
Clause 24.13 (and any agency fees for the account of the retiring Agent shall cease to accrue from (and shall be payable on) that date).
(d) Any successor Agent and each of the other Parties shall have the same rights and obligations amongst themselves as they would have had if such
successor had been an original Party.
24.14 FATCA Information
(a) Subject to paragraph (c) below, the Agent shall, within ten Business Days of a reasonable request by the Company or a Lender:
(i) confirm to that other Party whether it is:
(A) a FATCA Exempt Party; or
(B) not a FATCA Exempt Party; and
(ii) supply to that other Party such forms, documentation and other information relating to its status under FATCA (including its applicable
“passthru payment
62
percentage” or other information required under the US Treasury Regulations or other official guidance including intergovernmental agreements) as
that other Party reasonably requests for the purposes of that other Party’s compliance with FATCA.
(b) If the Agent confirms to another Party pursuant to paragraph (a)(i) above that it is a FATCA Exempt Party and it subsequently becomes aware that it is
not, or has ceased to be a FATCA Exempt Party, the Agent shall notify that other Party reasonably promptly.
(c) Paragraph (a) above shall not oblige the Agent to do anything which would or might in its reasonable opinion constitute a breach of:
(i) any law or regulation;
(ii) any fiduciary duty; or
(iii) any duty of confidentiality.
(d) If the Agent fails to confirm its status or to supply forms, documentation or other information requested in accordance with paragraph (a) above
(including, for the avoidance of doubt, where paragraph (c) above applies), then:
(i) if the Agent failed to confirm whether it is (and/or remains) a FATCA Exempt Party then the Agent shall be treated for the purposes of the
Finance Documents as if it is not a FATCA Exempt Party; and
(ii) if the Agent failed to confirm its applicable “passthru payment percentage” then the Agent shall be treated for the purposes of the Finance
Documents (and payments made thereunder) as if its applicable “passthru payment percentage” is 100%,
until (in each case) such time as the Agent provides the requested confirmation, forms, documentation or other information.
24.15 Confidentiality
(a) In acting as agent for the Finance Parties, each of the Agent shall be regarded as acting through its agency or, as the case may be, trustee division which
shall be treated as a separate legal person from any other of its branches, divisions or departments.
(b) If information is received by another branch, division or department of the legal person which is the Agent, it may be treated as confidential to that
branch, division or department and the Agent shall not be deemed to have notice of it.
(c) Notwithstanding any other provision of any Finance Document to the contrary, the Agent shall not be obliged to disclose to any Finance Party any
information supplied to it by the Company or any Affiliates of the Company on a confidential basis and for the purpose of evaluating whether any waiver
or amendment is or may be required or desirable in relation to any Finance Document.
63
24.16 Relationship with the Lenders
(a) Subject to Clause 26.2 ( Distributions
by
the
Agent
), the Agent may treat each Lender as a Lender, entitled to payments under this Agreement and acting
through its Facility Office unless it has received not less than five (5) Business Days prior notice from that Lender to the contrary in accordance with the
terms of this Agreement.
(b) Each Lender shall supply the Agent with any information that the Agent may reasonably specify as being necessary or desirable to enable the Agent to
perform its functions as Agent.
(c) Any Lender may by notice to the Agent appoint a person to receive on its behalf all notices, communications, information and documents to be made or
despatched to that Lender under the Finance Documents. Such notice shall contain the address, fax number and (where communication by electronic mail
or other electronic means is permitted under Clause 28.5 ( Electronic
communication
)) electronic mail address and/or any other information required to
enable the sending and receipt of information by that means (and, in each case, the department or officer, if any, for whose attention communication is to
be made) and be treated as a notification of a substitute address, fax number, electronic mail address, department and officer by that Lender for the
purposes of Clause 28.2 ( Addresses
) and paragraph (a) of Clause 28.5 ( Electronic
communication
) and the Agent shall be entitled to treat such person as
the person entitled to receive all such notices, communications, information and documents as though that person were that Lender.
24.17 Credit appraisal by the Lenders
Without affecting the responsibility of the Company for information supplied by it or on its behalf in connection with any Finance Document, each Lender
confirms to each Administrative Party that it has been, and will continue to be, solely responsible for making its own independent appraisal and investigation of all
risks arising under or in connection with any Finance Document including but not limited to:
(a) the financial condition, status and nature of each Group Member;
(b) the legality, validity, effectiveness, adequacy or enforceability of any Finance Document and any other agreement, arrangement or document entered into,
made or executed in anticipation of, under or in connection with any Finance Document;
(c) whether that Finance Party has recourse, and the nature and extent of that recourse, against any Party or any of its respective assets under or in connection
with any Finance Document, the transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into,
made or executed in anticipation of, under or in connection with any Finance Document; and
(d) the adequacy, accuracy and/or completeness of any information provided by the Agent, any Party or by any other person under or in connection with any
Finance Document, the transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into, made or
executed in anticipation of, under or in connection with any Finance Document.
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24.18 Reference Banks
If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Agent shall (with the consent of the
Company, such consent not to be unreasonably withheld) appoint another Lender or an Affiliate of a Lender or any bank approved by the Majority Lenders to
replace that Reference Bank.
24.19 Agent’s management time
Any amount payable to the Agent under Clause 15.3 ( Indemnity
to
the
Agent
), Clause 16 ( Costs
and
Expenses
) and Clause 24.11 ( Lenders’
indemnity
to
the
Agent
) shall include the reasonable cost of utilising the Agent’s management time or other resources in respect of any duties which are outside the scope of the
normal duties of the Agent under the Finance Documents and will be calculated on the basis of such reasonable daily or hourly rates as the Agent may notify to the
Parent and the Lenders, and is in addition to any fee paid or payable to the Agent under Clause 11 ( Fees
). For the avoidance of doubt, any action required to be
undertaken by the Agent in respect of or in relation to any Default, change in structure of the Facility, including acts contemplated in Clauses 16.2 ( Amendment
costs
) and 16.3 ( Enforcement
costs
) shall not be regarded as tasks falling within the scope of the normal duties of the Agent under the Finance Documents. In the
event of any dispute in respect of such cost of utilising the Agent’s management time or other resources, the costs to be paid shall be as reasonably determined by
the Agent.
24.20 Deduction from amounts payable by the Agent
If any Party owes an amount to the Agent under the Finance Documents the Agent may, after giving notice to that Party, deduct an amount not exceeding that
amount from any payment to that Party which the Agent would otherwise be obliged to make under the Finance Documents and apply the amount deducted in or
towards satisfaction of the amount owed. For the purposes of the Finance Documents that Party shall be regarded as having received any amount so deducted.
25.
S
HARING
AMONG
THE
F
INANCE
P
ARTIES
25.1 Payments to Finance Parties
If a Finance Party (a “
Recovering
Finance
Party”
) receives or recovers (whether by set off or otherwise) any amount from the Company other than in
accordance with Clause 26 ( Payment
Mechanics
) (a “
Recovered
Amount”
) and applies that amount to a payment due under the Finance Documents then:
(a) the Recovering Finance Party shall, within three Business Days, notify details of the receipt or recovery, to the Agent;
(b) the Agent shall determine whether the receipt or recovery is in excess of the amount the Recovering Finance Party would have been paid had the receipt
or recovery been received or made by the Agent and distributed in accordance with Clause 26 ( Payment
mechanics
), without taking account of any Tax
which would be imposed on the Agent in relation to the receipt, recovery or distribution; and
(c) the Recovering Finance Party shall, within three Business Days of demand by the Agent, pay to the Agent an amount (the “
Sharing
Payment”
) equal to
such receipt or recovery less any amount which the Agent determines may be retained by the
65
Recovering Finance Party as its share of any payment to be made, in accordance with Clause 26.6 ( Partial
payments
).
25.2 Redistribution of payments
The Agent shall treat the Sharing Payment as if it had been paid by the Company and distribute it between the Finance Parties (other than the Recovering Finance
Party) (the “
Sharing
Finance
Parties”
) in accordance with Clause 26.6 ( Partial
payments
) towards the obligations of the Company to the Sharing Finance
Parties.
25.3 Recovering Finance Party’s rights
(a) On a distribution by the Agent under Clause 25.2 ( Redistribution
of
payments
) of a payment received by a Recovering Finance Party from the Company,
as between the Company and the Recovering Finance Party, an amount of the Recovered Amount equal to the Sharing Payment will be treated as not
having been paid by the Company.
(b) If and to the extent that the Recovering Finance Party is not able to rely on its rights under paragraph (a) above, the Company shall be liable to the
Recovering Finance Party for a debt equal to the Sharing Payment which is immediately due and payable.
25.4 Reversal of redistribution
If any part of the Sharing Payment received or recovered by a Recovering Finance Party becomes repayable and is repaid by that Recovering Finance Party, then:
(a) each Sharing Finance Party shall, upon request of the Agent, pay to the Agent for the account of that Recovering Finance Party an amount equal to the
appropriate part of its share of the Sharing Payment (together with an amount as is necessary to reimburse that Recovering Finance Party for its proportion
of any interest on the Sharing Payment which that Recovering Finance Party is required to pay) (the “
Redistributed
Amount”
); and
(b) as between the Company and each relevant Sharing Finance Party, an amount equal to the relevant Redistributed Amount will be treated as not having
been paid by the Company.
25.5 Exceptions
(a) This Clause 25 shall not apply to the extent that the Recovering Finance Party would not, after making any payment pursuant to this Clause, have a valid
and enforceable claim against the Company.
(b) A Recovering Finance Party is not obliged to share with any other Finance Party any amount which the Recovering Finance Party has received or
recovered as a result of taking legal or arbitration proceedings, if:
(i) it notified that other Finance Party of the legal or arbitration proceedings; and
(ii) that other Finance Party had an opportunity to participate in those legal or arbitration proceedings but did not do so as soon as reasonably
practicable
66
having received notice and did not take separate legal or arbitration proceedings.
26.
P
AYMENT
M
ECHANICS
26.1 Payments to the Agent
(a) On each date on which the Company or a Lender is required to make a payment under a Finance Document, the Company or Lender shall make the same
available to the Agent (unless a contrary indication appears in a Finance Document) for value on the due date at the time and in such funds specified by
the Agent as being customary at the time for settlement of transactions in the relevant currency in the place of payment.
(b) Payment shall be made to such account in the principal financial centre of the country of that currency with such bank as the Agent specifies.
26.2 Distributions by the Agent
(a) Each payment received by the Agent under the Finance Documents for another Party shall, subject to Clause 26.3 ( Distributions
to
the
Company
), Clause
26.4 ( Clawback
), Clause 26.6 ( Partial
payments
) and Clause 24.20 ( Deduction
from
amounts
payable
by
the
Agent
) be made available by the Agent as
soon as practicable after receipt to the Party entitled to receive payment in accordance with this Agreement (in the case of a Lender, for the account of its
Facility Office):
(i) with respect to the Company and the Original Lenders, to such account as specified in Schedule 8 ( Account
details
) (or such other account as
that Party may notify to the Agent by not less than five Business Days’ notice with a bank in the principal financial centre of the country of that
currency); or
(ii) with respect to any other Party, to such account as that Party may notify to the Agent by not less than five Business Days’ notice with a bank in
the principal financial centre of the country of that currency.
(b) The Agent shall distribute payments received by it in relation to all or any part of a Loan to the Lender indicated in the records of the Agent as being so
entitled on that date PROVIDED
THAT
the Agent is authorised to distribute payments to be made on the date on which any transfer becomes effective
pursuant to Clause 21 ( Changes
to
the
Lenders
) to the Lender so entitled immediately before such transfer took place regardless of the period to which
such sums relate.
26.3 Distributions to the Company
The Agent may (with the consent of the Company or in accordance with Clause 27 ( Set-Off
)) apply any amount received by it for the Company in or towards
payment (in the currency and funds of receipt) of any amount due from the Company under the Finance Documents or in or towards purchase of any amount of any
currency to be so applied.
26.4 Clawback
(a) Where a sum is to be paid to the Agent under the Finance Documents for another Party, the Agent is not obliged to pay that sum to that other Party (or to
enter into
67
or perform any related exchange contract) until it has been able to establish to its satisfaction that it has actually received that sum.
(b) If the Agent pays an amount to another Party and it proves to be the case that the Agent had not actually received that amount, then the Party to whom that
amount (or the proceeds of any related exchange contract) was paid by the Agent shall on demand refund the same to the Agent together with interest on
that amount from the date of payment to the date of receipt by the Agent, calculated by the Agent to reflect its cost of funds.
26.5 Impaired Agent
(a) If, at any time, the Agent becomes an Impaired Agent, the Company or a Lender which is required to make a payment under the Finance Documents to the
Agent in accordance with Clause 26.1 ( Payments
to
the
Agent
) may instead either:
(i) pay that amount direct to the required recipient(s); or
(ii) if in its absolute discretion it considers that it is not reasonably practicable to pay that amount direct to the required recipient(s), pay that amount
or the relevant part of that amount to an interest-bearing account held with an Acceptable Bank and in relation to which no Insolvency Event has
occurred and is continuing, in the name of the Company or the Lender making the payment (the “
Paying
Party”
) and designated as a trust
account for the benefit of the Party or Parties beneficially entitled to that payment under the Finance Documents (the “
Recipient
Party”
or “
Recipient
Parties”
).
In each case such payments must be made on the due for payment under the Finance Documents.
(b) All interest accrued on the amount standing to the credit of the trust account shall be for the benefit of the Recipient Party or the Recipient Parties pro
rata
to their respective entitlements.
(c) A Party which has made a payment in accordance with this Clause 26.5 shall be discharged of the relevant payment obligation under the Finance
Documents and shall not take any credit risk with respect to the amounts standing to the credit of the trust account.
(d) Promptly upon the appointment of a successor Agent in accordance with Clause 24.13 ( Replacement
of
the
Agent
), each Paying Party shall (other than to
the extent that that Party has given an instruction pursuant to paragraph (e) below) give all requisite instructions to the bank with whom the trust account is
held to transfer the amount (together with any accrued interest) to the successor Agent for distribution to the relevant Recipient Party or Recipient Parties
in accordance with Clause 26.2 ( Distributions
by
the
Agent
).
(e) A Paying Party shall, promptly upon request by a Recipient Party and to the extent:
(i) that it has not given an instruction pursuant to paragraph (d) above; and
(ii) that it has been provided with the necessary information by that Recipient Party,
68
give all requisite instructions to the bank with whom the trust account is held to transfer the relevant amount (together with any accrued interest) to that
Recipient Party.
26.6 Partial payments
(a) If any Finance Party receives or recovers an amount from or in respect of the Company under or in connection with any Finance Document which amount
is insufficient to, or is not applied to, discharge all the amounts then due and payable by the Company under the Finance Documents, then the Agent shall
apply that payment towards the obligations of the Company under the Finance Documents in the following order:
(i) first
, in or towards payment pro
rata
of any unpaid fees, costs and expenses of the Agent under the Finance Documents;
(ii) secondly
, in or towards payment pro
rata
of any accrued interest, fee (other than as provided in (ii) above) or commission due but unpaid under
the Finance Documents;
(iii) thirdly
, in or towards payment pro
rata
of any principal due but unpaid under this Agreement; and
(iv) fourthly
, in or towards payment pro
rata
of any other sum due but unpaid under the Finance Documents.
(b) The Agent shall, if so directed by the Majority Lenders, vary the order set out in paragraphs (a)(ii) to (iv) above.
(c) Paragraphs (a) and (b) above will override any appropriation made by the Company.
26.7 No set-off by the Company
All payments to be made by the Company under the Finance Documents shall be calculated and be made without (and free and clear of any deduction for) set-off or
counterclaim.
26.8 Business Days
(a) Any payment which is due to be made on a day (other than a Final Repayment Date) that is not a Business Day shall be made on the next Business Day in
the same calendar month (if there is one) or the preceding Business Day (if there is not). If a Final Repayment Date is not a Business Day, any payment
which is due to be made on that Final Repayment Date shall be made on the preceding Business Day.
(b) During any extension of the due date for payment of any principal or Unpaid Sum under paragraph (a) above, interest is payable on the principal or
Unpaid Sum at the rate payable on the original due date.
26.9 Currency of account
(a) Subject to paragraphs (b) to (e) below, US Dollar is the currency of account and payment for any sum due from the Company under any Finance
Document.
69
(b) A repayment of a Loan or Unpaid Sum or a part of a Loan or Unpaid Sum shall be made in the currency in which that Loan or Unpaid Sum is
denominated on its due date.
(c) Each payment of interest shall be made in the currency in which the sum in respect of which the interest is payable was denominated when that interest
accrued.
(d) Each payment in respect of costs, expenses or Taxes shall be made in the currency in which the costs, expenses or Taxes are incurred.
(e) Any amount expressed to be payable in a currency other than US Dollar shall be paid in that other currency.
26.10 Change of currency
(a) Unless otherwise prohibited by law, if more than one currency or currency unit are at the same time recognised by the central bank of any country as the
lawful currency of that country, then:
(i) any reference in the Finance Documents to, and any obligations arising under the Finance Documents in, the currency of that country shall be
translated into, or paid in, the currency or currency unit of that country designated by the Agent (acting reasonably and after consultation with the
Company); and
(ii) any translation from one currency or currency unit to another shall be at the official rate of exchange recognised by the central bank for the
conversion of that currency or currency unit into the other, rounded up or down by the Agent (acting reasonably and after consultation with the
Company).
(b) If a change in any currency of a country occurs, this Agreement will, to the extent the Agent (acting reasonably and after consultation with the Company)
specifies to be necessary, be amended to comply with any generally accepted conventions and market practice in the Relevant Interbank Market and
otherwise to reflect the change in currency.
27.
S
ET
-O
FF
While an Event of Default is continuing, a Finance Party may set off any matured obligation due from the Company under the Finance Documents (to the extent
beneficially owned by that Finance Party) against any matured obligation owed by that Finance Party to the Company, regardless of the place of payment, booking
branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in
its usual course of business for the purpose of the set-off. That Finance Party shall promptly notify the Company of any such set-off or conversion.
28.
N
OTICES
28.1 Communications in writing
Any communication to be made under or in connection with the Finance Documents shall be made in writing and, unless otherwise stated, may be made by fax or
letter.
70
28.2 Addresses
The address and fax number (and the department or officer, if any, for whose attention the communication is to be made) of each Party for any communication or
document to be made or delivered under or in connection with the Finance Documents is:
(a) in the case of the Company that identified with its name below;
(b) in the case of each Lender that notified in writing to the Agent on or prior to the date on which it becomes a Party; and
(c) in the case of the Agent that identified with its name below,
or any substitute address, fax number or department or officer as the Party may notify to the Agent (or the Agent may notify to the other Parties, if a change is made
by the Agent) by not less than five Business Days’ notice.
28.3 Delivery
(a) Any communication or document made or delivered by one person to another under or in connection with the Finance Documents will be effective:
(i) if by way of fax, only when received in legible form; or
(ii) if by way of letter, only when it has been left at the relevant address or five Business Days after being deposited in the post postage prepaid in an
envelope addressed to it at that address;
and, if a particular department or officer is specified as part of its address details provided under Clause 28.2 ( Addresses
), if addressed to that department
or officer.
(b) Any communication or document to be made or delivered to the Agent will be effective only when actually received by the Agent and then only if it is
expressly marked for the attention of the department or officer identified with the Agent’s signature below (or any substitute department or officer as the
Agent shall specify for this purpose).
(c) All notices from or to the Company shall be sent through the Agent.
(d) Any communication or document which becomes effective, in accordance with paragraphs (a) to (c) above, after 5.00 p.m. in the place of receipt shall be
deemed only to become effective on the following day.
28.4 Communication when Agent is Impaired Agent
If the Agent is an Impaired Agent the Parties may, instead of communicating with each other through the Agent, communicate with each other directly and (while
the Agent is an Impaired Agent) all the provisions of the Finance Documents which require communications to be made or notices to be given to or by the Agent
shall be varied so that communications may be made and notices given to or by the relevant Parties directly. This provision shall not operate after a replacement
Agent has been appointed.
71
28.5 Electronic communication
(a) Any communication to be made between any two Parties under or in connection with the Finance Documents may be made by electronic mail or other
electronic means to the extent that those two Parties agree that, unless and until notified to the contrary, this is to be an accepted form of communication
and if those two Parties:
(i) notify each other in writing of their electronic mail address and/or any other information required to enable the sending and receipt of
information by that means; and
(ii) notify each other of any change to their address or any other such information supplied by them by not less than five Business Days’ notice.
(b) Any electronic communication made between those two Parties will be effective only when actually received in readable form and in the case of any
electronic communication made by a Party to the Agent only if it is addressed in such a manner as the Agent shall specify for this purpose.
(c) Any electronic communication which becomes effective, in accordance with paragraph (b) above, after 5.00 p.m. in the place of receipt shall be deemed
only to become effective on the following day.
28.6 English language
(a) Any notice given under or in connection with any Finance Document must be in English.
(b) All other documents provided under or in connection with any Finance Document must be:
(i) in English; or
(ii) if not in English, and if so required by the Agent, accompanied by a certified English translation and, in this case, the English translation will
prevail unless the document is a constitutional, statutory or other official document.
29.
C
ALCULATIONS
AND
C
ERTIFICATES
29.1 Accounts
In any litigation or arbitration proceedings arising out of or in connection with a Finance Document, the entries made in the accounts maintained by a Finance Party
are prima
facie
evidence of the matters to which they relate.
29.2 Certificates and determinations
Any certification or determination by a Finance Party of a rate or amount under any Finance Document shall set out the basis of calculation in reasonable detail and
is, in the absence of manifest error, conclusive evidence of the matters to which it relates.
72
29.3 Day count convention
Any interest, commission or fee accruing under a Finance Document will accrue from day to day and is calculated on the basis of the actual number of days elapsed
and a year of 360 days or, in any case where the practice in the Relevant Interbank Market differs, in accordance with that market practice.
30.
P
ARTIAL
INVALIDITY
If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction, neither the
legality, validity or enforceability of the remaining provisions nor the legality, validity or enforceability of such provision under the law of any other jurisdiction
will in any way be affected or impaired.
31.
R
EMEDIES
AND
WAIVERS
No failure to exercise, nor any delay in exercising, on the part of any Finance Party, any right or remedy under the Finance Documents shall operate as a waiver of
any such right or remedy or constitute an election to affirm any of the Finance Documents. No election to affirm any of the Finance Documents on the part of any
Finance Party shall be effective unless it is in writing. No single or partial exercise of any right or remedy shall prevent any further or other exercise or the exercise
of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.
32.
A
MENDMENTS
AND
WAIVERS
32.1 Required consents
(a) Subject to Clause 2.3 ( Additional
Commitments
), Clause 32.2 ( Exceptions
) and Clause 32.3 ( Extension
of
Commitments
), any term of the Finance
Documents may be amended or waived only with the consent of the Majority Lenders and the Company and any such amendment or waiver will be
binding on all Parties.
(b) The Agent may effect, on behalf of any Finance Party, any amendment or waiver permitted by this Clause 32.
32.2 Exceptions
(a) Subject to Clause 32.3 ( Extension
of
Commitments
), an amendment or waiver that has the effect of changing or which relates to:
(i) the definition of “
Majority
Lenders”
in Clause 1.1 ( Definitions
);
(ii) an extension to the date of payment of any amount under the Finance Documents;
(iii) a reduction in the Margin or a reduction in the amount of any payment of principal, interest, fees or commission payable;
73
(iv) an increase in the amount of any Commitment or an extension of the period of availability for utilisation of any Commitment or any requirement
that a cancellation of Commitments reduces the Commitments of the Lenders rateably;
(v) any provision which expressly requires the consent of all the Lenders;
(vi) Clause 2.3 ( Additional
Commitments
);
(vii) Clause 2.5 ( Finance
Parties’
rights
and
obligations
); or
(viii) Clause 21 ( Changes
to
the
Lenders
) or this Clause 32.2,
shall not be made without the prior consent of all the Lenders.
(b) An amendment or waiver which relates to the rights or obligations of any Administrative Party may not be effected without the consent of such
Administrative Party.
32.3 Extension of Commitments
(a) Subject to Clause 32.4 ( Requirement
to
offer
extension
of
Commitments
to
all
Lenders
) the Company and any Lender may agree that:
(i) the Availability Period and Final Repayment Date applicable to such participation be extended; and
(ii) if any extension as referred to in paragraph (a) applies, the Margin applicable to the relevant participation should be adjusted.
(b) Following any agreement as referred to in paragraph (a) above, the Company and the relevant Lender(s) may notify the Agent, giving details of the
applicable agreement (the “
Extension
Agreement”
).
(c) Promptly following notification in accordance with paragraph (b) above, the Agent shall, at the cost of the Company, agree with the Company on behalf of
the Finance Parties such amendments to the Finance Documents as may be necessary or appropriate to give effect to the Extension Agreement (which may
for the avoidance of doubt include designating the affected participations as loans under a new facility).
(d) The Agent shall promptly provide to each of the Finance Parties copies of any amendment agreement entered into pursuant to paragraph (c) above.
32.4 Requirement to offer extension of Commitments to all Lenders
(a) The Agent will only be authorised to enter into an amendment agreement under paragraph (c) of Clause 32.3 ( Extension
of
Commitments
) if prior to
entering into such amendment agreement it is satisfied (acting reasonably) that:
(i) each Lender shall have been offered the opportunity to participate in such extension in an amount up to that Lender’s Pro Rata Share; and
(ii) each Lender shall have been given a period of at least 10 Business Days following receipt of the proposed terms of the extension referred to in
74
paragraph (a) of Clause 32.3 ( Extension
of
Commitments
), to determine (A) whether or not to participate; and (B) if it wishes to participate, the
amount of its Commitment (up to its Pro Rata Share) that it is willing to extend on the proposed terms.
(b) For the purposes of paragraph (a) above, “
Pro
Rata
Share”
means in relation to a Lender whose Commitments are being extended, the percentage of the
aggregate amount of the relevant Extended Loans that that Lender’s Commitment bears to the Total Commitments.
(c) For the avoidance of doubt, prior to the date on which the Company and the relevant Lender(s) execute an Extension Agreement, the Company shall have
no obligation to proceed with any proposed extension.
32.5 Disenfranchisement of Defaulting Lenders
(a) For so long as a Defaulting Lender has any Available Commitment, in ascertaining:
(i) the Majority Lenders; or
(ii) whether:
(A) any given percentage (including, for the avoidance of doubt, unanimity) of the Total Commitments; or
(B) the agreement of any specified group of Lenders,
has been obtained to approve any request for a consent, waiver, amendment or other vote under the Finance Documents,
that Defaulting Lender’s Commitments will be reduced by the amount of its Available Commitments and, to the extent that that reduction results in that
Defaulting Lender’s Total Commitments being zero, that Defaulting Lender shall be deemed not to be a Lender for the purposes of paragraphs (i) and
(ii) above.
(b) For the purposes of this Clause 32.5, the Agent may assume that the following Lenders are Defaulting Lenders:
(i) any Lender which has notified the Agent that it has become a Defaulting Lender;
(ii) any Lender in relation to which it is aware that any of the events or circumstances referred to in paragraphs (a), (b) or (c) of the definition of “
Defaulting
Lender”
has occurred,
unless it has received notice to the contrary from the Lender concerned (together with any supporting evidence reasonably requested by the Agent) or the
Agent is otherwise aware that the Lender has ceased to be a Defaulting Lender.
32.6 Excluded Commitments
If:
75
(a) any Defaulting Lender fails to respond to a request for a consent, waiver, amendment of or in relation to any term of any Finance Document or any other
vote of Lenders under the terms of this Agreement within fifteen Business Days of that request being notified to the Lenders (or, if later, within 15
Business Days of the date on which the Lenders have received such information as the Agent determines is reasonably required to allow the Lenders to
respond to the relevant request in an informed manner); or
(b) any Lender which is not a Defaulting Lender fails to respond to such a request for such a vote within fifteen Business Days of that request being made,
(unless, in either case, the Company and the Agent agree to a longer time period in relation to any request):
(i) its Commitment(s) shall not be included for the purpose of calculating the Total Commitments when ascertaining whether any relevant
percentage (including, for the avoidance of doubt, unanimity) of Total Commitments has been obtained to approve that request; and
(ii) its status as a Lender shall be disregarded for the purpose of ascertaining whether the agreement of any specified group of Lenders has been
obtained to approve that request.
32.7 Replacement of Lender
(a) If:
(i) any Lender becomes a Non-Consenting Lender (as defined in paragraph (d) below); or
(ii) the Company becomes obliged to repay any amount in accordance with Clause 7.1 ( Illegality
) or to pay additional amounts pursuant to Clause
13 ( Increased
Costs
), Clause 12.2 ( Tax
gross-up
) or Clause 12.3 ( Tax
indemnity
) to any Lender; or
(iii) any Lender becomes a Defaulting Lender,
then the Company may, on fifteen (15) Business Days’ prior written notice to the Agent and such Lender, replace such Lender by requiring such Lender to
(and, to the extent permitted by law, such Lender shall) transfer pursuant to Clause 21 ( Changes
to
the
Lenders
) all (and not part only) of its rights and
obligations under this Agreement to a Lender or other bank, financial institution or other entity (a “
Replacement
Lender”
) selected by the Company,
which confirms its willingness to assume and does assume all the obligations of the transferring Lender in accordance with Clause 21 ( Changes
to
the
Lenders
) for a purchase price in cash payable at the time of transfer in an amount equal to the outstanding principal amount of such Lender’s participation
in the outstanding Utilisations and all accrued interest (to the extent that the Agent has not given a notification under Clause 21.10 ( Pro-rata
interest
settlement
)), Break Costs and other amounts payable in relation thereto under the Finance Documents.
(b) The replacement of a Lender pursuant to this Clause 32.7 shall be subject to the following conditions:
76
(i) the Company shall have no right to replace the Agent;
(ii) neither the Agent nor the Lender shall have any obligation to the Company to find a Replacement Lender;
(iii) in the event of a replacement of a Non-Consenting Lender such replacement must take place no later than 30 Business Days after the date on
which that Lender is deemed a Non-Consenting Lender;
(iv) in no event shall the Lender replaced under Clause 32.4 ( Requirement
to
offer
extension
of
Commitments
to
all
Lenders
) be required to pay or
surrender to such Replacement Lender any of the fees received by such Lender pursuant to the Finance Documents; and
(v) the Lender shall only be obliged to transfer its rights and obligations pursuant to paragraph (a) above once it is satisfied that it has complied with
all necessary “know your customer” or other similar checks under all applicable laws and regulations in relation to that transfer.
(c) A Lender shall perform the checks described in paragraph (b)(v) above as soon as reasonably practicable following delivery of a notice referred to in
paragraph (a) above and shall notify the Agent and the Company when it is satisfied that it has complied with those checks.
(d) In the event that:
(i) the Company or the Agent (at the request of the Company) has requested the Lenders to give a consent in relation to, or to agree to a waiver or
amendment of, any provisions of the Finance Documents;
(ii) the consent, waiver or amendment in question requires the approval of all the Lenders; and
(iii) Lenders whose Commitments aggregate more than eighty per cent. (80%) of the Total Commitments (or, if the Total Commitments have been
reduced to zero, aggregated more than eighty per cent. (80%) of the Total Commitments prior to that reduction) have consented or agreed to such
waiver or amendment,
then any Lender who does not and continues not to consent or agree to such waiver or amendment shall be deemed a “
Non-Consenting
Lender”
.
33.
C
OUNTERPARTS
Each Finance Document may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy
of the Finance Document.
34.
G
OVERNING
L
AW
This Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
77
35.
E
NFORCEMENT
35.1 Jurisdiction of English courts
(a) The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including any dispute relating
to any non- contractual obligation arising from or in connection with this Agreement and any dispute regarding the existence, validity or termination of
this Agreement) (a “
Dispute”
).
(b) The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the
contrary.
(c) This Clause 35.1 is for the benefit of the Finance Parties only. As a result, no Finance Party shall be prevented from taking proceedings relating to a
Dispute in any other courts with jurisdiction. To the extent allowed by law, the Finance Parties may take concurrent proceedings in any number of
jurisdictions.
35.2 Service of process
Without prejudice to any other mode of service allowed under any relevant law:
(a) the Company irrevocably appoints Law Debenture Corporate Services Limited as its agent for service of process in relation to any proceedings before the
English courts in connection with any Finance Document; and
(b) agrees that failure by a process agent to notify the Company of the process will not invalidate the proceedings concerned.
The Company expressly agrees and consent to the provision of this Clause 35.2.
35.3 Waiver of immunities
The Company irrevocably waives, to the extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended
use), all immunity on the grounds of sovereignty or other similar grounds from:
(a) suit;
(b) jurisdiction of any court;
(c) relief by way of injunction or order for specific performance or recovery of property;
(d) attachment of its assets (whether before or after judgment); and
(e) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any proceedings in the courts of any
jurisdiction (and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any immunity in any such proceedings).
This
Agreement
has
been
entered
into
on
the
date
stated
at
the
beginning
of
this
Agreement.
78
SCHEDULE
1
THE
ORIGINAL
LENDERS
79
SCHEDULE
2
CONDITIONS
PRECEDENT
1. Company
(a) A copy of the constitutional documents of the Company (comprising, its currently effective memorandum and articles of association, certificate of
incorporation (and certificate(s) of incorporation on change of name, if any), register of directors and register of mortgages and charges).
(b) A copy of a resolution of the board of directors of the Company:
(i) approving the terms of, and the transactions contemplated by, the Finance Documents to which it is a party and resolving that it execute the
Finance Documents to which it is a party;
(ii) authorising a specified person or persons to execute the Finance Documents to which it is a party on its behalf;
(iii) if applicable, authorising a specified person or persons, on its behalf, to sign and/or despatch all documents and notices (including, if
relevant, any Utilisation Request and Selection Notice) to be signed and/or despatched by it under or in connection with the Finance
Documents to which it is a party.
(c) A specimen of the signature of each person authorised by the resolution referred to in paragraph (b) above.
(d) A certificate from the Company (signed by a director) confirming that borrowing the Total Commitments would not cause any borrowing or similar limit
binding on it to be exceeded.
(e) A certificate of an authorised signatory of the Company certifying that each copy document specified in this Schedule 2 is correct, complete and in full
force and effect as at a date no earlier than the date of this Agreement.
(f) A copy of a certificate of good standing of the Company.
(g) A copy of a certificate of incumbency (or registered officer provider’s certificate) from the registered officer provider of the Company.
2. Finance Documents
Copies of the following (duly executed and delivered by all parties thereto):
(a) this Agreement;
(b) each Fee Letter (excluding any Additional Commitment Fee Letter); and
(c) the Syndication Letter.
3. Legal opinions
80
(a) A legal opinion as to English law from Freshfields Bruckhaus Deringer in relation to the documents referred to in paragraph 2 above, addressed to the
Mandated Lead Arrangers, the Agent and the Original Lenders and in form and substance satisfactory to the Mandated Lead Arrangers, the Agent and the
Original Lenders (acting reasonably).
(b) A legal opinion as to Cayman Islands law from Maples and Calder, addressed to the Mandated Lead Arrangers, the Agent and the Original Lenders and in
form and substance satisfactory to the Mandated Lead Arrangers, the Agent and the Original Lenders (acting reasonably).
4. Other documents and evidence
(a) Evidence that the process agent referred to in Clause 35.2 ( Service
of
process
) has accepted its appointment.
(b) A copy of the Group Structure Chart.
(c) Evidence that any fees, costs and expenses then due from the Company pursuant to Clause 11 ( Fees
) and Clause 16 ( Costs
and
Expenses
) have been
paid or will be paid by the first Utilisation Date.
81
SCHEDULE
3
REQUESTS
Part
A
Utilisation
Request
From:
Alibaba Group Holding Limited
To:
[Agent]
Dated:
Dear Sirs
Alibaba
Group
Holding
Limited
–
US$3,000,000,000
Facility
Agreement
dated
[
]
(the
“Facility
Agreement”)
1. We refer to the Facility Agreement. This is a Utilisation Request. Terms defined in the Facility Agreement shall have the same meaning in this Utilisation
Request.
2. We wish to borrow a Loan on the following terms:
Proposed Utilisation Date:
[ ] (or, if that is not a Business Day, the next Business Day)
Currency of Loan:
US Dollars
Amount:
Interest Period:
[ ] or, if less, the Available Facility
[ ]
3. We confirm that each applicable condition specified in Clause 4.2 ( Further
conditions
precedent
) is satisfied on the date of this Utilisation Request.
4. The proceeds of this Loan should be credited to [account].
5. This Utilisation Request is irrevocable.
Yours faithfully
authorised signatory for
Alibaba
Group
Holding
Limited
82
Part
B
Selection
Notice
From:
Alibaba Group Holding Limited
To:
[Agent]
Dated:
Dear Sirs
Alibaba
Group
Holding
Limited
–
US$3,000,000,000
Facility
Agreement
dated
[
]
(the
“Facility
Agreement”)
1. We refer to the Facility Agreement. This is a Selection Notice. Terms defined in the Facility Agreement shall have the same meaning in this Selection
Notice.
2. We refer to the following Loan[s] with an Interest Period ending on [ ·
].
3. We request that the next Interest Period for the above Loan[s] is [ ·
].
4. This Selection Notice is irrevocable.
Yours faithfully
authorised signatory for
Alibaba
Group
Holding
Limited
83
SCHEDULE
4
FORM
OF
TRANSFER
CERTIFICATE
To:
[ ] as Agent
From:
[The Existing Lender] (the “
Existing
Lender”
) and [The New Lender] (the “
New
Lender”
)
Dated:
Alibaba
Group
Holding
Limited
–
US$3,000,000,000
Facility
Agreement
dated
[
]
(the
“Facility
Agreement”)
1. We refer to Clause 21.5 ( Procedure
for
transfer
) of the Facility Agreement. This is a Transfer Certificate. Terms used in the Facility Agreement shall
have the same meaning in this Transfer Certificate.
2. The Existing Lender and the New Lender agree to the Existing Lender transferring to the New Lender by novation, and in accordance with Clause 21.5 (
Procedure
for
transfer
), all of the Existing Lender’s rights and obligations under the Facility Agreement and the other Finance Documents which relate to that
portion of the Existing Lender’s Commitment(s) and participations in Loans under the Facility Agreement as specified in the Schedule.
3. The proposed Transfer Date is [ ].
4. The Facility Office and address, fax number and attention particulars for notices of the New Lender for the purposes of Clause 28.2 ( Addresses
) are set
out in the Schedule.
5. The New Lender expressly acknowledges:
(a) the limitations on the Existing Lender’s obligations set out in paragraphs (a) and (c) of Clause 21.4 ( Limitation
of
responsibility
of
Existing
Lenders
); and
(b) that it is the responsibility of the New Lender to ascertain whether any document is required or any formality or other condition requires to be satisfied to
effect or perfect the transfer contemplated by this Transfer Certificate or otherwise to enable the New Lender to enjoy the full benefit of each Finance
Document.
6. The New Lender confirms that it is a “New Lender” within the meaning of Clause 21.1 ( Transfers
by
the
Lenders
).
7. The New Lender confirms that it is not an Industrial Competitor.
8. This Transfer Certificate may be executed in any number of counterparts and this has the same effect as if the signatures on the counterparts were on a
single copy of this Transfer Certificate.
9. This Transfer Certificate [and all non-contractual obligations arising from or in connection with this Transfer Certificate] [is/are] governed by English
law.
84
10. This Transfer Certificate has been entered into on the date stated at the beginning of this Transfer Certificate.
85
THE
SCHEDULE
Commitment/rights
and
obligations
to
be
transferred,
and
other
particulars
Commitment/participation(s)
transferred
Drawn Loan(s) participation(s) amount(s):
[ ]
Available Commitment amount:
Administration
particulars:
New Lender’s receiving account:
Address:
Telephone:
Facsimile:
Attn/Ref:
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ the
Existing
Lender
]
[ the
New
Lender
]
By:
By:
This Transfer Certificate is executed by the Agent and the Transfer Date is confirmed as [ ].
[the
Agent]
By:
Note:
It
is
the
New
Lender’s
responsibility
to
ascertain
whether
any
other
document
is
required,
or
any
formality
or
other
condition
is
required
to
be
satisfied,
to
effect
or
perfect
the
transfer
contemplated
in
this
Transfer
Certificate
or
to
give
the
New
Lender
full
enjoyment
of
all
the
Finance
Documents.
86
SCHEDULE
5
MATERIAL
SUBSIDIARIES
87
SCHEDULE
6
FORM
OF
INCREASE
CONFIRMATION
To:
Citicorp International Limited as Agent
Alibaba Group Holding Limited as the Company
From:
[the Increase
Lender
] (the “
Increase
Lender”
)
Dated:
Alibaba
Group
Holding
Limited
-
US$3,000,000,000
Facility
Agreement
dated
[
]
(the
“Facility
Agreement”)
1. We refer to the Facility Agreement. This agreement (the “
Agreement”
) shall take effect as an Increase Confirmation for the purpose of the Facility
Agreement. Terms defined in the Facility Agreement have the same meaning in this Agreement unless given a different meaning in this Agreement.
2. We refer to Clause 2.2 ( Increase
) of the Facility Agreement.
3. The Increase Lender agrees to assume and will assume all of the obligations corresponding to the Commitment specified in the Schedule (the “
Relevant
Commitment”
) as if it was an Original Lender under the Facility Agreement.
4. The proposed date on which the increase in relation to the Increase Lender and the Relevant Commitment is to take effect (the “
Increase
Date”
) is
[ ].
5. On the Increase Date, the Increase Lender becomes party to the relevant Finance Documents as a Lender.
6. The Facility Office and address, fax number and attention details for notices to the Increase Lender for the purposes of Clause 28.2 ( Addresses
) of the
Facility Agreement are set out in the Schedule.
7. The Increase Lender expressly acknowledges the limitations on the Lenders’ obligations referred to in paragraph (d) of Clause 2.2 ( Increase
) of the
Facility Agreement.
8. This Agreement may be executed in any number of counterparts and this has the same effect as if the signatures on the counterparts were on a single copy
of this Agreement.
9. This Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
10. This Agreement has been entered into on the date stated at the beginning of this Agreement.
88
THE
SCHEDULE
Relevant
Commitment/rights
and
obligations
to
be
assumed
by
the
Increase
Lender
[ insert
relevant
details
]
[ Facility
office
address,
fax
number
and
attention
details
for
notices
and
account
details
for
payments
]
[ Increase
Lender
]
By:
This Agreement is accepted as an Increase Confirmation for the purposes of the Facility Agreement by the Agent and the Increase Date is confirmed as [ ].
Agent
By:
89
SCHEDULE
7
FORM
OF
CONFIDENTIALITY
UNDERTAKING
[Letterhead
of
Existing
Lender]
To:
[insert
name
of
potential
transferee
/
Participant]
The
Facility
Agreement
Borrower:
Alibaba
Group
Holding
Limited
Date
of
Facility
Agreement:
Amount:
US$3,000,000,000
Facility
Agent:
Citicorp
International
Limited
Dear Sirs
We understand that you are considering acquiring an interest in the Facility Agreement and (if applicable) the other Finance Documents which, subject to the
Facility Agreement, may be by way of novation, the entering into, whether directly or indirectly, of a sub-participation or any other transaction under which
payments are to be made or may be made by reference to one or more Finance Documents and/or the Borrower or by way of investing in or otherwise financing,
directly or indirectly, any such novation, sub-participation or other transaction (the “
Acquisition”
).
In consideration of us agreeing to make available to you certain information, by your signature of a copy of this letter you agree as follows:
1. Confidentiality
Undertaking
You undertake:
(a) to keep the Confidential Information confidential and not to disclose it to anyone except as provided for by paragraph 2 below and to ensure that
the Confidential Information is protected with security measures and a degree of care that would apply to your own confidential information; and
(b) until the Acquisition is completed, to use the Confidential Information only for the Permitted Purpose.
2. Permitted
Disclosure
You may disclose Confidential Information:
(a) to any member of the Purchaser Group, its professional advisers, officers, directors, employees, auditors and other persons providing services to
it (provided that such person is under a duty of confidentiality in relation to the Confidential Information, professional, contractual or otherwise,
to you) to the extent necessary for the Permitted Purpose, if such person to whom the
90
Confidential Information is to be given pursuant to this paragraph is informed in writing of its confidential nature and that some or all of such
Confidential Information may be price-sensitive information, except that there shall be no such requirement to so inform if the recipient is
subject to professional obligations to maintain the confidentiality of the information or is otherwise bound by requirements of confidentiality in
relation to the Confidential Information;
(b) (i) where requested or required by any court of competent jurisdiction or any competent banking, taxation, judicial, governmental, supervisory,
regulatory or equivalent body, (ii) where required by the rules of any stock exchange on which the shares or other securities of any member of
the Purchaser Group are listed or (iii) where required by the laws or regulations of any country with jurisdiction over the affairs of any member
of the Purchaser Group;
(c) to any person:
(i) to (or through) whom you transfer (or may potentially transfer) all or any of the rights, benefits and obligations which you may acquire under
the Facility Agreement; or
(ii) with (or through) whom you enter into (or may potentially enter into) any sub-participation in relation to, or any other transaction under
which payments are to be made by reference to, the Facility, the Facility Agreement and/or one or more of the other Finance Documents or the
Borrower,
provided that such person has delivered to you (with a copy to the Company) a letter in equivalent form to this letter; and
(d) notwithstanding paragraphs (a) to (c) above, to such persons to whom, and on the same terms as, a Finance Party is permitted to disclose
Confidential Information under the Facility Agreement, as if such permissions were set out in full in this letter and as if references in those
permissions to a Finance Party were references to you.
3. Notification
of
Required
or
Unauthorised
Disclosure
To the extent practicable and permitted by law and regulation, you agree to inform us:
(a) of the full circumstances of any disclosure under paragraph 2(b) above except where such disclosure is made to any of the persons referred to in
that paragraph during the ordinary course of its supervisory or regulatory function; and
(b) upon becoming aware that Confidential Information has been disclosed in breach of this letter.
91
4. Return/Destruction
of
Confidential
Information
If you do not enter into the Acquisition and we so request in writing, you shall:
(a) return or destroy all Confidential Information supplied to you by us;
(b) destroy or permanently erase all copies of Confidential Information made by you; and
(c) use reasonable endeavours to ensure that anyone who has received any Confidential Information destroys or permanently erases such
Confidential Information and all copies made by them,
in each case save to the extent that you or the recipients are required to retain any such Confidential Information by any applicable law, rule or regulation
or by any competent banking, taxation, judicial, governmental, supervisory, regulatory or equivalent body or where required by the rules of any stock
exchange on which the shares or other securities of any member of the Purchaser Group are listed or in accordance with internal policy, or where the
Confidential Information has been disclosed under paragraph 2(b) above.
However, you and any such recipients shall not be under any obligation to return, destroy or permanently erase any Confidential Information:
(i) contained in any work produced by any member of the Purchaser Group, its professional advisers or other persons providing services to it, to the
extent that any of them are required by any applicable law, rule or regulation or by any competent banking, taxation, judicial, governmental,
supervisory, regulatory or equivalent body or stock exchange or by internal policy to retain such work; or
(ii) contained in any computer record or file which has been created by or pursuant to any automatic electronic archiving system or IT back-up
procedure.
5. Continuing
Obligations
The obligations in this letter are continuing and, in particular, shall survive the termination of any discussions or negotiations between you and us.
Notwithstanding the previous sentence, the obligations in this letter shall cease on the earliest of:
(a) if you become a party to the Facility Agreement as a lender of record, the date on which you become such a party to the Facility Agreement;
(b) if you enter into the Acquisition but it does not result in you becoming a party to the Facility Agreement as a lender of record, the date falling
twelve (12) months after the date on which all of your rights and obligations contained in the documentation entered into to implement that
Acquisition have terminated;
92
(c) in any other case, the date falling twelve (12) months after the date of your final receipt (in whatever manner) of any Confidential Information.
6. No
Representation;
Consequences
of
Breach,
etc
You acknowledge and agree that:
(a) neither we nor any member of the Borrower Group nor any of our or their respective officers, employees, affiliates or advisers (each a “
Relevant
Person”
) (i) make any representation or warranty, express or implied, as to, or assume any responsibility for, the accuracy, reliability
or completeness of any of the Confidential Information or any other information supplied by us or any member of the Borrower Group or the
assumptions on which it is based or (ii) shall be under any obligation to update or correct any inaccuracy in the Confidential Information or any
other information supplied by us or any member of the Borrower Group or be otherwise liable to you or any other person in respect of the
Confidential Information or any such information; and
(b) we or members of the Borrower Group may be irreparably harmed by the breach of the terms of this letter and damages may not be an adequate
remedy; each Relevant Person may be granted an injunction or specific performance for any threatened or actual breach by you of the provisions
of this letter.
If you become a party to the Finance Documents, the terms of paragraph (a) above are without prejudice to your right to enforce and enjoy any term of any
Finance Document on and from the date on which you become a party to the Finance Documents.
7. No
Waiver;
Amendments,
etc
This letter sets out the full extent of your obligations of confidentiality owed to us in relation to the information the subject of this letter and supersedes
any previous agreement, whether express or implied, regarding the information the subject of this letter. No failure or delay in exercising any right, power
or privilege under this letter will operate as a waiver thereof nor will any single or partial exercise of any right, power or privilege preclude any further
exercise thereof or the exercise of any other right, power or privilege under this letter. The terms of this letter and your obligations under this letter may be
amended or modified only by written agreement between you and us.
8. Inside
Information
You acknowledge that some or all of the Confidential Information is or may be price-sensitive information and that the use of such information may be
regulated or prohibited by applicable legislation including securities laws relating to insider dealing or market misconduct and you undertake not to use
any Confidential Information for any unlawful purpose.
93
9. Nature
of
Undertakings
The undertakings given by you in this letter are given to us and (without implying any fiduciary obligations on our part) are also given for the benefit of
each member of the Borrower Group.
10. Third
party
rights
Subject to this paragraph 10 and to paragraphs 6 and 9, a person who is not a party to this letter has no right under the Contracts (Rights of Third Parties)
Act 1999 (the “
Third
Parties
Act”
) to enforce or to enjoy the benefit of any term of this letter.
The Relevant Persons and each member of the Borrower Group may enjoy the benefit of the terms of paragraphs 6 and 9 subject to and in accordance with
this paragraph 10 and the provisions of the Third Parties Act.
Notwithstanding any provisions of this letter, the parties to this letter do not require the consent of any Relevant Person or any member of the Borrower
Group to rescind or vary this letter at any time.
11. Governing
Law
and
Jurisdiction
This letter (including the agreement constituted by your acknowledgement of its terms) and all non-contractual obligations arising from or in connection
with this letter shall be governed by and construed in accordance with the laws of England and the courts of England have non-exclusive jurisdiction to
settle any dispute arising out of or in connection with this letter (including a dispute relating to any non-contractual obligation arising out of or in
connection with this letter).
12. Definitions
In this letter (including the acknowledgement set out below):
“
Borrower
Group”
means the Borrower and each of its Holding Companies and Subsidiaries and each Subsidiary of each of its Holding Companies.
“
Confidential
Information”
means the Finance Documents, any information relating to the Borrower, Borrower Group, the Finance Documents or the
Facility (including without limitation the information package and any other information provided in relation to the Facility) provided to you by us or any
of our affiliates or advisers, in whatever form, and:
(a) includes information given orally and any document, electronic file or any other way of representing or recording information which contains or
is derived or copied from such information, but
(b) excludes information that:
(i) is or becomes public knowledge other than as a direct or indirect result of any breach by you of this letter, or
(ii) is known by you before the date the information is provided to you by us or any of our affiliates or advisers, or
94
(iii) is lawfully disclosed to you, other than from a source which is connected with the Borrower Group, after the date it is provided to you
by us or any of our affiliates or advisers,
and which, in the case of sub-paragraphs (b)(ii) and (b)(iii), as far as you are aware, has not been disclosed in violation of, and is not otherwise
subject to, any obligation of confidentiality.
“
Facility
Agreement”
means the Facility Agreement described in the heading of this letter.
“
Finance
Documents”
means the documents defined in the Facility Agreement as Finance Documents.
“
Finance
Party”
means the parties defined in the Facility Agreement as Finance Parties.
“
Holding
Company”
means, in relation to any company or corporation, any other company or corporation in respect of which it is a Subsidiary.
“
Permitted
Purpose”
means considering and evaluating whether to enter into the Acquisition.
“
Purchaser
Group”
means you, your head office and any other branch, each of your Holding Companies and Subsidiaries and each Subsidiary of each
of your Holding Companies.
“
Subsidiary”
means, in relation to any company or corporation, a company or corporation:
(a) which is controlled, directly or indirectly, by the first mentioned company or corporation;
(b) more than half the issued share capital of which is beneficially owned, directly or indirectly, by the first mentioned company or corporation; or
(c) which is a Subsidiary of another Subsidiary of the first mentioned company or corporation,
and, for this purpose, a company or corporation shall be treated as being controlled by another if that other company or corporation is able to direct its
affairs and/or to control the composition of its board of directors or equivalent body.
Please acknowledge your agreement to the above by signing and returning the enclosed copy.
Yours faithfully
for and on behalf of
[ Existing
Lender
]
To: [ Existing
Lender
]
95
The Borrower and each other member of the Borrower Group
We acknowledge and agree to the above:
for and on behalf of
[
potential
transferee
/
Participant
]
96
SCHEDULE
8
ACCOUNT
DETAILS
97
SCHEDULE
9
FORM
OF
ADDITIONAL
COMMITMENT
NOTICE
Additional
Commitment
Notice
number:
[1/2/3
...]
To: The Agent
From: The Company and the Accordion Lenders named herein
Dated: [ ·
]
Dear Sirs,
Alibaba
Group
Holding
Limited
-
US$3,000,000,000
Facility
Agreement
dated
[
]
(the
“Facility
Agreement”)
1. We refer to the Facility Agreement. This notice shall take effect as an Additional Commitment Notice for the purpose of the Facility Agreement. Unless
otherwise defined herein, terms used in the Facility Agreement shall have the same meaning in this notice.
2. We refer to Clause 2.3 ( Additional
Commitments
) of the Facility Agreement.
3. We have agreed with the following Accordion Lenders that they commit Additional Commitments as follows:
Name
of
Accordion
Lender
Existing
Lenders
(yes/no)
Additional
Commitment
(US$)
4. The date on which the Additional Commitments referred to above are confirmed is [DATE]
.
5. By countersigning this notice:
TOTAL:
(a) each Accordion Lender agrees to commit the Additional Commitments set out against its name in paragraph 3 above and assume all of the obligations
corresponding to such Additional Commitments as a Lender under the Facility Agreement;
(b) each Accordion Lender which is not an existing Lender under the Facility Agreement expressly confirms and acknowledges the following:
(i) it is not an Industrial Competitor;
98
(ii) on and with effect from the date referred to in paragraph 4 above, it shall become party to the Facility Agreement and the other relevant Finance
Documents as a Lender;
(iii) its Facility Office and address, fax number and attention details for notices for the purposes of Clause 28.2 ( Addresses
) of the Facility
Agreement are set out in the Schedule to this notice; and
(iv) it is its own responsibility to ascertain whether any document is required or any formality or other condition is required to be satisfied to enable
it to enjoy the full benefit of each Finance Document.
6. This notice may be executed in any number of counterparts and this has the same effect as if the signatures on the counterparts were on a single copy of
this notice.
7. This notice and all non-contractual obligations arising from or in connection with this notice are governed by English law.
8. This notice has been entered into on the date stated at the beginning of this notice.
Yours faithfully
authorised signatory for
Alibaba
Group
Holding
Limited
Countersigned by
[ NAME
OF
EACH
ACCORDION
LENDER
]
99
THE
SCHEDULE
[ insert
relevant
details
for
each
Accordion
Lender
which
is
not
an
existing
Lender
under
the
Facility
Agreement
]
[ Facility
office
address,
fax
number
and
attention
details
for
notices
and
account
details
for
payments
]
This notice is accepted as an Additional Commitment Notice for the purposes of the Facility Agreement by the Agent.
Agent
By:
SIGNATORIES
The
Company
ALIBABA
GROUP
HOLDING
LIMITED
100
By:
Address:
Fax:
Telephone:
Email:
[Signature
Page
to
the
Facility
Agreement
(Company)]
The
Mandated
Lead
Arrangers
AUSTRALIA
AND
NEW
ZEALAND
BANKING
GROUP
LIMITED
By:
Address:
Fax:
Telephone:
Email:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
CITIGROUP
GLOBAL
MARKETS
ASIA
LIMITED
Asghar Ali
Managing Director
By:
Address:
Fax:
Telephone:
Email:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
CREDIT
SUISSE
AG,
SINGAPORE
BRANCH
Karen Ng
Vice President
General Counsel Division
Wu Jun Wei
Director
By:
Address:
Fax:
Telephone:
Email:
Attention:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
DEUTSCHE
BANK
AG,
SINGAPORE
BRANCH
Haltham Ghattas
Director
Steffen Limbach
By:
Address:
Fax:
Telephone:
Email:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
GOLDMAN
SACHS
BANK
USA
By:
Address:
Fax:
Telephone:
Email:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
JPMORGAN
CHASE
BANK,
N.A.,
HONG
KONG
BRANCH
By:
Address:
Fax:
Telephone:
Email:
Attention:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
MIZUHO
BANK,
LTD.
Gabriel Tang
By:
Address:
Fax:
Telephone:
Email:
Attention:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
MORGAN
STANLEY
ASIA
LIMITED
Andrew Schwendiman
Managing Director
By:
Address:
Fax:
Telephone:
Email:
Attention:
[Signature
Page
to
the
Facility
Agreement
(Mandated
Lead
Arrangers)]
The
Original
Lenders
AUSTRALIA
AND
NEW
ZEALAND
BANKING
GROUP
LIMITED
By:
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
CITIBANK
N.A.,
HONG
KONG
BRANCH
By:
Asghar Ali
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
CREDIT
SUISSE
AG,
SINGAPORE
BRANCH
By:
Colin Rice
Director
General Counsel Division
Wu Jun Wei
Director
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
DEUTSCHE
BANK
AG,
SINGAPORE
BRANCH
By:
Haitharm Ghattas
Director
Steffen Limbach
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
GOLDMAN
SACHS
BANK
USA
By:
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
GOLDMAN
SACHS
INTERNATIONAL
BANK
By:
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
JPMORGAN
CHASE
BANK,
N.A.,
HONG
KONG
BRANCH
By:
Neha Rastogi
Executive Director
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
MIZUHO
BANK,
LTD.,
HONG
KONG
BRANCH
By:
Davis Chai
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
MORGAN
STANLEY
BANK,
N.A.
By:
Name: Michael King
Title: Authorized Signatory
[Signature
Page
to
the
Facility
Agreement
(Original
Lenders)]
The
Agent
CITICORP
INTERNATIONAL
LIMITED
By:
Address:
Fax:
Telephone:
Email:
Attention:
Terence Young
Vice President
[Signature
Page
to
the
Facility
Agreement
(Agent)]
3
May
2016
Exhibit
4.48
EXECUTION
VERSION
ALIBABA
GROUP
HOLDING
LIMITED
as the Company
THE
FINANCIAL
INSTITUTIONS
LISTED
HEREIN
as Original
Lenders
THE
FINANCIAL
INSTITUTIONS
LISTED
HEREIN
as New
Lenders
CITICORP
INTERNATIONAL
LIMITED
as Agent
SYNDICATION
AND
AMENDMENT
AGREEMENT
in
respect
of
a
US$3,000,000,000
Facility
Agreement
dated
9
March
2016
CLAUSE
PAGE
CONTENTS
DEFINITIONS AND INTERPRETATION
TRANSFER BY NOVATION AND AMENDMENTS
CONSENT OF THE NEW LENDERS
CONSENTS AND WAIVERS
MISCELLANEOUS
GOVERNING LAW
ENFORCEMENT
1.
2.
3.
4.
5.
6.
7.
SCHEDULE 1 THE PARTIES
PART A THE ORIGINAL LENDERS
PART B THE NEW LENDERS
SCHEDULE 2 THE LENDERS
SCHEDULE 3 EFFECTIVE DATE PARTICIPATIONS
SCHEDULE 4 AMENDMENTS TO ORIGINAL FACILITY AGREEMENT
SCHEDULE 5 ACCOUNT DETAILS
1
2
5
5
5
6
6
7
7
8
9
10
11
13
THIS
SYNDICATION
AND
AMENDMENT
AGREEMENT
(this Agreement
) is dated 3 May 2016 and made between:
(1) ALIBABA
GROUP
HOLDING
LIMITED
(the Company
);
(2) THE
FINANCIAL
INSTITUTIONS
listed in Part A of Schedule 1 ( The
Parties
) as original lenders (the Original
Lenders
);
(3) THE
FINANCIAL
INSTITUTIONS
listed in Part B of Schedule 1 ( The
Parties
) as new lenders (the New
Lenders
); and
(4) CITICORP
INTERNATIONAL
LIMITED
as facility agent of the Finance Parties (other than itself) (the Agent
).
WHEREAS:
(A) The Company, the Agent and the Original Lenders entered into a facility agreement dated 9 March 2016 (the Original
Facility
Agreement
).
(B) Each Original Lender as part of syndication is transferring by way of novation certain of its Commitments, rights and obligations under the Original
Facility Agreement to the New Lenders on the terms set out in this Agreement.
(C) The parties to this Agreement have agreed that on the Effective Date (as defined below) the Total Commitments under the Original Facility Agreement
will be increased from US$3,000,000,000 to US$4,000,000,000 and the Original Facility Agreement shall be amended on the terms set out in this
Agreement.
IT
IS
AGREED
as follows:
1.
DEFINITIONS
AND
INTERPRETATION
1.1 In this Agreement:
Amended
Facility
Agreement
means the Original Facility Agreement, as amended by this Agreement.
Effective
Date
means 5 May 2016, provided that on or before such date, the Agent has given the notification referred to in paragraph (c)(i) of Clause 2.6 ( New
Lenders’
participations
).
Party
means a party to this Agreement.
1.2 Save as defined in this Agreement, words and expressions defined in the Original Facility Agreement shall have the same meanings in this Agreement.
1.3 Clauses 1.2 ( Construction
) and 1.3 ( Third
Party
rights
) of the Original Facility Agreement shall be deemed to be incorporated into this Agreement
save that references in the Original Facility Agreement to “this Agreement” shall be construed as references to this Agreement.
1.4 This Agreement constitutes a Finance Document for the purposes of the Original Facility Agreement and the Amended Facility Agreement.
1
2.
TRANSFER
BY
NOVATION
AND
AMENDMENTS
2.1 Transfer by novation and amendments
With effect from the Effective Date:
(a) each Original Lender shall transfer by novation in accordance with Clause 21.5 ( Procedure
for
transfer
) of the Original Facility Agreement (except to
the extent amended or varied pursuant to the terms of this Agreement) all or part of its Commitment, and the corresponding rights and obligations under
the Original Facility Agreement to a New Lender;
(b) in addition to the Commitments, and the corresponding rights and obligations being transferred to the New Lenders in accordance with paragraph
(a) above, the Original Lenders and the New Lenders shall provide certain additional Commitments; and
(c) the Original Facility Agreement shall be amended as set out in Schedule 4 ( Amendments
to
Original
Facility
Agreement
),
so that on the Effective Date:
(i) each New Lender will become a Lender under the Amended Facility Agreement with the Commitment as set out in the column opposite its
name in Schedule 2 ( The
Lenders
);
(ii) each Original Lender’s Commitment shall be reduced to the respective amount set out in the column opposite its name in Schedule 2 ( The
Lenders
);
(iii) each Party agrees that this Agreement constitutes a Transfer Certificate and consents to the New Lenders becoming Lenders under the
Amended Facility Agreement;
(iv) each New Lender will become a Lender under the Amended Facility Agreement with a participation in each Loan which was made before the
Effective Date and which is outstanding on the Effective Date as set out in the column opposite its name in Schedule 3 ( Effective
Date
Participations
);
(v) each Original Lender’s participation in each Loan which was made before the Effective Date and which is outstanding on the Effective Date
shall be as set out in the column opposite its name in Schedule 3 ( Effective
Date
Participations
); and
(vi) the Total Commitments under the Original Facility Agreement (being US$3,000,000,000 at the date of this Agreement) shall be increased to
US$4,000,000,000.
2.2 Procedure for transfer by novation
The transfer by novation set out in paragraph (a) of Clause 2.1 ( Transfer
by
novation
and
amendments
) above shall take effect on the Effective Date so that:
(a) to the extent that in Clause 2.1 ( Transfer
by
novation
and
amendments
) an Original Lender seeks to transfer by novation its rights and obligations under
the Original
2
Facility Agreement to a New Lender, the Company and such Original Lender shall be released from further obligations towards one another under the
Finance Documents and their respective rights against one another shall be cancelled (being the Discharged
Rights
and
Obligations
);
(b) the Company and such New Lender shall assume obligations towards one another and/or acquire rights against one another which differ from the
Discharged Rights and Obligations only insofar as the Company and such New Lender have assumed and/or acquired the same in place of the Company
and such Original Lender;
(c) the Agent, such New Lender and the other Lenders shall acquire the same rights and assume the same obligations between themselves as they would have
acquired and assumed had such New Lender been an Original Lender with the rights and/or obligations acquired or assumed by it as a result of the transfer
by novation and to that extent the Agent and such Original Lender shall each be released from further obligations to each other under the Finance
Documents; and
(d) such New Lender shall become a party to the Amended Facility Agreement as a Lender
.
2.3 Amounts due on or before the Effective Date
Any amounts payable to the Original Lenders by the Company pursuant to any Finance Document (including, without limitation, all interest, fees and commission
payable on the Effective Date) in respect of any period ending on or before the Effective Date shall be for the account of the Original Lenders and none of the New
Lenders shall have any interest in, or any rights in respect of, any such amount.
2.4 Limitation of responsibility of Original Lenders
(a) On the Effective Date, each New Lender confirms to the Original Lenders that it:
(i) has received a copy of the Original Facility Agreement together with such other information as it has required in connection with the
transaction contemplated under this Agreement and the Original Facility Agreement;
(ii) has made (and shall continue to make) its own independent investigation and assessment of the financial condition and affairs of the Company
and its related entities in connection with its participation in this Agreement and the Original Facility Agreement and has not relied exclusively
on any information provided to it by any Original Lender in connection with any Finance Document;
(iii) will continue to make its own independent appraisal of the creditworthiness of the Company and its related entities whilst any amount is or
may be outstanding under the Finance Documents or any Commitment is in force; and
(iv) is a New
Lender
within the meaning of Clause 21.1 ( Transfer
by
the
Lenders
) of the Original Facility Agreement and that it is not a
Prohibited Transferee.
3
(b) Unless expressly agreed to the contrary, no Original Lender or Administrative Party makes any representation or warranty or assumes any responsibility
to the New Lenders for:
(i) the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other documents;
(ii) the financial condition of the Company;
(iii) the performance and observance by the Company of its obligations under the Finance Documents or any other documents; or
(iv) the accuracy of any statements (whether written or oral) made in or in connection with the Finance Documents or any other document,
and any representations or warranties implied by law are excluded.
(c) Nothing in any Finance Document obliges any Original Lender to:
(i) accept a re-transfer from any New Lender of any of the rights and obligations transferred by novation under this Agreement; or
(ii) support any losses directly or indirectly incurred by a New Lender by reason of the non-performance by the Company of its obligations under
the Finance Documents or otherwise.
2.5 Administrative Details and Account Details
Each New Lender confirms to the Agent that:
(a) for the purposes of Clause 28.2 ( Addresses
) of the Amended Facility Agreement, its Facility Office details and address, fax number and attention details
for notices are as notified in writing to the Agent prior to the date on which it becomes a Party; and
(b) for the purposes of Clause 26.2 ( Distributions
by
the
Agent
) of the Amended Facility Agreement, its account details for payments under the Finance
Documents are as specified in Schedule 5 ( Account
details
).
2.6 New Lenders’ participations
(a) On or before 5 May 2016, each New Lender shall fund the Agent’s account as the Agent has notified to the New Lenders (for the account of the Original
Lenders) (such that by 12:00 noon (Hong Kong time) (the Cut-off
Time
) the Agent receives remittance evidence in the form of MT202 or MT103 in
respect of such funding (collectively, the Remittance
Evidence
)) in an amount equal to their respective funded commitments as set out in the column
opposite its name in Schedule 3 ( Effective
Date
Participations
) (the aggregate of such amount, the Funding
Proceeds
).
(b) If, by the Cut-Off Time on 5 May 2016, the Agent has not received the Remittance Evidence in respect of all the Funding Proceeds, each of the New
Lenders which has so funded in accordance with paragraph (a) above will have returned to it on the
4
immediately following Business Day that amount of the Funding Proceeds it has paid to the Agent, and no Effective Date will occur for the purposes of
this Agreement.
(c) If the Agent has received the Remittance Evidence in respect of the Funding Proceeds by the Cut-Off Time on 5 May 2016, the Agent shall:
(i) as soon as reasonably practicable upon such receipt, give a notification to each other Party of the completion of the steps described in
paragraph (a) above; and
(ii) as soon as reasonably practicable after the giving of the notification described in paragraph (c)(i) above, make such balancing payments out of
the Funding Proceeds to each Original Lender (by crediting the relevant amount into such account as the relevant Original Lender has notified
to the Agent) as may be required so as to ensure that each Lender’s (including each New Lender’s and each Original Lender’s) participation in
outstanding Loans as at the Effective Date shall be the amount as set out in the column opposite its name in Schedule 3 ( Effective
Date
Participations
).
(d) For the avoidance of doubt, no Break Costs will be payable as a result of the readjustment of participations in outstanding Loans pursuant to this
Agreement.
3.
CONSENT
OF
THE
NEW
LENDERS
Pursuant to Clause 21.7 ( Existing
consents
and
waivers
) of the Original Facility Agreement, each New Lender is bound by any consent, waiver, election or
decision given or made by the Original Lenders under or pursuant to any Finance Documents prior to the signing by all Parties of this Agreement.
4.
CONSENTS
AND
WAIVERS
4.1 Consent and Waiver
The Company, the Original Lenders and the Agent:
(a) consent to the New Lenders becoming Lenders; and
(b) waive the requirements of Clause 21 ( Changes
to
the
Lenders
) of the Original Facility Agreement for the purposes of this Agreement and for the transfer
by novation effected pursuant to this Agreement.
4.2 Agent’s Waiver
The Agent waives the requirement for the payment of the fee referred to in Clause 21.3 ( Transfer
fee
) of the Original Facility Agreement in respect of the transfers
by novation effected pursuant to this Agreement.
5.
MISCELLANEOUS
5.1 This Agreement is a Finance Document.
5.2 This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the
same instrument.
5
5.3 The provisions of the Original Facility Agreement and the other Finance Documents shall, save as amended by this Agreement, continue in full force and
effect.
6.
GOVERNING
LAW
This Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
7.
ENFORCEMENT
7.1 The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including any dispute to any
non-contractual obligations arising from or in connection with this Agreement and any dispute relating to the existence, validity or termination of this Agreement)
(a Dispute
).
7.2 The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the
contrary.
7.3 This Clause 7 is for the benefit of the Finance Parties only. As a result, no Finance Party shall be prevented from taking proceedings relating to a Dispute
in any other courts with jurisdiction. To the extent allowed by law, the Finance Parties may take concurrent proceedings in any number of jurisdictions.
This
Agreement
has
been
entered
into
on
the
date
stated
at
the
beginning
of
this
Agreement.
6
SCHEDULE
1
THE
PARTIES
Part
A
THE
ORIGINAL
LENDERS
Australia and New Zealand Banking Group Limited
Citibank N.A., Hong Kong Branch
Credit Suisse AG, Singapore Branch
Deutsche Bank AG, Singapore Branch
Goldman Sachs Bank USA
Goldman Sachs International Bank
JPMorgan Chase Bank, N.A., Hong Kong Branch
Mizuho Bank, Ltd., Hong Kong Branch
Morgan Stanley Bank, N.A.
7
Part
B
THE
NEW
LENDERS
Wing Lung Bank, Limited
China Construction Bank (Asia) Corporation Limited
Bank of China Limited Macau Branch
Industrial and Commercial Bank of China (Asia) Limited
Bank of Communications Co., Ltd (Acting through its Offshore Banking Unit)
Bank of Communications Co., Ltd. Hong Kong Branch
China Merchants Bank Co., Ltd., Hong Kong Branch
China Merchants Bank Co.,Ltd, Off-Shore Banking Center
DBS BANK LTD.
Nanyang Commercial Bank, Limited
Standard Chartered Bank (Hong Kong) Limited
The Bank of East Asia, Limited (
)
Wells Fargo Bank, National Association
Hang Seng Bank Limited
Bank of Communications Co., Ltd. Macau Branch
KGI Bank
Sumitomo Mitsui Banking Corporation
Cathay United Bank
Mega International Commercial Bank Co., Ltd., Offshore Banking Branch
Taishin International Bank
8
SCHEDULE
2
THE
LENDERS
9
SCHEDULE
3
EFFECTIVE
DATE
PARTICIPATIONS
10
SCHEDULE
4
AMENDMENTS
TO
ORIGINAL
FACILITY
AGREEMENT
(a) Clause 1.1 ( Definitions
) is amended as follows:
(i) the following new definitions shall be added:
““ Increased
Commitments
” means the difference between the Total Commitments as of the Upsize Effective Date and the Original
Commitments.
“ Original
Commitments
” means the Total Commitments as of the date of this Agreement, being US$3,000,000,000.
“ Syndication
and
Amendment
Agreement
” means the syndication and amendment agreement between (among others) the Company, the
Original Lenders and the Agent.
“ Upsize
Effective
Date
” means 5 May 2016.”
(ii) the definition of “Availability Period” shall be deleted and replaced in its entirety with the following:
““ Availability
Period
” means:
(a) in respect of the Original Commitments, the period from and including the date of this Agreement to and including the date falling
three (3) months after the date of this Agreement; and
(b) in respect of the Increased Commitments, the period from and including the Upsize Effective Date to and including the date falling
three (3) months after the Upsize Effective Date.”
(iii) the definition of “Total Commitments” shall be deleted and replaced in its entirety with the following:
““ Total
Commitments
” means the aggregate of the Commitments (being US$3,000,000,000 at the date of this Agreement and
US$4,000,000,000 at the Upsize Effective Date).”
(iv) the definition of “Commitment” shall be deleted and replaced in its entirety with the following:
““ Commitment
” means:
(a) in relation to an Original Lender, (i) the amount set opposite its name under the heading Commitment in (at any time prior to
occurrence of the Upsize Effective Date) Schedule 1 ( The
Original
Lenders
) or (with effect from the occurrence of the Upsize
Effective Date) Schedule 2 ( The
Lenders
) to the Syndication and Amendment Agreement and (ii) the amount of any other
Commitment transferred to it under this Agreement or assumed by it in accordance with
11
Clause 2.2 ( Increase
) or Clause 2.3 ( Additional
Commitments
); and
(b) in relation to any other Lender, the amount of any Commitment transferred to it under this Agreement or assumed by it in accordance
with Clause 2.2 ( Increase
) or Clause 2.3 ( Additional
Commitments
) or the Syndication and Amendment Agreement,
to the extent not cancelled, reduced or transferred by it under this Agreement.”
(b) The following new paragraph (a)(v) shall be added in Clause 1.2 ( Construction
) and the subsequent paragraphs shall be renumbered accordingly:
“(v) “ the
date
of
this
Agreement
” is a reference to 9 March 2016;”
(c) Paragraph (a) of Clause 11.1 ( Commitment
fee
) shall be deleted and replaced in its entirety with the following:
“(a) The Company shall pay to the Agent (for the account of each Lender) a fee in US Dollars computed and accruing on a daily basis with effect
from (but excluding) the date falling 45 days after the Upsize Effective Date (the “ Commitment
Fee
Commencement
Date
”) at 0.25 per cent.
per annum on that Lender’s Available Commitment for the Availability Period of the Increased Commitments at close of business (in New York)
on each day of such Availability Period falling after the Commitment Fee Commencement Date (or, if any such day shall not be a Business Day,
at such close of business on the immediately preceding Business Day).”
(d) The phrase “the giving of notice of the lapse of time” shall be replaced by the phrase “the giving of notice or the lapse of time” in Clause 18.4 (
Notification
of
default
).
(e) The phrase “on the due for payment” shall be replaced by the phrase “on the due date for payment” in the last sentence of paragraph (a) of Clause 26.5 (
Impaired
Agent
).
(f) The paragraph reference “(ii)” shall be replaced by the paragraph reference “(i)” in paragraph (a)(ii) of Clause 26.6 ( Partial
payments
).
12
SCHEDULE
5
ACCOUNT
DETAILS
13
SIGNATURE
PAGES
The
Company
ALIBABA
GROUP
HOLDING
LIMITED
By:
Name:
Title:
Timothy Alexander Steinert
Authorized Signatory
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
The
Original
Lenders
AUSTRALIA
AND
NEW
ZEALAND
BANKING
GROUP
LIMITED
By:
Chris RACITI
Head of North & North-East Asia
Loan Syndications
Elizabeth Davies
Head of Loans Structuring & Execution, Asia
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
CITIBANK,
N.A.,
HONG
KONG
BRANCH
By:
Asghar Ali
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
CREDIT
SUISSE
AG,
SINGAPORE
BRANCH
By:
Colin
Rice
Director
General Counsel Division
Andrea Woo
Director
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
DEUTSCHE
BANK
AG,
SINGAPORE
BRANCH
By:
Ananda Chakravorty
Managing Director
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
GOLDMAN
SACHS
BANK
USA
By:
Rebecca
Kratz
Authorized Signatory
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
GOLDMAN
SACHS
INTERNATIONAL
BANK
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
JPMORGAN
CHASE
BANK,
N.A.,
HONG
KONG
BRANCH
By:
Neha Rastogi
Executive Director
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
MIZUHO
BANK,
LTD.,
HONG
KONG
BRANCH
By:
Davis Chai
Senior Deputy General Manager
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
MORGAN
STANLEY
BANK,
N.A.
By:
Name:
Title:
Michael King
Authorized Signatory
The
New
Lenders
WING
LUNG
BANK,
LIMITED
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
Wilson He
Department Head
Corporate Banking Department
Boris Liu
Syndication Head
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
CHINA
CONSTRUCTION
BANK
(ASIA)
CORPORATION
LIMITED
By:
1831 MA, Ivan Siu -Wah
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
Benny Ha
General Manager of CBDI
BANK
OF
CHINA
LIMITED
MACAU
BRANCH
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
INDUSTRIAL
AND
COMMERCIAL
BANK
OF
CHINA
(ASIA)
LIMITED
By:
CHOI, Mau Keung
Ms. Wong Wing Nar
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
BANK
OF
COMMUNICATIONS
CO.,
LTD
(ACTING
THROUGH
ITS
OFFSHORE
BANKING
UNIT)
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
BANK
OF
COMMUNICATIONS
CO.,
LTD.
HONG
KONG
BRANCH
By:
CHEN BUN (A118)
YIP YEE LEUNG (A060)
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
CHINA
MERCHANTS
BANK
CO.,
LTD.,
HONG
KONG
BRANCH
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
CHINA
MERCHANTS
BANK
CO.,LTD,
OFF-SHORE
BANKING
CENTER
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
DBS
BANK
LTD.
By:
Heng Yeow Khing
Managing Director
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
NANYANG
COMMERCIAL
BANK,
LIMITED
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
STANDARD
CHARTERED
BANK
(HONG
KONG)
LIMITED
By:
Lewis Wong
Managing Director & Regional Head,
Loan Syndications, G C & NEA
Corporate Finance
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
THE
BANK
OF
EAST
ASIA,
LIMITED
By:
Christine Wong
Fanny Mok
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
WELLS
FARGO
BANK,
NATIONAL
ASSOCIATION
By:
John C. Gough
Senior Vice President
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
HANG
SENG
BANK
LIMITED
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
BANK
OF
COMMUNICATIONS
CO.,
LTD.
MACAU
BRANCH
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
KGI
BANK
By:
Name:
Title:
Jean
Wu
Executive
Vice
President
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
SUMITOMO
MITSUI
BANKING
CORPORATION
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
CATHAY
UNITED
BANK
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
MEGA
INTERNATIONAL
COMMERCIAL
BANK
CO.,
LTD.,
OFFSHORE
BANKING
BRANCH
By:
Name:
Title:
Yen Chen
SVP & GM
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
TAISHIN
INTERNATIONAL
BANK
By:
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
The
Agent
CITICORP
INTERNATIONAL
LIMITED
By:
Terence Yeng
Vice President
[Signature
Page
to
the
Syndication
and
Amendment
Agreement]
Exhibit
4.49
EXECUTION VERSION
AMENDED
AND
RESTATED
INVESTMENT
AGREEMENT
dated as of August 9, 2015
and amended and restated as of May 19, 2016
by and between
ALIBABA
GROUP
HOLDING
LIMITED
and
SUNING
COMMERCE
GROUP
CO.,
LTD.
TABLE
OF
CONTENTS
Page
ARTICLE I DEFINITIONS AND INTERPRETATION
Section 1.01
Section 1.02
Definitions
Interpretation and Rules of Construction
ARTICLE II PURCHASE AND SALE OF SECURITIES
Section 2.01
Section 2.02
Section 2.03
Section 2.04
Purchase of Issued Shares
Determination of Number of Issued Shares and Aggregate Purchase Price
Payment of Purchase Price
Closing
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Section 3.01
Section 3.02
Section 3.03
Section 3.04
Section 3.05
Section 3.06
Section 3.07
Section 3.08
Section 3.09
Section 3.10
Organization
Authorization; Enforcement; Validity
No Conflicts
Consents
Litigation
Status and Investment Intent of the Purchaser
Financing
Source of Funds
Independent Investigation
Brokers and Finders
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.01
Section 4.02
Section 4.03
Section 4.04
Section 4.05
Section 4.06
Section 4.07
Section 4.08
Section 4.09
Section 4.10
Section 4.11
Organization and Qualification
Capitalization
Subsidiaries
Authorization; Enforcement; Validity
No Conflicts
Consents
Issuance of Issued Shares
Public Documents
Compliance with Laws
Financial Statements
Undisclosed Liabilities
i
2
2
8
8
8
9
9
10
10
10
10
11
11
11
11
12
13
13
13
13
14
14
14
14
15
15
15
15
16
16
16
Section 4.12
Section 4.13
Section 4.14
Section 4.15
Absence of Changes
Litigation
No Other Representations
Brokers and Finders
ARTICLE V AGREEMENTS OF THE PARTIES
Section 5.01
Section 5.02
Section 5.03
Section 5.04
Section 5.05
Section 5.06
Section 5.07
Section 5.08
Further Assurances
Responsibility to Notify
PRC Regulatory Filings
Confidentiality; Public Disclosure
No Promotion
No Amendment to Finance Documents
Supplemental Listing Application
Purchaser Transfer Restrictions
ARTICLE VI CONDITIONS TO THE COMPANY’S OBLIGATION
Section 6.01
Section 6.02
Section 6.03
Section 6.04
Section 6.05
Section 6.06
Section 6.07
Representations and Warranties; Covenants
No Stop Order
No Action
PRC Regulatory Filings
Onshore Investment
Payment Obligations
Officer’s Certificate
ARTICLE VII CONDITIONS TO THE PURCHASER’S OBLIGATION
Section 7.01
Section 7.02
Section 7.03
Section 7.04
Section 7.05
Section 7.06
Section 7.07
Representations and Warranties; Covenants
No Stop Order
No Action
No Material Adverse Effect
PRC Regulatory Filings
Onshore Investment
Company Officer’s Certificate
ARTICLE VIII TERMINATION
Section 8.01
Section 8.02
Termination
Effect of Termination
ARTICLE IX INDEMNIFICATION
ii
17
17
17
17
18
18
18
18
19
19
20
20
20
23
23
23
24
24
24
24
24
24
24
25
25
25
25
25
25
25
25
26
26
Section 9.01
Section 9.02
Section 9.03
Survival
Indemnification
Limitation to Liability
ARTICLE X MISCELLANEOUS
Section 10.01
Section 10.02
Section 10.03
Section 10.04
Section 10.05
Section 10.06
Section 10.07
Section 10.08
Section 10.09
Section 10.10
Section 10.11
Section 10.12
Section 10.13
Section 10.14
Section 10.15
Section 10.16
Expenses
Governing Law
Dispute Resolution
Counterparts
Severability
Entire Agreement
Notices
No Third Party Beneficiaries
Successors and Assigns
Construction
Further Assurances
Adjustment of Share Numbers
Specific Performance
Amendment; Waiver
Original Agreement and the other Transaction Documents
Language Version
iii
26
26
27
28
28
28
28
29
29
29
29
30
30
31
31
31
31
31
31
32
AMENDED
AND
RESTATED
INVESTMENT
AGREEMENT
THIS INVESTMENT AGREEMENT, dated as of August 9, 2015 (the “ Original
Agreement
Date
”) and as amended and restated May 19, 2016 (the “
Amendment
Date
”) (this “ Agreement
”), is made by and between ALIBABA GROUP HOLDING LIMITED, an exempted company with limited liability
incorporated under the Laws of the Cayman Islands (the “ Company
”), and SUNING COMMERCE GROUP CO., LTD., a joint stock company incorporated
under the Laws of the People’s Republic of China (the “ Purchaser
” and, together with the Company, the “ Parties
” and each a “ Party
”).
RECITALS
WHEREAS
, the Company desires to issue, sell and deliver to the Purchaser, and the Purchaser desires to purchase and acquire from the Company, upon
the terms and conditions set forth in this Agreement, certain Ordinary Shares of the Company (the “ Offshore
Investment
”) and, in connection therewith, the
Company and the Purchaser have entered into an Investment Agreement, dated the Original Agreement Date (the “ Original
Agreement
”);
WHEREAS
, concurrently with the Parties’ execution and delivery of the Original Agreement, (i) 淘宝 ( 中国 ) 软件有限公司 (Taobao (China)
Software Co., Ltd.), an Affiliate of the Company (the “ Onshore
Investor
”) entered into a Share Subscription Agreement with the Purchaser (as may be amended,
supplemented or modified from time to time in accordance with the terms thereof, the “ Onshore
Investment
Agreement
”), pursuant to which, among other
things, the Purchaser will issue, sell and deliver to the Onshore Investor, and the Onshore Investor will purchase and acquire from the Purchaser, upon the terms
and conditions set forth in the Onshore Investment Agreement, certain shares of the Purchaser (the “ Onshore
Investment
”), and (ii) the Onshore Investor entered
into a Business Cooperation Framework Agreement with the Purchaser (the “ Business
Cooperation
Framework
Agreement
”), which agreement contemplates
certain business cooperation between the Parties and/or their Affiliates, as applicable;
WHEREAS
, (i) the Company and the Purchaser entered into a letter agreement, dated August 10, 2015 (the “ Letter
Agreement
”), relating to certain
conditions upon which the Purchaser may grant security interest over Securities (as defined below), and (ii) the Purchaser wishes to finance a portion of the
Aggregate Purchase Price (as defined below) with a U.S. dollar loan from certain financial institutions and, in connection therewith, the following agreements,
among others, are being entered into by the parties thereto: (A) a facility agreement, dated on or about the Amendment Date (the “ Facility
Agreement
”), by and
among the Purchaser, Shiny Lion Limited, an exempted company incorporated with limited liability in the Cayman Islands (the “ Borrower
”), Industrial and
Commercial Bank of China Limited, Hong Kong Branch as facility agent (the “ Facility
Agent
”), Industrial and Commercial Bank of China (Asia) Limited as
security agent (the “ Security
Agent
”) and certain other parties; (B) an assignment agreement, dated on or about the Amendment Date (the “ Assignment
Agreement
”), by and among the Purchaser, the Borrower and the Company, pursuant to which the Purchaser will assign its rights under this Agreement to the
Borrower; (C) a consent letter, dated on or about the Amendment Date (the “ Consent
Letter
”), by and among the Purchaser, the Borrower and the Company,
pursuant to which the Company will consent to the Borrower’s proposed grant of certain security
1
interests over the Issued Shares (and/or ADSs representing Issued Shares) on the terms and the conditions set forth in the Consent Letter ; and (D) a Step-in Right
Agreement, dated on or about the Amendment Date (the “ Step-in
Right
Agreement
”), by and among the Purchaser, the Borrower, the Company, the Facility
Agent and the Security Agent, pursuant to which the Company will have certain “step-in rights” as more fully set forth therein and as contemplated by the Letter
Agreement; and
WHEREAS
, concurrently with the execution and delivery of the Assignment Agreement, the Consent Letter and the Step-in Right Agreement by the
parties thereto, the Company and the Purchaser are amending and restating the Original Agreement in its entirety as more fully set forth below.
NOW,
THEREFORE
, in consideration of the premises set forth above, the mutual promises and covenants set forth herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchaser hereby agree as follows:
ARTICLE
I
DEFINITIONS
AND
INTERPRETATION
Section 1.01 Definitions . In this Agreement, except to the extent otherwise provided or that the context otherwise requires:
“ ADS
” means the American Depositary Shares, each of which represents one (1) Ordinary Share, of the Company;
“ Affiliate
” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, Controls, is
Controlled by, or is under common Control with, such specified Person;
“ Aggregate
Purchase
Price
” has the meaning set forth in Section 2.02(c);
“ Agreement
” has the meaning set forth in the Preamble;
“ Amendment
Date
” has the meaning set forth in the Preamble;
“ Assignment
Agreement
” has the meaning set forth in the Recitals;
“ Bankruptcy
and
Equity
Exception
” has the meaning set forth in Section 3.02;
“ Borrower
” has the meaning set forth in the Recitals;
“ Business
Cooperation
Framework
Agreement
” has the meaning set forth in the Recitals;
“ Business
Day
” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in Nanjing,
Hong Kong or New York;
2
“ Closing
” has the meaning set forth in Section 2.04(a);
“ Closing
Date
” has the meaning set forth in Section 2.04(a);
“ Company
” has the meaning set forth in the Preamble;
“ Company
Bank
Account
” has the meaning set forth in Section 2.03(a)(i);
“ Company
Competitors
” has the meaning set forth in Section 5.08(d);
“ Company
Share
Plans
” means, collectively, all of the equity incentive plans of the Company as disclosed in the Public Documents;
“ Company’s
Bid
” has the meaning set forth in Section 5.08(c)(iv);
“ Confidentiality
Agreement
” has the meaning set forth in Section 5.04(a);
“ Consent
Letter
” has the meaning set forth in the Recitals;
“ Contract
” means any agreement, contract, lease, indenture, instrument, note, debenture, bond, mortgage or deed of trust or other agreement,
commitment, arrangement or understanding;
“ Control
” (including the terms “ Controlled
by
” and “ under
common
Control
with
”) means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or
otherwise, including the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the
affairs of such Person or securities that represent a majority of the outstanding voting securities of such Person;
“ Encumbrance
” means any security interest, pledge, mortgage, lien, charge, claim, hypothecation, title defect, right of first option or refusal, right of
preemption, third-party right or interests, put or call right, lien, adverse claim of ownership or use, or other encumbrance of any kind;
“ Enumerated
PRC
Regulatory
Filings
” means (i) the filing with the National Development and Reform Commission of the PRC, (ii) the filing with the
Ministry of Commerce of the PRC, and (iii) the registration with the State Administration of Foreign Exchange of the PRC, in each case, by the Purchaser in
respect of the Offshore Investment;
“ Exchange
Act
” means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder;
“ Facility
Agent
” has the meaning set forth in the Recitals;
“ Facility
Agreement
” has the meaning set forth in the Recitals;
“ Finance
Document
” has the meaning set forth in the Facility Agreement;
3
“ GAAP
” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment of the accounting profession that are in effect from time to time, as codified and
described in FASB Statement No. 18, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, and applied
consistently throughout the periods involved;
“ Governmental
Authority
” means any federal, national, foreign, supranational, state, provincial, local, municipal or other political subdivision or other
government, governmental, regulatory or administrative authority, agency, board, bureau, department, instrumentality or commission or any court, tribunal, judicial
or arbitral body of competent jurisdiction or stock exchange;
“ ICC
Rules
” has the meaning set forth in Section 10.03;
“ Indemnified
Liabilities
” has the meaning set forth in Section 9.02(a);
“ Initial
Cash
Payment
Amount
” has the meaning set forth in Section 2.03(a)(i);
“ Issued
Shares
” has the meaning set forth in Section 2.01;
“ Judgment
” has the meaning set forth in Section 3.05;
“ knowledge
” means, with respect to any party, the actual knowledge of such party’s executive officers (as defined in Rule 405 under the Securities Act);
“ Law
” means any federal, national, foreign, supranational, state, provincial or local statute, law, ordinance, regulation, rule, code, order, requirement or
rule of law (including common law), official policy, rule or interpretation of any Governmental Authority with jurisdiction over the Company or the Purchaser, as
the case may be;
“ Letter
Agreement
” has the meaning set forth in the Recitals;
“ Long
Stop
Date
” means the second anniversary of the date of this Agreement;
“ Material
Adverse
Effect
” means any material adverse effect on the business, properties, financial condition, assets or results of operations of the
Company and its Subsidiaries, taken as a whole, provided
, however, that in no event shall any of the following exceptions, alone or in combination with the other
enumerated exceptions below, be deemed to constitute, nor shall be taken into account in determining whether a Material Adverse Effect has occurred: (i) any
effect resulting from the announcement, pendency or consummation of the transactions contemplated by, or from compliance with the terms and conditions of, this
Agreement, any other Transaction Document or any Onshore Transaction Document, (ii) any effect that results from changes generally affecting any of the
principal industries in which the Company or its Subsidiaries operate, (iii) any effect that results from changes affecting general economic, financial, credit or
securities market conditions in the PRC, the United States or
4
globally, including changes in interest rates or foreign exchange rates, (iv) any pandemic, earthquake, typhoon, tornado or other natural disaster, declaration of war,
act of terrorism, armed hostilities or other similar force majeure event, (v) changes in generally accepted accounting principles or any interpretation thereof that are
applicable to the Company or any of its Subsidiaries, or changes in applicable Laws or any interpretation or enforcement thereof, (vi) actions taken (or omitted to
be taken) at the request of or with the prior consent of the Purchaser, (vii) any failure to meet any internal or public projections, forecasts, or guidance, provided
that the underlying causes that lead to any failure to meet any internal or public projections, forecasts, or guidance as set forth in (vii) may be taken into account in
determining whether a Material Adverse Effect has occurred, or (viii) any change in the Company’s stock price or trading volume, in and of itself, provided
that the
underlying causes that lead to any change in the Company’s stock price or trading volume as set forth in (viii) may be taken into account in determining whether a
Material Adverse Effect has occurred; provided,
further
, that with respect to clauses (ii), (iii) and (v), such change does not have a materially disproportionate
adverse effect on the Company and its Subsidiaries, taken as a whole, compared to major competitors of the Company and its Subsidiaries or other companies of
similar size operating in the principal industries in which the Company or its Subsidiaries operate;
“ Material
Subsidiary
” means a Subsidiary of the Company that is listed in Exhibit 8.1 to the Company’s Annual Report on Form 20-F for the fiscal
year ended March 31, 2015, filed with the SEC on June 25, 2015;
“ Memorandum
and
Articles
” means the Amended and Restated Memorandum and Articles of Association of the Company in effect from time to time;
“ Measurement
Date
” has the meaning set forth in Section 4.02;
“ NYSE
” means the New York Stock Exchange;
“ Offshore
Investment
” has the meaning set forth in the Recitals;
“ Onshore
Investment
” has the meaning set forth in the Recitals;
“ Onshore
Investment
Agreement
” has the meaning set forth in the Recitals;
“ Onshore
Investor
” has the meaning set forth in the Recitals;
“ Onshore
New
Share
Registration
” means the issuance of the new shares in the Purchaser to, and the registration of such shares in the securities
account of, the Onshore Investor pursuant to the Onshore Investment Agreement;
“ Onshore
New
Share
Registration
Date
” means the “New Share Registration Date” ( 新股登记日 ) as defined in the Onshore Investment Agreement,
being the date on which the Onshore New Share Registration occurs;
“ Onshore
Payment”
means the payment by the Onshore Investor of the purchase price for the new shares in the Purchaser to be issued to the Onshore
Investor pursuant to the Onshore Investment Agreement;
5
“ Onshore
Payment
Date
” means the “Payment Date” ( 支付日 ) as defined in the Onshore Investment Agreement, being the date on which the Onshore
Payment occurs;
“ Onshore
Purchase
Price
” means the aggregate amount of the purchase price for the Onshore Investment pursuant to the Onshore Investment
Agreement;
“ Onshore
Transaction
Documents
” means the Onshore Investment Agreement, the Strategic Cooperation Agreement and each of the other agreements
and documents entered into or delivered by the parties thereto or their respective Affiliates in connection with the transactions contemplated by the Onshore
Investment Agreement;
“ Ordinary
Shares
” has the meaning set forth in Section 4.02;
“ Original
Agreement
” has the meaning set forth in the Recitals;
“ Original
Agreement
Date
” has the meaning set forth in the Preamble;
“ Party
” or “ Parties
” has the meaning set forth in the Preamble;
“ Per
Share
Issue
Price
” has the meaning set forth in Section 2.01;
“ Permits
” has the meaning set forth in Section 4.09;
“ Permitted
Transfers
” means (i) Transfers to a wholly-owned Subsidiary of the Purchaser, and (ii) Transfers to the depository bank of the Company for
purposes of converting the Issued Shares into ADSs to be issued and registered in the name of the Purchaser or a wholly-owned Subsidiary of the Purchaser;
“ Person
” means any individual, partnership, corporation, association, joint stock company, trust, joint venture, limited liability company, organization,
entity or Governmental Authority;
“ PRC
” means the People’s Republic of China, excluding, for purposes of this Agreement, Hong Kong, Macau and Taiwan;
“ PRC
Regulatory
Filings
” has the meaning set forth in Section 5.03;
“ Proceedings
” has the meaning set forth in Section 3.05;
“ Public
Documents
” has the meaning set forth in Section 4.08;
“ Purchaser
” has the meaning set forth in the Preamble;
“ Purchaser
Designee
” has the meaning set forth in Section 10.09;
“ Relevant
Exchange
Rate
” has the meaning set forth in Section 2.02(a)(i);
“ Relevant
Trading
Day
” has the meaning set forth in Section 5.08(b)(i);
6
“ RMB
” means Renminbi, the lawful currency of the PRC;
“ RMB
Aggregate
Purchase
Price
” has the meaning set forth in Section 2.02(a)(ii);
“ ROFO
Notice
” has the meaning set forth in Section 5.08(c)(ii);
“ ROFO
Notice
Period
” has the meaning set forth in Section 5.08(c)(iii);
“ ROFO
Securities
” has the meaning set forth in Section 5.08(c)(i);
“ ROFO
Transferor
” has the meaning set forth in Section 5.08(c)(i);
“ ROFR
Election
Period
” has the meaning set forth in Section 5.08(b)(ii);
“ ROFR
Exercise
Notice
” has the meaning set forth in Section 5.08(b)(ii);
“ ROFR
Offer
Notice
” has the meaning set forth in Section 5.08(b)(i);
“ ROFR
Sale
Proposal
” has the meaning set forth in Section 5.08(b)(i);
“ ROFR
Sale
Window
” has the meaning set forth in Section 5.08(b)(i);
“ ROFR
Securities
” has the meaning set forth in Section 5.08(b)(i);
“ SEC
” means the U.S. Securities and Exchange Commission;
“ Second
Cash
Payment
Amount
” has the meaning set forth in Section 2.03(a)(ii);
“ Securities
” means any Ordinary Shares or any equity interest of, or shares of any class in the share capital (ordinary, preferred or otherwise) of, the
Company and any convertible securities, options, warrants and any other type of equity or equity-linked securities convertible, exercisable or exchangeable for any
such equity interest or shares of any class in the share capital of the Company;
“ Securities
Act
” means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder;
“ Security
Agent
” has the meaning set forth in the Recitals;
“ Step-in
Right
Agreement
” has the meaning set forth in the Recitals;
“ Subsidiary
” of any Person means any corporation, partnership, limited liability company, joint stock company, joint venture or other organization or
entity, whether incorporated or unincorporated, which is Controlled by such Person;
“ Supplemental
Listing
Application
” has the meaning set forth in Section 5.07;
“ Trading
Day
” means a day (U.S. Eastern Time) on which the NYSE is open for trading.
7
“ Transaction
Documents
” mean this Agreement and each of the other agreements and documents entered into or delivered by the parties hereto or their
respective Affiliates in connection with the transactions contemplated by this Agreement;
“ Transfer
” means, with respect to any Securities, the direct or indirect transfer, sale, assignment, pledge, mortgage, grant of a security interest or other
disposal of, or granting or permitting any Encumbrance on such Securities, and “ Transfers
”; “ Transferring
” and “ Transferred
” shall have correlative
meanings;
“ U.S.
” or “ United
States
” means the United States of America;
“ US$
” or “ USD
” means United States dollars, the lawful currency of the United States; and
“ Utilization
Request
” has the meaning set forth in Section 2.03(a)(ii).
Section 1.02 Interpretation and Rules of Construction . In this Agreement, except to the extent otherwise provided or that the context otherwise
requires:
Agreement;
(a) when a reference is made in this Agreement to an Article or Section, such reference is to an Article or Section of this Agreement;
(b) the headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this
(c) the words “hereof,” “herein” and “hereunder” and words of similar import, when used in this Agreement, refer to this Agreement as a
whole and not to any particular provision of this Agreement;
(d) all terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered
pursuant hereto, unless otherwise defined therein;
(e) the definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms;
(f) references to a Person are also to its successors and permitted assigns; and
(g) the use of the term “or” is not intended to be exclusive.
ARTICLE
II
PURCHASE
AND
SALE
OF
SECURITIES
Section 2.01 Purchase of Issued Shares . Subject to the conditions and on the terms of this Agreement, on the Closing Date, the Company shall issue and
sell to the Purchaser, and the Purchaser shall subscribe for and purchase from the Company, such number of Ordinary Shares to be determined pursuant to
Section 2.02 (the “ Issued
Shares
”) for a purchase price per Ordinary Share of US$81.51 (the “ Per
Share
Purchase
Price
”).
8
Section 2.02 Determination of Number of Issued Shares and Aggregate Purchase Price .
(a) For purposes hereof,
Trade System under the authorization of the People’s Bank of China as of the date that is five (5) Business Days prior to the Onshore Payment Date; and
(i) “ Relevant
Exchange
Rate
” shall mean the USD:RMB middle exchange rate last published by China Foreign Exchange
(y) RMB14,000,000,000.
(ii) “ RMB
Aggregate
Purchase
Price
” shall mean the lower of (x) 50% of the Onshore Purchase Price, and
(b) The number of Issued Shares shall be the lower of (i) 27,800,000, and (ii) the USD equivalent of the RMB Aggregate Purchase Price
(calculated at the Relevant Exchange Rate) divided by the Per Share Purchase Price (rounded down to the nearest whole Ordinary Share).
(c) The total purchase price for all of the Issued Shares (the “ Aggregate
Purchase
Price
”) shall be an amount, denominated in USD,
equal to the number of Issued Shares determined pursuant to Section 2.02(b) multiplied by the Per Share Purchase Price.
Section 2.03 Payment of Purchase Price .
(a) The Purchaser shall:
(i) (A) no later than the Onshore Payment Date, pay the Company by wire transfer of immediately available USD funds in an
amount equal to the Initial Cash Payment Amount (defined below) to a bank account (the “ Company
Bank
Account
”) designated in writing by the Company at
least five (5) Business Days prior to the Onshore Payment Date, and (B) prior to the payment by the Onshore Investor of the Onshore Purchase Price, deliver to the
Company an MT103 message evidencing that such wire transfer has been made. For purposes of this Agreement, “ Initial
Cash
Payment
Amount
” means the
excess of the Aggregate Purchase Price over the Second Cash Payment Amount, and “ Second
Cash
Payment
Amount
” means USD1,450,000,000;
(ii) no later than the Onshore Payment Date, duly deliver or cause to be duly delivered to the Facility Agent a utilization request
(the “ Utilization
Request
”) in accordance with the Facility Agreement. The Utilization Request shall specify a proposed utilization date that is no later than five
(5) Business Days (as such term is defined in the Facility Agreement) after the date of such request, a utilization amount not less than the Second Cash Payment
Amount, and the Company Bank Account as the account to receive the proceeds of the loan; and
(iii) no later than the Onshore Payment Date, deliver a true and complete copy of the Utilization Request to the Company.
(b) No later than five (5) Business Days after the date of the Utilization Request, the Purchaser shall pay or cause to be paid (whether by
utilizing the debt facility under
9
the Facility Agreement or otherwise) to the Company by wire transfer of immediately available USD funds in an amount equal to the Second Cash Payment
Amount to the Company Bank Account .
Section 2.04 Closing .
(a) Date
and
Time
. The closing of the Offshore Investment (the “ Closing
”) shall take place at the offices of Simpson Thacher &
Bartlett, ICBC Tower, 3 Garden Road, Central, Hong Kong, on the first (1 ) Business Day after the date on which the Company has received the Aggregate
Purchase Price in full, or on such other date and time as may be mutually agreed in writing by the Parties. The date on which the Closing occurs is referred to
herein as the “ Closing
Date
.”
st
(b) Closing
Delivery
. At the Closing, and subject to the Purchaser having complied with its obligations set forth in Section 2.03, the
Company shall deliver to the Purchaser: (i) a share certificate representing the Issued Shares, duly executed on behalf of the Company and registered in the name of
the Purchaser (or, if applicable, the Purchaser Designee); and (ii) a certified copy of the relevant extract of the register of members of the Company, reflecting the
Purchaser’s (or, if applicable, the Purchaser Designee’s) ownership of the Issued Shares.
ARTICLE
III
REPRESENTATIONS
AND
WARRANTIES
OF
THE
PURCHASER
The Purchaser represents and warrants to the Company as of the Original Agreement Date, as of the Amendment Date and as of the Onshore Payment
Date (or, if a representation or warranty is made as of a specified date, as of such date) that:
Section 3.01 Organization . The Purchaser is a joint stock company duly incorporated, validly existing and in good standing under the Laws of the
PRC and has the requisite corporate power and authorization to own, lease and operate its properties and to carry on its business as now being conducted.
Section 3.02 Authorization; Enforcement; Validity . The Purchaser has the requisite corporate power and authority to execute and deliver this
Agreement and the other Transaction Documents to which it is a party and perform its obligations under this Agreement and such other Transaction Documents in
accordance with the terms hereof. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Purchaser is a
party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite corporate action by the
Purchaser. This Agreement has been, and the other Transaction Documents to which the Purchaser is a party will be, duly executed and delivered by the Purchaser,
and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of the Purchaser, enforceable against
the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general
applicability relating to or affecting creditors’ rights and to general equity principles (the “ Bankruptcy
and
Equity
Exception
”).
10
Section 3.03 No Conflicts . The execution, delivery and performance by the Purchaser of this Agreement and the other Transaction Documents to
which it is a party and the consummation by the Purchaser of the transactions contemplated hereby and thereby will not (a) result in a violation of the articles of
association of the Purchaser, (b) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of, any Contract to which the Purchaser is a party, or (c) result in a violation of any
Law applicable to the Purchaser or by which any property or asset of the Purchaser is bound or affected, except in the case of clauses (b) and (c) above, for such
violations which would not, individually or in the aggregate, have a material adverse effect on the ability of the Purchaser to consummate the transactions
contemplated hereunder and under the Onshore Transaction Documents.
Section 3.04 Consents . In connection with the entering into and performance of this Agreement and the other Transaction Documents to which it is
a party, the Purchaser is not required to obtain any consent, authorization or order of, or make any filing or registration with, (a) any Governmental Authority in
order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement and the other Transaction Documents to which it is a
party, or (b) any third party pursuant to any agreement, indenture or instrument to which the Purchaser is a party, in each case in accordance with the terms hereof
or thereof other than such as have been made or obtained except, in each case, for the PRC Regulatory Filings and such other consents, authorizations, orders,
filings or registrations that, if not obtained or made, would not, individually or in the aggregate, have a material adverse effect on the ability of the Purchaser to
consummate the transactions contemplated hereunder and under the Onshore Transaction Documents.
Section 3.05 Litigation . As of the Amendment Date, there are no pending or, to the Purchaser’s knowledge, threatened, legal, administrative,
arbitral or other claims, suits, actions or proceedings or governmental or regulatory investigations (“ Proceedings
”) of any nature against the Purchaser or any of
its Subsidiaries, which would, individually or in the aggregate, have a material adverse effect on the Purchaser’s ability to consummate the transactions
contemplated hereunder and under the Onshore Transaction Documents. There is no judgment, order, injunction or decree (“ Judgment
”) outstanding against the
Purchaser or any of its Subsidiaries, except for any Judgment which would not, individually or in the aggregate, have a material adverse effect on the Purchaser’s
ability to consummate the transactions contemplated hereunder and under the Onshore Transaction Documents.
Section 3.06 Status and Investment Intent of the Purchaser .
(a) Not
a
U.S.
Person
. The Purchaser is not a “U.S. person” within the meaning of Regulation S under the Securities Act.
(b) Experience
. The Purchaser (i) has sufficient knowledge and experience in financial and business matters to be capable of evaluating
the merits and risks involved in purchasing the Issued Shares and (ii) is capable of bearing the economic risk of the Offshore Investment.
11
(c) No
Public
Sale
or
Distribution
. The Purchaser is acquiring the Issued Shares for its own account and not with a view towards, or for
resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act. The Purchaser does not
have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Issued Shares. The Purchaser is not a broker-dealer registered
with the SEC under the Exchange Act or an entity engaged in a business that would require it to be so registered as a broker-dealer.
(d) Restricted
Securities
. The Purchaser acknowledges that the Issued Shares are “restricted securities” (within the meaning of Rule 144
of the Securities Act) that have not been registered under the Securities Act or any applicable state securities law and may not be offered or sold except pursuant to
registration or to an exemption from the registration statements of the Securities Act.
(e) Share
Ownership
. The Purchaser does not beneficially own any Ordinary Shares or any other Securities of the Company.
Section 3.07 Financing .
(a) As of the Amendment Date and as of the Closing, the Purchaser has delivered to the Company true, complete and correct copies of a
fully executed Facility Agreement and the Security Documents (as defined in the Facility Agreement) (redacted in a manner consistent with the proviso below),
pursuant to which, upon the terms and subject to the conditions set forth therein, the lenders therein have agreed to lend the amounts set forth therein, for the
purpose of financing a portion of the Aggregate Purchase Price; provided
that, none of the Finance Documents not provided to the Company nor any of the
provisions redacted from the Facility Agreement and the Security Documents relate to or could adversely affect the conditionality, enforceability, availability,
termination or aggregate principal amount of the financing contemplated thereby or the Company’s rights under the Step-in Right Agreement.
(b) As of the Amendment Date and as of the Closing, (i) each of the Purchaser and the Borrower has the requisite corporate power and
authority to execute and deliver the Finance Documents to which it is a party and perform its obligations under the Finance Documents in accordance with the
terms hereof; (ii) the execution, delivery and performance of the Finance Documents and the consummation of the transactions contemplated thereby have been
duly and validly authorized by all requisite corporate action by the Purchaser and the Borrower; and (iii) each Finance Document has been duly executed and
delivered by the Purchaser and the Borrower, and, assuming the due authorization, execution and delivery by the other parties thereto, constitutes a legal, valid and
binding obligation of the Purchaser and the Borrower, enforceable against the Purchaser or the Borrower, as applicable, in accordance with its terms, subject to
Bankruptcy and Equity Exception.
(c) As of the Amendment Date and as of the Closing, (i) the Finance Documents have not been amended or modified in any manner which
could adversely affect any rights of the Company thereunder or under the Step-in Right Agreement (other than amendments or modifications to which the
Company’s prior written consent has been obtained pursuant to Section 5.06), (ii) the respective commitments provided under the Finance Documents have not
12
been terminated, reduced, withdrawn or rescinded in any respect and, to the knowledge of the Purchaser, no such termination, reduction, withdrawal or rescission is
contemplated, and (iii) no event has occurred that would constitute a breach or default (or with notice or lapse of time or both would constitute a default) under the
Finance Documents by the Purchaser, the Borrower or, to the knowledge of the Purchaser, any other party thereto.
(d) As of the Amendment Date, the Purchaser has no reason to believe that any of the conditions to utilization under the Facility
Agreement to be satisfied by the Borrower will not be satisfied on or prior to the date of the Utilization Request or that the facility contemplated by the Facility
Agreement will not be made available to the Purchaser.
(e) As of the Amendment Date and as of the Closing Date, there are no side letters, understandings or other agreements or arrangements
relating to the Finance Documents or the transactions contemplated therein that could affect the availability of the financing contemplated by the Facility
Agreement.
Section 3.08 Source of Funds . The funds used by the Purchaser to pay the Aggregate Purchase Price are not directly or (to the knowledge of the
Purchaser) indirectly derived from activities that contravene applicable anti-money laundering Laws.
Section 3.09 Independent Investigation . The Purchaser has conducted its own independent investigation, review and analysis of the business,
operations, assets, liabilities, results of operations, financial condition and prospects of the Company and its Subsidiaries, which investigation, review and analysis
was done by the Purchaser and its Affiliates and representatives. In entering into this Agreement, the Purchaser acknowledges that the Company and its
representatives have not made any representations, warranties, estimates or projections, and it has not relied on any representations, warranties, estimates or
projections of the Company or its representatives, other than the specific representations and warranties of the Company set forth in ARTICLE IV.
Section 3.10 Brokers and Finders . Neither the Purchaser nor any of its Affiliates is a party to any agreement, arrangement or understanding with
any Person (other than Goldman Sachs Gao Hua Securities Company Limited, China Merchants Securities Company Limited and CITIC Securities Company
Limited or their respective Affiliates) that would give rise to any valid right, interest or claim against or upon the Company or the Purchaser for any brokerage
commission, finder’s fee or other similar compensation, as a result of the transactions contemplated by the Transaction Documents.
ARTICLE
IV
REPRESENTATIONS
AND
WARRANTIES
OF
THE
COMPANY
The Company represents and warrants to the Purchaser as of the Original Agreement Date, as of the Amendment Date and as of the Onshore Payment
Date (or, if a representation or warranty is made as of a specified date, as of such date) that, except as set forth in its Public Documents filed or furnished prior to
the date hereof (excluding disclosure of non-specific risks included in any forward-looking statement, disclaimer or risk factor disclosure contained in its Public
Documents, but without excluding any factual information disclosed therein):
13
Section 4.01 Organization and Qualification . The Company is an exempted company duly incorporated, validly existing and in good standing under
the Laws of the Cayman Islands, and has the requisite corporate power and authorization to own, lease and operate its properties and to carry on its business as now
being conducted. The Company is duly qualified or licensed to do business in each jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not, individually or in
the aggregate, have a Material Adverse Effect.
Section 4.02 Capitalization . As of the Original Agreement Date, the authorized share capital of the Company is US$100,000 divided into
4,000,000,000 ordinary shares of a par value of US$0.000025 each (the “ Ordinary
Shares
”). As of March 31, 2015 (the “ Measurement
Date
”),
(i) 2,495,499,036 Ordinary Shares were issued and outstanding, (ii) 16,775,577 Ordinary Shares were issuable upon exercise of options issued and outstanding
pursuant to the Company Share Plans, (iii) 77,890,207 Ordinary Shares were subject to unvested restricted share units issued and outstanding pursuant to the
Company Share Plans, (iv) 22,111,169 Ordinary Shares were authorized for issuance pursuant to the Company’s 2014 Post-IPO Equity Incentive Plan, and
(v) options to acquire 50,000,000 Ordinary Shares were granted to a non-profit organization. From the Measurement Date to the Original Agreement Date, other
than the issuance of Ordinary Shares pursuant to the exercise of options issued pursuant to the Company Share Plans or settlement of restricted shares or restricted
share units issued pursuant to the Company Share Plans, no other Ordinary Shares, options, restricted shares or restricted share units have been issued by the
Company. Except as set forth in this Section 4.02, as of the Measurement Date, no Securities convertible into or exchangeable or exercisable for any Ordinary
Shares are outstanding.
Section 4.03 Subsidiaries . Each Material Subsidiary has been duly organized, is validly existing and in good standing (with respect to jurisdictions
that recognize the concept of good standing) under the Laws of its jurisdiction of organization, and has the requisite corporate power and authorization to own,
lease and operate its properties and to carry on its business as now being conducted. Each Material Subsidiary is duly qualified or licensed to do business in each
jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary,
except where the failure to be so qualified or licensed would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 4.04 Authorization; Enforcement; Validity . The Company has the requisite corporate power and authority to execute and deliver this
Agreement and the other Transaction Documents to which it is a party and perform its obligations under this Agreement and such other Transaction Documents in
accordance with the terms hereof. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Company is a
party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite corporate action by the
Company, and no other filing, consent or authorization on the part of the Purchaser is necessary to authorize or approve this Agreement or the other Transaction
Documents or, other than any required filing or notification with the SEC or the NYSE regarding the issuance of the Issued Shares, to consummate the transactions
contemplated hereby or thereby. This Agreement has been, and the other
14
Transaction Documents to which the Company is a party will be, duly executed and delivered by the Company, and, assuming the due authorization, execution and
delivery by the Purchaser, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject
to the Bankruptcy and Equity Exception.
Section 4.05 No Conflicts . The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to
which it is a party and the consummation by the Company of the transactions contemplated hereby and thereby will not (a) result in a violation of the Memorandum
and Articles, (b) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any Contract to which the Company or any of its Subsidiaries is a party, or (c) result in a
violation of any Law applicable to the Company or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, except in the case
of clauses (b) and (c) above, for such conflicts, defaults, rights or violations which, individually or in the aggregate, would not result in a Material Adverse Effect.
Section 4.06 Consents . In connection with the entering into and performance of this Agreement and the other Transaction Documents to which the
Company is a party, subject to the accuracy of the warranties of the Purchaser in Section 3.06, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, (a) any Governmental Authority in order for it to execute, deliver or perform any of its obligations under or
contemplated hereby or thereby or (b) any third party pursuant to any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a
party, in each case in accordance with the terms hereof or thereof other than such as have been made or obtained, and except for (i) any required filing or
notification with the SEC or the NYSE regarding the issuance of the Issued Shares (including the Supplemental Listing Application), and (ii) such consents,
authorizations, orders, filings or registrations that, if not obtained or made, would not, individually or in the aggregate, result in a Material Adverse Effect.
Section 4.07 Issuance of Issued Shares . The Issued Shares are duly authorized, and, when issued and paid for in accordance with the terms hereof
and entered in the register of members of the Company, will be validly issued, non-assessable and fully-paid, and free from all Encumbrances (except for
Encumbrances created or imposed by the Transaction Documents or under applicable securities Laws). Assuming the accuracy of the representations and
warranties set forth in Section 3.06, the offer, issuance and sale by the Company of the Issued Shares to the Purchaser is exempt from registration under the
Securities Act.
Section 4.08 Public Documents . The Company has timely filed or furnished, as applicable, all reports, schedules, forms, statements and other
documents required to be filed or furnished by it with the SEC pursuant to the Securities Act or the Exchange Act (all of the foregoing documents filed with or
furnished to the SEC and all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “ Public
Documents
”). As of their respective filing or furnishing dates pursuant to the Exchange Act (and to the extent such Public
Documents were amended, as of the date of filing of such amendment) and as of the date of effectiveness in the case of Public Documents filed pursuant to the
Securities Act, the Public Documents (a)
15
complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder, as applicable, and (b) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of the Original
Agreement Date, there are no outstanding or unresolved comment letters received from the SEC or its staff with respect to any Public Document.
Section 4.09 Compliance with Laws . The business of the Company and its Subsidiaries is not being conducted, and has not been conducted at any
time during the three years prior to the Original Agreement Date, in violation of any applicable Laws (including, without limitation, the U.S. Foreign Corrupt
Practices Act, as amended, and PRC anti-bribery laws) or government order applicable to the Company except for violations which would not, individually or in
the aggregate, result in a Material Adverse Effect. Except as disclosed in the Public Documents, the Company or its relevant Subsidiaries have all permits,
licenses, authorizations, consents, orders and approvals (collectively, the “ Permits
”) required under applicable Laws to carry on their business as presently
conducted, except where the failure to have such Permits would not result in a Material Adverse Effect. Except as disclosed in the Public Documents, all such
Permits are in full force and effect and, to the knowledge of the Company, no suspension or cancellation of any of them is threatened, except where such failure to
be in full force and effect, or such suspension or cancellation, would not result in a Material Adverse Effect. The Company is in compliance in all material respects
with the applicable listing and corporate governance rules and regulations of the NYSE. The Company and its Subsidiaries have taken no steps to delist the ADSs
from the NYSE. As of the Original Agreement Date, the Company has not received any notification from the SEC or the NYSE indicating that the SEC or the
NYSE, as applicable, is contemplating suspending or terminating the listing of the ADSs (or the applicable registration under the Exchange Act related thereto).
Section 4.10 Financial Statements . As of their respective dates, the financial statements of the Company included in the Public Documents
complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. The
consolidated financial statements of the Company (including any related notes thereto) included or incorporated by reference in the Public Documents fairly
presented in all material respects the consolidated financial position of the Company as of the dates indicated therein and the consolidated results of its operations,
cash flows and changes in shareholders’ equity for the periods specified therein, other than as corrected or clarified in a subsequent Public Document. Such
financial statements were prepared in accordance with GAAP applied on a consistent basis (except (a) as may be otherwise indicated in such financial statements or
the notes thereto, or (b) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed to summary statements or
subject to recurring year-end adjustments).
Section 4.11 Undisclosed Liabilities . Since March 31, 2015, the Company and its Subsidiaries do not have any liabilities or obligations that would
be required to be disclosed on a consolidated balance sheet of the Company in accordance with GAAP, other than (a) liabilities or obligations reflected on, reserved
against, or disclosed in the Company’s balance sheet as of March 31, 2015 included in the Public Documents (excluding those liabilities or obligations
16
discharged or paid in full prior to the Original Agreement Date), (b) liabilities or obligations that would not, individually or in the aggregate, have a Material
Adverse Effect, and (c) liabilities incurred since March 31, 2015 in the ordinary course of business consistent with past practices and any liabilities incurred
pursuant to this Agreement.
Section 4.12 Absence of Changes . Except for the execution and performance of this Agreement, the other Transaction Documents, the Onshore
Transaction Documents and the discussions, negotiations and transactions related hereto and thereto, since March 31, 2015, the Company and its Subsidiaries have
conducted their respective businesses in all material respects in the ordinary course of business consistent with past practice and there has not been:
(a) any Material Adverse Effect;
(b) any amendment to the Memorandum and Articles;
(c) any sale of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole;
(d) any merger or consolidation of the Company or any Material Subsidiary with or into another Person;
(e) (i) any declaration, setting aside or payment of any dividend or other distribution with respect to any share capital of the Company or
any Material Subsidiary (except for dividends or other distributions by any Subsidiary to the Company or to any of the Company’s wholly owned Subsidiaries), or
(ii) any redemption, repurchase or other acquisition of any share capital of the Company or any Material Subsidiary;
(f) any adoption of resolution to approve or petition or similar proceeding or order in relation to a plan of complete or partial liquidation,
dissolution, scheme of arrangement, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any Material Subsidiary;
(g) any receiver, trustee, administrator or other similar Person appointed in relation to the affairs of the Company or its property or any
material part thereof; or
(h) any agreement to carry out any of the foregoing.
Section 4.13 Litigation . As of the Original Agreement Date, there are no pending or, to the Company’s knowledge, threatened, Proceedings of any
nature against the Company or any of its Subsidiaries, which would, individually or in the aggregate, have a Material Adverse Effect. There is no Judgment
outstanding against the Company or any of its Subsidiaries, except for any Judgment which would not, individually or in the aggregate, have a Material Adverse
Effect.
Section 4.14 No Other Representations . In entering into this Agreement, the Company acknowledges that the Purchaser and its representatives have
not made any representations, warranties, estimates or projections, and it has not relied on any representations, warranties, estimates or projections of the Purchaser
or its representatives, other than the specific representations and warranties of the Purchaser set forth in ARTICLE III.
17
Section 4.15 Brokers and Finders . Neither the Company nor any of its Affiliates is a party to any agreement, arrangement or understanding with
any Person (other than China International Capital Corporation Limited or its Affiliates) that would give rise to any valid right, interest or claim against or upon the
Purchaser or the Company for any brokerage commission, finder’s fee or other similar compensation, as a result of the transactions contemplated by the
Transaction Documents.
ARTICLE
V
AGREEMENTS
OF
THE
PARTIES
Section 5.01 Further Assurances . Each Party shall use its reasonable best efforts to fulfill or obtain the fulfillment of the conditions precedent to its
obligation to consummate the transactions contemplated by this Agreement on a timely basis, including the execution and delivery of any documents, certificates,
instruments or other papers that are reasonably required for the consummation of such transactions, and will cooperate and consult with the other and use its
reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to
obtain all necessary permits of, or any exemption by, all Governmental Authorities, necessary or advisable to consummate the transactions contemplated by this
Agreement.
Section 5.02 Responsibility to Notify . From the Original Agreement Date through the Closing Date, the Parties shall promptly notify each other in
writing of any event, condition or circumstances occurring from the Original Agreement Date through the Closing Date which would, or would reasonably be
expected to, (a) result in any conditions set forth in ARTICLE VI or ARTICLE VII not to be satisfied, or (b) result in any material violation of any provision of this
Agreement. If a notice of any matter pursuant to this Section 5.02 contains an express admission by the notifying Party that such matter has caused or will cause
any conditions set forth in ARTICLE VI (if the notifying Party is the Purchaser) or ARTICLE VII (if the notifying Party is the Company) to be incapable of being
satisfied on or prior to the Long Stop Date, and the receiving Party nevertheless proceeds to consummate the Offshore Investment, the receiving Party shall be
deemed to have irrevocably waived its right to indemnification pursuant to ARTICLE IX with respect to the matter set forth in such notice.
Section 5.03 PRC Regulatory Filings . The Purchaser shall, as soon as practicable after the Original Agreement Date, duly make all filings
necessary under applicable PRC Laws (including, for the avoidance of doubt, the Enumerated PRC Regulatory Filings) in respect of the Offshore Investment and
the transactions contemplated by the Transaction Documents (the “ PRC
Regulatory
Filings
”). Following each PRC Regulatory Filing, the Purchaser shall
(i) promptly notify the Company of such PRC Regulatory Filing, (ii) use reasonable best efforts to promptly complete such PRC Regulatory Filing and obtain
written confirmation or acceptance thereof from the applicable Governmental Authority as soon as practicable, and (iii) upon such PRC Regulatory Filing having
been confirmed or accepted by the applicable Governmental Authority, promptly notify the Company of such confirmation or acceptance and provide proof
thereof. The Parties shall reasonably cooperate with each other (including furnishing to each other all necessary information) in connection with the preparation
and making of the PRC Regulatory Filings and resolving any investigation or other inquiry of any Governmental Authority in connection therewith. The Purchaser
shall promptly inform the Company of any
18
material communication with any Governmental Authority regarding any PRC Regulatory Filing with reasonable details and, to the extent reasonably practicable,
provide advanced notice to the Company in respect of, and permit representatives of the Company to participate in, any meeting with any Governmental Authority
in respect of any such filing, investigation or other inquiry.
Section 5.04 Confidentiality; Public Disclosure .
(a) The confidentiality terms of the confidentiality agreement dated as of August 7, 2015 (the “ Confidentiality
Agreement
”) between the
Parties are hereby incorporated herein by reference and shall continue in full force and effect until the first anniversary of the Closing Date or, if this Agreement is
terminated prior to the Closing, until the first anniversary of such termination.
(b) Without limiting any other provision of this Agreement, the Parties will, to the extent permitted by applicable Law, consult with each
other before issuance, and provide each other the opportunity to review, comment upon and concur with, and use all reasonable efforts to agree on, any press
release or public statement with respect to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby, and will not
(to the extent practicable) issue any such press release or make any such public statement prior to such consultation and agreement, except as may be required by
Law or an applicable securities exchange, provided
that the disclosing Party shall, to the extent permitted by applicable Law or the applicable securities exchange
and if reasonably practicable, inform the other Party about the disclosure to be made pursuant to such requirements prior to the disclosure.
Section 5.05 No Promotion .
(a) Except as required for conducting ordinary course of business cooperation between the Company and/or its Affiliates on the one hand
and the Purchaser and/or its Affiliates on the other than (and in compliance with the terms and conditions of such cooperation), without the prior written consent of
or otherwise agreed in writing to by the Company, and whether or not the Closing is consummated, the Purchaser shall not, and shall procure that its Affiliates do
not use for advertising or promotion purposes, the name of the Company or any Affiliate of the Company, either alone or in combination, including “ 阿里巴巴 ”
(Chinese equivalent for “Alibaba”), “ 淘宝 ” (Chinese equivalent for “Taobao”), “ 阿里 ” (Chinese equivalent for “Ali”), “ 全球速卖通 ” (Chinese brand for
“AliExpress”), “ 淘 ” (Chinese equivalent for “Tao”), “ 天猫 ” (Chinese equivalent for “Tmall”), “ 一淘 ” (Chinese equivalent for “eTao”), “ 聚划算 ” (Chinese
equivalent for “Juhuasuan”), “ 阿里旅行 去啊 ” (Chinese equivalent for “Alitrip”), “ 阿 里妈妈 ” (Chinese equivalent for “Alimama”), “ 阿里云 ” (Chinese
equivalent for “Aliyun”), “ 云 OS” (Chinese equivalent for “YunOS”), “ 万网 ” (Chinese brand for “HiChina”), “ 口碑 ” (Chinese equivalent for “Koubei”), “ 虾
米 ” (Chinese equivalent for “Xiami”), “ 蚂蚁金服 ” (Chinese brand for “Ant Financial”), “ 蚂蚁 ” (Chinese brand for “Ant”), “ 支付宝 ” (Chinese brand for
“Alipay”), “ 小微金服 ” (Chinese equivalent for “Xiao Wei Jin Fu”), “1688”, “ 来往 ” (Chinese equivalent for “Laiwang”), “ 一达通 ” (Chinese equivalent for
“OneTouch”), “ 友盟 ” (Chinese equivalent for “Umeng”), “ 酷盘 ” (Chinese equivalent for “Kanbox/ Kupan”), “ 天天动听 ” (Chinese equivalent for “TTPOD”),
“ 优视 ” (Chinese equivalent for “UC / UCWeb”), “ 高德 ” (Chinese equivalent for
19
“AutoNavi”), “ 去啊 ” (Chinese equivalent for “Alitrip”), “ 钉钉 ” (Chinese equivalent for “DingTalk”), “ 余额宝 ” (Chinese equivalent for “Yu’e Bao”),” 招财宝
” (Chinese equivalent for “Zhaocaibao”), “ 芝麻信用 ” (Chinese equivalent for “Sesame Credit”), “Alibaba”, “Taobao”, “Ali”, “AliExpress”, “Tao”, “Tmall”,
“eTao”, “Juhuasuan”, “Alimama”, “Aliyun”, “YunOS”, “HiChina”, “Koubei”, “Xiami”, “Ant Financial”, “Ant”, “Alipay”, “Xiao Wei Jin Fu”, “Laiwang”,
“OneTouch”, Umeng”, “Kanbox”, “Kupan”, “TTPOD”, “UCWeb”, “UC”, “AutoNavi”, “Alitrip”, “DingTalk”, “Yu’e Bao”, “Zhaocaibao”, “Sesame Credit”, “11
Main”, the associated devices and logos of the above brands (including but not limited to the smiling face device of Alibaba Group, cow device of Alibaba.com, ant
device of Taobao, Tao doll device of Taobao, cat device of Tmall, Juxiaomeng device of Juhuasuan, ant device of Ant Financial, lion device of Alipay, Zhixiaobao
device of Alipay, ingot device of Zhaocaibao and sesame device of Sesame Credit).
(b) Except as required for conducting ordinary course of business cooperation between the Company and/or its Affiliates on the one hand
and the Purchaser and/or its Affiliates on the other than (and in compliance with the terms and conditions of such cooperation), without the prior written consent of
or otherwise agreed in writing to by the Purchaser, and whether or not the Closing is consummated, the Company shall not, and shall procure that its Affiliates do
not use for advertising, publicity or promotion purposes, the name of the Purchaser or any Affiliate of the Purchaser, either alone or in combination, including “ 苏
宁 ”, “ 苏宁易购 ”, “ 苏宁云商 ”, “ 乐购仕 , “LAOX”, “ 易付宝 ”, “Suning”, “ 苏宁阅读 ”, “IT 帮客 ”, “ 红孩子 ”, “Red Baby” and the associated devices and
logos of the above brands.
(c) Without the prior written consent of or otherwise agreed in writing to by Company, and whether or not the Closing is consummated,
each Party shall not, and shall procure that its Affiliates do not represent, directly or indirectly, that any product or services provided by it, has been approved or
endorsed by the other Party or any of its Affiliates.
Section 5.06 No Amendment to Finance Documents . Prior to the Closing, the Purchaser shall not, and shall procure that the Borrower does not,
agree to or permit any termination, amendment, replacement, supplement or other modification of, or waive any of it rights under, the Finance Documents (in each
case, that could adversely affect any rights of the Company thereunder, including the granting of any additional Encumbrance over any Issued Shares or any ADSs
representing any Issued Shares or the inclusion of additional events or circumstances as an Event of Default (as defined in the Facility Agreement)) without the
Company’s prior written consent. Upon any such amendment, replacement, supplement or modification, the term “Finance Documents” shall mean the Finance
Documents as so amended, replaced, supplemented or modified.
Section 5.07 Supplemental Listing Application . The Company shall file with the NYSE the supplemental listing application in respect of the Issued
Shares (the “ Supplemental
Listing
Application
”) as soon as reasonably practicable after the Amendment Date.
Section 5.08 Purchaser Transfer Restrictions .
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(a) The Purchaser shall not, and shall procure its Affiliates who hold any Issued Shares or ADSs representing any Issued Share to not,
except with the prior written consent of the Company or in connection with a Permitted Transfer:
Issued Share;
(i) at any time on or before the 6-month anniversary of the Closing Date: Transfer any Issued Share or any ADS representing any
(ii) at any time after the 6-month anniversary of the Closing Date and on or before the 18-month anniversary of the Closing Date:
Transfer any Issued Shares or any ADS representing any Issued Shares, except any Transfer that (x) is a block trade of such Securities conducted pursuant to the
procedures set forth in Section 5.07(b), and (y) would not result in the Purchaser and its wholly-owned Subsidiaries collectively holding less than 50% of the Issued
Shares (including, for purposes of this subsection (ii), any ADS representing the Issued Shares); and
(iii) at any time after the 18-month anniversary of the Closing Date and on or before the 36-month anniversary of the Closing
Date: Transfer any Issued Share or any ADS representing any Issued Share if such Transfer would result in the Purchaser and its wholly-owned Subsidiaries
collectively holding less than 50% of the Issued Shares (including, for purposes of this subsection (iii), any ADS representing the Issued Shares).
(b) Right of First Refusal.
(i) If the Purchaser or any of its Affiliates intends to conduct a block trade of any Securities during the time period specified in
Section 5.08(a)(ii), the Purchaser shall notify the Company in writing of such intention and specify in such notice (the “ ROFR
Sale
Proposal
”) (x) the number
and type of Securities proposed to be so sold (the “ ROFR
Securities
”), (y) the period of time during which such Securities are proposed to be sold (the “ ROFR
Sale
Window
”), provided,
however
, that the Sale Window shall commence not less than 10 Trading Days after Company’s receipt of the Sale Proposal and shall
be a period of not more than 10 consecutive Trading Days. After the close of market on any Trading Day during the Sale Window (the “ Relevant
Trading
Day
”), but prior to the open of market on the immediately following Trading Day, the Purchaser may offer to sell to the Company all of the Offered Securities by
delivering a written notice to the Company specifying the per share price at which the Purchaser is willing to sell the Offered Securities (the “ ROFR
Offer
Notice
”).
(ii) The Company shall have an option to, by written notice (the “ ROFR
Exercise
Notice
”) to the Purchaser at any time after an
Offer Notice has been given and prior to the open of market on the second Trading Day after the Relevant Trading Day (the “ ROFR
Election
Period
”), elect to
purchase all or a portion of the Offered Securities at a price per share equal to that set forth in the Offer Notice. If the Company has duly delivered the Exercise
Notice within the Election Period, then payment for the Offered Securities to be purchased shall be made by the Company, against delivery of such Offered
Securities, no later than the 10
Business Day after the Company’s delivery of the Exercise Notice.
th
Purchaser (or its Affiliate, as
(iii) If the Company does not elect to purchase all of the Offered Securities in accordance with Section 5.08(b)(ii), then, the
21
applicable) shall be entitled to sell the remaining Offered Securities via block trades at any time thereafter but prior to the open of market of the fourth Trading Day
after the expiration of the Election Period, at a price per share not less than the price specified in the Offer Notice. In the event the Purchaser (or its Affiliate, as
applicable) does not sell all the Offered Securities during such period, the rights of the Company under Section 5.08(b)(i) and Section 5.08(b)(ii) shall be revived
and shall be applicable to each subsequent proposed block trade of such Offered Securities during the time period specified in Section 5.08(a)(ii).
(c) Right of First Offer.
(i) From and after the 18-month anniversary of the Closing Date, the Company shall have a right of first offer if the Purchaser or
any of its Affiliates (the “ ROFO
Transferor
”) proposes to Transfer (other than a Permitted Transfer) any Issued Shares or any ADSs representing the Issued
Shares (collectively, the “ ROFO
Securities
”) owned by it to any Person. Each time a ROFO Transferor proposes to Transfer any ROFO Securities, it shall first
make (and the Purchaser shall procure the ROFO Transferor to make) an offer to sell the ROFO Securities to the Company in accordance with the following
provisions of this Section 5.08(c).
fide intention to Transfer the ROFO Securities and specifying the number of ROFO Securities.
(ii) The ROFO Transferor shall give written notice (the “ ROFO
Notice
”) to the Company stating the ROFO Transferor’s bona
(iii) Upon receipt of the ROFO Notice, the Parties agree to procure the ROFO Transferor and the Company to negotiate in good
faith for a period of 10 Business Days (the “ ROFO
Notice
Period
”) the terms and conditions of Transfer of the ROFO Securities by the ROFO Transferor to the
Company. If the ROFO Transferor and the Company agree on the terms and conditions of the Transfer in accordance with this Section 5.08(c)(iii), then payment
for the ROFO Securities to be purchased shall be made by the Company, against delivery of such ROFO Securities, no later than the 10th Business Day after such
agreement.
(iv) If the Parties fails to agree on the terms and conditions of the proposed Transfer in accordance with Section 5.08(c)(iii), the
ROFO Transferor may, during the 10 Business Day period following the expiration of the ROFO Notice Period, Transfer all of the ROFO Securities not purchased
by the Company, provided that, during such 10 Business Day period, (x) the Company shall have the right to deliver a notice to the ROFO Transferor stating the
material terms (including the price and number of ROFO Securities it intends to purchase) (the “ Company’s
Bid
”) prior to such ROFO Securities having been
transferred in accordance with this Section 5.08(c)(iv) and (y) the Purchaser shall not Transfer any ROFO Securities to any Transferee on terms and conditions less
favorable to the ROFO Transferor than those set forth in the Company’s Bid unless the Purchaser agrees to Transfer to the Company the number of ROFO
Securities at the price set forth in the Company’s Bid. If the ROFO Transferor does not Transfer the ROFO Securities within such period, the rights provided
hereunder shall be deemed to be revived and the ROFO Securities shall not be offered to any Person unless first re-offered to the Company in accordance with this
Section 5.07(c).
(d) Notwithstanding anything herein to the contrary, the Purchaser shall not, and shall procure its Affiliates who hold any Issued Shares or
ADSs representing any Issued
22
Shares to not, Transfer any Issued Shares or any ADS representing any Issued Shares to any Company Competitor, provided, however, that this
Section 5.08(d) shall not apply to any sale of Securities conducted through the automated trading system of the applicable securities exchange where the identity of
the prospective purchaser is unknown and could not reasonably be known to the seller of such Securities . For purposes hereof, “ Company
Competitors
” means
(i) Persons designated in writing by the Company to the Purchaser on or about the Original Agreement Date and as such designations may be updated by the
Company (as determined by the Company in good faith) from time to time by written notice to the Purchaser, provided that the Company shall not update such
designations more than twice during any calendar year, and (ii) Subsidiaries and, to the Purchaser’s knowledge, other Affiliates of any Person who is designated
under subsection (i).
ARTICLE
VI
CONDITIONS
TO
THE
COMPANY’S
OBLIGATION
The obligation of the Company hereunder to issue and sell the Issued Shares to the Purchaser at the Closing is subject to the satisfaction or waiver by the
Company, at or before the Onshore Payment Date, of each of the following conditions:
Section 6.01 Representations and Warranties; Covenants .
(a) Each representation and warranty made by the Purchaser in Section 3.01, Section 3.02 and Section 3.07 shall be true and correct in all
respects as of the Original Agreement Date, as of the Amendment Date and as of the Onshore Payment Date as though made at that date (except for those
representations and warranties that speak as of a specific date, which shall be so true and correct as of such specified date).
(b) Each representation and warranty made by the Purchaser in ARTICLE III (other than those enumerated in Section 6.01(a)) shall be true
and correct in all respects, as of the Original Agreement Date, as of the Amendment Date and as of the Onshore Payment Date as though made at that date (except
for those representations and warranties that speak as of a specific date, which shall be so true and correct as of such specified date), except, in each case, where the
failure of any such representations and warranties to be so true and correct, individually or in the aggregate, has not had and would not have a material adverse
effect on the ability of the Purchaser to consummate the transactions contemplated hereunder and under the Onshore Transaction Documents.
(c) The Purchaser shall have performed, satisfied and complied with the covenants and agreements required by this Agreement to be
performed, satisfied or complied with by the Purchaser at or prior to the Onshore Payment Date, except for such non-compliance which would not, individually or
in the aggregate, result in a material adverse effect on the ability of the Purchaser to consummate the transactions contemplated hereunder and under the Onshore
Transaction Documents.
Section 6.02 No Stop Order . No stop order suspending the qualification or exemption from qualification of ADSs from trading on the NYSE shall
have been issued and no Proceeding for that purpose shall have been commenced or shall be pending or threatened.
23
Section 6.03 No Action . No Law or Judgment entered by or with any Governmental Authority with competent jurisdiction, shall be in effect that
enjoins, prohibits or materially alters the terms of the transactions contemplated by the Transaction Documents, nor any Proceeding challenging any Transaction
Document or the transactions contemplated hereby and thereby, or seeking to prohibit, alter, prevent or delay the Closing, shall have been instituted or being
pending before any Governmental Authority.
Section 6.04 PRC Regulatory Filings . The Purchaser shall have duly made all PRC Regulatory Filings and the Company shall have received copies
of written evidence issued by the applicable Governmental Authorities showing that each PRC Regulatory Filing has been unconditionally confirmed or accepted,
and all such confirmation or acceptance shall remain in full force and effect.
Section 6.05 Onshore Investment . All conditions precedent to the Onshore Investor’s obligation to pay the Onshore Purchase Price as set forth in
Section 3.02 of the Onshore Investment Agreement shall have been satisfied or duly waived in accordance with the Onshore Investment Agreement (other than the
condition set forth in Section 3.02(c) of the Onshore Investment Agreement).
Section 6.06 Payment Obligations . The Purchaser shall have performed its obligations under Section 2.03(a) in full.
Section 6.07 Officer’s Certificate . The Purchaser shall have delivered to the Company a certificate, dated as of the Onshore Payment Date,
executed by a duly authorized officer of the Purchaser, certifying to the fulfillment of the condition specified in Section 6.01.
ARTICLE
VII
CONDITIONS
TO
THE
PURCHASER’S
OBLIGATION
The obligations of the Purchaser under Section 2.03 are subject to the satisfaction or waiver by the Purchaser, at or before the Onshore Payment Date, of
each of the following conditions:
Section 7.01 Representations and Warranties; Covenants .
(a) Each representation and warranty made by the Company in Section 4.01, Section 4.02, Section 4.03, Section 4.04 and Section 4.07
shall be true and correct in all respects as of the Original Agreement Date, as of the Amendment Date and as of the Onshore Payment Date as though made at that
date (except for those representations and warranties that speak as of a specific date, which shall be so true and correct as of such specified date).
(b) Each representation and warranty made by the Company in ARTICLE IV (other than those enumerated in Section 7.01(a)) shall be true
and correct in all respects, as of the Original Agreement Date, as of the Amendment Date and as of the Onshore Payment Date as though made at that date (except
for those representations and warranties that speak as of a specific date, which shall be so true and correct as of such specified date), except, in each case, where the
failure of any such representations and warranties to be so true and correct, individually or in the aggregate, has not had and would not have a Material Adverse
Effect.
24
(c) The Company shall have performed, satisfied and complied with the covenants and agreements required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Onshore Payment Date, except for such non-compliance which would not, individually or
in the aggregate, result in a material adverse effect on the ability of the Company to consummate the transactions contemplated hereunder and under the Onshore
Transaction Documents.
Section 7.02 No Stop Order . No stop order suspending the qualification or exemption from qualification of ADSs from trading on the NYSE shall
have been issued and no Proceeding for that purpose shall have been commenced or shall be pending or threatened.
Section 7.03 No Action . No Law or Judgment entered by or with any Governmental Authority with competent jurisdiction, shall be in effect that
enjoins, prohibits or materially alters the terms of the transactions contemplated by the Transaction Documents, nor any Proceeding challenging any Transaction
Document or the Shareholders Agreement or the transactions contemplated hereby or thereby, or seeking to prohibit, alter, prevent or delay the Closing, shall have
been instituted or being pending before any Governmental Authority.
Section 7.04 No Material Adverse Effect . No Material Adverse Effect shall have occurred after the Original Agreement Date and be continuing as
of the Onshore Payment Date.
Section 7.05 PRC Regulatory Filings . All Enumerated PRC Regulatory Filings shall have been made with, and unconditionally confirmed or
accepted by, the applicable Governmental Authorities, and all such confirmation or acceptance shall remain in full force and effect.
Section 7.06 Onshore Investment . The Onshore Investor shall have paid the Onshore Purchase Price pursuant to Section 3.01 of the Onshore
Investment Agreement.
Section 7.07 Company Officer’s Certificate . The Company shall have delivered to the Purchaser a certificate, dated as of the Onshore Payment
Date, executed by a duly authorized officer of the Company, certifying to the fulfillment of the conditions specified in Section 7.01 and Section 7.04.
ARTICLE
VIII
TERMINATION
Section 8.01 Termination . Subject to Section 8.02, this Agreement may be terminated and the transactions contemplated by this Agreement
abandoned at any time prior to the Onshore Payment Date:
(a) by the mutual written consent of the Company and the Purchaser;
(b) by the Company or the Purchaser if any Law, or any final, non-appealable injunction or order shall have been enacted, issued,
promulgated, enforced or entered which is in effect and has the effect of prohibiting the sale, issuance or purchase of the Issued Shares;
25
(c) by the Purchaser if there has been a breach of any representation, warranty, covenant or agreement by the Company under this
Agreement that would give rise to the failure of the condition set forth in Section 7.01, and such breach is not cured within 30 days of receipt of written notice
thereof from the Purchaser;
(d) by the Company if there has been a breach of any representation, warranty, covenant or agreement by Purchaser under this Agreement
that would give rise to the failure of the condition set forth in Section 6.01, and such breach is not cured within 30 days of receipt of written notice thereof from the
Company;
(e) by the Company or the Purchaser, upon written notice to the other Party, if the Onshore Payment has not occurred as of the Long Stop
Date, provided,
however, that the right to terminate this Agreement under this Section 8.01(e) shall not be available to any Party whose failure to fulfill any
obligation under this Agreement shall have been the principal cause of, or shall have resulted in, the failure of the Onshore Payment to occur on or prior to such
date; or
(f) by the Company or the Purchaser, upon written notice to the other Party, if the Onshore Investment Agreement has been terminated in
accordance with its terms prior to the Onshore Payment Date.
Section 8.02 Effect of Termination . In the event of termination of this Agreement as provided in Section 8.01, written notice thereof shall be given
to the other Party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of the Parties; provided
that (a) nothing herein shall relieve any Party from liability for any breach of this Agreement that occurred
before such termination and (b) the provisions of this ARTICLE VIII, ARTICLE X, Section 5.04 and Section 5.05 shall remain in full force and effect and survive
any termination of this Agreement pursuant to the terms of this ARTICLE VIII.
ARTICLE
IX
INDEMNIFICATION
Section 9.01 Survival . Other than the representations and warranties set forth in Section 3.01, Section 3.02, Section 4.01, Section 4.02,
Section 4.03, Section 4.04 and Section 4.07, which shall survive the Closing until the expiration of the applicable statute of limitations, the representations and
warranties of the parties set forth in ARTICLE III and ARTICLE IV shall survive the Closing until the first anniversary of the Closing Date. All of the covenants
or other agreements of the Parties contained in this Agreement shall survive the Closing until fully performed in accordance with their terms.
Section 9.02 Indemnification .
(a) The Company, from and after the Closing, shall defend, protect, indemnify and hold harmless the Purchaser, its Affiliates and their
respective officers, directors, employees and agents from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith, and including reasonable attorneys’ fees and disbursements (the “ Indemnified
Liabilities
”), incurred by the
26
Purchaser as a result of, or arising out of, or relating to (i) any misrepresentation or breach of any representation or warranty made by the Company in this
Agreement, or (ii) any breach of any covenant, agreement or obligation of the Company contained in this Agreement.
(b) The Purchaser, from and after the Closing, shall defend, protect, indemnify and hold harmless the Company, its Affiliates and their
respective officers, directors, employees and agents from and against any and all Indemnified Liabilities incurred by the Company as a result of, or arising out of,
or relating to (i) any misrepresentation or breach of any representation or warranty made by the Purchaser in this Agreement, or (ii) any breach of any covenant,
agreement or obligation of the Purchaser contained in this Agreement.
Section 9.03 Limitation to Liability . Notwithstanding anything to the contrary in this Agreement and except in the case of fraud or deliberate breach
by a Party in connection with the transactions contemplated under this Agreement:
(a) no claim for indemnification may be asserted nor may any Proceeding be commenced against either Party for breach of any
representation, warranty, covenant or agreement contained herein, unless written notice of such claim or Proceeding is received by such Party describing in
reasonable detail the facts and circumstances with respect to the subject matter of such claim or proceeding on or prior to the date on which the representation,
warranty, covenant or agreement on which such claim or Proceeding is based ceases to survive as set forth in Section 9.01. In the event that a notice of claim for
indemnification under this ARTICLE IX has been given within the applicable survival period, the representations and warranties that are the subject of such
indemnification claim (and the right to pursue such claim) shall survive with respect to such claim until such time as such claim is finally resolved in accordance
with the provisions hereof;
(b) the Company shall not be liable to the Purchaser for any Indemnified Liabilities (i) unless and until the aggregate amount of such
Indemnified Liabilities in respect of the indemnification hereunder exceeds US$46,000,000 and once such amount has been exceeded, the Company shall be liable
for the aggregate amount of all Indemnified Liabilities and not merely the excess, and (ii) unless and until the amount of Indemnified Liabilities arising from any
particular inaccuracy in or breach of any representation, warranty exceeds US$2,000,000, provided
that, the limitation to the Company’s liabilities under this
Section 9.03(b) shall not apply to any breach of any representation or warranty made by the Company under Section 4.01, Section 4.02, Section 4.03, Section 4.04
or Section 4.07;
(c) the Company shall have no liabilities or obligations under this ARTICLE IX from and after the aggregate amount of all Indemnified
Liabilities exceeds (i) with respect to all claims under ARTICLE IX (other than claims for Indemnified Liabilities arising out of any breach of any representation or
warranty made by the Company under Section 4.01, Section 4.02, Section 4.03, Section 4.04 or Section 4.07), an amount equal to 25% of the Aggregate Purchase
Price, and (ii) with respect to all claims under ARTICLE IX arising out of any breach of any representation or warranty made by the Company under Section 4.01,
Section 4.02, Section 4.03, Section 4.04 or Section 4.07), an amount equal to 100% of the Aggregate Purchase Price;
27
(d) no Party shall have any liability under any provision of this Agreement for any punitive, incidental, consequential, special or indirect
damages, including loss of future revenue or income, or loss of business reputation or opportunity relating to the breach or alleged breach of this Agreement;
(e) the Party seeking indemnification pursuant to this ARTICLE IX shall use commercially reasonable efforts to pursue all legal rights and
remedies available in order to mitigate and minimize any Indemnifiable Liabilities subject to indemnification pursuant to this ARTICLE IX promptly upon
becoming aware of any event or circumstance that could reasonably be expected to constitute or give rise to such Indemnifiable Liabilities; and
(f) notwithstanding any other provision contained herein, from and after the Closing, a claim for indemnification pursuant to this
ARTICLE IX shall be the sole and exclusive remedy of any Party for any claims against the other Party arising out of or resulting from this Agreement or other
Transaction Documents and the transactions contemplated hereby and thereby; provided
that a Party shall also be entitled to seek specific performance or other
equitable remedies pursuant to Section 10.13.
ARTICLE
X
MISCELLANEOUS
Section 10.01 Expenses . Except as otherwise provided in this Agreement and the other Transaction Documents, each Party shall bear and pay its
own costs, fees and expenses incurred by it in connection with the Transaction Documents and the transactions contemplated by the Transaction Documents.
Section 10.02 Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of Hong Kong, without regard to
principles of conflict of laws thereunder.
Section 10.03 Dispute Resolution . Any dispute, controversy or claim arising out of or relating to this Agreement, including, but not limited to, any
question regarding the breach, termination or invalidity thereof shall be finally resolved by arbitration in Hong Kong in accordance with the rules (the “ ICC
Rules
”) of the International Chamber of Commerce in force at the time of commencement of the arbitration.
(a) The arbitral tribunal shall consist of three arbitrators. The arbitrators shall be appointed in accordance with the ICC Rules.
(b) The language to be used in the arbitration proceedings shall be English.
(c) Any arbitration award shall be (i) in writing and shall contain the reasons for the decision, (ii) final and binding on the parties hereto
and (iii) enforceable in any court of competent jurisdiction, and the parties hereto agree to be bound thereby and to act accordingly.
(d) In the event a dispute is referred to arbitration hereunder, the Parties shall continue to exercise their remaining respective rights and
fulfill their remaining respective obligations under this Agreement.
28
(e) It shall not be incompatible with this arbitration agreement for any party to seek interim or conservatory relief from courts of
competent jurisdiction before the constitution of the arbitral tribunal.
Section 10.04 Counterparts . This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed by each party and delivered to the other parties. A facsimile or “PDF” signature
shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original.
Section 10.05 Severability . If any provision of this Agreement is found to be invalid or unenforceable, then such provision shall be construed, to the
extent feasible, so as to render the provision enforceable and to provide for the consummation of the transactions contemplated hereby on substantially the same
terms as originally set forth herein, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement, which
shall remain in full force and effect unless the severed provision is essential to the rights or benefits intended by the parties. In such event, the parties shall use
commercially reasonable efforts to negotiate, in good faith, a substitute, valid and enforceable provision or agreement, which most nearly effects the parties’ intent
in entering into this Agreement.
Section 10.06 Entire Agreement . This Agreement, the other Transaction Documents and the Onshore Transaction Documents, together with all the
schedules and exhibits hereto and thereto and the certificates and other written instruments delivered in connection therewith from time to time on and following
the Original Agreement Date, constitute and contain the entire agreement and understanding between the Parties with respect to the subject matter hereof and
thereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the Parties in respect of the
subject matter hereof and thereof.
Section 10.07 Notices . Except as may be otherwise provided herein, any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (a) upon receipt, when delivered personally; (b) upon
receipt, when sent by facsimile ( provided
confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); (c) one
(1) Business Day after deposit with an internationally recognized overnight courier service; in each case properly addressed to the party to receive the same or
(d) upon dispatch, when sent by electronic mail, provided that the sender of such email shall not have, within 24 hours after such electronic mail is sent, received
any automated response that such electronic mail is undeliverable to the intended recipient or the delivery is being delayed. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Alibaba Group Holding Limited
Address:
c/o Alibaba Group Services Limited
26th Floor, Tower One, Times Square, 1 Matheson Street
Causeway Bay, Hong Kong S.A.R.
29
E-mail:
Attention:
with a copy (for informational purposes only) to:
Simpson Thacher & Bartlett
Address:
ICBC Tower, 35/F, 3 Garden Road
Hong Kong
Email:
Attention:
If to the Purchaser:
Suning Commerce Group Co., Ltd.
Address:
Email:
Attention:
No. 1 Suning Avenue, Xuanwu District, Nanjing, China 210042
with a copy (for informational purposes only) to:
Sullivan & Cromwell
Address:
Email:
Attention:
28 Floor, Nine Queen’s Road Central, Hong Kong
A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this Section 10.07 by giving the other parties
written notice of the new address in the manner set forth above.
Section 10.08 No Third Party Beneficiaries . This Agreement shall be binding upon and inure solely to the benefit of, and be enforceable by, only the
parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any
right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
Section 10.09 Successors and Assigns . The provisions of this Agreement shall inure to the benefit of, and shall be binding upon, the successors and
permitted assigns of the parties hereto. Except as otherwise provided herein, neither this Agreement nor any of the rights, interests, or obligations hereunder shall
be assigned by any party hereto (whether by operation of law or otherwise) without the prior written consent of the other parties hereto; provided
, however, that the
Purchaser may designate, by written notice to the Company no later than five (5) Business Days prior to the Closing, a wholly-owned Subsidiary of the Purchaser
reasonably acceptable to the Company (the “ Purchaser
Designee
”), to be registered as the owner of the Issued Shares at the Closing, provided further that the
Purchaser shall remain jointly and severally liable with the Purchaser Designee under this Agreement.
30
Section 10.10 Construction . Each Party has participated in the drafting and negotiation of this Agreement. If an ambiguity or question of intent or
interpretation arises, this Agreement must be construed as if it is drafted by all the parties and no presumption or burden of proof shall arise favoring or disfavoring
any party by virtue of authorship of any of the provisions of this Agreement.
Section 10.11 Further Assurances . Each Party shall do and perform, or cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and documents, as any other parties may reasonably request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
Section 10.12 Adjustment of Share Numbers . If there is a subdivision, split, share dividend, combination, reclassification or similar event with
respect to any of the Ordinary Shares, then the numbers and types of shares of such Ordinary Shares referred to in this Agreement shall be adjusted to the number
and types of shares that a holder of such number of shares would own or be entitled to receive as a result of such event if such holder had held such number of
shares immediately prior to the record date for, or effectiveness of, such event.
Section 10.13 Specific Performance . The Parties acknowledge and agree that irreparable harm may occur for which money damages would not be an
adequate remedy in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that, in addition to any other remedies at law or in equity, the Parties shall be entitled to injunction and other equitable remedies, including
specific performance of the terms and provisions of this Agreement, without posting any bond or other undertaking.
Section 10.14 Amendment; Waiver . Except as specifically provided herein, this Agreement may be amended, modified or supplemented only by a
written instrument duly executed by the Parties. Except as specifically provided herein, the observance of any provision in this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively) only by the written consent of the Party against whom such waiver is to be effective.
Any amendment or waiver effected in accordance with this Section 10.14 shall be binding upon the Parties and their respective assigns. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, shall
impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or
in any similar breach, default or noncompliance thereafter occurring.
Section 10.15 Original Agreement and the other Transaction Documents . The Original Agreement is amended, restated, replaced and superseded in
its entirety by this Agreement as of the Amendment Date, provided , however , that such amendment and restatement shall not relieve any Party from any liability
for any breach of the Original Agreement that occurred prior to the Amendment Date. Notwithstanding the amendment and restatement of the Original Agreement
and for the avoidance of doubt, the other Transaction Documents, including the Letter Agreement, shall continue in full force and effect.
31
Section 10.16 Language Version . This Agreement is written and executed in English and Chinese. In the event of any inconsistency between the two
language versions, the English version shall prevail.
[ Signature
Page
Follows
]
32
IN
WITNESS
WHEREOF
, the parties hereto have caused their respective signature page to this Agreement to be duly executed as of May 19, 2016.
ALIBABA
GROUP
HOLDING
LIMITED
By:
/s/ Timothy Alexander Steinert
Name: Timothy Alexander Steinert
Title: Authorized Signatory
SUNING
COMMERCE
GROUP
CO.,
LTD.
(Company Chop)
By:
/s/ Ren Jun
Name: Ren Jun
Title: Authorized Signatory
List
of
Significant
Subsidiaries
and
Consolidated
Entities
of
Alibaba
Group
Holding
Limited
as
of
March
31,
2016
Exhibit
8.1
Taobao Holding Limited (Cayman Islands)
Taobao China Holding Limited (Hong Kong)
Zhejiang Tmall Technology Co., Ltd. (PRC)
Taobao (China) Software Co., Ltd. (PRC)
Ali Panini Investment Holding Limited (Hong Kong)
Alibaba Group Services Limited (Hong Kong)
Alibaba (China) Co., Ltd. (PRC)
Alibaba Group Treasury Limited (BVI)
Alibaba Group Properties Limited (Cayman Islands)
Alibaba Investment Limited (BVI)
Ali UC Investment Holding Limited (Cayman Islands)
Ali WB Investment Holding Limited (Cayman Islands)
AutoNavi Holdings Limited (Cayman Islands)
Ali YK Investment Holding Limited (Cayman Islands)
Ali CV Investment Holding Limited (Cayman Islands)
Perfect Advance Holding Limited (BVI)
Hangzhou Ali Venture Capital Co., Ltd. (PRC)
Ali CN Investment Holding Limited (BVI)
Ali KB Investment Holding Limited (Cayman Islands)
Alibaba.com Limited (Cayman Islands)
Alibaba.com Investment Holding Limited (BVI)
Alibaba.com China Limited (Hong Kong)
Alibaba (China) Technology Co., Ltd. (PRC)
Shen Zhen OneTouch Business Service Ltd. (PRC)
Alibaba.com International (Cayman) Holding Limited (Cayman Islands)
Alibaba.com International (BVI) Holding Limited (BVI)
Alibaba.com Singapore E-Commerce Private Limited (Singapore)
Alimama Limited (Cayman Islands)
Alimama Investment Holding Limited (BVI)
Alimama China Holding Limited (Hong Kong)
Hangzhou Alimama Technology Co., Ltd. (PRC)
Hangzhou Alimama Software Services Co., Ltd. (PRC)
Alisoft Holding L imited (Cayman Islands)
Alisoft Investment Holding Limited (BVI)
Alisoft China Holding Limited (Hong Kong)
Zhejiang Alibaba Cloud Computing Ltd. (PRC)
Alibaba Cloud Computing Ltd. (PRC)
Hangzhou Alibaba Advertising Co. , Ltd. (PRC)
Hangzhou Ali Technology Co. , Ltd. (PRC)
Zhejiang Taobao Network Co., Ltd. (PRC)
Zhejiang Tmall Network Co., Ltd. (PRC)
Exhibit
12.1
Certification
by
the
Principal
Executive
Officer
Pursuant
to
Section
302
of
the
Sarbanes-Oxley
Act
of
2002
I, Daniel Yong Zhang, Chief Executive Officer of Alibaba Group Holding Limited (the “Company”), certify that:
1. I have reviewed this annual report on Form 20-F of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company and
have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Company’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over
financial reporting.
Dated: May 24, 2016
By:
/s/ Daniel Yong Zhang
Name: Daniel Yong Zhang
Title: Chief Executive Officer
Exhibit
12.2
Certification
by
the
Principal
Financial
Officer
Pursuant
to
Section
302
of
the
Sarbanes-Oxley
Act
of
2002
I, Maggie Wei Wu, Chief Financial Officer of Alibaba Group Holding Limited (the “Company”), certify that:
1. I have reviewed this annual report on Form 20-F of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company and
have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Company’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over
financial reporting.
Dated: May 24, 2016
By:
/s/ Maggie Wei Wu
Name: Maggie Wei Wu
Title: Chief Financial Officer
Certification
by
the
Principal
Executive
Officer
Pursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002
Exhibit
13.1
I, Daniel Yong Zhang, Chief Executive Officer of Alibaba Group Holding Limited (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
a. the Company’s annual report on Form 20-F for the fiscal year ended March 31, 2016 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
b. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the
periods presented therein.
Dated: May 24, 2016
By:
/s/ Daniel Yong Zhang
Name: Daniel Yong Zhang
Title: Chief Executive Officer
Certification
by
the
Principal
Financial
Officer
Pursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002
Exhibit
13.2
I, Maggie Wei Wu, Chief Financial Officer of Alibaba Group Holding Limited (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
a. the Company’s annual report on Form 20-F for the fiscal year ended March 31, 2016 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
b. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the
periods presented therein.
Dated: May 24, 2016
By:
/s/ Maggie Wei Wu
Name: Maggie Wei Wu
Title: Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-199133) of Alibaba Group Holding Limited of our report
dated May 24, 2016 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
Exhibit
15.1
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Hong Kong, May 24, 2016
Exhibit
15.2
FANGDA PARTNERS
上海 Shanghai ·
北京 Beijing ·
香港 Hong Kong ·
深圳 Shenzhen
http://www.fangdalaw.com
电子邮件
电 话
传 真
E-mail:
Tel.:
Fax:
email@fangdalaw.com
86-10-5769-5600
86-10-5769-5788
中国北京市朝阳区光华路1号
北京嘉里中心北楼27层
邮政编码：100020
27/F, North Tower, Beijing Kerry Centre
1 Guanghua Road, Chaoyang District
Beijing 100020, PRC
May 24, 2016
Alibaba Group Holding Limited
c/o Alibaba Group Services Limited
26/F Tower One, Times Square
1 Matheson Street, Causeway Bay
Hong Kong
Dear Sirs,
We consent to the references to our firm under “Item 3. Key Information—D. Risk Factors—Risks Related to our Corporate Structure—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.”, “Item 4. Information on the Company—C. Organizational Structure—Contracts that Enable Us to Receive Substantially All of the
Economic Benefits from the Variable Interest Entities”, “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements”
and “Item 10. Additional Information—E. Taxation” in Alibaba Group Holding Limited’s Annual Report on Form 20-F for the year ended March 31, 2016 (the
“Annual Report”), which is filed with the Securities and Exchange Commission (the “SEC”) on May 24, 2016. We also consent to the filing with the SEC of this
consent letter as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of
1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours faithfully,
/s/ Fangda Partners
Fangda Partners
Exhibit
15.3
Our ref SSY/604743-000001/9526080v1
Alibaba Group Holding Limited
c/o Alibaba Group Services Limited
26/F Tower One, Times Square
1 Matheson Street, Causeway Bay
Hong Kong
24 May 2016
Dear Sir
Alibaba
Group
Holding
Limited
We have acted as legal advisors as to the laws of the Cayman Islands to Alibaba Group Holding Limited, an exempted limited liability company incorporated in the
Cayman Islands (the “ Company
”), in connection with the filing by the Company with the United States Securities and Exchange Commission of an annual report
on Form 20-F for the fiscal year ended March 31, 2016.
We hereby consent to the reference of our name under the heading “Item 10. Additional Information E. Taxation — Cayman Islands Taxation” in the Form 20-F.
Yours faithfully
/s/ Maples and Calder
Maples and Calder