Alibaba's Jack Ma Cedes Control of Key China Business Licenses

BEIJING—Billionaire Jack Ma surrendered control of the legal entities that hold Alibaba Group Holding Ltd.’s BABA -0.94% business licenses in China nearly two months before announcing his plans to retire, regulatory filings show.

Alibaba said Mr. Ma, who has said he wants to do more in education and philanthropy, ceded control of the so-called variable-interest entities, or VIEs, partly to reduce his administrative burden.

“He wants to get a clean break and start fresh with his new philanthropy,” said Fredrik Oqvist, founder of financial-services startup blueflag.io. “If you are going to step down and no longer be involved in the company, staying on as a key shareholder in the VIEs starts raising questions.”

Mr. Oqvist said companies typically want VIEs in the hands of executives whose interests are aligned with those of the corporation. Once Mr. Ma retires next year, investors could start questioning his motives and set off a panic if he chooses to sell off shares in the company.

The previous arrangement also put too much authority in the hands of Mr. Ma and Alibaba co-founder Simon Xie—who between them control four of Alibaba’s five main VIEs—said Matthew Dresden, a Seattle-based attorney at Harris Bricken who is knowledgeable about Chinese law.

“There was a lot of risk there,” Mr. Dresden said. This move “parses out the risk in smaller tranches rather than have it concentrated in just two people.”

The VIE decision was disclosed in a U.S. Securities and Exchange regulatory filing July 27, but not widely reported at the time. The filing says Alibaba aims to restructure most of its VIEs by 2019.

The entities were devised by financial advisers in the late 1990s to allow offshore investment in Chinese sectors where foreign investment is banned or restricted, such as technology. The resulting corporate structure has two parts: the Chinese VIE, which holds the business permits and licenses required for China, and an offshore holding company in which foreigners can hold shares.

Before its public offering on the New York Stock Exchange in 2014, Alibaba disclosed that its licenses to operate websites in China were held by VIEs controlled by Mr. Ma and Mr. Xie.

Alibaba said Monday that the change in control will also reduce the “key-man” risk of heavily relying on one employee. In the July filing the company said the restructuring will tighten Alibaba’s control over the VIEs and “address the uncertainty resulting from any potential disputes between us and the individual equity holders.”

After the restructuring, two layers of holding companies, owned by Alibaba partners or executives, will control the VIEs. The filing did not disclose the co-owners.

Alibaba has faced controversy over VIEs in the past.

In 2010, Mr. Ma cut a contractual relationship between Alibaba and a VIE that he controlled and that owned the Alipay payments business. That surprised Alibaba investors Yahoo and Softbank, but they were unable to stop the deal because they owned shares in a holding company without control over Alipay, now called Ant Financial. Mr. Ma still controls voting rights at Ant.

In his September announcement, Mr. Ma said he would hand over the job to chief executive officer Daniel Zhang. He plans to continue as the founding partner in the Alibaba Partnership, a group of senior executives who have the power to nominate most of the company’s board despite not holding a majority of the company’s shares.

Mr. Ma could also retain control in the background by appointing allies to the holding companies that will gain control over the VIEs.

“It depends on how the restructuring really occurs,” Mr. Dresden said. But given that Mr. Ma. freely chose to retire, “it would seem odd to set up a puppet regime.”

Alibaba dominates e-commerce in China through online sales platforms Taobao and Tmall, where Chinese consumers and businesses alike shop for apparel, food, electronics and other goods. The company reported revenue of $11.83 billion in its second quarter, up 61% from a year earlier.

Write to Shan Li at shan.li@wsj.com

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