JD.com Founder's $591 Million Payout

NEW YORK (TheStreet) -- Richard Qiangdong Liu, the founder of China's largest online direct sales company, JD.com, received $591 million in stock compensation in the first quarter of 2014 as the company moved toward an initial public offering in the U.S.

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According to JD.com's prospectus, Liu was granted over 93.7 million restricted share units that immediately vested in the first quarter. That share grant was worth $591 million and caused the company to report a loss for the first quarter of 2014, in spite of an over 65% increase in revenue.

JD.com will seek to sell nearly 93.7 million American depositary shares (ADSs), or just over 187.3 million Class A Ordinary shares in its U.S. listing. On Friday, the company said in a filing with the Securities and Exchange Commission it would seek to sell its shares at a range of between $16 and $18 apiece on the Nasdaq. JD.com will list under ticker "JD."

At the high-end of JD.com's range, the company would sell about $1.7 billion worth of stock on the Nasdaq. JD.Com said it expects net proceeds of $1.1 billion from the stock offering. Founder Liu will sell 13.9 million shares in the offering while hedge fund Tiger Global Management will sell 13.4 million shares, JD.com's prospectus stated.

The 2013 Stock Plan

Founder Liu's $591 million first-quarter payout was the result of restricted share grants approved in the company's 2013 equity incentive plan. The company also granted about 12.3 million restricted share units and 1,955,000 ordinary shares to Tencent employees who have joined the company as part of a partnership signed earlier in 2014.

In total, first-quarter operating expense at the company rose over 100%, mostly as a result of $606 million in overall share-based compensation. Cost of revenue and fulfillment, in contrast, rose at about the same rate as JD.com's revenue for the first quarter.

"We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations," JD.com said in its prospectus.

The 2013 equity plan was adopted on Dec. 20, 2013, JD.com said in its prospectus, which was filed about a month later at the end of January. The  plan was then revised on Mar. 6, 2014 to increase the amount of shares awarded.

JD.com didn't disclose its 2014 equity compensation plan in its prospectus.

Liu Needed for Quorum

JD.com is seeking to list its shares with a dual class stock structure that will give Liu voting control over the company's shares, in addition to special rights that might seem unusual for a traditional U.S.-based listing.

Liu will beneficially own about 83.7% of the voting power of JD.com's shares, however, he will own only a minority of Class A Ordinary shares.

That voting control will afford Liu all of powers that usually come with a controlling voting stake in a company through a dual class stock structure. The company's bylaws also appear to afford Liu some special powers.

JD.com's board of directors will not be able to form a quorum without Liu so long as he remains a director of the company. That means the company's board of directors won't be able to assemble without him.

"[U]nder the new memorandum and articles of association that will become effective immediately prior to the completion of this offering, our board of directors will not be able to form a quorum without Mr. Liu for so long as Mr. Liu remains a director," JD.com states in its IPO prospectus.

That means JD.com board of directors won't be able to meet without Liu. Normally, a simple majority of board directors can form a quorum.

Differences With Alibaba

Alibaba, JD.com's biggest competitor in the Chinese e-commerce market, is also in the process of a U.S.-based initial public offering. Instead of dual class stock structure, Alibaba is seeking to list its shares in the U.S. with a partnership structure that will allow long-time insiders to nominate a majority of the company's board of directors. All Alibaba shares, however, will carry one vote.

Alibaba's board can form a quorum when a majority of directors are in attendance, the company's prospectus states.

Growth and Tencent

JD.com says it is the largest online direct sales company in China with a 46.5% market share, according to iResearch as of 2013. Gross merchandising volumes reached $20.7 billion in 2013, a near doubling from the year earlier.

The number of products JD.com offers through its online direct sales and marketplace has grown to about 25.7 million products as of 2013 from 7.2 million in 2012.

Revenue at the company reached $11.5 billion in 2013, while its net loss narrowed to $8 million for the year.

On March 10, JD.com signed a strategic partnershio with Tencent that will give the company special access to its Weixin and Mobile QQ applications. As part of the deal, Tencent took a 15% stake in JD.com on a fully diluted basis.

Selling Shareholders, Underwriters

In addition to Liu, Yuri Milner's DST Global, Sequoia Capital Funds and Tiger Global are listed as shareholders in JD.com. Tiger Global, DST Global and Liu will sell a small minority of their shares in JD.com's IPO, the company's prospectus shows.

JD.com will expand its fulfillment infrastructure, conduct land purchases, build warehouses and purchase delivery vehicles with the over $1 billion in proceeds it expects from the share offering.

Proceeds will also be used for general corporate purposes such as acquisitions, JD.com said.

Bank of America Merrill Lynch and UBS will lead JD.com's offering, while Allen & Co., Barclays, China Renaissance, Jefferies, Oppenheimer, Piper Jaffray, SunTrust Robinson Humphrey and Cowen & Co. will also have underwriting roles in the offering.

None of JD.com's underwriters are working on Alibaba's share offering.

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-- Written by Antoine Gara in New York.

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