STAYING INDEPENDENT

Beijing is often wary of what it sees as attempts by foreigners to control prominent Chinese companies.

Alibaba dominates China's business-to-business sector with a 70 percent share of a market that is expected to grow to 2,130 billion yuan ($303.6 billion) in 2009 from 1,250 billion yuan in 2007, according to the Internet Society of China.

Alibaba is expected to maintain its dominant position in the short term, said Ovum analyst Charice Wang, but over the longer term local rivals offering niche services may eat into that lead.

Beijing was stung by its exposure to a foreign firm shortly after a 2005 deal in which Yahoo merged its Chinese operations into Alibaba in exchange for the stake in Alibaba.

Along with Yahoo's operations, Alibaba also gained a role in an international human rights controversy when press freedom watchdogs and U.S. lawmakers attacked Yahoo for turning over a Chinese reporter's emails to the government, which later imprisoned him.

If the Microsoft-Yahoo deal goes through and Yahoo retains its stake, the Chinese authorities are likely to set conditions for the stake's transfer, such as limiting the number of foreigners on Alibaba's board.

RIGHT OF FIRST OFFER

Even if Alibaba manages to shore up finances to buy back its stake from Yahoo, there is a small chance its interpretation of the 'right of first offer' might be challenged by a combined Microsoft-Yahoo entity. Both U.S. companies have declined to comment on Alibaba's interpretation of the right.

But one lawyer said Alibaba's right of first offer -- which applies to both a direct and indirect transfer of Yahoo's stake -- may not apply in case of a change of ownership of Yahoo.

Alibaba's position is that if Microsoft buys Yahoo, what it gets is ownership of Yahoo's stock and not Yahoo's ownership in Alibaba, said the lawyer, who declined to be identified because his firm could advise one of the companies.

So, if Yahoo is bought, Alibaba's argument is that it amounts to an indirect transfer and triggers the right of first offer, but New York state laws govern the definition of 'indirect' in this case, said the partner at a U.S .law firm who has worked on international M&A transactions.

"Microsoft, it seems, unless there is language or other terms elsewhere, simply will step into the shoes of Yahoo in the Alibaba agreement," he said.

But Carol Glendenning, a mergers and acquisitions lawyer at Strasburger and Price LLP, said that "a sale of Yahoo stock would be an indirect transfer of the beneficial ownership that Yahoo owns in Alibaba, which falls into the definition of a transfer."

Both lawyers based their assessment on excerpts of the agreement sent to them by Reuters.

Under the 2005 agreement, which is available on the U.S. Securities and Exchange Commission Web site, Yahoo also has a pre-emptive option of refusing to sell to a list of competitors.

But the lawyers said the pre-emptive option applies only if Alibaba plans to issue new shares in case of a transaction.

(Additional reporting by Mayumi Negishi in TOKYO; editing by Ken Wills and Louise Heavens)

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