June 22, 2020 / 6:34 AM / 23 days ago

Breakingviews - Ancient Chinese governance tech stymies SoftBank

Sotheby's Asia Deputy Chairman Nicolas Chow poses with a massive imperial white jade "Xintian Zhuren" seal in front of the cursive script "Shi Gu Ge" by Han Yu during an auction preview in Hong Kong August 31, 2010. The seal is expected to fetch HK$25-30 million ($3.2-3.85 million) at an auction in October. REUTERS/Bobby Yip (CHINA - Tags: SOCIETY BUSINESS)

HONG KONG (Reuters Breakingviews) - SoftBank is finding itself stymied by ancient governance technology. Its Chinese chipmaking venture can’t get rid of its Chairman and Chief Executive Allen Wu because he won’t return the company seal. It’s a common problem in the People’s Republic, but this conflict adds Arm to boss Masayoshi Son’s headaches.

Son’s Japanese group paid $32 billion in 2016 for the UK-based company which generates roughly one-fifth of its revenue from Chinese customers. SoftBank gave up control of the Chinese part in 2018 by selling a 51% stake to investors led by mainland private equity fund Hopu Investments. A majority locally owned business can duck certain restrictions and grow faster.

Arm China executive Wu took charge of the joint venture, but he also set up his own investment fund which competed with a similar fund run by Arm and Hopu, among other violations, a personal familiar with the situation told Reuters Breakingviews. Arm China has said the allegations are inaccurate and misleading.

It’s not rare for a JV chief to start competing side businesses in China; a venture between France’s Danone and beverage giant Wahaha disintegrated over a similar issue in 2009. But SoftBank and the Arm China board that voted seven to one to oust Wu made two basic mistakes. They gave Wu too much power in not separating out the chairman role, and they failed to grab the company seal before they canned him. Everyone in China knows that there is one corporate ring that rules them all: the official company seal, or “chop”, must be applied on any document to certify its validity. Chops have been used in Chinese business for thousands of years, but they haven’t evolved much and belong in a museum.

Barring direct intervention by Shenzhen authorities to return the chop to SoftBank, Wu can probably stay in charge for years. Son might prefer to sever the connection.

Arm’s global business represents about 9% of the equity value of holdings in SoftBank’s portfolio as of March, per the Japanese company’s presentation. Son’s investments across the listed firm and its Vision Fund, from The We Company to Indian hotel chain Oyo, are already suffering. Arm was an overpriced purchase; now part of the business could end up a lost cause.


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