INSIGHTS | Corporate intrigue triple header

In the past few months, a series of power struggles have rocked Chinese tech companies, including e-commerce company Dangdang, bitcoin mining rig maker Bitmain, and UK chip designer Arm’s Chinese branch.

The disputes at the three companies were over different versions of the same issue: removed company executives trying to regain power. But their approaches varied, as well as the results. Some tried to grab company seals, some tried to restore a key position at a company with the support of the authorities, and some just ignored decisions made by the board.

Bottom line:  The power struggles in the three companies are, at their core, battles between management and shareholders. But some peculiarities of Chinese corporate governance makes it easier for executives to seize control and harder to resolve such standoffs.

Three coups

Grabbing seals: A former executive tried to take control of e-commerce marketplace Dangdang by forcibly seizing the company’s official seals from its office in a daylight raid.

• In February 2019, Li Guoqing announced in an open letter that he had left the company, indicating a peaceful handover.
• But on April 26, Li broke into the company’s Beijing headquarters with six others and took control of nearly 50 of the company’s official stamps and financial seals.
• In a letter to employees distributed during the visit, Li says he would take over the company’s operations, while Yu Yu, his wife and co-founder, would no longer be executive director, legal representative, nor general manager.
• On July 13, local police said Li’s takeover of the stamps “didn’t break the law.” 
• On the same day, Dangdang said the police’s decision was “shocking” and that the company had filed for administrative reconsideration.
• Li claims that he was authorized to take control of the company at a temporary session of the general meeting of shareholders. However, rival Yu owns 64.2% of Dangdang, according to its corporate registration information.
• Seals? Company seals are considered a company’s legal signature. Documents affixed with a company seal are usually seen legally binding upon that company.
• It seems that Li didn’t take control of the company as he planned. Chinese media still recognizes statements by Yu as representing the company.

Defying the board: On June 10, Arm China, a subsidiary of British chipmaker Arm, rejected a decision by its own parent company to fire China chief Allan Wu.

• The day before, Arm said the board of Arm China, a joint venture set up by the British firm and a Chinese investment consortium in 2018, voted to remove Wu from his position as chairman and CEO.
• The Chinese subsidiary fired back with a statement saying the board’s decision was invalid and that Wu remains in his positions. Arm’s UK headquarters responded that they stood by their original statement firing Wu.
• The statement by Arm’s UK headquarters said Wu had been fired “after an investigation uncovered undisclosed conflicts of interest and violations of employee rules.”
• The Arm China board voted 7-1 to dismiss Wu, Bloomberg reported Saturday.
• All signs show that Wu is still in charge of Arm China. In an open letter signed by a number of Arm China employees, Wu’s supporters said they were “shocked by the allegations against Wu.”

Whatever this is? Bitmain’s co-founder Zhan Ketuan’s coup attempt started with reappointing himself as the legal representative of the company with the help of Beijing’s market regulator.

• Context: In October 2019, Bitmain co-founder Wu Jihan ousted Zhan from company positions as co-CEO and legal representative.
• On May 8, the Market Administration of Beijing’s Haidian district convened a meeting to hand over Bitmain’s business license to Zhan after the market regulator backed Zhan’s claim that the change of the company’s legal representative was invalid. Zhan claimed a document submitted by Wu to change the legal representative did not follow proper procedures.
• A physical brawl broke out at the government office after Bitmain management tried to take the license from Zhan by force.
• Corporate registration information shows Wu replaced Zhan as the company’s legal representative on October 28, 2019.
• Zhan has partially controlled Bitmain since he was re-granted the position as the company’s legal representative. In June, Zhan re-took the control of Bitmain headquarters in Beijing and ordered employees to halt product deliveries. 

Why is it so hard to know who’s in charge?

The power of legal representatives: Chinese corporate law requires every company to have one legal representative, an executive position on par with the CEO in importance. Leadership turnovers in a Chinese firm almost always involve the company’s legal representative in some capacity.  

The representative is practically the company incarnate: they have the power to act on behalf of the company and are answerable for the company’s mistakes—they can even go to jail on the company’s behalf. It’s a high-risk, high-reward position.  

• The board of directors has the power to remove a legal representative, but until the papers are filed—and stick—the officeholder’s power can outweigh that of their supervisors.

The Chinese-style insider-ownership problem: Experts have attributed the frequent power struggles that happen within Chinese companies partially to a so-called “insider ownership” problem. 

When American CEOs get away with ignoring their shareholders, it’s usually because they own company stocks or that the company’s equity ownerships are highly dispersed, Zheng Zhigang, professor at Renmin University’s School of Finance, wrote in an article in 2017.

In China, executives rely more on informal personal relationships to control their companies—so much so they can sideline the board, according to Zheng.

Chinese company founders usually own their companies and hold executive positions, forming “strong social connections” with employees in the process. When leadership challenges arise, this “de-facto control” is often unassailable, even overriding the board of directors, said the article.

• In the Dangdang case, when Li broke into Dangdang’s office in Beijing, employees working there “didn’t dare” to stop him because he was an “ex-boss,” according to Chinese media reports.
• Bitmain’s Zhan tried to buy support from workers. He offered RMB 10,000 ($1,400) to any employee who returned to their desks the day he marched into Bitmain’s headquarters.
• Wu of Arm China, despite being removed by the board, stays in power as employees show their loyalty. “Wu has been leading our way until today after he joined Arm in 2004, started to lead Arm’s Chinese branch in 2007, and became Arm China’s chairman [in 2018],” said the open letter by employees.

A lawyer’s view: Cheng Jun, a lawyer at Beijing Yanshang Law firm, argues that the power struggles happening in Chinese tech companies may be a result of poorly conceived corporate structures.

China’s current company law doesn’t provide comprehensive provisions on how to balance power inside an enterprise, he said, but company founders can formulate clauses in the company constitution to prevent ambiguous power structures.

“I estimate 99% of Chinese companies simply adopted templates of company constitution provided by market regulators instead of drafting their own,” he said.

Trust the court: In the long run, Cheng said, China’s courts can be trusted to resolve the problems at three companies. “Eventually, the decision-makers are company owners, or the shareholders, who exercise their power through the board of directors,” he said.

But “eventually” is a long time. According to Bloomberg’s reporting on Saturday, Wu will remain the legal representative of Arm China until he hands over the company seals he holds. The problem is he refuses to do so.

Shareholders could go through the courts, the article said, “but the process could take years.”