Arm Holding’s head office in Cambridge in the UK
When he declared himself the first emperor of China in 221 BC, Qin Shi Huang knew that he needed to legitimise his claim so he ordered a jade seal carved with the words “Received the Mandate of Heaven” as an indicator of his ‘divine’ approval.
The Heirloom Seal of the Realm, as it became known, was passed from emperor to emperor until it was lost nearly a thousand years later, according to legend. Whoever controlled the seal, also wielded power. And so it is today in China, where seals or ‘chops’ still confer authority.
One person who knows that better than anyone is Allen Wu. He’s currently executive chairman and CEO of Arm Technology (China). Or he’s not, depending on how events unfold at the Chinese unit of the British-based chip designer.
Wu is at the centre of a tussle between shareholders and management after the board sacked him on June 4. He claims the board meeting was invalid because it wasn’t convened on proper procedures. He says he wasn’t invited and so couldn’t vote alongside the eight other directors, the majority of whom voted against him. But he is also the company’s legal representative, which means that he still retains its chop and registration documents. The board cannot change his status without the chop, which Wu is refusing to hand over. And he is still going to work, backed by a local management team that published a supportive statement on the company’s WeChat channel.
The media is struggling to unpick what’s really going on. The board says it sacked Wu because of conflicts of interest, including the establishment behind its back of a Cayman Islands investment fund. Reportedly, the fund was set up to invest in companies that use Arm technology. Sources close to Wu told China’s AI Finance that he had received permission to set up the fund from Masayoshi Son, the founder and CEO of SoftBank, which owns Arm Holdings. However, Arm and another of the shareholders in the the China unit already have one of these funds themselves so Wu’s venture put him in direct competition with his employers, Bloomberg has suggested.
As we wrote in WiC410, it’s never been clear where the real power lies in Arm’s China business. When it was set up in 2018, the local press labelled the company as a “white gloves” operation: a Chinese metaphor for ‘hidden hands’ exercising control. At the heart of the issue is whether Arm Holdings has the final say, despite owning less than 50% of the company (it has a 49% stake). This is because the Chinese interests that hold the other 51% are split between private equity fund Hopu (36%), two China Merchants vehicles (13.77%) and a Hong Kong registered company (with 1.2%, but ownership unclear).
Arm Holdings and its major shareholder SoftBank have four board seats, Hopu has three, Wu has one and the final seat is taken by one of the industry partners in Arm China’s business.
The Chinese press notes that the Hopu board directors seem to have voted with Arm Holdings on Wu’s firing and the two issued a joint statement on the matter as well. This makes the press less convinced that there is a geopolitical issue behind the row, possibly related to the politics of the Sino-US tech war. In May 2019 it was widely reported that Arm China would no longer provide chip designs to Huawei’s HiSilicon unit, because of its reliance on US origin technology, which is being denied to a number of Chinese parties. Wu then seemed to contradict this the following September, telling a press conference that the two companies were still working closely together.
In their statement, Arm Holdings and Hopu may have been trying to flag how the move had nothing to do with the Huawei situation by describing Wu as a US citizen. In contrast, his replacements as co-CEOs are Ken Phua from Singapore and Phil Tang, a Chinese national who Wu sacked on May 26 for unspecified “major violations”.
Wu’s firing could also have been forced by a disagreement about the company’s future direction. Back in 2018 much of the initial idea for the Chinese offshoot (heavily pushed by Wu) was that it would be given freedoms to develop its own chip designs that could be sold locally, avoiding potential tariffs. The main responsibility of the China unit was still the selling of licences for designs developed at headquarters. But Wu hoped that, over time, proprietary chips could become more prominent.
Developing that kind of advanced technology from scratch takes patience and capital, two things that SoftBank has less of today than previously. Earlier this year, it launched a ¥4.5 trillion ($42 billion) asset disposal programme after reporting a ¥1.9 trillion loss at its Vision Fund in 2019.
It has also said that it wants to float Arm Holdings, raising much-needed funds. What’s not clear is whether it wants to also float Arm China, or fold it back into Arm Holdings first. The latter action might make more sense from a control standpoint, boosting Arm Holding’s IPO valuation, given that China accounts for about a third of global sales.
A single entity, without messy local ownership issues, could make the company a more clear-cut proposition for prospective IPO investors. But it wouldn’t change the increasingly treacherous tightrope that Arm is traversing between a Chinese government determined to become technologically independent in semiconductors and an American one determined to maintain its nation’s leadership in key parts of the same industry.
It’s also unclear how Arm China could be reabsorbed into the mothership. When the new company was first set up, there were reports of a three-year lock-up period after which the company’s backers could only sell shares to Chinese entities (and none to Arm’s competitors).
Local media is now awaiting the next stage of the battle between Wu and the Arm China board, although board members told Bloomberg that they have the upper hand: as a “last resort”, Arm Holdings could even suspend licence sales to Arm China on the grounds of protecting its intellectual property.
Corporate governance experts says the case resembles a nasty row between the board of then-Nasdaq-listed ChinaCast Education and its ousted CEO Ron Chan back in 2012. The board sued Chan for the return of the company chop in what the New York Times described as a “battle worthy of a John Grisham novel”.
There was another chop dispute when Li Guoqing stormed into Dangdang’s head office this April and forcibly removed the company seal. In this case the move was driven by Li’s messy divorce from Peggy Yu, with whom he had co-founded the e-commerce firm (which was compared to Amazon in its early days; see WiC494).
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