Nvidia’s $40bn deal for the UK-based chip designer Arm is facing fresh problems in China, after it emerged that the disaffected head of Arm’s local joint venture controls almost 17 per cent of its shares.

Company registration documents reviewed by the Financial Times show that Allen Wu, the chief executive of Arm China, assumed control of a key investment firm in November last year, and now controls four out of six of Arm China’s shareholders.

Two of the companies controlled by Mr Wu have filed lawsuits in Shenzhen to protest that he was wrongfully dismissed by Arm and its main partner in the joint venture, the private equity firm Hopu.

In June, Arm China’s board voted 7-1 to remove Mr Wu after he was accused of conflicts of interest relating to his Alphatecture investment fund. A spokesperson told the FT Mr Wu had disclosed the fund to the board from the outset.

Removing Mr Wu, who continues to be in charge of Arm China’s day-to-day operations and is its legal representative, is a major obstacle to Nvidia’s deal. One person close to Arm China’s board said he rated the odds of success for the deal at “only 50-50”.

Arm’s current owner, Japanese group SoftBank, put Eric Chen, the head of its China operations, in charge of negotiating an exit for Mr Wu, according to two people familiar with the process.

They said the discussions revolved around a potential payout of between $100m and $200m.

By September the two sides appeared to be near a settlement, with Mr Wu and Mr Chen separately telling colleagues that Mr Wu planned to leave at the end of the month, the people said.

Arm China shareholding structure

But the value of the 16.6 per cent stake controlled by Mr Wu has been a sticking point, with Mr Wu arguing that Arm China’s value has risen fivefold since its establishment in 2018 to Rmb50bn ($7.5bn) today. It is unclear if he wishes to keep or sell the stake, and whether there is a buyer which would suit Arm, Hopu and the Chinese government.

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The two sides remain in mediation talks, and a deal may be reached, but Mr Wu has recently told colleagues that his exit from Arm China is “not a sure thing” and people close to SoftBank and Hopu suggested the negotiations may drag on.

Arm China handles licensing deals in the country, and carries out some research and development. In 2018 SoftBank said China was responsible for a fifth of Arm’s overall sales.

The tension over the Chinese unit comes at a critical point in the deal between Arm and Nvidia, as the two companies prepare to approach China’s market regulator for approval, a move that will require both co-operation and data from Arm China. Two people familiar with the matter said Arm and Nvidia had not made any filings with regulators, with one saying it was because of difficulty gaining control of the joint venture.

At Arm China’s offices, Mr Wu has installed his own security team to deny entry to representatives of Arm or Arm China’s board, and emails from Arm headquarters to employees are being blocked by a filtering system, two people close to the company said.

Arm’s and Hopu’s attempts to unseat Mr Wu unilaterally have included everything from using high-level connections in Beijing to lean on the local government in Shenzhen, to making calls to local regulators warning that the case will discourage foreign investment into the city if it is allowed to fester.

But Mr Wu also has backing in some corners of the Shenzhen government. In September, for example, Mr Wu was named on a high-level reform committee in the city, alongside other high-profile business figures such as Merlin Swire and Zhang Lei, founder of Hillhouse Capital, according to a document seen by the FT.

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Both the Shenzhen government and Beijing have a keen interest in the outcome of the battle, since Arm’s intellectual property underpins almost every mobile phone chip designed in the country.

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Arm, SoftBank and Nvidia declined to comment, while Mr Wu did not respond to a request for comment. A spokesperson for Arm China said it did not respond to speculation, and threatened legal action “against any organisation or individual who spreads rumours with the hope to damage our reputation”.

“It is in everyone’s best interest for Arm China to remain stable,” the spokesperson said.

Additional reporting by Nic Fildes in London and Kana Inagaki in Tokyo

Via Financial Times