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The ‘chop’ reigns in corporate China

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Via Financial Times

Arm faces a months-long wait to regain control over its China business, as the chip design company grapples with the ancient “chop” system that has prevented the UK group from firing the chief executive of its joint venture in Shenzhen.

Chops, or traditional company seals, are the sole means of authorising official documents in China. Inked signatures used in western countries hold little weight.

The system, used for thousands of years in China, grants whoever holds the chop the power to pay the company’s employees, fire executives, open bank accounts and make acquisitions — essentially conduct any official business.

Managed well, they prevent actions by rogue employees. But when chops fall into the wrong hands, are stolen or seized in a battle for control, company operations can be paralysed for months. 

For Arm, the experience has proved embarrassing, especially after it publicly failed to fire its top executive in China.

In a court in Delaware in the US, questions over the authenticity of a Chinese seal have also played a part in a failed $5.8bn luxury hotel transaction.

“We call this corporate hijacking,” said Riccardo Benussi, deputy regional manager at law firm Dezan Shira. He noted there were few parallels in Europe and the US in which one employee can wield so much unauthorised control over a company.

“Foreign companies don’t see it as a big nuisance in the beginning and they don’t understand why we are stressing [the importance of the chops] so much. But when we tell them the horror stories they start to get it.”

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“It’s crucial the chop doesn’t fall into the wrong hands,” said Raoul Schweicher, managing director at Moore MS Advisory, which advises foreign companies on operating in China and provides custodial services for holding foreign companies’ chops.

Arm, a UK company that was acquired by Japanese technology group SoftBank in 2016, fired its head of China Allen Wu earlier in the year. The termination notice, sent by email, claimed he had set up a separate investment fund that competed directly with an investment fund of Arm China, in a clear conflict of interest, according to two sources with direct knowledge of the matter.

But Mr Wu denied he had been fired when Arm made the termination public this month, issuing a company notice that was stamped with the chop. This in effect cancelled the parent group’s attempt to fire him and gave him legal grounds to continue running the China unit.

The incident is a stark reminder to foreign corporations of the particular challenges of operating China joint ventures.

TPG, the US private equity group, began sparring with local management after buying a majority stake in Japanese leasing company Nissin Leasing (China) in 2008. This led to an attempt to remove the chief executive and replace her with a TPG partner.

When the chief executive refused to step aside or surrender the chop, a top TPG executive appeared at the Shanghai office with seven security guards and a handful of staff in search of the item. But the TPG executive was forced to flee the country when local management called the police, sparking a months-long court battle. TPG sold its stake in the business in 2013.

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The chop system has also played a critical role in a New York court case involving Mirae, a South Korean asset manager that failed to pay Chinese insurer Anbang for 15 US hotels in a $5.8bn deal. Mirae claims a document bearing the seals of now jailed Anbang founder Wu Xiaohui casts doubt on the validity of the insurer’s ownership of the hotels.

“International investors may not be familiar with the potential risks and benefits of company seals,” said Gabriel Wilson-Otto, head of stewardship in Asia at BNP Paribas Asset Management. He added that chops gave an extra layer of authorisation to a document if used properly. 

“The holder of a seal may be able to bind a company in important transactions. This can represent a potential source of risk to shareholders — in particular in the case of unauthorised or improper use.”

The path to resolving disputes over company seals can be long and arduous. Managers can involve the police in the hope that they will forcibly secure the chops. But police are reluctant to wade into corporate disputes and often reject such cases.

Another option is to attempt to re-register the business through China’s State Administration of Market Regulation, a process that could take months. If successful, new chops can be issued, rendering the old ones useless.

Arm has gone to the Shenzhen police to apply for a new chop. But for approval, it must produce the company business licence, which Mr Wu also controls.

“The system hurts the confidence of foreign investors,” said one lawyer with close links to Arm China. “The company has the right to remove him by a simple majority of the board . . . The company seal should be the company’s property, not that of the legal representative.

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“[Mr Wu] knows he will eventually be removed. But this is his weapon to get a better separation agreement.”

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