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SoftBank Group representative Masayoshi Son speaks at a press conference to announce the company’s financial results in Tokyo, Japan, on July 28, 2016. Photo: AFP

UK chip giant Arm’s battle over ousting of China CEO escalates, complicating SoftBank sale

  • Arm China sues three employees who had been fired and subsequently reinstated
  • Legal disputes involving Arm China CEO Allen Wu, a Chinese-born US citizen, could drag on for years

The battle for control of Arm's China business is escalating with new lawsuits aimed at keeping the unit’s controversial chief executive in power, further complicating SoftBank Group Corp’s efforts to sell the business to Nvidia Corp.

The dispute erupted almost a year ago in June after the board voted to oust Arm China chief executive officer Allen Wu for conflicts of interest, but he refused to leave. Now the Chinese unit, which remains under Wu’s control, has filed lawsuits against three senior executives the board designated to replace him, according to people familiar with the matter. The previously unreported suits could take years to resolve, suggesting Wu may remain entrenched.

Wu fired the three men – including co-CEO Phil Tang – but they were subsequently reinstated by the board. In the new lawsuits, Arm China is suing the trio, demanding they return company property, according to the people.

A photographer taking pictures in front of the logo for British chip designer ARM in Taipei on May 27, 2019. Photo: AFP

Arm China declined to comment on any ongoing legal cases or possible settlement talks. It did say the three executives had caused “material damages” to the company and they had been terminated for legitimate reasons.

Tang did not return requests for comment. British semiconductor design company Arm declined to elaborate, saying it will not comment on pending legal matters.

The complex tussle has thrown into question the future of Arm, whose semiconductor technology is the world’s most widely used for smartphones and is increasingly deployed in computers. SoftBank founder Masayoshi Son agreed to sell the British firm to Nvidia for US$40 billion last year, but the path for completing that transaction is growing increasingly difficult.

The China dispute also raises questions about Beijing’s willingness to protect foreign investment in the world’s second-largest economy. Arm sold a majority stake in the China unit to a consortium of investors, including Beijing-backed institutions. That has complicated the British firm’s efforts to manage Arm China and Wu, who has support from local authorities in Shenzhen.

Both sides appear to be at a stalemate. Wu, a Chinese-born US citizen, pulled back from signing settlement agreements worth tens of millions of dollars if he would leave the company, the people said, asking not to be identified talking about legal matters. At the same time, two minority shareholders in Arm China linked to Wu have filed lawsuits to overturn his June 4 dismissal, they said.

SoftBank opened negotiations with him last year and had hoped to reach some sort of resolution, they said. Instead the court battles are deepening and the Japanese company has soured over the increasingly complicated dispute, the people said. SoftBank is now resigned to letting the legal proceedings take their course and there are no current negotiations with Wu, according to one of the people.

“We are going through a leadership change in China; it’s taking time to resolve,” said Arm’s chief executive  Simon Segars in an interview with Bloomberg Television recently. “It’s hard. But we are confident that’s going to get resolved.”

SoftBank and Nvidia declined to comment on the dispute in China.

Arm China said in a statement that Wu’s position “is compliant with legal registration and confirmed by China law and regulations.”

What semiconductors are and why China needs to make them itself

The stand-off accords a relatively unknown executive outsized influence over one of the industry’s most important pieces of technology, in the world’s biggest internet and semiconductor market. Chinese companies need unfettered access to Arm’s products to push forward with the country’s attempts to make itself more independent in chip technology, an area where it is largely reliant on imports. Beyond resolving the stalemate, Nvidia and SoftBank also need Beijing’s sign-off to seal their deal, and it’s unclear whether Wu’s presence would complicate that.

Wu’s hold on Arm China is partially due to local laws which make it difficult to change control of a company unless you are physically in control of the company stamp and registration documents. He has refused to give them up and has used company funds to pay for legal fees incurred in his attempt to fight off his dismissal, the people said.

Arm China said payment of legal fees “is made in compliance with company policies as well as China laws and regulations.”

His ultimate goals appear to be a large cash payoff and immunity from subsequent legal action, according to people who have spoken with him. Inside Arm China, which is responsible for selling licences to its chip designs and fundamental technology in the country, Wu has told local staff he is not going anywhere. He recently gave employees Chinese New Year cash presents in a red envelope with his surname on it.

Arm China said the money came from Wu personally to show his appreciation to colleagues, a tradition at Chinese New Year in the country.

Masayoshi Son attends a news conference in Tokyo, Japan, on November 5, 2018. Photo: Reuters

Hearings in the case against the three executives are expected to take place in late May, one of the people said. Separately, two minority shareholders in Arm China have sued the Chinese entity in Shenzhen to nullify the board’s decision to oust Wu. These two cases are now being merged and hearings are slated for late April, the people said.

Son told investors as recently as February that he expects to close the Arm sale and “I don’t have any Plan B".

Arm, for its part is trying to make sure that its technology remains pervasive in China, despite US sanctions intended to curb the supply of American technology to major companies like Huawei Technologies Co. While Arm is a UK-based company, part of its operations are in the US, making its products subject to controls.

The Chinese government has not stated its position on the Arm China leadership struggle, but the unit has several government-backed shareholders including sovereign wealth fund China Investment Corp and the Silk Road Fund.

In his interview with Bloomberg Television, Arm chief Segars said that the 10-month stand-off has not hurt Arm’s business in China. Lack of travel for face-to-face meetings during the pandemic has prolonged the process of changing leadership in China, he said.

“When we announced the deal in September, we said it would take about 18 months,” he said. “We remain confident in that timeline.”