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Arm takes action to regain control at its renegade China unit

Arm has moved to regain control of its renegade China unit and replace its chief executive Allen Wu, as the UK chip designer seeks to clear its path to a successful public listing.

The UK chip designer will put forward two individuals to act as co-chief executives of its China joint venture and has received official sign-off to submit the paperwork, according to two people with direct knowledge of the matter.

The proposed candidates to take over as co-CEOs are Dr Liu Renchen, a government adviser and vice-dean of the Research Institute of Tsinghua University in Shenzhen and Vision Fund managing partner Eric Chen, who has been leading SoftBank’s negotiations with Chinese officials.

Arm has been trying to oust Wu for almost two years, after he disregarded a 7 to 1 board vote for his removal and unilaterally took control of the company.

“Discussions have been going on for a while and this is the proposed solution,” said one person close to Arm China’s board. “But submission is not the problem, getting authorities to sign off on it is,” the person said.

The person noted that previous deals to resolve the stand-off had fallen through at the last minute and cautioned: “We still have to see if Allen will be able to derail it.”

People close to the matter say Arm’s move to transfer shares of the joint venture to SoftBank had spurred Chinese officials to action in an effort to maintain the UK chip designer’s stake in the unit.

Last week’s appointment of a new Communist party secretary, Meng Fanli, in Shenzhen has also helped speed up difficult negotiations over removing Arm China chief Wu, the people said.

The talks between Arm, its owner SoftBank and representatives of the Shenzhen government have been going on for months, with Chinese officials determined to use the impasse with Wu to ensure the country’s continued access to the UK company’s semiconductor blueprints. Arm’s chip designs power almost every smartphone.

Wu’s possession of Arm China’s “chop” — through which official documents are authorised — and position as the company’s legal representative has made it difficult to remove him under Chinese law, making government intervention necessary.

The paperwork to be submitted in Shenzhen proposes to replace Wu as the company’s legal representative with Liu and enables the company to make a new chop, the two people said.

Arm’s proposed share transfer, which spurred the government action, would leave the UK chip designer owning less than 10 per cent of the China venture, down from 47.3 per cent today. This would remove the need to audit Arm China’s financials for an IPO.

The prospect of Arm withdrawing from the venture, or retaining only a very small stake, has made stakeholders in China uneasy.

“Can you even call it ‘Arm China’ without Arm,” said one person close to the company.

It has also become clear in recent weeks that leaving Wu in place threatened to undermine Arm’s business and could be an obstacle to gaining strong investor interest in the listing.

Arm China has a perpetual and exclusive licence to market and sell Arm’s chip blueprints in the country and receives a cut of the sales. But for its internally developed intellectual property (IP), it receives 100 per cent of the income.

The structure’s inherent incentives mean that in practice Wu works to sell as much of Arm China’s internally developed IP as possible, often by bundling it with deals for Arm’s IP, three people close to the company said. They added that demand for Arm China’s IP was probably not high.

“It’s hard to say if Arm China’s [proprietary] IP is actually worth anything. All customers are forced to buy it to get Arm’s IP and they also have to say good things about it,” said one person close to Arm China.

Arm declined to comment. A spokesperson for Wu and Arm China did not immediately respond to questions on his removal, but said Arm China relied on Arm’s “comprehensive global pricing system” to price deals and that its self-developed IP had had “strong market success”.

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