Arm has transferred its stake in its rogue Arm China joint venture to an independent entity, enabling it to continue collecting licensing fees from Chinese companies but without requiring Arm China to open its books to potential Arm investors when the company IPOs in 2023. However, the dispute between Arm and Arm China may not be over.
Arm Ltd. notified Caixin/Nikkei Asia that it had transferred its stake in Arm China to a new entity for accounting reasons. Thus, Arm can now deem its stake in Arm China as an investment rather than a joint venture. As a result, Arm China will continue to distribute Arm's IP in China, and Arm Ltd. will continue to collect licensing fees from Chinese companies. However, it will not have to disclose Arm China's financial results to regulators or Arm's future investors.
"Transferring shares to a special purpose vehicle could be a well-thought-out option that SoftBank is using to deal with the standoff between Arm and its China joint venture," said Han Lijie, partner at U.S. law firm Katten Muchin Rosenman, in a conversation with Caixin/Nikkei Asia.
Arm China accounts for about a quarter of Arm's revenue. But Arm China is not a fully-owned subsidiary of the parent company, but is a joint venture between Arm Ltd. (currently controlled by Softbank) and a consortium of China-based investment funds. Arm owned a 47.33% stake in Arm China, whereas the remaining stake was controlled by various Chinese entities, including China Investment Corp.'s Hopu Investment (a 36% stake) and various investment funds controlled by Allen Wu, the chief executive of Arm China.
Since Allen Wu doesn't share Arm China's financial results with Arm (and Arm cannot fire Wu because he holds the company's seal), so the latter cannot disclose them to its investors and future shareholders, essentially blocking its IPO that was planned to take place at NYSE in March 2023. To IPO, Arm Ltd. needs to complete its financial review between June and September, which was impossible due to Arm China's refusal to disclose its financial results.
Now that Arm Ltd. does not directly hold a stake in Arm China, its accounting problems look to be solved. But there may be another problem. It's unclear whether the transfer was approved by the current Arm China CEO, who continues to hold Arm China's seal needed for the transaction, Han Lijie notes. Technically, Arm Ltd. is a U.K.-based company, so it should be able to transfer its assets however it wants. But Chinese laws may say otherwise, so we will continue to follow the story.