Shareholder infighting major obstacle for A-share listed Chinese firms

Shareholder infighting major obstacle for A-share listed Chinese firms

Staff Reporter 

2014-02-01

Since 2011, there have been at least 26 A-shares or Hong Kong-listed Chinese firms that have seen shareholder infighting, which has become a major obstacle for corporate governance and the further development of the listed companies, the Chinese-language Shanghai Securities News reports.

On Jan. 6, Ling Zhaowei, the second-largest shareholder of Shenzhen Terca Technology, which makes vehicle electromagnetic retarders, publicly criticized the firm’s 481 million yuan (US$79.5 million) rights issue, further revealing that he now has no contact at all with Terca chairman Zhang Huimin. The infighting between the two founding partners is a typical case in problems with corporate governance, seriously affecting the firm’s future development.

In April 2011, Netac Technology also saw infighting between its two co-founders.

Infighting in the 26 companies involves conflicts between founders and managers, founders and external investors, as well as fights over management control.

Vice president of Shenzhen Co-win Venture Capital, Zhang Xiao said that during the founding periods of a company, its founding partners typically have the same goals, but after the debut listing, the original shareholders become rich and have lots of resources at their disposal, leading them to expand and diversify their individual viewpoints, which leads to infighting. It usually takes five to 10 years for an enterprise to make its debut listing, and during such a long period, it’s difficult to avoid different opinions emerging among its founding partners, he added. In Western countries, it’s common for entrepreneurs to leave the companies they founded, and some even become serial entrepreneurs, continuously coming up with new ideas and starting new businesses, he continued, adding that these serial entrepreneurs are very popular among venture capital firms.

Unnamed venture-capital insiders said Chinese enterprises have developed a common feature, dubbed “Chinese-style partnership,” referring to the fact that, in the founding stages, Chinese partners don’t map out the shareholding structure clearly, and down the line, they seek out opportunities for growth by inviting external investors into the companies, which often leads to infighting.

Infighting is more common in three types of enterprises: Firstly, those in which the founders don’t emphasize corporate governance and rely too much on individual governance, secondly, those in which the core founders rely too much on technology and marketing teams, and don’t have management control of the companies, and thirdly, those in which the holding stakes of external investors have exceeded those of the core founders who are responsible for technological and actual management.

Vice chairman of the Shenzhen Listed Companies Association, Yan Weimin said shareholder infighting is essentially a personality problem. To resolve it, he said, the core management team and the major shareholders of a company must adhere to corporate governance, legal responsibility and policies that forward innovation.