Sorry, Trump. 52% Is by No Means 'Total Control'
(Bloomberg Opinion) -- President Donald Trump’s spat with China over “total control” of TikTok raises a corporate governance question: Does majority ownership actually give you control over a business empire? The Chinese, and the broader conglomerate world, may have a very different view from the administration.
The first details that surfaced from TikTok’s planned deal with Oracle Corp. and Walmart Inc. would put most of the company in American hands. U.S. investors already own 40% of TikTok parent ByteDance Ltd. The current proposal would give 32% of TikTok to American investors (40% of ByteDance’s 80% stake), plus Oracle and Walmart’s 20%. This gets us to 52%.
But just because you have a majority stake doesn’t mean you have control. It all depends on the corporate structure. Asia’s conglomerates routinely grip onto their empires via pyramid-shaped ownership. Often, those with the most shares are mere passive investors, enjoying economic interests only.
South Korea’s chaebol take this art to perfection, using just a few billion worth of shares to control empires multitudes larger. For instance, the fund industry is the largest holding bloc of blue chip Samsung Electronics Co., and Korea’s National Pension Service is its single biggest shareholder. But the founding Lee family is firmly in the driver’s seat, mostly through the 13.5% stake held by Samsung C&T Corp. and Samsung Life Insurance Co. At about 5%, the Lee family’s direct holdings in Samsung Electronics are tiny.
Or consider Korea’s third largest conglomerate, SK Holdings Co. The Chey family has about a 25% stake in the company, which owns 27% of SK Telecom Co. That business, in turn, has 20.1% interest in chipmaker SK Hynix Inc. In other words, with just $3.2 billion worth of shares, the family has the $51 billion semiconductor crown jewel at its command.
This is the capital-efficient way to control empires. Founders build layers of holding companies, owning more shares than any other single entity at each level above the flagship assets. These are often too expensive to hold directly.
China’s conglomerates are taking to the Korean fashion of layering, too. For instance, Tsinghua Unigroup Co., a commercial arm of the prestigious Tsinghua University and the closest thing the country has to the Samsung group, has built a labyrinth of holding companies to control cutting-edge (by Chinese standards) flash-memory chipmaker Yangtze Memory Technologies Co.
In terms of money spent, the state-backed China Integrated Circuit Industry Investment Fund, known simply as the Big Fund, is by far YMTC’s largest shareholder, owning 49% via direct and indirect holdings. But since Unigroup has more than a 50% stake at each level of YMTC’s ownership tree, it has control, even though it has put in only 13% of the registered capital.
In many ways, corporate layering is even more important to the Chinese than the Koreans. While chaebol simply want to maximize control, mainland entities sometimes use this structure to hide ballooning debt. As part of its deleveraging campaign two years ago, Beijing pressed pause on costly public-private partnership projects. State-owned entities would insist on large minority interests on paper so they didn’t have to consolidate these infrastructure build-outs and report the new debt that arose from them higher up the chain.
Beijing might be able to curb this behavior among its affiliates, but it can’t stop private entities from mimicking the chaebol structure. Real-estate developers, for example, have also used joint ventures to hide debt from their balance sheets. The trend of conglomerate structuring will only blossom in China.
So how to structure the new TikTok Global makes a world of difference. ByteDance owning an 80% stake outright is a very different proposition from Oracle’s vision, which involves distributing the 80% proportionally to ByteDance’s current shareholders. The former leaves the Chinese firmly in control, while the latter is perhaps more palatable to the U.S.
When it comes to voting rights, indirect stakes give you nothing. Trump’s claim that the U.S. will have control is self-serving. As a dealmaker, he’s a long way away from turning TikTok into an American company. He'd better have an army of corporate lawyers ready to scrutinize the art of layering.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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