Abstract: The Chinese Communist Party has long tightly controlled private sector enterprises. In the past year, that control has taken a new form: board seats.
Over the past several months, China has pivoted from regulating tech companies through fines and sanctions to purchasing ownership interests with special rights. These “golden shares” represent a small portion of the companies’ equity interest but come with powerful governance rights, such as the ability to nominate directors. The Chinese government has used the arrangement at ByteDance, Tencent, and Alibaba to exert control, or at least the option of it.
Some, however, are concerned that corporate control is a prelude to content control. The director position created by the golden share arrangement has special rights. For instance, at ByteDance, that director has the right to chair a “content safety committee.” The government has chosen Wu Shugang for that position, who was formerly in charge of supervising online commentary for the Cyberspace Administration of China. The shares themselves have special rights as well. Again at ByteDance, the state-controlled investment vehicle which owns the shares, WangTouZhongwen Technology, has veto power over any decision to appoint or dismiss the editor-in-chief of Douyin, the Chinese deployment of TikTok.
While China has always exerted more control over domestic corporations than most other countries, this new approach is certainly novel. Many countries have owned parts of major corporations, such as when the U.S. bought ownership interests in troubled banks during the Great Financial Crisis. This injection of liquidity stabilized the financial system, and the U.S. has earned its money back and then some. But the Chinese golden share arrangements differ from the U.S.’s crisis response because of the special governance rights of the Chinese shares. While the U.S. case was about providing liquidity, the Chinese case is about controlling firm conduct.
The level of corporate control is likewise different than in other countries. In the U.S., some of this regulation is federal, such as the Securities Exchange Commission’s regulation of stockholders’ rights, but most is at the state level, where laws proscribe the composition and function of boards of directors and other details of the corporate form. The most famous international example of state control of private enterprise is Germany, which requires corporations to include a worker’s council in their corporate structure. That said, some countries have used golden share arrangements in the past. However, those arrangements have remained more general, entailing rights more akin to supervoting shares, such as the shares that Mark Zuckerberg infamously held in Meta.
This is part of China’s attempt to reinvigorate state control of enterprise, as it sees wealth amassed by entrepreneurs like Alibaba head Jack Ma as a threat to its rule. In many ways, special governance rights in corporations is the newest stage in China’s plan to reinforce state control of the private sector. Having effectively exiled Ma, and other powerful Chinese entrepreneurs, the Chinese government has turned its attention to controlling the enterprises which are left behind.
Author Biography: Evan Conner is a Moderator of the International Law and Policy Brief (ILPB) and a J.D. candidate at The George Washington University Law School.