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Two Major Chinese Companies with Three Things in Common

Two major Chinese technology companies—ByteDance and Tencent—have been in the news recently, but why? These two Chinese companies have three things in common: they are both variable interest entities, they both traversed into the United States market, and they were both met with pushback when doing so. Specifically, they were seen as national security threats to the United States because they were run by the People’s Republic of China (PRC). As a result, I will delve into each company’s ownership and governance structure to see if this is a credible threat.

ByteDance

ByteDance is the parent company of TikTok, or Duoyin, the increasingly popular social media platform in the United States. The reason there has been increased scrutiny over TikTok in the United States is that ByteDance is a Chinese company. And so, the story goes, China can spy on the information flowing through the application. The narrative is that this spying leads to national security, foreign policy, and economic threats to the United States, as the information being used can be taken to build “dossiers” of blackmail.1 And, on August 6, 2020, the former Administration released an Executive Order on the matter.2 Is there any truth to this threat?

In 2012, Yiming Zhang founded ByteDance, which launched a collection of applications. ByteDance itself has a “complex structure that involves layers of holding companies,” but what is important to note here is that ByteDance is a closely held variable interest entity (VIE).3 As seen through the complexity of the structure, VIEs raise money outside of China by setting up offshore, shell corporations, which invest in foreign enterprises inside China.4 The foreign enterprise is able to move money and get returns from the wholly Chinese set up company authorized to do business. The reason a VIE structure is used is to circumvent the Chinese regulations that “limit foreign investment across more than 30 sectors including the internet, telecommunications, and education.”5 The VIE evades this limitation, allowing for foreign capital to be invested into one of the prohibited sectors. In order to function this way, the interactions taking place within China are predicated on contractual agreements between the foreign enterprise and the domestic entity that is allowed to do business in China.6 As a result, while a VIE is owned by Chinese individuals who do business within China, it is in reality controlled through these contracts by the foreign listed companies.

For ByteDance specifically, not much is known other than the fact that it is registered in the Cayman Islands. The reason for the lack of information is because “the principals won’t be disclosed unless there’s an IPO prospectus.”7 Unfortunately, ByteDance, to date, has not IPOed. However, the complexity of the VIE can be shown through ByteDance’s main business, Jinri Toutiao. Jinri Toutiao is “owned by [Yiming] Zhang and ByteDance Senior Vice President Zhang Lidong through a Beijing-registered holding firm, according to China’s National Enterprise Credit Information Publicity System.”8  Yiming Zhang channeled “his 98.8 percent stake to another Beijing company, which in turn is owned by a Hong Kong-registered firm.”9 That Hong Kong-registered firm, “where Zhang is a director, is owned by a company registered in the Cayman Islands.”10

With that said, it would appear that the Chinese state does not have control over ByteDance, as it has no overt ownership control. In fact, as discussed above, ByteDance was created as a VIE because of the Chinese government’s limitations. However, because not much is known, there is still the possibility that some actors within the ownership and management structures of the VIE could be affiliated with, and thus influenced by, the Chinese state.

And, while it is unclear whether China itself is able to control the company’s actions from the inside, it can outwardly influence it elsewhere. The Chinese state can threaten to shut ByteDance down altogether. As Donald Clarke, a specialist in Chinese law, discusses, “[t]here are risks to the structure [of a VIE] for foreign investors.”11 Specifically, as previously mentioned, a VIE is predicated on contracts. And, “a contract entered into for an unlawful purpose is invalid under Chinese law.”12 Thus, “[a]ny time the government wants to pull the plug, it can.”13 There is a real risk that, due to the structure of ByteDance, the Chinese state can decide at any time that the contractual agreement is illegally involved in a prohibited industry and force it to shut down in China. However, there is no clear and obvious threat to fear from the United States’ side that China can exert control from the inside of the company, and so the certainty of the rhetoric used seems unwarranted.

In sum, while not much is known about ByteDance, its entity structure seems to illustrate that the Chinese state does not have any ownership within it. The fact that ByteDance has taken such big steps toward proving that the United States has nothing to worry about, even contemplating a creation, followed by a sale, of a TikTok subsidiary to a United States company, should further demonstrate this.14 Therefore, I concluded that the Executive Order’s claims and, specifically, the national security threat are possibly overstated, and certainly one-sided.

Tencent

Tencent is the parent company that owns WeChat, a Chinese messaging, social media, and electronic payment application. The United States’ concern with WeChat is that through its app the Chinese state will obtain and use personal, and private, information of Americans to its advantage, similar to that of TikTok. And, on August 8, 2020, the former Administration released an Executive Order on the matter.15 Again, we must ask, is there truth to this threat? Can the Chinese government take this sensitive information from Tencent?

Similar to ByteDance, Tencent follows a typical VIE structure. However, more is known about Tencent, and so a deeper dive into the company can be done to provide a clearer picture of its ownership and governance structure.16 The original company, Tencent Computer, began as a “mainland incorporated entity in November 1998.”17 After an investment interest from Naspers, a South African internet and entertainment group, the company “restructured its operational structure in late 1999[,]” forming a British Virgin Island company.18 At this point, it was Tencent Holdings Ltd. and a “wholly foreign-owned enterprise, Tencent Technology, based in China.”19  Then, in 2004, another “wholly foreign-owned enterprise was formed, Shidai Zhaoyang Technology.”20 And, at that time, Tencent Holdings Ltd. changed its “domicile to the Cayman Islands in preparation for listing in Hong Kong.”21  Due to the restrictions in China, Tencent Holdings, now as a VIE, transacted through two mainland Chinese companies: Tencent Computers and Shiji Kaizuan—both of which were created and owned by the main founders of Tencent Holdings.22 As is the case in a VIE structured enterprise, each mainland company had “‘structured contracts’ with the foreign-owned units.” As of 2018, the only ownership shift of note is that Naspers sold a stake in the company, decreasing its ownership to about 31.17 percent.23

Not only is Tencent’s outward ownership structure devoid of the Chinese state, but it seems its governance structure is as well. Before listing on the Hong Kong market in 2004, Tencent Holdings had a complex structure. Its shares were owned equally by two groups, “12 mainland founders, of which five [were] core founders (50%); and Naspers of South Africa (50%).” 24 The company had a “strong shareholder agreement,” in that it gave the core founders the power to appoint the chief executive officer and Naspers the power to appoint the chief financial officer—two very important positions, giving neither of the two shareholder groups power over both25  Also, more than half of the first post-IPO board was non-Chinese, and the percentage of independent directors on the board was 42 percent.26 The company also undertook a range of governance improvement measures, including appointing experienced secretaries and increasing independence on the board.27

The current governance structure is very similar. It still contains two executive directors, “[Ma Huateng] as chairman and chief executive officer and Martin Lau as president.”28 It also still remains that there are “two non-executive directors from Naspers,” and the number of independent directors has increased “from three to four.”  29  Moreover, “the board and management composition has also been stable.” Since Tencent Holding’s listing on the Hong Kong market in 2004, “five of the current eight directors . . . have been on the board” since Tenant Holding’s listing on the Hong Kong market in 2004.30 The only change is that three of the core founders, Zhang Zhidong, Zheng Liqing and Chen Yidan resigned.31 However, even though they resigned, they continued to stay on in various advisory roles, with specifically Zhidong and Yidan “remain[ing as] part-owners of the two local operating companies.”32 While the above is complex, it is important to remember that this is a VIE. And, so, it is notable that none of the above ownership and governance structures overtly involve the Chinese state.

Finally, just as with ByteDance, Tencent is a VIE, so there is a fear of it being forcibly shut down by the Chinese state. From 2013-2014, there was great concern about the possibility that the Chinese government would shut down VIE structures, but “the discussion has [since] gone quiet.”33 At the same time, the risk is not gone yet. In Tencent’s 2016 and 2017 annual reports, they stated that while the firm’s legal advisers believe that “its structured contracts do not violate current mainland law, there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations.”34 As a result, in the future, PRC regulatory authorities and courts may “take a view that is contrary to the position of the Company’s PRC legal advisers concerning the[ir contracts].”35 

However, for the focus of this blog, it is concluded that the Executive Order’s claims, and, specifically, the national security threat to the United States, seem to be overstated. Tencent has been around for decades and has previously not been a concern of the United States. It invests in many United States companies, such as Tesla, and only now is seen as a threat.36

Conclusion

Throughout each instance, there is a theme of the company entering the United States market only to be met by an immediate, visceral reaction of national security threat rhetoric by the United States. As has been shown throughout this blog post, there are alternative, and equally feasible, stories to be portrayed in each company’s instance to counteract the rhetoric used against it. And one must query what the United States’ relationships with these companies will be like during the current Administration. 


  1. Exec. Order No. 13942, 85 Fed. Reg. 48637, 48637 (Aug. 11, 2020). 

  2. Id

  3. Venus Feng, The Complex Fortune Growing Inside World’s Most Valuable Startup, Bloomberg: Quint (Mar. 29, 2019, 5:30 AM), https://www.bloombergquint.com/global-economics/the-complex-fortune-growing-inside-world-s-most-valuable-startup.) 

  4. See id

  5. Id

  6. See id. 

  7. Id. 

  8. Id. 

  9. Id. 

  10. Id. 

  11. Id

  12. Id

  13. Id

  14. See Helen Davidson, TikTok: Why It Is Being Sold and Who Will Own It, Guardian(Sept. 22, 2020), https://www.theguardian.com/technology/2020/sep/22/tiktok-sale-the-reasons-behind-it-and-the-new-deal. 

  15. Exec. Order No. 13943, 85 Fed. Reg. 48641, 48641 (Aug. 11, 2020). 

  16. See Jamie Allen et al., Awakening Governance: The Evolution of Corporate Governance in China 221-28 (2018). 

  17. Id. at 221. 

  18. Id

  19. Id

  20. Id

  21. Id

  22. Id

  23. Id. at 222. 

  24. Id

  25. Id

  26. Id

  27. See id

  28. Id. at 223 

  29. Id

  30. Id

  31. Id

  32. Id. 

  33. Id. at 228. 

  34. Id

  35. Id

  36. See Pei Li, Factbox: WeChat owner Tencent invests in the United States and beyond, Reuters (Aug, 7, 2020, 1:27 AM), https://www.reuters.com/article/us-usa-wechat-trump-factbox/factbox-wechat-owner-tencent-investments-in-the-united-states-and-beyond-idUSKCN2530K8.