1988: Back to the human world for a few years

Chapter 267 AB Shares and Vesting Clauses
Among all the Sino-foreign joint venture projects established before the millennium, very few were able to go smoothly. More than 95% of them ended up hanging there half-dead... On this point, I guess the students in Qingdao have the most say.

The reason for this is not that the projects are bad, or that both parties do not have the ability to complete the projects.

There are many issues involved in this, but unreasonable equity design is undoubtedly one of the most serious problems.

The 51%+49% shareholding ratio of both parties does not seem to be a problem at first glance. After all, Huaxia Enterprises definitely holds 51% of the shares, which sounds very good and very dominant.

However, in fact, anyone with a little business common sense in later generations knows that 51% absolute controlling rights only sounds good. This kind of share design model is simply a huge pit within a huge pit!

………………

Everyone on earth knows that such joint ventures are generally established for the purpose of mutual benefit. Foreign capital has strong professional design and development capabilities and a full range of products with a long history, while domestic capital has considerable advantageous resources or market channels. Thus, with the promotion of the idealized strategies of the top management of both parties, a seemingly prosperous joint venture is born.

One party needs the other party to capture local market share, and the other party needs to introduce the other party's technology and management. It seems like a "talented man and a beautiful woman", and it should be a beautiful marriage from the previous life...but is it really like this?
The reality is obviously cruel. The honeymoon period is often short-lived, and after a few years, major differences will arise between the two parties to the joint venture.

The slow, casual and romantic "three-man" working style of Western foreigners is seriously inconsistent with China's development model of seizing the day; and the Japanese companies' style of being meticulous and guarding core technologies more strictly than thieves is also difficult for Chinese people to accept.

So as time goes by, the local partners think that the foreign technical team is not strong enough and the support is insufficient; while the foreign party also thinks that the market capabilities of the joint venture partner are seriously overestimated. In addition to constantly proposing various internal demands that are either fantastic or further strict to improve production efficiency, the actual contribution to the company is lower than expected, and the profitability of the joint venture is not ideal.

As a result, the company entered a stage of superficial harmony, and the joint venture executives sent by both parties began to constantly report to the bosses of their respective parent companies. The company culture began to seriously deteriorate from then on, and middle-level managers also began to split up and set up their own factions!

After some time, the Chinese parent company could no longer tolerate being controlled by others in technology, so the capable local enterprises started a dual-track model. On the one hand, they continued to operate the half-dead joint venture factory, and on the other hand, they set up independent portals to carry out independent research and development by imitating others.

The foreign party was sensitive and strictly controlled all kinds of technical exchanges and cooperation, and began a strategy of fleecing the foreign parties by making every possible profit. At this time, the joint venture entered a stage of sharing the same bed with different dreams. Many such joint ventures failed to find a solution after replacing a batch of senior executives.

Why is this so? !

In fact, from the perspective of future generations, the reason is not complicated... The problem lies in the fact that both sides are standing on their own ideals and are unable to fully think from each other's perspective.

Once foreign capital establishes the business scope of a joint venture, the articles of association of the joint venture will generally require the foreign company to give up the right to independently develop the market in that region, and to allow the joint venture to develop the products within the business scope entirely. This will lead to high expectations from the foreign party for the dividend returns that the joint venture will bring to the parent company in the short term.

Otherwise, why would the foreign party give half of the profits to the joint venture partner? Wouldn’t it be better to get 100% of the profits through exclusive operation? … This is also the most important part of the foreign party’s appreciation of the local partner.

Of course, foreign parties also value China's heavy asset investments, such as land, factories and equipment; using China's assets and personnel to create value is almost a good business with high returns, extremely low risks and the ability to advance or retreat for foreign parties.

However, in reality, the Chinese side generally does not take it as its responsibility to use its own resource advantages to help joint ventures quickly increase sales and profit performance, especially some state-owned enterprises have a deep-rooted mindset of "trading market for technology."

What China actually needs is "time". Through the existence of the joint venture, it can digest the foreign party's technology and management, train and cultivate the business capabilities of the local team, and then use this capability to quickly open up the high-end market.

This is exactly what the foreign party does not agree with... because any joint venture has a lifespan, which can be as short as 10 years or as long as 20 or 30 years. The strategic department of the foreign headquarters will never train a foreign joint venture to become a future competitor, so apart from technical patents, they often have tight control over the core R&D technologies and management of the underlying material formulas, software development platforms and supply chains of the products, and will not invest the latest technologies into the business scope of the joint venture.

This kind of "blockade" will naturally make the smart and studious Chinese side very dissatisfied, and feel that the foreign party is stingy and very unfair. As a result, there are endless sarcasm and tit-for-tat in the board of directors. In the later stage, international friendship is no longer taken care of, and all kinds of things such as slamming the table and making trouble occur in meetings.

Huh?
Don’t you see how this is related to the 51%+49% shareholding design model?
Ok……

As we all know, in the equity rules of a limited company (non-listed), there are eight critical lines for the proportion of shareholders' holdings, namely:

10% shareholding: Application for dissolution line… has the power to apply to the court to dissolve the company and convene a shareholders' meeting;
20% holding: significant influence line… Any investment may be accounted for under the equity method;
25% shareholding: Foreign investment treatment line... Foreign investors must contribute more than 25% of their capital to enjoy the treatment of foreign-invested enterprises;
34% holding: shareholder troublemaker line… shareholders have a veto over seven matters: amendment of company articles, increase or decrease of company capital, change of company form, merger, division, dissolution and liquidation (this is also the most cost-effective and manipulable holding line);
51% shareholding: absolute shareholding line...Except for the above seven categories of matters, the company has decision-making power on all other matters.

67% shareholding: perfect shareholding line...with a veto power over all decisions of the shareholders' meeting.

Yes, you understand it now. In fact, if you don’t consider other factors, just from the perspective of cost-effectiveness, the 51% absolute shareholding line is the least cost-effective line...especially in joint venture projects.

Since only 34% of the shares are required to have a veto on major issues, neither shareholder has absolute control over all matters of the company. However, there is no third-party shareholder in the middle to serve as a wrestling and buffer zone. This also determines that under this equity structure, it is impossible for a real "leader" to emerge; therefore, once a major conflict occurs, it will often evolve into a situation of life and death.

But business is a game where "as long as you stay at the table, you have a chance to turn the tables", no matter how good or bad the leader is, even if he is an idiot, it is better than having no leader at all.

In a situation like this where two monks are waiting for water to drink, it would be strange if enterprises and projects died down in the endless mental consumption!
Obviously, as the executive director of Sankyo Co., Ltd., Suzuki Jiken undoubtedly has a much deeper understanding of this aspect than the leaders of Chinese enterprises;
However, this GAP Chinese medicinal materials planting project was not simply for the purpose of coveting the Chinese domestic market, nor was it like the previous investments of other island companies in China with a strong official color. Therefore, he naturally could not sit idly by and watch this extremely important project plant such serious hidden dangers from the very beginning.

………………

"Chief Yang, I suggest that before the project is established, we both establish a series of enterprise groups with a tree-like equity structure;"

“Take our Sankyo Co., Ltd. as an example. We can conduct internal financing through the Sankyo Co., Ltd. headquarters, the Malaysia branch, the Singapore branch, and the America branch to jointly establish a 100% internally-controlled [Sankyo International Holdings];”

"Then this international holding company will set up a 100% holding company [Sankyo Holdings];"

"Next, this Sankyo holding company will set up a 100%-owned [Sankyo International];"

"Then Sankyo International will set up a Sankyo Group."

After saying a bunch of confusing new company names like a tongue twister, Suzuki Jiken did not explain the international business rules. Instead, he glanced at the confused rookie and Miss Mu with a contempt that outsiders could not detect, and then looked at Yang Mo seriously: "Next, this Sankyo Group will become the investment entity and will jointly invest in a new company with your company;"

"But my suggestion is that the new company we jointly invest in is not one, but three!"

"Hmm... For the time being, let's call them [Momo Sankyo Pharmaceutical Company], [Momo Sankyo Medicinal Materials Planting and Management Company], and [Momo Sankyo Medicinal Materials Processing Company]."

At this point, Suzuki Jiken became excited: "According to my assumption, among these four companies, the pharmaceutical company has the largest initial investment, so my suggestion is that for your sake, this company should still be structured with the conventional 51% + 49% shareholding;"

"But for the medicinal material planting and management company, we only need to hold 47.1% to 48% of the shares... But correspondingly, the pharmaceutical company must hold 10.6% to 11% of the shares of the planting and management company in the form of non-cross-holding;"

"Next, Sankyo Group and your company will jointly establish a Sankyo Chinese Medicinal Materials Import and Export Trading Company with a 30-30 shareholding, and will invest in % of the shares of the Momo Sankyo Medicinal Materials Processing Company... Correspondingly, Sankyo Group will also invest in a % stake in the Medicinal Materials Processing Company;"

Pursing his lips, Suzuki Jiken's eyes flashed with excitement: "Next, it's time for the exciting moment."

"After the establishment of the medicinal material planting management company, I suggest that this company immediately invest downward with the other two companies in the name of segmented management to establish a mixed-ownership GAP agricultural material production enterprise... The shareholding ratio does not need to be large, 18% to 20% is enough;"

"Then this GAP agricultural material production company will work with the villagers in those planting bases to set up several small business companies... Section Chief Yang can decide the business content on his own, as long as they can make a little money."

"At the same time, the medicinal material planting management company will also invest in a mixed-ownership medicinal material seedling cultivation company in the name of segmented management... Chief Yang can decide which shareholders to absorb, but there is one thing... Momo Sankyo Medicinal Material Processing Company must own more than 20% of the shares of this medicinal material seedling cultivation company;" "Similarly, the medicinal material planting management company will invest in a special transportation company dedicated to the transportation of medicinal materials... The shareholders will also be determined by Chief Yang, but Sankyo Huaxia Medicinal Material Import and Export Trade must own more than 15% of the shares in it."

At this point, Suzuki Jiken's eyes flashed with pride: "With Chief Yang's intelligence, he should know the benefits of doing this... leaving the largest pharmaceutical company to your company, and then using a multi-level cross-shareholding model to ensure the long-term healthy operation of the GAP planting project... It can be said to be the best of both worlds. As long as your company can do some dredging, I'm sure the higher-ups will tolerate it!"

Blinking his eyes, Suzuki Jiken lowered his voice and said, "Of course, this is just a model I designed based on the actual situation of Sankyo Co., Ltd., and the focus is only on the Momo Sankyo Medicinal Herb Planting Management Company;"

"As for Section Chief Yang, we can actually apply this model to the equity design of Momo Sankyo Medicinal Materials Processing Company... Of course, if there are objections when the other subordinate companies have cross-holdings, we will coordinate in time!"

Looking at the rookies who were starting to feel dizzy and Miss Mu who was still looking down in deep thought, Yang Mo took out a pack of cigarettes without any negotiation etiquette.

He flicked out a cigarette and gestured to Suzuki Jiken. After the other party shook his head and refused, Yang Mo lit the lighter, exhaled a long puff of green smoke, and then looked at the Mediterranean old man with interest: "Huh~AB share model?"

"Senior Managing Director Suzuki is very confident in your company's capabilities. I originally thought that you wanted to start with [Concerted Action] or [Preferred Stock] to gain control of this GAP planting project... I didn't expect you to directly use this method of dividing shares to seize power?"

After hearing this, even Morita Jo was confused, but Suzuki Jiken's face changed drastically and he looked at the young man in front of him with disbelief.

If he had not been in China at this time and was not in a formal negotiation occasion, he would have almost jumped up and pointed at Yang Mo and asked loudly: Are you a human or a ghost?

Ok……

That’s right, the fancy methods used by Suzuki Jiken above are the AB share model that has just appeared in Europe and the United States not long ago.

This is something that is very difficult to explain in detail, as it involves a series of issues such as internationally accepted laws, shareholder rights, firewall design, accounting audits, equity transactions, etc. It would be impossible to explain it clearly without 100,000 words.

Therefore, you only need to know that shares are a somewhat illusory thing in practice. After all, there is a rule of equal shares but different rights. More than 90% of project founders in the world are not willing to share the companies they have worked hard to build with others. As a result, a series of operating methods of "dividing shares and money but not rights" were born.

Generally speaking, this kind of fancy centralization method using cross-holding + responsibility cutting can be roughly divided into the following seven types from common to uncommon:

Limited partnership framework, pyramid structure, persons acting in concert, delegated voting rights, company charter control, preferred shares, and AB share model.

These seven methods do not exist alone. International large companies often use three or more of them at the same time.
But among them, only the last AB share model is the most difficult to achieve... It can even be said that in order to perfectly realize the AB share model, among the previous six methods, except for "company charter control" which is not a necessary method, the rest must be arranged well one by one!

Ok……

If you still don’t understand how difficult it is to perfectly implement this gameplay, you might as well spend some time to understand Liu Jingdong and Ma Ali, or the equity structure tree of Fosun International. These people adopted the AB share model... Of course, times are different, and their gameplay is much more detailed and complicated than Suzuki Jiken’s initiative. What came out of the mouth of the Mediterranean old man is just the original version 1.0. There are many loopholes in it in the eyes of Yang Mo, the reborn!
………………

Yang Mo leisurely enjoyed the horrified look of Suzuki Jiken and the awe-filled gazes of the others, and shook off the ash from his cigarette: "Senior Managing Director Suzuki, I personally do not oppose cross-holdings, nor do I oppose your company's attempt to build an AB share model framework for this project;"

"After all, the business world is like a battlefield. Only with competition can there be progress... And you just made it very clear that this framework is open. If you can bury it, so can we!"

After taking a long puff of cigarette to relieve his craving, Yang Mo looked at him with a smile: "However, appropriate competition is conducive to progress, but it is not good if it is too much... I believe that your company is the same as us. The ultimate goal is actually to make this project better and bigger... This is the only way to achieve a win-win situation!"

Suzuki Jiken's brain was a little out of control, and he hadn't gotten over the huge regret and loss yet. When he heard Yang Mo's unexpected words, he subconsciously asked, "Appropriate competition?"

Yang Mo, who had eaten bait all the way, nodded and threw out his ultimate move: "Senior Managing Director Suzuki, I think it would be better to try this way. The project can try to split into company groups based on subdivided business as the axis. You can also try to lay the framework of the AB share model, but there are two points that I think must be improved."

Suzuki Jiken, who had suffered a lot of losses along the way, was immediately shocked when he heard this, and then bowed his head: "Chief Yang, which two points, please correct me."

Even the AB share model, which was the trump card to regain lost ground, was exposed by Yang Mo. The executive director looked at Yang Mo with fear in his eyes, and his tone became respectful, even using the three words "please correct me".

Seeing this, Yang Mo just smiled indifferently: "First, the framework of the AB share model can be laid, and there is no lower limit... As long as your company has the ability, you can pull every villager in to set up thousands of downline units."

"However, the upper limit of the equity tree must be limited to the owner... In other words, whether it is GAP Chinese herbal medicine planting management company or the pharmaceutical factory, the cooperative entity must be the headquarters of your Sankyo Co., Ltd., or a branch company... Stop talking about international holdings or not!"

It is obvious that Yang Mo has no intention of letting Sangong Co., Ltd. cut off its tail through internationally accepted business rules, nor does he want them to take advantage of relevant international regulations to find loopholes.

Suzuki Jiken heard this and pondered for a long time before speaking with some difficulty: "I can't answer this question now, Chief Yang. I need to report to the board of directors and apply for it... I will try my best!"

Yang Mo glanced at him. Since this guy was the person in charge of the negotiations and the executive director, he must be qualified to make the decision on the spot... It was obvious that he wanted to pass the blame to the board of directors.

But this was none of his business. Since he said he would try his best, there would probably be no problem. He nodded and said, "Second, Senior Manager Suzuki, I have always believed that healthy competition is the best way to go and only then can a win-win situation be achieved. "

"Your Sangong Co., Ltd. certainly attaches great importance to this tens of thousands of acres of GAP authentic medicinal materials planting base, and our company also sincerely hopes that this project can grow and develop;"

"I also know that in a joint-stock company, a triangular or even polygonal equity structure is more viable, but given the nature of this project and our unit, it is impossible for a third-party shareholder to appear in this project in the true sense;"

"But you were right before. The traditional 50-50 share structure is indeed not conducive to the medium- and long-term development of the project, so..."

At this point, Yang Mo raised a smile: "How about we introduce the Vseting clause?"

Vseting terms?

Hearing this extremely unfamiliar word, Mu Liya was stunned for a moment, and looked at the man beside her who she could never understand with confusion.

The pupils of Suzuki Jiken on the other side shrank, and his expression turned ugly...

Good job, young man. You have a big appetite!

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PS: This was originally a long chapter, and I wanted to finish writing this very important part that connects to the later plots. But unfortunately, the school suddenly issued an emergency notice today, requiring us poor high school students to rush to a food desert to observe and learn that day, and we will be gone for three days. It seems that we will not have time to do it, and I can't guarantee that I can update the day after tomorrow.

There is no other way. For the sake of my perfect attendance and those bags of spicy snacks, I can only change the big chapter into a small one and send it over two days.

(End of this chapter)