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ZTE replaces the board, but the power structure remains



ZTE
Corp.


ZTCOY 2.50%

replaced its board on Friday to meet the demands of the US authorities and conclude a deal to rescue the affected company of the Chinese telecommunications giant as they appear, a Wall Street Journal review of corporate records Found

All 14 directors, including chairman

Yin Yimin,

has left the ZTE board. The company appointed eight new directors as part of an overhaul involving the dismissal of dozens of senior executives. However, the incoming board members were handpicked by ZTE's state-sponsored majority shareholder, as the submissions show, and the majority are longtime officials of the shareholder or its state-sponsored parent companies.

At least two of ZTE's outgoing directors may also continue to take influence over the company because they hold stakes in a company that owns part of the shareholder, a holding company called Zhongxingxin. The US Department of Commerce required a new leadership at ZTE, but it does not require managers or directors to sell the shares.

ZTE's reshuffling may end up as "musical chairs," said Mark Stokes, a former China director of the Defense Secretary's Office. "If you are looking for a real change of leadership, you would probably need to target the very institutions behind these people," said Mr. Stokes, who is now Executive Director of the Project 2049 Institute, a think tank based in Arlington, Va.

The settlement sets "a new standard for the protection of American technology," Commerce Secretary

Wilbur Ross

said in a statement to the journal. "The dismissal of directors and executives will have a deterrent effect on other people at ZTE and elsewhere by demonstrating that hurtful behavior has consequences for the people involved," said Ross.

"There is no basis for forcing shareholders of a listed company to select our directors' candidates or to force the largest shareholders to sell them," he added.

A spokeswoman for ZTE, which is trading in Hong Kong and Hong Kong Shenzhen declined to comment.

In April, the Department of Commerce banned American companies from selling components and software to ZTE for the Chinese company to manufacture smartphones and telecommunications equipment. The ban, which remains in place, was introduced to punish ZTE for violating the terms of a previous agreement designed to clarify the allegations that it imposed sanctions on Iran and North Korea. The sentence threatened to kill ZTE's business.

According to US President

Donald Trump

The Commerce Department intervened earlier this month to reach an agreement to overturn the ban if ZTE agreed personnel changes, paid a $ 1

billion fine, placed a further $ 400 million in trustees and agreed to be monitored by US compliance officers for 10 years ,

The continued influence of key personnel and Chinese officials in ZTE's affairs adds ammunition to the critics of the deal, which was brokered by the Trump administration in the midst of a wider trade-off between the US and China. A large cross-party group in Congress is pushing legislation to ensure that the April ban on sales remains in force.

"The seemingly endless pitfalls and loopholes associated with the government's poor ZTE deal, including the restructuring of the board, are precisely why the government should not back down to help the Chinese government while they do threatened the jobs and security of our nation, "Minority Leader of the Senate

Chuck Schumer

said in a statement to the journal.

The New York Democrat, with other senators including Tom Cotton (R., Ark.), Marco Rubio (R., Fla.), And

Chris Van Hollen

(D., Md.), Embedded in a bill passed by the Senate earlier this month that could preserve the April ban if the measure is approved by the House of Representatives – and not rejected by Mr. Trump.

Although ZTE counts global asset managers, including

Black skirt
Inc.

and Vanguard Group, among its investors, Zhongxingxin is the largest and most powerful shareholder. The company, described in the ZTE Annual Report as a "controlling shareholder", holds a 30% stake.

Zhongxingxin, in turn, is half owned by two state-owned enterprises, Xi & # 39; s Microelectronics and Aerospace Guangyu company registrations, according to ZTE. The rest of Zhongxingxin is owned by two private companies with 42 members, including two outgoing board members: Mr. Yin, the former chairman, and

Wei Zaisheng.

Among them was Li Guangyong, a ZTE vice-president responsible for removing some ZTE leaders from an internal ZTE memo, and ZTE founder Hou Weigui. Mr. Hou left ZTE's board in 2016 after the company was accused of violating US sanctions.

Men. Yin, Wei and Li did not respond to the journal's requests. Mr. Hou could not be reached for a comment.

Five out of eight zhongxingxin candidates for ZTE's next board of directors are individuals with long history in the state-sponsored unit. Among them are Li Zixue, the deputy head of Xi & # 39; to Microelectronics and its secretary of the Communist Party, and Li Buqing, a director of Aerospace Guangyu, for biographies published by ZTE.

ZTE was co-founded by a state-owned enterprise in 1985, and Zhongxingxin was founded during the telecommunications boom in the 1990s to provide ownership to corporate leaders. According to Christopher Balding, a professor at the Business School of Peking University in Shenzhen, the ownership structure of ZTE, where leading companies hold stakes in state-owned enterprises and ordinary investors, is not unusual for a large Chinese company. [19659006] "However, if your focus is on changing your business practices," he said of the US agreement, "that should be of great concern, because you have not changed who owns and influences what in the company. "

Please contact Dan Stocking at daniel.strumpf@wsj.com, Wenxin Fan at Wenxin.Fan@wsj.com and Kate O'Keeffe at kathryn.okeeffe @ wsj .com


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