State as an Entrepreneur : A Study of the Investment Contractual Terms and Level of Control of China’s Sovereign Wealth Fund in Its Portfolio Firms

In recent years, the increasing cross-border investments by sovereign wealth funds have aroused high profile controversies, particularly over the strategic motives behind them and the potential control they could exert over target firms. Using a hand-collected dataset consisting of 51 M&As, 5 JVs and 23 fund investments made by China Investment Corporation from 2007 to the end of 2013, this paper analyzes important direct control rights, such as level of ownership and voting rights, as well as director nomination and board representation, of CIC in its target firms. It is found that while CIC usually holds significant but non-controlling equity stakes in its targets, its voting rights are often restricted in the investment contracts with them; and it is a rule rather than exception that CIC is generally not represented in targets' boards. Except for one Chinese company in which CIC is the second largest shareholder, there is no evidence of CIC pursuing shareholder activism by exercising its voting rights or bringing up proposals, neither in shareholder or board meetings of the portfolio companies.Although CIC does not seem to have actively exercised its formal control rights, a further examination of the related business dealings happened pre-and-post CIC investments across the networks of CIC and its targets suggests that practically, it is often not necessary for CIC to possess or use formal corporate governance tools to exert control over them. Rather, there are plenty of opportunities where CIC could still extract indirect private control benefits by virtue of the long-term post-investment relationships with the target firms. These findings question the necessity and efficacy of regulatory proposals forcing SWFs to remain passive in the corporate governance realm by, for example, asking them to suspend their voting rights. Countries hosting SWF investments should thus consider carefully before directing any new regulation at SWFs as a particular group of investors, and guard against those proposals rushed out of short-term fad or political pressure, which may backfire for protectionism in the long run