Chinese Style VIEs: Continuing to Sneak Under Smog?
38 Pages Posted: 4 Mar 2015
Date Written: February 1, 2014
Abstract
The VIE (Variable Interest Entity) is a business structure that is comprised of a series of contractual arrangements that enable relevant parties to obtain a degree of control over, as well as a substantial economic interest in, certain companies without having to directly own their shares. For about fifteen years, by virtue of the VIE structure and its accounting treatment in the U.S. or Hong Kong, many China-based enterprises were successfully listed overseas, thus circumventing Chinese regulatory control on foreign equity ownership and investment restrictions in specific industries such as internet or education. However in recent years, serious doubts arose about the validity and viability of the Chinese styled VIE. Court judgments, arbitration awards, and administrative decisions from different sectors and levels have continued to pose challenges to the practice of creating Chinese style VIEs. The egregious breach of contracts and the chaotic battles over control have also caused foreign investors to suffer, eliciting concern from the SEC and HKEx. This Article reviews the structure, origin, and logic of the VIE, and analyzes the evolution and dynamics of such practice. An argument can be made that China’s best interest would be served by ending the murky situation surrounding the VIE, stopping this self-enforced vicious spiral by realigning the interests of the parties involved. One proposal suggests that a collective and coordinated regulatory framework that is characterized as less restrictive, more transparent, better defined, and more user friendly, should be set up for the VIE practice; this proposal should be initiated by the State Council and MOFCOM in particular. Moreover, international cooperation should be strengthened to better protect investors and deter opportunistic misbehavior.
Keywords: Variable Interest Entity, Foreign Investment, Chinese Law, Securities Regulation
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