【精编汇总版】VIEStructureforForeignInvestmentinthePRCMayFaceChallenges合集

1、【精编汇总版】VIEStructureforForeignInvestmentinthePRCMayFaceChallenges合集】7/7【精编汇总版】VIEStructureforForeignInvestmentinthePRCMayFaceChallenges合集Variable Interest Entity (VIE) Structure for Foreign Investment in thePRC May Face Challengesby Xu PingThe variable interest entity (VIE) has long been a popular st

2、ructure for foreign investors in sectors that arc subject to Chinas investment restrictions. VIEs have also been used as a means by which Chinese domestic entities are able to list overseas on international capital markets.The first well known VIE structure was that ofS in its 2000 listing on (he NA

3、SDAQ. Indeed (he VIE structure is also commonly known as the Sina Structure. Sina used a VIE as a workaround structure to avoid restrictions on foreign direct investment (FDl) in the value-added telecom services sector. Since then, both foreign and Chinese investors alike have replicated the VIE str

4、ucture in many other sectors of Chinas economy where FDI is either restricted or prohibited from foreign investment.In essence, a VIE refers to a structure whereby an entity established in China that is wholly or partially foreign owned (the Controlling Company*) has de facto control over an operati

5、ng company (the Operating Company) which holds the necessary license(s) to operate in an FDI restricted/prohibited sector. As such sectors are subject to investment restrictions in China, foreign investors are not able to directly invest in the Operating Company. Accordingly, the foreign investors a

6、dopt various contractual arrangements between the Controlling Company and the Operating Company in order to obtain de facto control over the operation and management of the Operating Company. The profits of (he Operating Company would also flow back to the Controlling Company and ultimately be conso

7、lidated with the finances of the Controlling Company.For domestic companies, especially companies in restricted industries that dont typically have many physical assets (such as internet or telecommunications companies), the VIE structure was widely used to enable companies to obtain financing from

8、overseas markets through overseas listings. Gradually, companies in the heavy industries also started to adopt the VIE structure to list overseas, as did offthore shell companies that were looking to circumvent approval requirements stipulated by Chinas M&A RulesFrom a regulatory perspective, althou

9、gh there is no clear prohibition against the VIE structure in China, there has also been no express endorsement of the VIE structure either. Accordingly, the VIE structure has always been a gray area in the Chinese legal system. Although the VIE structure allows both domestic and foreign investors t

10、o circumvent government reviews and regulation, this also means that the1/4VIE structure does not have the backing of the authorities and therefore possesses inherent defects and potential legal and regulatory risks.I.Recent Alibaba CaseThe risks and uncertainties facing VIE structures include: (a)

11、the level of protection of the rights of beneficial owners in VIE arrangements being far lower than a direct equity interest in the Operating Company; (b) the potential conflicts of interest between the legal shareholders of the Operating Company and the beneficial owners; and (c) the uncertainly in

12、 whether VIE contractual arrangements are enforceable between the Controlling Company and the Operating Company in the event of a dispute.The recent case of Alibaba, a popular shopping website which had a successful IPO on the Hong Kong Stock Exchange in 2007, is a good example illustrating the pote

13、ntial risks of a VIE structure and the rationale fbr possible government intervention in the future.Yahoo and SoftbankMa YunOther shareholders(Mafority) |Alibaba Group HoldingVIE arrangement , Zhejiang Alibaba OffshoreOnshoreWFOEAlipayAMpay share transferAlibabas structure is a typical VIE arrangeme

14、nt: Zhejiang Alibaba, a private company held by Ma Yun (Jack Ma), acted as an operating company controlled by Alibaba Group Holding through a VIE arrangement. No problem arose until Ma Yun decided to complete a 70% equity transfer of Alipay from Alibaba Group Holding to Zhejiang Alibaba allegedly wi

15、thout majority shareholders approval on the part of the Alibaba Group (i.c. Yahoo and Softbank). The argument from Ma Yun was that Alipay would be unable to acquire the necessary operational license from the People Bank of China if it was held by foreign investors.2/4The Alibaba matter placed a spot

16、light on VIE arrangements and has been widely reported that the CSRC , Chinas securities regulator, submitted an internal report to the Slate Council asking the government to clamp down on this controversial yet popular corporate structure. This has resulted in even greater concern on the part of in

17、vestors and has cast doubts as to the feasibility of the VIE structure going forward.II.The Implication of the Report on the future of the VIE structureThere has always been a great controversy regarding the legality of the VIE structure, mainly because (a) it circumvents the restrictions on foreign

18、 investors making it possible for them to invest in restricted/prohibited industries in the PRC; (a) it circumvents approval requirements by the Ministry of Commerce (MOFCOM) in accordance with the M&A Rules, especially by oftshore shell companies making round trip investments (i.c. where PRC nation

19、al owned businesses and assets arc owned by an offshore entity owned by PRC owners); and (c) it may constitute price transferring and consequently result in tax evasion in some cases.The leaked report supposedly analyzes the legality of the VIE structure as well as the current status of PRC internet

20、 companies listed overseas by using the VIE structure. More importantly, the report recommends future overseas listings using a VIE structure should first obtain MOFCOM and CSRC approval. The leaked Report, is causing grave concerns for foreign and domest ic investors alike as nothing has been offic

21、ially confirmed. Furthermore, there is substantial uncertainty as to what (if any) requirements will be introduced.Notwithstanding the above, it was recently reported by the Shanghai Securities News that the report, which was allegedly drafted by a research department of the CSRC, was created solely

22、 for an internal study. Therefore, it is not an official report submitted to the State Council and therefore the actual policy implications, if any, arc unclear.However, (he investors should note that since the overseas listing of domestic companies by way of VIE structure has gradually been extende

23、d from traditional light industries to heavy industries involving material assets (such as infrastructure and natural resources) and therefore also avoiding PRC government supendsion, the motivation for the PRC government to regulate the VIE structure has become greater. Although we expect the gover

24、nment will not launch a severe clampdown upon the VIE structure in the short run, it is an issue very likely to be tackled by the government at some time in the future.III.Potential effect from NSR system on the VIE structureEven though currently there are no laws or regulations directly regulating

25、the VIE structure, a newly established National Security Review (NSR) system by the Chinese government may prevent foreign acquisitions of domestic companies if the3/4purpose is to evade the governments security review. This system, similar to those in many other countries, bestows upon the government the authority to review and approve a proposed foreign M&A (ransaction if it involves one of several key sectors (i.c. military, key technology and agricultural products) that have a bearing on Chinas national secu