Analysis of the VIE model from a legal perspective

An excellent article on Vantage Asia (China Business Law Journal) this morning about VIEs and their legal impacts. Key highlights are -

..often referred to as the “agreement control model” in China, in offshore listings means that a listed entity registered abroad is separate from a domestic business operating entity but the domestic business entity is controlled by the offshore listed entity by way of agreements. The business entity is the VIE of the listed entity.

According to incomplete statistics, among the Chinese enterprises listed on the three major US stock exchanges (the New York Stock Exchange, NASDAQ and the American Stock Exchange), 42% of them have adopted the agreement control model.

Potential issues for the education companies (EDU, TEDU, REDU, DL, COE, HLG etc.) using VIEs to list themselves in foreign markets -

Furthermore, the Supreme People’s Court expressly pointed out in the Ambow Case, “the possible entry of a foreign investor into the compulsory education sector in a disguised manner, and its involvement in the management of the school through control of the founder of the school, should be regulated and, through administrative law enforcement, penalties should be imposed for violation of the law”. In this respect, it issued a judicial recommendation to the Ministry of Education.

Possible conclusions for the VIE situations by the author -

Firstly, stop with the delusions, gambling that the government will continue to look the other way and the VIE model can still be used to circumvent the restrictions on foreign investment in laws and regulations.

Secondly, there is also no need to worry about the sky falling in, as the three methods mentioned in the Draft Law on Foreign Investment leave those enterprises that have used the VIE model and whose actual controller is a Chinese investor room for manoeuvre.

Thirdly, attention needs to be given to the negative list for access by foreign investors. For example, against the background of the relaxation of the restrictions on foreign investment in online data processing and e-commerce business in the Shanghai Free Trade Zone, there is absolutely no need to bring up the VIE model.

Article sums it up with this -

“What we really need to get rid of is not VIE itself, but the cause that gave rise to VIE.”

You can find the entire article here