A Study On The Legitimacy Of Variable Interest Entity System

After Sina listed successfully in U.S. by the adoption of the structure of variable interest entity (hereinafter referred to as "VIE"), a large number of top Internet companies realized their listing dream in offshore capital markets by following Sina’s suit. Up to now, PRC authorities have not promulgated any specific rules to regulate the VIE structure, therefore VIE structure is often thought to be legitimate simply due to no direct prohibition. It is usually disclosed in many legal opinions issued by PRC legal counsels for the listed companies like this,"each contract under VIE arrangement is effective and binding in accordance with PRC laws and regulations, but we cannot assure you that the PRC regulators will reach the same conclusion as us. Their effectiveness would be affected in future due to the changes of PRC laws and regulations."With this background, this article illustrates the following four aspects to further explain the topic of VIE structure:Section I (Chapters1to2):The author explains the macro-significance of VIE structure from the perspective of contract theory of company law and in terms of its accounting meaning. The target of this section is to give a general picture of VIE structure for smooth further explanation in following sections.Section II (Chapters3to4):The author refers to relevant disclosures of various listed companies by the adoption of VIE structure to explain the legal and commercial significance of VIE contracts. In addition, the author compares the respective right of shareholders’rights under PRC company law to illustrate in detail the difference between VIE contracts and investment relationship and the reason why they are not analogous to each other.Section III (Chapter5):By using the theories of evasion of law and proportional principle of invalid legal acts, the author analyzes whether VIE contracts arrangement is regarded as an invalid legal act under PRC legal framework. In this section, the author concludes that VIE contracts shall be deemed valid from the aspects of the principle of law evation, the potential influenced parties under VIE contracts and the unproportionality if declaring the invalidity of VIE contracts.Section IV (Chapter6-7):The author discusses another factor affecting the validity of VIE structure: the administrative enforcement. The author refers to the administrative practices in recent years to explain the difficulties of many to-be-listed companies when adopting the VIE structure. Although the administrative authorities do not have the right to declare a legal act invalid, they can frustrate the commercial purposes of the to-be-listed companies at their own administrative discretion.