Research On The Risk Factors And Consummate Suggestions Of Contractual Control Mode

The contractual control mode refers to the method in which the foreign-investedenterprise which wholly controlled by the foreign special purpose vehicle entered intoa series contracts with the operation corporation in China to control the decision bodyof the operation corporations and transfer the profit produced by the operationcorporations hereof to the foreign holding company finally. The contractual controlmode became a frequently-used mode for the Chinese enterprises listing oversea afterSina achieved listing in America by using contractual control mode in2000. As theimprovement of the traditional red-chip mode, the contractual control mode hascreated the golden age of the emerging industries in China, including the internetindustry.However, the contractual control mode which helps the Chinese enterprisesconnect with the foreign capital market has been questioned frequently in recent years.After the Alipay event firstly demonstrated the legality and the validity of theaforementioned mode in front of the public, the event that the contractual controlmode of Baosheng steel has been denied by the local government further sparked thediscussion of this issue, and the investigation of the New Oriental by the U.S.Securities and Exchange Commission put the mode forward.This article intends to explore the origins, the concept, the risk factors, theregulatory status and the improving recommendations of the contractual control mode in four parts. The first part introduces the traditional way of listing overseas of theChinese companies–listing at abroad directly or indirectly, on the base of which thispart describes the background of the contractual control mode, basic concept and thepractical processes, laying the foundation for the analysis below. The second partfocuses on risk factors of the contractual control mode by analyzing the cases ofoverseas listed, including the effectiveness risk of agreements, the uncertainty ofregulatory rules, the corporate default risk, the agency risk and the effectiveness of thecontrol framework and other agreements. The third part focuses on the regulatorystatus quo of China and overseas capital markets for protocol control mode to exploredomestic and foreign regulators attitude. The fourth part provide some advices onhow to improve the stability of the foreign protocol control mode and reducing theinvestment risks from the perspective of the enterprises and the regulatorsrespectively combining the risk factors and characteristics of national regulatorsmentioned above.