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The Legal Study On The VIE Structure

Posted on:2015-09-07Degree:MasterType:Thesis
Country:ChinaCandidate:Z W TaoFull Text:PDF
GTID:2296330467954252Subject:International law
Abstract/Summary:PDF Full Text Request
According to the statistics results provided by the statistic agency Fredrik for theUnited States-listed and Hong Kong-listed Chinese companies, as of February24,2014, among the230companies listed in the United States, nearly half of themadopted the VIE structure; among the companies listed in Hong Kong,8of themadopted the VIE structure. In addition to the financing field, since the VIE structurecan evade the restrictions and regulations on the foreign mergers and acquisitionsindustry, it is also widely applicable to the foreign investment field by the foreigninvestment enterprises. However, whether the financing or the investment field, theVIE structure can not avoid the questions on it’s legality.The Chinese concept stocks has suffered on the red chips in the global capitalmarket, there is a growing trend calls for the red chips return to the domestic capitalmarket. However, due to the complexity of the VIE structure and the defects of thedomestic capital market, the returning road of the red chips is not smooth. At the sametime, the recent events such as the Ali-pay, New Oriental event, the litigation betweenthe Chinachem company and the SME company on the entrusted shareholdingagreement of Minsheng Bank which has been lasted for12years has been judgedinvalid by the Supreme Court all deepened the questions on the legality of the VIEstructure. So far, the VIE structure, which has helped many excellent Chinesecompanies listed on the global capital market suffered the questions from the public and become the culprit which has manufactured the crisis. What factors led to the VIEstructure into a sword of Damocles?This article is writing under the above background, analyze the legaleffectiveness of the theory and the practice of the VIE structure through studying theVIE structure related concept. On one hand, this article studies the different areas ofthe legal risk of it and proposes several targeted solutions standing in the companiesshoes; on the other hand, it analyzes the shortcomings of the existing regulation,draws the outside advanced experience and puts forward a sound legal regulatoryframework for the VIE structures from the perspective of the regulators. It raisessuggestions such as use the preference shares to solve the issue of the foreign controlover the company, take the reform of the Shanghai FTA as an opportunity to furtherrelax the restrictions on foreign access. It is concluded the VIE structure is a stageresult of Chinese capital market and discussed the future development from the shortand long term.Chapter1is the general overview of the VIE structure. Through elaborating therelated concepts of the VIE structure, it is revealed that the VIE structure is essentiallya way for investment and financing which used the complex accounting and legalarrangement to evade the laws and regulations. The VIE structure is first used by theChinese internet companies for offshore listing, then it is gradually applied to a widervariety of investment and financing and becomes the most thorough improvement ofthe red-chip mode. The construction process of the VIE structure is complex whichcontains numerous control protocol. On one hand, it enables the successful evading ofthe laws and regulations that become highly regarded in the field of investment andfinancing field. On the other hand, it is faced with great risk of law. However, it iswidely adopted by the domestic and foreign enterprises in the field of investment andfinancing in practice.In Chapter2, the legal effectiveness is analyzed from the angle of the legaltheory and the legal practice. From the prospective of the theory of law, firstly, theefficiency value of the prior to the order value judging from the value inJurisprudence. Secondly, the nature of the VIE structure is a contract, according to the theory of the autonomy of contract, the contract behavior is in line with the theory thatwhich is not prohibited by law is legitimate and valid in the private law domain.Thirdly, the VIE structure is in line with the overall benefit principle in the field ofEconomic Law. From the prospective of the legal practice, the Chinese governmenthas not enacted any law to determine the VIE structure is invalid. Although theJudicial Organs in China has concluded the Minsheng Bank Equity dispute case,which similar to the VIE structure and has determined the entrusted shareholdingagreement is invalid according to the Article52of the Contract Law:“Anyillegitimate purpose is concealed under the guise of acts.”But the judiciary field willnot directly deny the effectiveness of the VIE structure in the short term. There existssome arbitration cases which judge the VIE structure is invalid. However, the natureof arbitration determined that the specific arbitration case can not guide the similarcases in the future. In legal practice, the VIE structure is still used, especially in theTMT industry, the lawyers hold conservative attitude for the use of it in the heavyassets industry and the industry which is banned for the foreign companies to invest.The VIE structure is admitted by the Hong Kong Exchange and Clearing limited, butthe related regulation has become increasing hash recently. Although there hasoccurred excessive turbulence for the companies which has adopted the VIE structurein the American capital market, but so far the SEC did not explicitly deny thelegitimacy of the VIE structure. Therefore, the VIE structure is legitimate from thelegal theory and practice.Chapter3further analysis the legal risk the VIE structure may be faced with andfurther discuss the countermeasures of related companies. In the aspect of policy andlaw, since the VIE structure is currently in grey zone and it has not been clearlyallowed or prohibited, so the relevant enterprises is still faced with the risk to bestrictly regulated or even be banned, so those companies should pay close attention tothe policy and law changes and make timely response. In the aspect of offshore listing,the successful listing of domestic enterprises overseas with the VIE structure ismainly because of the accounting standards of the target place. However, due to theforeign accounting standards are usually inconsistent with those in China and this leads the Chinese Concept Share into an awkward situation. Therefore, the relevantenterprises need to study the accounting environments and standards jointly with theintermediary institutions, timely and fully disclose the information and establish thegood international image of the Chinese Concept Share. In terms of the merger andacquisition of foreign capital, the relevant enterprises should properly deal with thegeneral review, the possible antitrust review as well as the national security reviewinitiated by the Ministry of Commerce. In the aspect of the risk of the breach ofcontract, the relevant subject should be cautious to prevent the default of the foundersand senior managers and take effective measures to prevent these risks at thebeginning of adopting the VIE structure. In the aspect of the foreign exchange, therelevant enterprises should finish all kinds of registration, application, examinationand approval requirements strictly in accordance with the laws during the process ofthe establishment of the SPV, the round trip capital investment, the increase of theregistered capital of the WFOE, the capital settlement of the WFOE and the use ofthese foreign exchange and the transfer of the domestic money to overseas. Theyshould also pay timely attention to the domestic and overseas foreign exchangedevelopment so as to avoid unnecessary losses. In terms of the risk of tax, it issuggested that the related enterprises should wholly plan the tax issues, legally avoidthe double taxation problem, transfer the related transactions and other profit legally,and make the arrangement for its own taxable behavior in advance.Chapter4proposes several suggestions on the legal regulation of the VIEstructure in China in the viewpoint of the government. The Chinese government takesthe implied allowed attitude toward the VIE structure and has not explicitly ban orprohibit the VIE structure through legislation. In the short term, the VIE structure willcontinue to exist as a wise compromise. The government should strengthen thesupervision of it in order to ensure the orderly market norms. The existing defects ofthe legal supervision of the VIE structure are as followed: the binding level of thelegal document is not high, it lacks a clear position, the related concepts are notclearly defined, it lacks the unity among the present legislation and there exists theoverlaps of the power among different government departments, the current legislation is lack of guidance and forward-looking. The Chinese government anddepartments should learn from the mature regulatory experience from Hong Kong andthe United States, starting from the transformation of the overall regulatory thinking,improve the legal regulations on the Merge and Acquisition and the offshore listingfield in which the VIE structure are widely used. The specific regulation methodsincluding: change the thinking of the regulation, clearly define the related conceptsthrough legislation and show the regulatory stance, unify the supervision caliber andimplement a multi-level and comprehensive regulation, improve the informationdisclosure system and strengthen the international supervision cooperation.In the last section, it is concluded that the VIE structure as a stage product ofChinese capital market. In the short term, we need to guard it’s legal risk, improve thelegal regulation. In the long term, the reformation of the financing and investmentenvironment is the fundamental way to solve the problems related to the VIEstructure.
Keywords/Search Tags:The VIE Structure, Merge and Acquisition of ForeignCapital, Offshore Listing, Legal Risk, Legal Regulation
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