The Risk Research On Overseas Listing Education Training Companies Based On VIE

In2012, China’s education industry got frustrated again in America’s listingmarket. On May9,2012, China Cast Education exited the Nasdaq stock marketbecause of VIE asset transformation caused by the company’s controlling right fight.On May29,2012, Ambow Education failed in handling VIE between multi-mergersand was late for its annual report. Its stock price fell by40%. On July11,2012, NewOriental restructured its VIE shareholding picture and got investigated by SEC andreceived doubts from Muddy Waters. There is a common point in these three stories,that is all the crisis those companies had are related with VIE they adopted at the veryfirst beginning in listing.VIE, also known as Sina mode. It means overseas listed subjects have no actualequity control relationship with domestic operators; the two sides are connected bysigning a series of contracts so as to meet the standards of consolidated financialstatements in accounting regulations set by the listing location’s authorities, theoverseas listed subjects is in real control of domestic operator and make the operatorgo listed.The mode resolves the dilemma faced by foreign investors and domestic privateenterprises. On the one hand, it helps private enterprises in the restricted or prohibitedindustries bring in strategic investors to get overseas financing; on the other hand, itfacilitates foreign investors involving into the industries set by laws as restricted orprohibited. VIE has opened up a new channel for private enterprises to introduceforeign capital, facilitated the enterprises’ development, improved industry servicequality and met customers’ demand. It uses international capital and develops theenterprises and improves capability of enterprises and the competitiveness of the wholeindustry.However, with its wide application in China, the disadvantages of VIE began toshow up. Many education training companies have encountered serious fluctuations of stock price in overseas capital market, operating performance decline and shareholders’litigation. All these demonstrate great risks exist in education training companies gotlisted abroad through VIE. Therefore, a close study of risks brought by VIE andeffective risk prevention measures is of great importance to education trainingcompanies.This paper first introduces background and meanings of the research, researchstatus at home and abroad as well as VIE theories; then it connects theory with practiceand analyzes the status quo and risks of education training companies listed abroadthrough VIE. The paper makes a case study of the New Oriental Education&Technology Group, the first education training company listed through protocolcontrolling mode in overseas market. Through detailed analysis about the listing andresearch about the July2012investigations and doubts from SEC and Muddy Waters,the paper further confirms the following four risks which exist in education trainingcompanies listed through VIE: corporate governance risk, moral and ethic risk, legalrisk and risk of information disclosure. At last, it provides related resolutions,including improving company’s ownership structure to better corporate governance,appointing independent directors to strengthen internal supervision, enhance legalsupervision to a moderate level and establish and complete risk prevention measuresagainst information disclosure to limit negative effects of VIE.This paper provides reference for the identification and prevention of risks ineducation training companies listed abroad. Meanwhile, it services for educationtraining companies that are going or will go public in overseas market.