Legal Risk And Regulatory Research On Protocol Control Models

In the year 2000,when Sina company and Sohu company listed on the NASDAQ Stock Market in an initial public offering,it is the first time that the Contractual Control Mode,a type of trading structure,stepped into the stage of history.Because facing some circumstances like comparative domestic financing difficulties,the admission restriction of foreign investment and the supervision of foreign capital merger and acquisition within China,a number of Chinese companies have adopted the Contractual Control Mode(hereinafter referred to as “VIE Structure”)to list overseas successively instead of the Shareholding Control Mode.Over ten years after the date the VIE Structure was firstly used,the instability and risk of the structure seem to be more prominent little by little.On the one hand,the amount of the foreign investment into Chinese enterprises through VIE Structure is very huge.On the other hand,although the relevant regulatory authorities in China have not explicitly prohibited the use of VIE Structure,they have not explicitly endorsed it as well.The VIE Structure has been confronted with risks from regulatory authorities,the dispute resolution mechanism,defaults of the shareholders and the VIE structure operation and so on.The legitimacy and enforceability of the VIE structure has always been the primary concern of all subjects,and is one of key risk factors needed to be disclosed by enterprises using the VIE structure.Domestic and foreign scholars and investors are also trying to explore the attitude towards the legitimacy of the VIE structure held by Chinese dispute resolution organizations.The Supreme People's Court of PRC published its final judgment of Yaxing company vs Ambow company in July 2016 and this judgment sets off a heated debate about VIE structure.The uncertainty of the legal status and the inherent defects of the VIE Structure bring a certain level of risk towards the domestic financing enterprises,foreign investors,host countries and listed countries.With continuous development of Chinese economy and society and deepening participation in the international market competition,China is constantly exploring and trying to improve the foreign capital management system in the theory and the practice.The revision of the catalogue for guidance of foreign investment,the pilot of foreign capital management system in free trade zone,and the release of PRC Foreign Investment Law(draft version for public comment)will influence the future of the VIE structure.In general,as Chinese authorities loose the admission restriction of foreign investment,the necessity of the usage of the VIE structure will gradually decline in the future.To reduce the various risks arising from the VIE structure is of great practical significance to protect the interests of the market subjects and maintain the stability of the financial order.Therefore,it is necessary to further clarify and strengthen the legal supervision of the VIE structure.Because the subjects of the VIE structure are located in multiple jurisdictions,it should be conceived at the domestic and international levels to achieve effective legal supervision over the VIE structure.