Study On Legal Issues Related To The Dismantlement Of VIE Structure

VIE is short for "Variable Interest Entity".It is a term used by the United States Financial Accounting Standards Board to refer to an entity(the investee)in which another enterprise(the investor)holds a controlling interest that is not based on the majority of voting rights,but through a set of agreements,and their accounting statements need to be consolidated.VIE structure is such kind of legal structure that enables the investor to control the interest entity.Although VIE mode does not originate from China,it has been most fully used in China,because it meets the urgent financing needs of large quantities of developing enterprises,under the condition of high threshold for enterprises listing and many limitations on foreign investment in China.Some Chinese enterprises' founders set up overseas Special Purpose Companies,include but not limited to overseas financing enterprise and Wholly Foreign Owned Enterprise,to achieve financing from overseas investors.And through a set of agreements,the domestic entity is controlled by the overseas financing enterprise.But the VIE mode is not a perfect financing mode.Comparing with the direct shares holding,through the form of agreements to control the company will face greater risk and uncertainty.Since China has not yet taken a stand on the VIE mode,if one party breach,the other party may not get penalty,even the whole agreements may be deemed to be invalid.Affiliate transactions in order to transfer profits between enterprises in VIE structure,not only may be considered a violation of the principle of independent transaction in China's "Enterprise Income Tax Law",but also may not meet the overseas securities market regulators' information disclosure requirements on listed companies which exist VIE structure.In recent years,with the improvement of China's investment and financing environment and the strengthening of return investment regulation,some enterprises choose to dismantle the VIE structure and return back to the domestic capital market."The Foreign Investment Law(Draft For Comment)" published in 2015 by the Ministry of Commerce means the first time for Chinese government to face the issue of VIE structures.It's supposed that after the formal implementation of "The Foreign Investment Law" in the future,there will be more and more enterprises need to dismantle the VIE structure.According to the different types of VIE structures,the ways to dismantle the VIE structures are different.In order to visualize the different dismantlement methods,this thesis chose two typical cases to present the whole process of its dismantlement of VIE structure.One is "Baofeng Technology" whose overseas financing entity is a listed company,another is "Xueda Education" whose overseas financing entity is an unlisted company.Based on the understanding of the whole process of the VIE structure,this thesis summarized and analyzed the legal issues in the process of dismantling VIE structure.First of all,in the dissolution of the VIE agreements,the parties signed the Termination Agreement does not necessarily mean the termination of the control by the VIE agreements.Whether the VIE agreements is actual performance is also need to be paid attention,because if the original VIE agreements has not been fulfilled,there may be liability for breach of contract or liability for fault.Secondly,in the acquisition of foreign investors' shares,the income tax arising from the transfer of shares is the tax cost that the enterprise needs to consider when dismantling VIE structure.And it's likely to lead to minority shareholder litigations in the process of delisting.In addition,in the restructuring of domestic part,enterprises need to deal with some legal issues left under the VIE structure,such as tax,foreign exchange,special purpose companies and the equity incentive plan which is not yet completed.In view of the above issues,this thesis put forward some measures to help the enterprise to prevent the potential risks in the process of dismantling VIE structure,and perfect the relevant supervisions in China.Hope this thesis introduce valuable remarks and thus inspire effective solutions for the above issues,so as to regularize the entire process of dismantling VIE structure.