The Legal Analysis And Perfection Of Supervision System Of The VIE Structure

The essence of VIE(“Variable Interest Entity”)is that investors achieve the control of the invested entity and enjoy its benefits through a series of agreements,other than directly holding the equity of the invested entity.Under the contradiction between the offshore financing demand of domestic enterprises and China's overseas investment policy,the VIE structure was introduced into China,which was combined with red chip mode creatively.After Sina,the first Chinese company,listed on NASDAQ through the VIE structure successfully,the VIE structure becomes almost the only way China's Internet companies seek to be listed overseas.In the background of the rapid development of Internet technology,the VIE structure introduces overseas capital,technology,management experience into China,promoting the vigorous development of China's Internet industry,witnessing the emergence and growth of Tencent,Baidu,Alibaba,and other Internet financial giants.The VIE structure creates a win-win situation,in which the government,both domestic and overseas capital of the whole industry,entrepreneurs and the public have benefited greatly.On the one hand,the VIE structure improves the overseas listing and financing of China's.On the other hand,a series of events,such as the transfer of Alipay control,plummeting stock price of New Oriental,indicate that the market's doubts on the legitimacy of the VIE structure never stop.Although the VIE structure was generated with a tendency to circumvent the legal policy,the legal supervision on the VIE structure was almost in blank in China's security practice,until the promulgation of Provisions of the Ministry of Commerce on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors(2011),which formally brought the “control through agreement(VIE structure)” into the regulation scope of the overseas capital merger and acquisition's security review.However,the aforementioned provisions only prohibits the use of control-through-agreement mode to evade the security review on mergers and acquisitions,not giving a clear definition on the legitimacy of the VIE structure and its conformity with overseas investment accession policy.Foreign Investment Law of the People's Republic of China(Exposure Draft),promulgated in 2015,officially states that the VIE structure is a kind of overseas investment,while the current draft text doesn't give a clear opinion on the definition and handling of the existing VIE structure and the regulatory systems among different departments have not been unified.The paper tries to sort out the development of localization of the VIE structure in China and gives advice on the future regulation of the VIE structure.The first chapter is the overview of VIE structure.Tracing back to the origin of VIE is conducive to the understanding of its definition.“VIE” itself is an accounting term used to solve the problem of loopholes in consolidated financial statements.Because of the overseas investment access system in China's overseas investment law system,the VIE structure is introduced into China as a framework for overseas listing and becomes the main mode of the listing of red chips.The second chapter is about the legal analysis on the current situation of the VIE structure in China,analyzing the legitimacy of the VIE structure in China's legal system from the perspectives of contract law and international investment law respectively.Then,it summarizes the four legal risks of the VIE structure under China's legal framework.The third chapter generalizes the supervision of the VIE structure in China from the legislative,administrative and judicial aspects.The existing legislation for the VIE structure is mainly distributed in the field of overseas mergers and acquisitions security review and specific industries such as telecom game,which lacks a programmatic legal framework to regulate the VIE structure.The ways of regulation on the VIE structure of the United States and Hongkong are quite different.The regulation of the VIE structure of SEC in the United States is based on the principle of information disclosure,which has no specific norm and guideline,while Hongkong Stock Exchange stipulates the specialized listing guidelines for the VIE structure.The fourth chapter puts forward some suggestions on the legal supervision of the VIE structure by reference to Foreign Investment Law of the People's Republic of China(Exposure Draft).It reviews the legal system of overseas investment in China and then introduces the background of the introduction of the Exposure Draft.The Exposure Draft introduces the concept of “de facto control” to define Chinese and overseas investors,distinguishing the new VIE structure from the existing one and proposing three schemes to solve the existing VIE structure.A series of signals released by the Exposure Draft indicate that Foreign Investment Law of the People's Republic of China will solve the problem of the VIE structure.In the end of this paper,based on the analytical results aforementioned,the author puts forward some suggestions on the regulation of the VIE structure in the background of the promulgation of Foreign Investment Law of the People's Republic of China(Exposure Draft)and Provisional Measures on Administration of Filing for Establishment and Change of Foreign Investment Enterprises and the reform of the overseas investment legal system.