China’s New Online Publishing Rules: Another Nail in the VIE Coffin?

On March 10, 2016, the PRC government will impose new rules to govern online publishing in China. These are the Online Publishing Service Administration Rules (OPS Rules), promulgated by the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) and the Ministry of Industry, Administration and Technology.

Under the rules, all entities that intend to publish online in China must first obtain an Online Publishing Service Permit from SAPPRFT. The OPS Rules set out the conditions for obtaining the required permit. The Chinese government strictly regulates both traditional print publication and online publication in China and any publication done without the required permit or in violation of the terms of the permit is subject to severe sanctions.

The OPES Rules are primarily directed at controlling Chinese entities that publish online in China and it only indirectly addresses the activities of foreign entities. The reason for this is that foreign entities are already absolutely prohibited from any publication activities in China. I repeat: WFOEs, JVs and foreign entities are absolutely prohibited from carrying out any publication in China. Since this prohibition with respect to foreign publication in China is absolute, the only role of the OPS Rules is to prohibit schemes designed to evade this absolute prohibition.

Foreign commentators have consistently misunderstood the OPS Rules and the consequences that flow from those rules. The purpose of this post is to make clear the current status of foreign publication in China.

1. The new OPS Rules do not change the basic prohibition against publication in China by foreign owned entities. The OPS Rules merely confirm the prohibition that has always existed by making absolutely clear that “publishing” includes publishing “online.” Our China lawyers never doubted this.

2. The OPS Rules are primarily focused on regulating control of Chinese entities. The treatment of foreign entities is limited to measures intended to eliminate various schemes that have been used by foreign owned entities to evade application of the prohibition. The basic scheme that foreign entities have used has been to split ownership of the publishing license (held by the Chinese entity) and ownership and control of the technology and infrastructure required to carry out the publishing work (held by the foreign entity). These are the well known schemes of VIE structures and contract partner models. The new rules prohibit these evasive schemes. The OPS rules do this by imposing the following two new requirements:

a. The entity that holds the publishing license must have complete ownership and control of the publishing platform and technology.

b. Any cooperation agreement between a Chinese entity and a foreign entity must first be report to and approved by SAPPRFT.

The effect of these rules will be that VIE/Contracting Partner schemes will be illegal going forward unless it has prior SAPRFT approval. How this will affect existing entities using this sort of structure is not clear. By the term of the new rules, existing online publishing entities must apply for a new license under the terms of the new rules. It is doubtful any existing VIE structures will survive this process.

3. The rules vaguely broaden the definition of online publishing content, making it unclear how far the new rules will extend. However, the intent of the new rules is clear. Any material that would traditionally be published in print form is clearly intended to be included. The unclear area applies only to new forms of publishing developed solely for the Internet and with no traditional print analog. It is also unclear whether the new rules will be applied to publication online that is little more than the standard company brochure and promotional materials. Simply because these publications are far more commercial than informational, we think they will survive.

The main issue with the new rules is the clear prohibition of VIE and contract partner schemes designed to evade the foreign investment requirement. Though the new rules apply only to online publication, we see them as further demonstrating the PRC government’s dislike of VIE and contract partner structures everywhere, including other online businesses in China.

For example, the OPS Rules are not directed at online media publication such as film, TV and music because they are limited to the online provision of what traditionally would have been offered in print form. Though similar prohibitions on foreign investment already exist in film, TV and music, the target of these newest rules is The New York Times, not CBS or Metal Blade Records.

It appears VIEs like as Taobao and Tencent will not be directly impacted by these rules. On the other hand, Baidu and Sina may be since they publish news and other content that would traditionally be offered in print by newspaper or magazine. If Baidu and Sina are somehow exempted from the new rule, that would raise international trade rule concerns about the intent of the new program.

The issuance of the OPS Rules shows the PRC government is serious about eliminating the influence of foreign entities in China’s publishing and online media. In assessing the impacts of these new rules, it is important to note that bulk of Internet businesses in China are foreign owned through VIE structures. If the Chinese regulators are now serious about eliminating the VIE structure, what will that mean?

In part 2 of this series, coming tomorrow, I discuss the impacts of the new OPS rules.

The post China’s New Online Publishing Rules: Another Nail in the VIE Coffin? appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.