Read the Beforeitsnews.com story here. Advertise at Before It's News here.
Profile image
By China Law Blog
Contributor profile | More stories
Story Views
Now:
Last hour:
Last 24 hours:
Total:

Buying Into A China VIE. What Me Worry?

% of readers think this story is Fact. Add your two cents.


Years ago, we here at China Law Blog made clear our views on VIEs and nothing about those views has changed.  For that reason, and becuase VIEs have little to nothing to do with most companies doing business in China, we stopped writing about them years ago.  In a nutshell, we don’t like them, don’t trust them, and don’t do them.  Quite frankly, our malpractice insurance just isn’t high enough for the massive risks we see in these investment vehicles.  We simply believe that when push comes to shove, China’s courts simply won’t enforce the contractual agreements that are necessary to support such a structure.

Seems we are not alone in this assessment and we now have company from a Chinese court.  Sue-Lin Wong just did a story on VIEs for the International Herald Tribune/New York Times and because both Steve Dickinson and I were quoted in it, I cannot resist retreading old ground here and again writing about VIEs.

The NYTimes story is entitled China Court Ruling Could Threaten Some Foreign-Invested Companies and it comes on the heels of a recent ruling by China’s Supreme People’s Court holding that “contracts used by non-Chinese citizens to gain access to sectors of the Chinese economy that are protected from foreign investment were invalid.”  Ms. Wong nicely explains why V.I.E.’s exist at all:

Sectors the Chinese government considers sensitive, including finance, media, technology, the Internet and education, have long been largely off-limits to foreign investment. To get around that, some of the biggest companies in the country founded by Chinese people, including the Internet giants Baidu, Alibaba, Tencent and Sina, create variable interest entities, or V.I.E.’s, that give overseas investors de facto control over companies technically owned by their Chinese partners, as Neil reported. V.I.E.’s account for differing proportions of these companies’ income and assets, ranging from several percent to as much as 100 percent.

V.I.E.’s have for the most part worked just fine and this likely will not change, until there is a problem.  And that itself is the problem.  To make up a Yogi Berra quote, there is no problem with V.I.E.’s until there is a problem.  Problems arise if the Chinese partners decide they don’t want to follow the contracts any longer because, for example, they already have the money and know-how they were seeking, as has happened in several instances. When that happens, the foreign party most likely has no legal recourse.  China Law Blog’s own Steve Dickinson is quoted on the biggest problem with V.I.E.’s:

“Chinese law has a very clear provision. A contract written to avoid the requirements of Chinese law is void and the court will not enforce it,” said Steve Dickinson, a partner at Harris & Moure and a co-author of the China Law Blog.

In other words, they almost certainly are not legal.  Though some are seeking to distinguish this recent Supreme Court case because it involved a type of company structure that predated V.I.E’s, Steve isn’t buying that:

“This group of people will distinguish the recent Supreme People’s Court ruling because it was an earlier set of documents, not entirely the same as the V.I.E. structure,” Mr. Dickinson predicted. “But what the court said is that any contract that is designed to avoid the clear requirements of Chinese law is void from the very first step. That is what the V.I.E. is.”

I then chime in to explain why despite the risks V.I.E formations just keep on coming:

“Accountants, lawyers and stock brokers make a ton of money off IPOs so they have no incentive to slow them down,” said Dan Harris, a China lawyer with Harris & Moure and a co-author of the China Law Blog. “They have every incentive to keep the V.I.E. structure going.”

Of course it is not just Steve and me who view V.I.E’s with such trepidation.  Andrew Gilhom, head of Asia analysis at Control Risks describes them as a way for foreigners “to make some money for a few years but ultimately it’s kind of open season.”

Does this mean that all V.I.E’s are going to disappear or be sued out of existence?  Absolutely not, because as the article rightly notes, it is “unlikely that the Chinese government wants to turn the V.I.E. structure into a huge issue”:

“They don’t want all the U.S.-listed stocks suddenly tumbling and companies failing and panic,” Mr. Gilholm said. “I don’t really see any signs that they are going to proactively go out and across the board say that all these structures have to be unwound.”

But what is to stop one or two at a time to encounter major problems?  What do you think?

If you want to learn more about VIEs, I suggest you read the following China Law Blog posts:

And the following China Hearsay posts:

And the following China Accounting posts:

And the following China Finance posts:

If you read all of the above, you will probably know more about VIEs than anyone else alive. If you are going to read just one post, make it “Explaining VIE structures.” Oh, and just to give you more to read, I also recommend you read the Silicon Hutong post, “VIEs, The Long Resolution.” In that post, David Wolf talks of how the Chinese government likes to “boil its frogs slowly, not all at once,” and he then talks of how VIEs are on the wrong side of where China wants to be going. I could not agree more. I do not see VIEs disappearing overnight; instead, I see foreign companies involved with VIEs suffering a very long and very gradual squeeze out.

What do you think?

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.



Source: http://www.chinalawblog.com/2013/06/buying-into-a-china-vie-what-me-worry.html


Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Please Help Support BeforeitsNews by trying our Natural Health Products below!


Order by Phone at 888-809-8385 or online at https://mitocopper.com M - F 9am to 5pm EST

Order by Phone at 888-809-8385 or online at https://www.herbanomic.com M - F 9am to 5pm EST

Order by Phone at 888-388-7003 or online at https://www.herbanomics.com M - F 9am to 5pm EST


Humic & Fulvic Trace Minerals Complex - Nature's most important supplement! Vivid Dreams again!

HNEX HydroNano EXtracellular Water - Improve immune system health and reduce inflammation

Ultimate Clinical Potency Curcumin - Natural pain relief, reduce inflammation and so much more.

MitoCopper - Bioavailable Copper destroys pathogens and gives you more energy. (See Blood Video)
Oxy Powder - Natural Colon Cleanser!  Cleans out toxic buildup with oxygen! 
Nascent Iodine - Promotes detoxification, mental focus and thyroid health.
Smart Meter Cover -  Reduces Smart Meter radiation by 96%!  (See Video)

Immusist Beverage Concentrate - Proprietary blend, formulated to reduce inflammation while hydrating and oxygenating the cells.

Report abuse
Loading...

    Comments

    Your Comments
    Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

    MOST RECENT
    Load more ...

    SignUp

    Login

    Newsletter

    Email this story
    Email this story

    If you really want to ban this commenter, please write down the reason:

    If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.