VIE Structures in China：What You Need to Know (1).pdf.pdf

Topics in Chinese Law AN O’MELVENY & MYERS LLP RESEARCH REPORT October 2011 VIE Structures in China: What You Need to Know by David Roberts and Thomas Hall F or more than a decade, the captive or “Sina-model” structure (also commonly referred to as the “variable interest entity,” or VIE, structure, which is the term we use in this article) has been adopted by foreign-invested PRC companies operating in industries subject to restrictions on foreign investment. The structure has monplace and is used by many of China’s most well known offshore-panies, including Alibaba, Baidu, Dangdang, Focus Media, New Oriental, Sina and Tudou. For several emerging industries in China, including and private education, almost all major players have adopted VIE structures to attract foreign venture capital financing plete offshore listings. However, recent instances of listed companies losing control of their VIEs (including the very public dispute between Jack Ma, the founder and CEO of Alibaba, and Alibaba’s other shareholders regarding the Alipay VIE) and concerns over a potential regulatory clampdown on VIE structures have caused significant concern among investors. Steep declines in share prices of offshore-listed panies in September 2011 were attributed, at least in part, to concerns about the VIE structure. As a result, it is more important than ever that investors clearly understand how VIE structures work, why they are used, and the risks involved with investing in pany using a VIE structure. In this article, we discuss the basic characteristics and underlying rationale of the VIE structure, its expanded use in recent years, the regulatory history and recent regulatory scrutiny of the structure, the structural risks inherent in its use and best practices for mitigating such risks. Anatomy of the VIE Structure VIE structures are typically adopted as part of an offshore restructuring of a PRC pany in preparation for venture capita