China VIE structure for foreign investment under attack from multiple directions
China VIE structure for foreign investment under attack from multiple directions: will it emerge (relatively) unscathed or is its very survival threatened?
Historically the VIE structure and its predecessors essentially came about as a "workaround" to allow indirect non-equity based "investment" in industries in China in which foreign investment was restricted or prohibited, e.g., telecommunications services and media. However its role has since expanded to circumvent approval requirements on affiliated M&A transactions used in pre-IPO restructurings.
In September 2011, various media disclosed that the China Securities Regulatory Commission ("CSRC") had prepared an internal report ("CSRC Report") recommending, among others, a crackdown on future VIE structures and which seemed to be aimed at "persuading" major Internet companies to return to domestic stock markets for financing purposes. This was not entirely accurate, as a cursory reading of the actual CSRC Report suggests it was written by a low-level official and addressed to his superior within CSRC as a research result, and in no way represents an "official" or definitive CSRC view. Therefore, whether the CSRC Report represents anything more than one view from one (low-ranking) official is open to question.
Nevertheless, this report has generated speculation about the future of the VIE structure in China, and the spectre of the State Council (to whom the CSRC Report was apparently submitted) ordering a crackdown on these structures has created concern amongst investors and companies using, or planning to use, such structure.
In this client note we will try to step back from the hype and speculation and take a hard and objective look at the history of the VIE structure, provide some in-depth analysis on the CSRC Report, and provide a considered view on what this all means to the many foreign and other investors the future of whose business ventures in China are, in some way, tied to the fate of the VIE structure.