VIE stands for variable interest entity and they are entities used to allow a company in China to technically be a Chinese domestic company, but be de facto controlled by a foreign-owned entity or entities. VIE structures are usually used to allow foreign companies to get involved in various sectors of China’s economy forbidden to foreign companies by the Chinese government and its laws.
We have been speaking out against VIEs for years ,and just about every time we do, someone says if they are illegal, why have so many large law firms, large accounting firms, and large companies gone along with them? The answer is simple. Money.
And then we stopped writing so much on VIEs. Not because our position on VIEs had changed, but because we had said our piece (more than once) and it was time to move on.
I am writing on VIEs today not just to say “I told you so” to everyone who doubted us, but to emphasize that whatever the risks were with VIEs back in late 2011, they are even greater now because exactly what we said about China forbidding VIEs has been borne out by a recent China Supreme Court case (involving Chinachem) with an unfavorable ruling for those invested in a VIE.
In China Concern about a Chill in Foreign Investment, the New York Times wrote about this recent China Supreme Court case. According to China’s Supreme Court, contractual agreements between the foreign and the Chinese company “had clearly been intended to circumvent China’s restrictions on foreign investment, and amounted to ‘concealing illegal intentions with a lawful form.'” Though some commentators in the story talk of how such deals are more “sophisticated” today, in the end, they too are “intended to circumvent China’s restrictions on foreign investment with a lawful form.”
The article goes on to note that since 2010, “Shanghai’s arbitration board has invalidated two variable interest entities that had been used by foreign companies to control onshore businesses. In one case, involving an online game company, the board applied China contract law to reach the same conclusion as the China Supreme Court in the Chinachem case, saying that the variable-interest entities were ‘concealing illegal intentions with a lawful form.'” It then quotes Paul Gillis (who knows as much about VIEs as anyone) on how “China is attacking these VIE structures and the other ways that people have used legal form to get around the substance of what Chinese law says you can’t do.”
No surprise.
