Reuters: China VIE Company Structure Under Threat
- Posted by bbishop
- on September 18th, 2011
[UPDATE: This issue may be a bit exaggerated, if one of of China’s veteran executives has good information. Xie Wen claims that Vice Premier Wang Qishan has issued an order to grandfather in existing VIEs–China VIE Issue Overblown, Vice Premier Issues Directive To Recognize Existing Ones? | DigiCha. END UPDATE]
Reuters reports that the China Securities Regulatory Commission is calling for action against variable interest entities (VIEs). In Sunday’s story China company structure under threat Reuters writes that:
China’s securities regulator is asking the government to clamp down on the controversial corporate structure used by companies such as Sina (SINA.O) and Baidu (BIDU.O) to list overseas, and employed in thousands of other investments by foreigners into domestic Chinese companies, four legal sources told Reuters.
Lawyers at four different firms in China and Hong Kong said they have seen an internal report, dated August 17, said to come from the China Securities Regulatory Commission (CSRC) which asks China’s State Council, or cabinet, to take action against the structures known as Variable Interest Entities (VIEs).
The CSRC did not respond to a Reuters request to confirm whether or not the report is genuine. But lawyers say they are taking it seriously and that if the government were to accept the CSRC’s view it could jeopardize the way in which Chinese companies list overseas or receive foreign investment…
“If the PRC government did clamp down on the use of VIEs for overseas listings, it would leave few options for many of these companies to list outside of China, or even to take on foreign investment of any kind,” said Alan Seem, a partner at Shearman & Sterling in Beijing who has not seen the internal document.
“I don’t think U.S. investors would be that excited to be investing directly into a Chinese entity, and there is a question whether the CSRC would approve these companies for foreign listing even disregarding the VIE issue.”
The move by the CSRC is apparently driven in response to the raft of fraud cases seen recently at Chinese companies listed in North America, many of which used the VIE structure. The CSRC has repeatedly stated that it often has no jurisdiction over these companies, which tend to be incorporated offshore, but the wider impact of the scandals on investor sentiment to China is putting them under pressure to act.
I have posted on the VIE issue a few times, most recently in Do Most Chinese Internet Firms Have A Technically Illegal Corporate Structure?. From that post:
VIEs were in the news a few months ago when Jack Ma expropriated Alipay from the Alibaba Group on the grounds that for national security reasons the government would not allow foreign-backed firms, including those with a VIE, to obtain an online payments license. Ma eventually agreed to compensate Yahoo ($YHOO) and Softbank, but few believe he is paying them 100 cents on the dollar for an asset they once partly owned.
It is unlikely that the Chinese government intends a wholesale investigation or restructuring of the Internet industry, but investors should not be blind to this risk, nor should they believe arguments that the government would not dare because too many jobs would be lost. Jack Ma proved that you can you restructure the foreigners out without any job losses, and to the advantage of Chinese investors.
Foreign participation in the Internet, perhaps the last major industry in China that is not state-dominated, has come under increasing scrutiny, not just during the Alipay scandal but also in a recent article in Study Times, a publication of China’s Communist Party School, that decried the amount of foreign ownership in China’s Internet firms.
If there are any investigations of foreign ownership of Internet companies on national security grounds, one might be forgiven for thinking that search (Baidu) and Weibo (Sina and Tencent) are at least as important to national security as online payments are. Given that much of the foreign ownership in Chinese Internet firms is actually Chinese money offshore, and frequently very connected Chinese money, I would expect that in the unlikely event of any major restructurings there would some mechanism to take care of the important investors.
For those who want a deep dive into VIEs, I have embedded an excellent primer on the subject from the Cadwalader law firm. You can also follow this link to China Law Blog for several good articles and podcasts on the topic.
I still think it is unlikely that this will have any significant impact on the major Internet firms like Baidu ($BIDU), Sina ($SINA), Tencent, Sohu ($SOHU), Netease ($NTES), Youku ($YOKU), Shanda ($SNDA) et al.
This development however may freeze new China Internet IPOs and slow new venture investments. I have heard it is increasingly to find a Chinese law firm (it has to be a Chinese firm) to bless the VIE structure as required by the underwriters and the SEC.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Bill Bishop is an American living in Beijing. He is bilingual and has experience working in both US and China. In 1997 he co-founded CBS MarketWatch and stayed until the sale in 2004 to Dow Jones. He was never a journalist, and instead worked in several business roles over the years, the last as head of the MarketWatch consumer Internet business. More »
- Sinocism China Newsletter For 08.30.12
- The Sinocism China Newsletter
- Today’s China Readings July 18, 2012
- Sina Sell-Side Still Searching For Muppets
- China Daily Readings
- Sina Admits It Has Not Complied With Weibo Real Name Registration Rules
- Groupon’s China Firesale
- Apologies For The Hiatus
- Tweeting The Sina Q4 2011 Earnings Call
- Quick Thoughts Ahead Of Sina Earnings
- August 2012
- July 2012
- May 2012
- April 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- Inside Sina Weibo
- Reuters: China VIE Company Structure Under Threat
- Authorities Removing Apple iPads From Chinese Store Shelves? (Updated)
- Is Tencent The Wrong Partner For Groupon In China?
- China's Internet: The Invisible Birdcage
- Jack Ma Talks To China Entrepreneur Magazine About The Alipay Case (UPDATED)
- If Sina Is Cooking Its Books I'll Eat This Blog
- Do You Know Where Your China Stock CFO Lives?
- New Report On China's Online Game Industry-$3.6B in 2009 Revenue, $9.2B By 2014
- China's MIIT Declares Most VoIP Services, Including Skype, Illegal
TagsAdvertising Alibaba Apple Baidu Beijing cctv Censorship china China Mobile Corruption Cyberwar DangDang eCommerce Facebook Fraud Gaming GFW Google Group Buying groupon Internet Investing IPO Media Mobile Music Netease PerfectWorld Piracy Policy Readings Regulations Search Shanda Sina SNS Social Games Tencent Twitter US-China Virtual Items Web Video Weibo WoW WVAS
- Group Buying
- Internet Security
- Listed Firms
- Online Games
- Online Memes
- Online Payments
- Online Trends
- Perfect World
- Public Relations
- Renewable Energy
- Social Gaming
- Traditional Chinese Medicine TCM
- Web Advertising
- Web Video
- World of Warcraft
StockTwits - All Updates