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To VIE Or Not To VIE (in China). Answers Will Come Via Web Discussion This Tuesday.

By Dan Harris on Posted in China Business, Events, Legal News

For the last couple of years, there has been massive discussion regarding Variable Interest Entities (VIEs) in China. We at China Law Blog have taken a strong stand on them and our position has always been that we will not do them because we do do not think they hold up to legal scrutiny. Or to put it another way, our law firm is too small to withstand the onslaught of malpractice litigation we forsee when these VIEs start to unravel.

Under a VIE structure, a Chinese Internet provider is effectively owned by a foreign entity through a complex set of contractual arrangements, rather than through ownership of stock.  The control by the foreign entity is so total and complete that the arrangement is considered the equivalent of ownership under U.S. accounting rules. However, by there being no actual foreign ownership of stock, these VIE structures have managed to operate in China, evading the clear rules restricting foreign ownership.

Our concern has always been that the Chinese side in these deals will be able to jettison the foreign company because the foreign company will not be well positioned to fight back because its connection with China is not legal. We are hearing that none of the Big Four accounting firms will have anything more to do with VIE deals so it appears that our stand on this issue has now become the new reality.

Others do not see things the same as us and think that we are being too cautious and that VIEs are too important to China and so will always be protected. 

This Tuesday, November 1, there is going to be a web discussion/debate/cage fight involving some very outspoken people on VIE structures. The event is going to consist of CLB’s own Steve Dickinson (an attorney), China Hearsay’s Stan Abrams (an attorney), China Accounting Blog’s Paul Gillis (an accountant), and China Finance Blog’s Fredrik Öqvist (a financial analyst). 

There will also be a VIE-related Q&A through the G+ site during the course of the week. Anyone with an interest in VIEs should tune in. Go here to find out more. The main event will take place this Tuesday, November 1, from 10 am until 11 am EST.

For background on 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?