Our China lawyers have a long history of skepticism regarding China VIE structured entities.  In Buying Into A China VIE. What Me Worry? we had this to say about them:

Years ago, we here at China Law Blog made clear our views on VIEs and nothing about those views has changed.  For that reason, and because VIEs have little to nothing to do with most companies doing business in China, we stopped writing about them years ago.  In a nutshell, we don’t like them, don’t trust them, and don’t do them.  Quite frankly, our malpractice insurance just isn’t high enough for the massive risks we see in these investment vehicles.  We simply believe that when push comes to shove, China’s courts simply won’t enforce the contractual agreements that are necessary to support such a structure.

V.I.E.’s have for the most part worked just fine for China and this likely will not change, until there is a problem. And that itself is the problem. To make up a Yogi Berra quote, there is no problem with V.I.E.’s until there is a problem. Problems arise if the Chinese partners decide to cease abiding by the contracts any longer because, for example, they already have the money and know-how they were seeking, as has happened in several instances. When that happens, the foreign party most likely has no legal recourse. The New York Times quoted China Law Blog’s own Steve Dickinson on the biggest problem with V.I.E.’s:

“Chinese law has a very clear provision. A contract written to avoid the requirements of Chinese law is void and the court will not enforce it,” said Steve Dickinson, a partner at Harris Bricken and a co-author of the China Law Blog.

So how will Alibaba help? As this Washington Post article, The red flags around Alibaba and one of the biggest stock debuts in history points out, is a rather risky investment because it involves a VIE structure, among other things.

But Alibaba is also huge and very public and that means it is very influential. If Alibaba succeeds as a stock investment, the chances of other Chinese companies having successful IPOs will rise. Conversely, if Alibaba tanks, we can expect Chinese stock IPOs to go into its own tailspin.

We are always saying that the Chinese government favors stability over economics, but oftentimes economics equals stability and we believe that the Chinese government would like to see Alibaba succeed. If China were to deem VIEs illegal and shut some down, investors likely would flee Alibaba stock and that would be bad for China.

The risks of VIEs just decreased.

  • bystander

    I dunno. One possibility for how this unfolds is that VIEs become acceptable, maybe even explicitly acceptable under Chinese law. Another possibility is that they become illegal but foreign ownership becomes possible in a way that allows companies like Alibaba to reorganize their corporate governance structure in a way that matches the new ownership rules. However I think there are more possibilities yet. China could push hard for its own stock exchanges to grow in stature and size and influence, and could simultaneously crack down on VIEs, but without loosening foreign ownership rules in the internet area, to effectively force the use of the local exchanges for new IPOs. It’s really difficult to guess what any of this might mean for Alibaba as an isolated case — the shareholders could end up in a better position, or they could end up holding the empty bag. It’s really a crapshoot as I see it. So long as VIEs remain illegal and the laws around them are in a flux, it’s a big question mark.