Archives: China Hearsay

Just read a Bloomberg News article, “Proview Using ‘IPad’ Name is Harmful: Apple,” that quotes me on the Apple-Proview dispute, as follows:

“It’s not really trademark law, it’s about whether the trademark was legally transferred or not,” Dan Harris, a Seattle-based lawyer with Harris & Moure who handles cases on intellectual property in China, said before the hearing. “Proview Taiwan agreed to sign over the trademark, but Proview Taiwan didn’t own the trademark.”

I see the case as being about authority. Authority to sell the iPad trademark. Who had the authority to sell the iPad trademark to Apple back when Apple (acting through a third party intermediary) thought it purchased the trademark for iPad in China back in 2009?  Let me explain.

If you bought the Brooklyn Bridge from me, you would not own it. Why not? Because I cannot transfer title in the Brooklyn Bridge to anyone because I do not own it in the first place. This analysis should be the starting point for analyzing the Apple-Proview case. I say this because it appears that Apple bought the iPad China trademark from a company that did not own it. Apple (again, acting through a third party intermediary) bought the iPad China trademark from a Taiwanese company called Proview Electronics Company, Ltd. (“Proview-Taiwan”) at a time when a Shenzhen company called Proview Technology Shenzhen Co, Ltd. (“Proview-Shenzhen”) actually owned it.

So the big legal issue in China is not really a trademark issue, it is an ownership and authority issue. The ownership of the trademark when it was allegedly sold is not really in doubt; it was owned by Proview-Shenzhen. The real question is whether Proview-Shenzhen authorized Proview-Taiwan to sell the iPad trademark to Apple and that is mostly what is being argued in the Chinese courts.

To modify the Brooklyn Bridge analogy, let’s say that you bought a house from Mr. Jones and it turned out that Mr. Jones did not own the house, but rather, his wife, Mrs. Jones, owned the house. If Mr. Jones and Mrs. Jones were in the midst of a divorce and she had told him not to sell the house and had told you that she owned the house and so Mr. Jones could not sell it to you, your claim to own the house through the purchase would probably be pretty weak. But let us suppose that Mr. and Mrs. Jones were happily married and Mrs. Jones was right there during the negotiations for the sale of the house and never said a word about how she was the one who actually owned it. Well your claim to own the house would be a lot stronger.

The Apple-Proview case is dealing with similar factual issues, as can be seen in the Bloomberg article. In other words, it looks like a factual mess.

And that is not the only factual mess. Remember how I keep saying Apple used a third party intermediary to try to buy the China iPad trademark. Well, Proview-Taiwan is suing Apple in the United States about that, claiming that the way Apple sought to buy the iPad name constituted fraud and unfair competition. My initial reaction upon hearing of this lawsuit was to assume it had little validity. I assumed this because it is quite common for big companies (small ones too) to try to buy something through a third party intermediary so as to avoid revealing to the seller how much the desired item may really be worth and I had never heard of a lawsuit being brought over that.  But in reading, “How Apple snookered Proview to get the iPad trademark,” I am not prepared to just laugh off that lawsuit.

So what should your takeaway be from the Apple-Proview case? Nothing more than that you need to be sure that the company with whom you sign a contract is the right company. I know this sounds basic, but this sort of thing happens more than you can imagine in international deals.  I personally have worked on at least two joint venture deals gone bad where the American company had signed an agreement involving the wrong party. In both cases, the American company thought it had a deal to be the distributer of the Joint Venture’s products outside China, but in fact, the agreement actually said that the American company would be the distributer for its Chinese joint venture partners’ products. And since the Chinese partner did make products that the American wanted to distribute….

For more on the Apple-Proview case, check out “Apple v. Proview. China Trademarks And So Much To Learn” and if you want still more, go over to China Hearsay, where Stan Abrams has written nearly a dozen posts on this case. And for you law-geeks out there, click here for a copy of the just-filed Amended Complaint (along with some interesting exhibits) in Proview’s U.S. litigation against Apple.

Surprised and honored by a post over at the Associate’s Mind Blog (a terrific blog, BTW, written by a neophyte lawyer out of Birmingham Alabama). The Post is entitled Law Library of Congress Archiving Blawgs and it told me something I did not know: The Library of Congress maintains an archive of what it has apparently deemed to be the top legal blogs and that list includes CLB:

I went in expecting to find only things like the Harvard International Law Journal (which I did), but I was also pleasantly surprised to find regular blogs, such as China Law Blog, Simple Justice, The Trademark Blog, and others included. There are even a couple Canadian blogs included as well. It’s a nice resource when/if some legal bloggers decided to hang up their hats.

The full archive is here. In addition to our blog, Stan Abrams’ China Hearsay also made the cut and so too will live forever. Near as I can tell from my quick review, the list of the 100 or blawgs that are being saved for archiving are all worth a read so if you are searching for a new law blog or two to follow, do check out the archive.

On November 4, CLB’s own Steve Dickinson participated in an Internet discussion regarding Variable Interest Entities (VIEs) in China. The discussion was entitled, “Foreign Ownership in China: Still VIEable?” and the other participants were 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).  A full transcript of the proceedings can be found here. If you have any interest in VIEs or investing in the companies that have VIEs, I strongly urge you to read the transcript. I also urge you to check out this post on VIEs, which has a long list of good readings on VIEs.

What I found most interesting about the discussion is that everyone seemed to agree that Chinese courts will not enforce the contracts on which VIE structures are based. In light of this, what exactly do U.S. listed companies with VIE structures really have in China?

Now that I have your attention with my Global Times-ish headline on protectionism in China, I am going to backtrack.

The protectionism that people attribute to China is wrong. I have become convinced that the protectionism that people tend to attribute to China does not really exist, or at least barely so. The Chinese government does not care nearly as much about its domestic companies as widely believed, at least those that are not State Owned Entities (SOEs). Instead, the Chinese government cares almost exclusively about the Chinese government. Once you understand this, you will be better able to know where you, as a foreigner, stand.

I just read a China Hearsay post noting how China’s Ministry of Commerce’s recent approval of Yum! Brand’s purchase of Little Sheep Restaurant should put everyone’s fears to rest about China using its M&A review for protectionist purposes. China Hearsay was not the least bit surprised by this approval, nor was I. I figured the approval would come because the buy-out was not going to impact much (if at all) the things China’s government really cares about.

The Chinese Government is still uncomfortable with private business and it rarely, if ever, steps in to assist them just to assist them. Therefore, if you as a foreign business are going to be competing with private businesses, you likely will do okay. If you are going to be doing business in an arena dominated by SOEs there is a much better chance of your facing problems.

If you are going to be doing business in areas critical to the government, such as internet, publishing, movies, mining, defense, automobiles, then you really need to be very careful about what you are doing, both in terms of its legalities and in terms of how you will be viewed by the government. Each of these industries can be very different in terms of how you will be viewed by the government. By way of example, foreigners are not treated terribly well in the movie business and many have cried “protectionism” because of this.  The Chinese government’s policy towards foreign films does seem like protectionism, but because foreign films are limited for informational reasons and not to protect China’s domestic film industry, calling it protectionism may not be appropriate, especially since there does not appear to be all that much love lost between Beijing and China’s own film industry. Mathew Alderson, who represents a number of media companies in China, wrote on this in a post, entitled, Protecting Hollywood Films in China Makes Sense For China:

It is not the local Chinese film industry that wants to stop foreign films. Far from it. Barriers to entry such as China’s twenty foreign film quota, and the requirement that foreigners shoot their films in China as Chinese co-productions, are there to stem the invasion of Hollywood’s “corrupting” influences, which the  Chinese government sees as US propaganda or soft power. These barriers really have more to do with the government’s desire to preserve what it deems important than in protecting the local Chinese film industry.

The same is generally true with respect to publishing.

But if your business is something like retail, or electronics manufacturing, then you probably have nothing to worry about from Beijing by way of protectionism . That is not to say you do not have other issues you need to worry about, including local governments that may not appreciate your being there, but odds are good you do not have an enemy in Beijing.

What do you think?

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?

Yesterday, co-blogger Steve Dickinson wrote a post essentially excoriating VIEs. That post went live early this morning. A few hours before our post went live, Bill Bishop (who knows as much about China’s tech industry as any human being alive) wrote a post essentially saying that those who are trashing VIEs are engaging in scare tactics and that there is little cause for worry.

Bishop makes his very powerful counter-argument on his Digi-Cha blog, in a post entitled, “Bloomberg Keeps VIE Fears Alive: China Companies Evading Rule With U.S. Listings Stump Regulators” [link no longer exists]. Bishop contends that “so many powerful interests have financial stakes in VIEs that it would be career suicide or worse for a Chinese bureaucrat to destroy this structure on a wholesale basis.” We do not disagree with this statement, but we do not think it deals with the two main issues. One, the government has come out with regulations making very clear that such structures are illegal. On top of that, and as we have said all along, these regulations probably should not have even been necessary because VIEs were almost certainly already illegal under a proper reading of the various applicable laws. Having said this, however, we fully recognize that the Chinese government has in the past come out and said something was illegal and then done nothing about it. See, for instance, “China Rules Skype Illegal. Tell Me Something New,” where we predicted that the government’s making Skype “illegal” would have no real impact.

But with VIEs it is different and Bishop does not address our main point (note again that his post came before ours).

Whether or not existing VIEs are shut down (and at this stage we tend to agree with Bishop that they generally very likely will not be), the reality is that they have now been deemed illegal and that cannot help but have a major and game-changing impact on them. As mentioned above, VIEs are a structure that allows foreign companies to control the Chinese entity via various contracts. Now that those various contracts have been declared illegal, it will be difficult/impossible to enforce those contracts in Chinese courts. In this VIE structures, many of the contracts involve foreign countries and foreign country enforcement so their illegality in China may be minimized to that extent. However, even outside China, the party seeking to avoid enforcement of a contract will, in many cases, still be able to argue against enforcement based on China’s having made the structure illegal.

In many ways, what is happening to VIEs is no different from what we have called “fake Joint Ventures” and on which we wrote in the post, “Fake China Joint Ventures: Why You Calling Me, I’m Not The Guy:

In that post, I very loosely transcribed into one conversation a number of conversations I had been having with people wanting to set up contractual arrangements to avoid China’s expensive and difficult joint venture laws:

Caller: I’ve got this great website and it is exactly what China wants/needs. And I’ve been working on developing it with some Chinese tech friends of mine and we want to take it legal so we can start getting VC (venture capital) funding for it. Here’s our plan. Now I know that the old/truly legal/expected/usual way to do this is for me to form my own company and then form a joint venture with my Chinese partners, but I also know that will cost a lot of money. So our plan is for the Chinese company to own the website and then we will have an oral agreement (or a written agreement) that I really own half of it.

Me: Listen, my firm has been contacted at least twenty times after these situations have gone bad and I am aware of at least another twenty times where the same thing has happened, and let me tell you, these arrangements (it is NOT proper to call these joint ventures) virtually always end the same way. They end with the Chinese company booting you out completely and leaving you with no recourse. Protecting foreign companies in legitimate joint ventures is difficult enough, but it is pretty much impossible under the scenario you are describing. We had a guy who paid us a lot of money once for us to do everything we could to try to get “his” multi-million dollar business back. Guess what, we could not even come close to getting it back. Every Chinese lawyer we talked to about suing to get it back told us we had no chance of winning at all. I mean, just listen to the argument we would need to make to the judge:

Your honor, my client knew that China’s laws are very clear on what foreign companies must do to operate legally in China, but he thought these very clear laws should not apply to him because, well because he is an American tech company and he was just too smart/too poor to bother to comply with the very clear laws. So instead, he had this great method for completely circumventing China’s very clear laws. His idea was to not form a company, but rather, have his Chinese friends form the company and he would have a little side deal with that company. Well, that side deal has now gone bad and my client wants you to go against China’s very clear public policy on how foreign business is to be done in China and enforce this unwritten side deal.

What do you think of that argument?

Caller: (long pause) I understand things could go wrong with that kind of arrangement, but would you be willing to draft the contract between me and the Chinese company?

Me: No. I can’t do that. I can’t draft a contract that I know will never work. I just can’t. Give me a call if you ever want to do this legally, in a way where you actually have a chance of profiting from your work down the road.

For more on this, check out “China SMEs, Own If You Want To Own.” To get a feel for how difficult it can be even with a fully legal joint venture, check out this article by Steve Dickinson in China Brief, entitled, “Avoiding Mistakes in Chinese Joint Ventures.” and this Wall Street Journal article I wrote, entitled, “Joint Venture Jeopardy.

Update: In, “Private Equity, Venture Capital and ‘Fake’ China Joint Ventures,” China Hearsay very nicely maps out the way these deals are typically done (using an offshore holding company) and notes that you might have legal recourse in the rare instances where your Chinese partner has “huge assets offshore” in a country in which you can sue and win:

You can tie up the Chinese founders in 100 different contractual knots, but unless those founders have huge assets offshore (real assets, not equity in the holding company) that you can go after in a dispute, they can always tell you to piss off and kick your ass out of the business.

All I can say is that I have never and I will never invest in a company based on so thin a reed.

FULL DISCLOSURE: Our firm long ago made the decision to work with those companies and individuals with claims based on the arrangements set forth above, as opposed to representing those wanting to enter into such arrangments.

THIS JUST IN: Stan Abrams over at China Hearsay is out with a post, entitled, “A Post-Holiday Update on VIE Chatter,” that essentially says what this post says, which is that the dividing line between Bishop and us is that Bishop is analyzing what the government is likely to do with existing VIES while we are analyzing the risks involved in having a corporate structure based on unenforceable contracts. Stan completely nails it when he says he thinks the differences between us and Bishop stem largely from the angle from which we are looking at the VIE issues:

Anyway, I have nothing new to say, but I did want to point out a couple of new things for you VIE groupies to read. First is a lengthy Bloomberg overview of the issue. It’s generic, and therefore a decent place to start if you’re looking for a jumping-off point to the topic. Second and third are two opinion pieces, by Bill Bishop (DigiCha) and Steve Dickinson (China Law Blog), who sort of set themselves up on opposing sides of the issue.

It was interesting reading these two blog posts, since both authors are wicked smart, experts in their respective fields, and very opinionated (not that there’s anything wrong with that).

Stan then describes Bishop’s post as putting forth “The sky is not falling” position and Steve’s post as “VIEs are complete rubbish and should be avoided like the plague.” Stan then notes how the positions appear very different, but maybe not so:

So, at first glance, two very different views, and I bet they would get into a serious argument if the opportunity arose. But I actually think that their fundamental conclusions are both right but are merely coming at the issue from two very different perspectives. Bill is a Internet and finance guy, and is looking at the market, firms’ access to capital, and what the government is likely to do.

Steve, on the other hand, is a corporate lawyer. He is looking at potential risk, at what might go wrong, and what is/is not a technical violation of the law.

When Bill says that we shouldn’t worry about the government going after Chinese listed firms in the U.S. that use the VIE structure, I think he’s right. All the inside chatter on that issue seems to indicate that the government will grandfather in those companies even if it adopts a new enforcement strategy.

And when Steve says that VIEs are rubbish, he’s of course right. These things are illegal in that their purpose is to deliberately skirt foreign investment restrictions. I don’t actually agree with him on what the M&A rules mean (I think it’s too early to tell), but I definitely agree with his overall legal opinion.

Stan then goes on to say essentially what I say above, which is that the story is not the shutting down of VIEs, it is the inherent risks they present by being based on illegal contracts:

All this being said, if I have one bone to pick with recent commentary on this subject it’s that it emphasizes the latest regulatory goings-on without paying attention to the real risk story with respect to VIEs. The most likely source of problems with these companies has nothing to do with the government, but rather with unenforceable contracts and unstable shareholding structures. Perhaps this is one of those things to which Bill was referring when he said that there are other reasons to be cautious about investing in China. (I should also point out that Steve regularly writes about these sorts of legal issues as well.)

I completely agree.

UPDATE: Fredrik Öqvist over at the China Finance Blog did an excellent post today, entitled, Consolidating Recent Opinions on VIEs, in which he seeks to synthesize all the posts that have been written on VIEs in the last few days by me, by Steve Dickinson, by Stan Abrams, and by Bill Bishop. Fredrik concludes his post with his own take on VIEs:

Here’s where I think the real issue lies, but I don’t think it’s entirely confined to future deals and PE/VC investors. This could for all intents and purposes have a deeply negative impact for listed companies as well.

In order to consolidate VIEs one has to show that the listed company not only receives the economic benefits and takes the economic risks of the venture, a second condition is to show that the VIE is in fact controlled by the listed company. If the contracts, which are put in place to establish this control, are indeed deemed illegal and unenforceable, fulfilling the second part of the consolidation requirement becomes decidedly more difficult.

I agree.

Growing up, I used to occasionally play basketball with a guy by the name of Eddie Stokes. Eddie was a few inches shorter than me, but a heck of a lot stronger and quicker and he used to give me fits. What particularly irritated me about him was that every single time he would score against me (or anyone else), he would point at me and say “money….so money”  Though Eddie was a nice guy, every time he did that, I wanted to punch him.  But seeing as how he was a golden gloves boxer (and apparently 1-0 as a professional), I was smart enough never to do that.

I thought of Eddie for some strange reason today when viewing the “China Money Podcast” site for the first time. I was directed to this site by a China Hearsay link-over to a podcast by China Hearsay’s Stan Abrams on Variable Interest Entities. The podcast is called “Variable Interest Equity is a Very Risky Structure” and it is excellent.

Stan knows VIEs and, even more importantly, he and I see pretty much eye to eye on them. To grossly summarize our positions, we are both wary of VIEs and particularly of the idea that they are risk-free. If you want to listen to Stan discuss VIEs and the risks (and rewards) inherent in them, I urge you to check out his podcast here, or go here for the iTunes version.

Stan has written extensively and well on VIEs, including the following:

For even more on VIEs, check out the following CLB posts:

How do you feel about VIEs?

Chinese Law Professor has an excellent post, entitled, “Who Owns The Chinese Internet,” seeking to answer that very question. The post is in reference to this article [in Chinese] by Jing Linbo and Wang Xuefeng from the Chinese Academy of Social Sciences, asserting “(a) that foreigners (“foreign capital”) in the article’s terminology) have come to control the Chinese Internet, and (b) that this is a bad thing.”

Chinese Law Professor analyses whether or not foreigners do control China’s Internet and he concludes they do not. In fact, he persuasively argues that many of the Variable Interest Entities (VIEs) to which the Linbo/Xuefeng article cites, are actually controlled by Chinese, not foreigners:

  • Take Baidu (the Cayman Islands company listed on the NYSE), for example. 52% of the voting power is owned by Robin Li, either directly or through a BVI company he owns and controls. Another 16% is owned by his wife. Except for a Scottish partnership that holds 2.49%, the rest of the voting power appears to be widely held. In other words, foreign capital is helping out Robin Li, but exercises no control. Robin Li, to the best of my knowledge a patriotic citizen of China, controls the offshore company and the money.
  • Sina.com presents a third model. The president and CEO, Charles Chao, is of PRC origin. (I don’t know if he is still a citizen.) He appears to be the largest single shareholder, controlling over 8.66% of voting rights. Only one other shareholder holds more than 5% of the voting rights. In other words, the shareholding is largely dispersed and there is no controlling shareholder. Since Jing and Wang admit in their 2009 article that Sina.com has no controlling shareholder, how then can they claim at the same time (as they do) that the company is “controlled by international capital”? They state that ownership of more than 50% of the shares constitutes absolute control, but this means that some unified will – a single person or a unified group – has to control all those shares. In grammatical terms, the subject of the verb “to own” has to be an entity capable of thinking and expressing a will. “International capital” is not a person with a unified will. The authors appear to believe that in a 10,000,000-share company, if 5,000,001 foreigners each own one share, that is “foreign control” just as much as if one foreigner holds 5,000,001 shares. It is not. One can always identify a group of random and unconnected shareholders in any company whose holdings add up to more than 50%; that does that mean that they control the company. When a company has no controlling shareholder, who does control it? The answer is: management. And in the case of Sina.com, management appears to be predominantly in the hands of Chinese nationals.
  • Dangdang presents another model of control. In this case, the Chinese entrepreneurs – Li Guoqing and Peggy Yu – don’t have absolute, majority control. They do, however, control more than 45% of the company’s voting power and occupy the top management and board positions. This doesn’t look very much like control by foreign capital.

To which I say so what? To me the big question is not who owns China’s Internet? I know the answer to that and if you define it by who actually controls the content or who actually has final say over the overwhelming bulk of Internet companies, it is the Chinese. I mean, come on. Chinese law effectively precludes foreign involvement and though there are foreign companies involved in China’s Internet through VIEs and other patchwork solutions, those companies are always going to be at least somewhat beholden to their Chinese “partners.”

The better question is who is perceived in China, by Chinese, to “own” China’s Internet? 

if the perception in China becomes that foreigners control China’s Internet, that perception will lead to repercussions for those entities that are perceived to be foreign and perceived to control China’s Internet. Or as the China Accounting Blog put it in its post, “Communist Party School on VIEs:

We have already seen regulatory challenges to VIEs, leading to Yahoo losing its interest in Alipay, and alleged theft of a VIE.  Now we can add political risk.  I think it is time to again ask the question whether VIEs are a going concern.  I started this series suggesting that the VIE could be compared to the fable of the Emperor’s new suit – not really doing what people are told they do.   My recommendations to clean up this sector remain valid.

The China Real Time Report blog of the Wall Street Journal has picked up this story. There is also a good analysis of it at China Finance Blog.   An interesting read on the legal theories at play here was posted by Professor Clarke at the Chinese Law Prof Blog.  I like his conclusion:  “I think we all agree that these structures are OK until they are not OK.”  Are we there yet?

China Finance blog is more blunt. In its post, “China IT Just Got Even Riskier,’ it starts out noting that the Linbo/Xuefeng article has deemed China’s Internet to already be controlled by foreigners and that this does not bode well:

The piece doesn’t just brand the obviously foreign companies as being controlled by foreign capital, but includes almost every Chinese internet company in this group. As such the risk of increased scrutiny of VIE structures (explained at lengths in the article), and any dealings between foreign and domestic players in the sensitive IT market has gone up significantly.

China Finance Blog then goes on to note that no matter how accurate the article is or is not regarding foreign control of China’s Internet, the “bigger picture” is what is going to matter:

Although I think the report misses the mark on some issues, the details are unlikely to matter too much, the bigger picture will sell it.

One of my disagreements with the article lies for instance in that the Alipay case to some extent demonstrates the power that VIE structures can give the Chinese government over the IT-companies, rather than highlight the dangers of foreign investment.

That this issue is being discussed in this detail, at this level, at this point in time, should give everyone reason to take this quite seriously, indeed.

The last time I wrote on VIEs, Paul Gillis of the China Accounting Blog left the following comment:

What about all the lawyers who have given clean opinions to the use of these structures for the past decade?

What about all those lawyers? Don’t cry for them. Any lawyer worth his or her salt that was involved in a VIE structure wrote a lengthy CYA letter making crystal clear that VIEs were risky, that the whole purpose of VIEs is to usurp/circumvent Chinese law, that Chinese law is itself risky, and that nobody really knows what will happen to VIEs or for how long they will be allowed to exist.

China Hearsay spoke to this as well, in its post, “Gray Areas in China Law: A Vote For Legal Realism:

I think what this comes down to is that Dan Harris and I are looking at this [VIE structures] as practitioners. If a client wants to do a deal in a restricted area by setting up a structure that has never been shut down by the government in 25 years, I still can’t tell that client that this is a “gray area.” I just can’t do it as a lawyer, for basic liability reasons.

What I can say is that it is technically illegal, and then explain the history of enforcement (or lack thereof). If the client then wants to proceed, then (in some cases), I will stay on board and help facilitate the transaction (in some cases, I will beg off).

I think I might add something along the following lines: VIES. They were risky yesterday and they are even riskier today. They are okay right now and will be okay until they are deemed not okay. I have no idea when or if that will ever happen, nor does anyone else, but hey, you are big boys and it’s your money, so you make the call.

What do you think?

Just got back from watching Mike Daisey’s one man play, “The Agony and the Ecstasy of Steve Jobs” at the Seattle Repertory Theater.  It was an absolutely amazing show and I highly recommend it. It was hilarious, thought provoking and, near as I can tell, unfailingly accurate.  I cannot recommend it highly enough; it is truly a must-see.

To grossly summarize the play, Steve Jobs is an “asshole-visionary” who has done amazing things at Apple, but in doing so, willfully ignores how Foxconn, which makes “all of our shit” grossly mistreats its workers, some of whom are as young as twelve. Daisey spent weeks in Shenzhen talking with factory workers and factory owners there to gather up material for the play and what he describes completely jibes with what I have seen there.  His recounting of meetings with factory owners in conference rooms with business cards and interminably boring Powerpoint presentations definitely was totally spot-on and had me laughing so hard I could barely stop. As Daisey so aptly puts it, Powerpoint is to communicate with other people in the same room as us.

During the show, I thought often of the book, The China Price, by Alexandra Harney, which I have previously discussed here and in this post on the ten best books on China business.  If you watch this play or read that book, you are forced to conclude that factory life in China is mostly brutal and that Western notions of Corporate Social Responsibility (CSR) have had very little impact on that. Daisey talked a lot about how the Western media is failing to report what is really happening there because as he put it, governments seek to block information getting out because that works.

At one point in the play, Daisey referred to a Wired Magazine article, written soon after the Foxconn suicides, as having been written by “useful idiots.” My problem with applying that term to Westerners who are always so quick to whitewash what is really going on in China is that few of them are idiots. Rather, they are calculating businesspeople who have chosen to come down on the money side of the equation.

What do you think?

UPDATE: A number of commenters have rushed to defend Foxconn with the argument that it treats its workers better than many/most other companies in China. My response to that is that I do not believe Daisey would necessarily say otherwise. I think he focuses on Foxconn simply because it is so big and because it is so representative of what goes on in China’s factories.

A reader sent me a link to a just out PC Magazine article on Foxconn, entitled, “Foxconn Factories: How Bad Is It?” Pretty bad, according to the article.

I realize it is easy to criticize Foxconn without providing any solutions, but that is not the point of this post. My only goal with this post is to put out there the way things are so as to make it more difficult for people who should and do know better to act as though things are otherwise.

UPDATE:  3-18-2012  Turns out Daisey “stretched” the truth.  For a great post explaining how he did this and the effect of what he did, I recommend China Hearsay’s, “Would-be Apple Killer Mike Daisey Goes Down in Flames.