China VIE

Back in 2011, we were regularly writing and speaking about the risks of China VIEs. And every time we did, someone with a financial stake in a VIE would tell us we were being too negative.

VIE stands for variable interest entity and those 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.

In our last piece on VIEs, entitled, VIEs In China. The End Of A Flawed Strategy, [link no longer exists] we vehemently argued that VIEs are to be avoided:

These risks have long been known. However, the clarity of the new regulations means it is now nearly impossible to claim Chinese law on these issues is ambiguous or unclear. Where Chinese law says ownership by foreigners is restricted or prohibited, the law means what it says and foreigners who invest in violation of Chinese law are betting their violations will be ignored. These are sucker’s bets and should be avoided at all costs.

We have been speaking out against VIEs for years and just about every time we do so, 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. Big money. Really big money. Now, some of these same law firms and accounting firms and companies are denying anything has changed. And why is that? Again, money. Only this time they are taking positions not so much to make more money going forward, but to avoid losing through lawsuits the money they already made.

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 with an unfavorable ruling for those invested in a VIE.

The New York Times Deal Book, In China Concern about a Chill in Foreign Investment, wrote about this recent Chinachem 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 probably knows more about VIEs than anyone) to the effect that “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.”

We were not surprised. Were you?

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.