Reading the Tea Leaves: What is Really Happening with VIEs in China

The variable interest entity, or VIE, structure has been the predominant method for foreign investors to enter restricted industries (including internet, telecom value-added services and social media) in China for more than 10 years. This structure -- whereby control of PRC operating entities is obtained through a series of contracts rather than direct equity ownership -- also presents a practical way to establish an offshore holding company that can be used as the listing vehicle for an IPO exit in the U.S. or Hong Kong markets without requiring “roundtrip” restructuring approval from China’s Ministry of Commerce at the central level.
 
VIEs are currently used by dozens of listed companies, including high profile issuers such as Baidu, NetEase, Tencent, Youku, Sina and SOHU, and numerous private equity-backed portfolio companies in industries ranging from internet to dredging. In recent months, however, confusing signals from the governmental authorities in Beijing, coupled with negative press and aggressive trading by short sellers, have created unprecedented attention and uncertainty surrounding this uniquely Chinese investment structure.
 
In this presentation, we look beyond the media hype to review:
• the origins of the VIE structure and how the PRC government has addressed it over the years
• recent government actions and how they can be expected to shape future policy making
• how routine real life problems, such as divorce and employee disputes, have had a very real impact on VIEs in the market
• best practices for implementing VIEs in the current environment and planning for contingencies in case VIE usage is limited or prohibited in the future
Seasoned private equity and capital markets lawyers who have been working with VIEs since their very inception in 2000 will discuss these developments and what private equity sponsors and underwriter banks can do to minimize their risk.