UM E-Theses Collection (澳門大學電子學位論文庫)


Research on legal issues of VIE model

English Abstract

The data of Reuters showed that there were more than 230 enterprises listed in the USA, nearly half of the enterprises (97) used VIE Model; and among the enterprises listed in Hong Kong, there were 8 enterprises used VIE Model. From these listed enterprises, amounting to 53% are Chinese enterprises, and almost all of them used VIE Model for listing. In addition to the financing field, since the VIE Model can evade the restrictions and regulations on the foreign mergers and acquisitions industry, it is also widely applicable to the foreign investment field by the foreign investment enterprises. However, whether the financing or the investment field, the VIE Model cannot avoid the questions on its legality. The Chinese concept stocks has suffered on the reds chips in the global capital market, there is a growing trend calls for the red chips return to the domestic capital market. However, due to the complexity of the VIE Model and the defects of the domestic capital market, the returning road of the red chips is not smooth. At the same time, the recent events such as the Ali-pay, New Oriental event, the litigation between the Chinachem company and the SME company on the entrusted shareholding agreement of Minsheng Bank which has been lasted for 12 years has been judged invalid by the Supreme Court all deepened the questions on the legality of the VIE Model. So far, the VIE Model, which has helped many excellent Chinese enterprises listed on the global capital market suffered the questions from the public and become the culprit which has manufactured the crisis. What factors led to the VIE Model into a sword of Damocles? This thesis is writing under the above background, analyze the legality of the theory and the practice of the VIE Model through studying the VIE Model related concept. On one hand, this thesis studies the different areas of the legal risks of it and proposes several counter-measures standing in the enterprises shoes; on the other hand, it analyzes the shortcomings of the existing regulation, draws the outside advanced experience and puts forward a sound legal regulatory framework for the VIE Model from the perspective of the regulators. It raises suggestions such as use the preference shares to solve the issue of the foreign control over the enterprise, take the reform of the Shanghai FTA as an opportunity to further relax the restrictions on foreign access. It is concluded the VIE Model is a stage result of Chinese capital market and discussed the future development from the short and long term. Chapter 1 is the general overview of the VIE Model. Through elaborating the related concepts of VIE Model, it is revealed that the VIE Model is essentially a way for investment and financing which used the complex accounting and legal arrangement to evade the laws and regulations. The VIE Model is first used by the Chinese internet companies for offshore listing, then it is gradually applied to a wider variety of investment and financing and becomes the most thorough improvement of the red-chip mode. The construction process of the VIE structure is complex which contains numerous control protocol. On one hand, it enables the successful evading of the laws and regulations that become highly regarded in the field of investment and financing field. On the other hand, it is faced with great risk of law. However, it is widely adopted by the domestic and foreign enterprises in the field of investment and financing in practice. Chapter 2, the legality of VIE Model is analyzed from the angle of the legal theory and the legal practice. From the prospective of the theory of law, firstly, the efficiency value of the prior to the order value judging from the value in jurisprudence. Secondly, the nature of the VIE Model is a contract, according to the theory of the autonomy of contract, the contract behavior is in line with the theory that which is not prohibited by law is legitimate and valid in the private law domain. Thirdly, the VIE Model is in line with the overall benefit principle in the field of Economic Law. From the prospective of the legal practice, although Hebei Chinese government has judged that one case in mineral field used VIE Model is invalid, but the Chinese government has not enacted any law to determine the VIE Model is invalid. The Judicial Organs in China has concluded the Minsheng Bank Equity dispute case, which different to the VIE Model and has determined the entrusted shareholdings agreement is invalid according to the Article 52 of the Contract Law: "Any illegitimate purpose in concealed under the guise of acts." The judiciary field will not directly deny the effectiveness of the VIE Model in the short term. There were some arbitration cases which judge the VIE Model is invalid. However, the nature of arbitration determined that the specific arbitration case can not guide the similar cases in the future. In legal practice, the VIE Model is still used, and more and more enterprises through use the VIE Model to get its legal and financing determination, especially in the TMT industry. The lawyers hold conservative attitude for the use of it in the heavy assets industry and the industry which is banned for the foreign companies to invest. The VIE Model is admitted by the Hong Kong Exchange and Clearing Limited, but the related regulation has become increasing hash recently. Although there has occurred excessive turbulence for the companies which has adopted and VIE Model in the American capital market, but so far the SEC did not explicitly deny the legality of the VIE Model. Therefore, the legality of VIE Model still not clear, but for lots of enterprises still use it in practice, cause it unclear legality, there will be more legal risks which enterprises should face and solve. Then we should stand the side of companies to check it legal risks and do counter-measures. Chapter 3 further analysis the legal risks the VIE Model may be faced with further discuss the counter-measures of related enterprises. In the aspect of the risk of the breach of contract, the relevant subject should be cautious to prevent the default of the founders and senior managers and take effective measures to prevent these risks at the beginning of adopting the VIE Model, or other ways to perfect the agreements under VIE Model. In the aspect of policy and law, since the VIE Model in currently in grey zone and it has not been clearly allowed or prohibited, so the relevant enterprises is still faced with the risk to be strictly regulated or even be banned, so those companies should pay close attention to the policy and law changes and make timely response. In the aspect of offshore listing, the successful listing of domestic enterprises overseas with the VIE Model is mainly because of the accounting standards of the target place. However, due to the foreign accounting standards are usually inconsistent with those in China and this leads the Chinese Concept share into an awkward situation. Therefore, the relevant enterprises need to study the accounting environments and standards jointly with the intermediary institutions, timely and fully disclose the information and establish the good international image of the Chinese Concept Share. In terms of the merger and acquisition of foreign capital, the relevant enterprises should properly deal with the general review, the possible antitrust review as well as the national security review initiated by the Ministry of Commerce. In the aspect of the foreign exchange, the relevant enterprises should finish all kinds of registration, application, examination and approval requirements strictly in accordance with the laws during the process of the establishment of the SPV, the round trip capital investment, the increase of the registered capital of the WFOE, the capital settlement of the WFOE and the use of these foreign exchange and the transfer of the domestic money to overseas. They should also pay timely attention to the domestic and overseas foreign exchange development so as to avoid unnecessary losses. In terms of the risk of tax, it is suggested that the related enterprises should wholly plan the tax issues, legally avoid the double taxation problem, transfer the related transactions and other profit legally, and make the arrangement for its own taxable behavior in advance. Or if it does not work, we consider to removal the VIE Model, and now there was some companies has to do so. Chapter 4 proposes several suggestions on the legal regulation of the VIE Model in China in the viewpoint of the government. The Chinese government takes the implied allowed attitude toward the VIE Model and has not explicitly ban or prohibit the VIE Model through legislation. In the shot term, the VIE Model will continue to exist as a wise compromise. The government should strengthen the supervision of it in order to ensure the orderly market norms. The existing defects of the legal supervision of the VIE Model are as followed: the related concepts are not clearly defined, it lacks the unity among the present legislation and there exists the overlaps of the power among different government departments, the current legislation is lake of guidance and forward-looking. The Chinese government and departments should learn from the mature regulatory experience from Hong Kong and the United States, starting from the transformation of the overall regulatory thinking, improve the legal regulations on the Merge and Acquisition and the offshore listing field in which the VIE Model are widely used. The specific regulation methods including: change the thinking of the regulation, clearly define the related concepts through legislation and show the regulatory stance, unify the supervision caliber and implement a multi-level and comprehensive regulation, improve the information disclosure system and strengthen the international supervision cooperation. In the last section, it is concluded that the VIE Model as a stage product of Chinese capital market. In the short term, we need to guard it's legal risks, improve the legal regulation. In the long term, the reformation of the financing and investment environment is the fundamental way to solve the problems related to the VIE Model. KEY WORDS: The VIE Model, "protocol control", Foreign capital Mergers and Acquisitions, Offshore (Overseas) Listing, Legal Risk, Legal Regulation

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Wu, Si Chen


Faculty of Law




Securities -- Listing -- Law and legislation -- China

Going public (Securities) -- Law and legislation -- China


Garcia, Augusto

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