The best new legal resource I’ve come across in a long time. For a while, there were some listed VIEs on the Singapore Exchange (SGX) but the numbers have petered out along with the dearth of new S-chips listings on the exchange. Singapore, on the other hand, moved towards a disclosure-based regime gradually and the express association with a caveat emptor philosophy was only emphasised in the early 2000s. While it is possible for the Chinese government to simply ban VIE structures or take away their licences, the consequences of that would be negative for China and undermine the gradual liberalisation of the Chinese economy. And free to boot! Investors were so eager to add the Chinese e-commerce giant to their portfolios that the shares rocketed 38% on its debut and Alibaba closed with a valuation of $231 billion on the first day, more than the market value of Amazon and E-Bay combined. In addition, Alibaba operates under a variable interest entities (VIE) structure, and the main VIEs (onshore operating companies) that generate cash flow are controlled by two limited partnerships comprised of members of Alibaba Partnership or senior management who are PRC citizens. Alibaba stock bears often cite gov't influence and BABA's VIE structure as negatives. The VIE structure might be considered as a “foreign investment enterprise”. ... Citation: Alibaba IPO … "Alibaba’s new structure doesn’t alter the risk of a controlling entity’s misbehavior toward offshore investors.” QuickTake: China’s Overseas IPOs One example of VIE risk The key is to control the domestic licensed company via multiple agreements under the VIE structure … Keep a step ahead of your key competitors and benchmark against them. Anecdotally however, the CSRC approval process for the DL framework is expected to be that much quicker. Many Chinese companies are forced to list overseas because it is too difficult to get approval to list in the PRC and Chinese citizens are denied of the opportunity to invest in some of their country’s most successful firms listed offshore due to capital controls, yet foreign investors do not technically buy into Chinese companies structured as VIEs either – nobody wins. Ma will continue to serve as a partner of Alibaba. The VIE structure involves control of a company through contracts instead of ownership. While there are usually standard banners in prospectuses disclosing that the PRC government may at some point take the view that VIEs are illegal notwithstanding longstanding industry practice, these health warnings are often buried under a mountain of other information in the listing documents. Now we come to the more interesting and difficult question. Taking Alibaba for example, its PRC counsel, Fangda Partners, has issued the legal opinion which commented on Alibaba's VIE structure as follows: Altaba owns 11.13% of Alibaba, making it the company’s third-largest shareholder. In addition to the VIE ownership structure, Alibaba employs another The VIE structure is entirely reliant on related-party transactions which are not at arms-length. There was considerable discussion of the risks of Chin-ese stocks, and in particular the variable interest entity (VIE) structure used by Alibaba and many other overseas listed Chinese stocks. In September 2014, under the ticker symbol BABA, Alibaba went public on the NYSE at a VIE share price of around $68. Alibaba has attempted to address this risk by getting a legal opinion that the V.I.E. Altaba. But VIEs are fraught with complexity and risk for investors, including vulnerability to For applicants that are involved in a restricted industry where foreign investment is limited, the VIE structure will be considered on a case-by-case basis, provided that certain pre-specified conditions and requirements are met. Inside Alibaba Group Holding Ltd.’s filing on Tuesday for a U.S. initial public offering are three words well-known to China-focused investors but alien to many others: variable-interest entity. %PDF-1.6 %���� Alibaba applies the VIE structure with the no assurance to their shareholders that the company will always progress with the interest of the shareholders prioritized. The China Unicom’s C-C-F joint venture ultimately failed in 1998 when it was declared ‘irregular’ by the Ministry of Information Industry (MII), and this was notwithstanding that the contracts were approved by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the State Administration of Industry and Commerce (SAIC) or local level officials. Now, the problem is that VIEs are not only being used to circumvent foreign investment restrictions in sensitive industries, its utility has since expanded to defeat the PRC Provisions on the Merger or Acquisition of Enterprises in China by Foreign Investors (M&A Rules) that was promulgated in 2006. VIE Overseas. structure is kosher. The VIE structure consists of at least three core entities: a Chinese company with legitimate operations (referred to as the VIE or OpCo); a wholly foreign-owned enterprise (WFOE) established as an intermediary in China; and an offshore shell Alibaba’s VIE structure: does it have a place in Singapore? In 2011, Jack Ma, the founder of Alipay successfully severed such VIE structure between Alibaba Group and Alipay, and committed to make certain compensation to Yahoo and Softbank in the future. Alibaba Group Holding Inc., which conducted a $25 billion initial public offering (still the largest ever) on the New York Stock Exchange in 2014, trades under this structure. I’m not sure if Alibaba have really hit the nail on the head with this VIE-LLP structure, but they are at least seemingly taking active steps to mitigate some of the risks involved in VIEs which makes them more proactive in their VIE risk handling than most companies. “let the buyer beware”) and the further doctrine of caveat venditor (i.e. Whatever happens, the VIE structure is dead. �L!B@�$���@aF����4���A��D�Ŕ��&b$�HZX P9KhD��, frM@� h�[G�R Хu��D�� ˁ�K ۘɎ��ƛ�ML�L��o1�3$�[9ŨrN�*�n20`T�8��ؒ؝�ٞ��1�B�m��9 �����Hs2��7_��� The VIE structure is entirely reliant on related-party transactions which are not at arms-length. Nearly every Chinese ADR has a similar structure. ninety-five employ the VIE structure. This legal structure is called “Variable Interest Entity” (VIE), which essentially employs two Special Purpose Vehicles (SPVs) and a series of entangled contractual agreements that artificially replicate an equity position. • VIE structure has been used by numerous PRC companies since 2000, primarily in the media, education, Internet and value-added telecommunications sectors ... • Alibaba/Alipay incident: It was based on this unpublished rule that Alibaba’s Jack Ma stated he had no choice but to unwind the Alipay-related VIE structure According to a post on the New York Times Deal book blog, Alibaba co-founders Jack Ma and Simon Xie actually own Alibaba. Or perhaps, it is the investors who are choosing to look the other way. Under the DL framework which was announced late last year, PRC companies may list directly in Singapore and thus do away with VIEs or pre-IPO restructurings that require MOFCOM approval. Altaba is … The VIE structure is common among Chinese companies seeking foreign investment, including internet giants like Sina—which in 2000 became the first U.S.-listed Chinese company using a VIE—and Alibaba, which in 2014 made the largest IPO in history. BABA Stock Has A Sketchy Corporate Structure This issue particularly grates on me. Alibaba subsidiary Taobao would later force eBay out of the Chinese market, with eBay closing its unprofitable China Web unit, though the two companies would break even six years later. Well-known listed companies are using a VIE structure. The gist is that the Chinese internet giant is reforming its legal structure, which uses a fragile and ingenious device known as a variable interest entity (VIE). In a typical VIE, Chinese founders remain registered as shareholders of the domestic capital company holding the required licences and permits needed for the business to operate. The trouble is that the legal contracts that form the cornerstone of the entire set-up are extremely fragile. Risks of a VIE Many experts in Chinese law doubt this structure … 6 The VIE structure enables international investors to access a sector of the Chinese economy that would otherwise be off-limits to foreign ownership due to China’s foreign investment restrictions. Investors had been badly burned by Chinese stocks in the past few years, but they were en-thusiastic about Alibaba. Indeed, bears long have highlighted that VIE structure as an important reason not to own Alibaba stock at all. Alibaba Group’s shareholders were Yahoo, Softbank, Jack Ma and other PRC individuals. The risks of Alibaba Group Holding Ltd.'s corporate structure, which it shares with several other major Chinese internet companies, don't seem to be damping enthusiasm for its initial public offering. Please contact customerservices@lexology.com, All eyes were on Alibaba in its $22 billion initial public offering (IPO) on 19 September 2014, the largest ever in US history. Thanks to the foreign investment law that China intends to implement at the beginning of next year, companies that want to list abroad will have fewer concerns when forming a VIE structure about accepting foreign investors. What we’ve got is trust from the people.”. 2528 0 obj <> endobj 2546 0 obj <>/Filter/FlateDecode/ID[<598F836DFE7842988544C42E37D6D957>]/Index[2528 26]/Info 2527 0 R/Length 93/Prev 769396/Root 2529 0 R/Size 2554/Type/XRef/W[1 3 1]>>stream The M&A Rules impose a new set of restrictions by the Ministry of Commerce (MOFCOM) on cross-border acquisitions of domestic capital companies, which are often carried out in pre-IPO restructurings for an overseas listing. A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest, despite not having a majority of voting rights. alibaba group offerings Tmall Taobao Marketplace Freshippo Alibaba Health 1688.com Lingshoutong AliExpress Lazada Group Kaola Alibaba.com Ele.me Koubei Fliggy Youku Alibaba Pictures Damai Amap DingTalk Cainiao Network Alimama Ant Group Alibaba Cloud Alisports Alibaba Entrepreneurs Fund Alibaba Global Initiatives While it is possible for the Chinese government to simply ban VIE structures or take away their licences, the consequences of that would be negative for China and undermine the gradual liberalisation of the Chinese economy. Alibaba as an example. The next generation search tool for finding the right lawyer for you. The risks of Alibaba Group Holding Ltd.'s corporate structure, which it shares with several other major Chinese internet companies, don't seem to be damping enthusiasm for its initial public offering. The reputation of S-chips has unfortunately taken a severe beating amongst investors in Singapore following a string of spectacular corporate scandals owing to poor corporate governance, and a large number of S-chips originally listed in 2000s have been delisted. In 2005, Yahoo! invested in Alibaba through a variable interest entity (VIE) structure… Alibaba structure poses 'major risks' to investors. ARTFUL DODGE. Beijing Enhances Enforcement of Social Insurance Contributions for Beijing-Based Employees, SEC Releases Guidance on Disclosure Considerations for China-Based Issuers, At a glance: termination of employment in China, Overview of Medical Device Regulation in China. The catch however, is that listing approval will need to be obtained from CSRC and SGX such that both authorities will have jurisdiction over the listed company. Alibaba utilized the VIE structure to avoid PRC government restrictions. Please keep providing it. • VIE structure has been used by numerous PRC companies since 2000, primarily in the media, education, ... • Alibaba/Alipay incident: It was based on this unpublished rule that Alibaba’s Jack Ma stated he had no choice but to unwind the Alipay-related VIE structure There are currently eleven Chinese tech companies besides Alibaba trading on New York exchanges with a combined market capitalization of over $150 billion, all of them using the VIE structure. ", © Copyright 2006 - 2020 Law Business Research. Why? A large number of very large companies operate in China’s Internet and telecom sector as VIEs. But its first major foreign investor, Yahoo sheds further light on the risks of U.S. investors face in buying into Chinese Internet companies under the VIE structure. Many large Chinese technology companies, such as Alibaba, Baidu and Tencent, make use of a VIE structure and have been able to grow by accessing foreign capital. The mere existence of these IPO's as well as the wholly predictable disclosure/leak and the repercussions are simply a product of the today's regulatory environment. Chinese e-commerce companies turned to the VIE structure as a means to circumnavigate China’s restrictions against foreign ownership. Under Alibaba’s VIE structure, its Caymans Islands-incorporated company has contracts with its VIEs, including loan agreements, proxy agreements, exclusive call … For example, Alibaba, the world's largest retailer and e-commerce company, uses a VIE structure allowing U.S. citizens to purchase VIE shares in Alibaba on the New York Stock Exchange (NYSE). As the founder himself observed in front of cameras at the New York Stock Exchange: “Today, what we’ve got is not money. The Variable Interest Entity (VIE) structure that is Alibaba, is all about trust indeed. So far, that fact hasn't been an issue, but legal loopholes are always at risk of being closed. h�b```f``����� ��A�X�����3:`�ð��+#��P@m��4�n��MQ���_�ж�����S�� �^����l��f6�d�>� c���+\�Y. Inside Alibaba Group Holding Ltd.’s filing on Tuesday for a U.S. initial public offering are three words well-known to China-focused investors but alien to many others: variable-interest entity. The Variable Interest Entity (VIE) structure that is Alibaba, is all about trust indeed. When the company is growing fast, many problems are glossed over, but when the company starts to struggle, these issues come back to haunt investors. But the structure continues to operate in a legal limbo as Beijing has never confirmed their validity. Variable Interest Entities. With certain variations, the VIE structure has been used by tens of other China-based firms listed on Nasdaq and the NYSE, including market leaders such as Baidu and JD.com. As these permits could practically only be obtained by a domestic capital company, separate contractual arrangements are put in place to transfer the actual control or economic benefits of the operating company (OpCo) from the Chinese founders, to a wholly foreign-owned enterprise (WFOE) separately established by an offshore holding company (HoldCo) set up by the Chinese founders, for offshore financing purposes. In September 2014, under the ticker symbol BABA, Alibaba went public on the NYSE at a VIE share price of around $68. The Alibaba IPO alone funneled more than US$30 billion, at the time to the Caymans/BVI and other shell companies. endstream endobj startxref 0 %%EOF 2553 0 obj <>stream Introducing PRO ComplianceThe essential resource for in-house professionals. Understand your clients’ strategies and the most pressing issues they are facing. Baidu, Sina and Alibaba are only a few of the hundreds of VIEs currently operating in China. Essentially, it uses various contractual arrangements to avoid direct foreign ownership in restricted or prohibited industries or other requisite government approvals. Moreover, the upside of CSRC retaining regulatory oversight over such overseas listed Chinese companies is the mitigation of the problem of lack of accountability and enforcement where there is bad behaviour. Foreigners who want to buy Alibaba Group shares in the Chinese e-commerce giant's U.S. public offering will need to get comfortable with an unusual business structure. For example, Alibaba set up its VIE in the Cayman Islands, outside of the Chinese government's jurisdiction. Alibaba's online and mobile commerce businesses will be controlled by a "variable interest entity," an arrangement meant to allow investors ... you have to get comfortable with the VIE structure." 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