"The VIE structure is the only way at present to play this game," said Paul Gillis, a professor at Peking University's Guanghua School of Management. Under Alibaba’s VIE structure, its Caymans Islands-incorporated company has contracts with its VIEs, including loan agreements, proxy agreements, exclusive call … Keep a step ahead of your key competitors and benchmark against them. These risks remain, al-though Alibaba’s offering might have changed the picture. 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. 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. Homegrown heroes such as Alibaba and Tencent took advantage of a loophole to tap overseas investors. Yes, Alibaba set up Alibaba Group Holdings as a variable interest entity, or VIE. The trouble is that the legal contracts that form the cornerstone of the entire set-up are extremely fragile. But the structure continues to operate in a legal limbo as Beijing has never confirmed their validity. 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). And free to boot! Introducing PRO ComplianceThe essential resource for in-house professionals. Alibaba Group’s shareholders were Yahoo, Softbank, Jack Ma and other PRC individuals. The Variable Interest Entity (VIE) structure that is Alibaba, is all about trust indeed. • 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 • Alibaba/Alipay incident: It was based on this unpublished rule that Alibaba’s Jack Ma stated he had no choice but to unwind the Alipay-related VIE structure Altaba owns 11.13% of Alibaba, making it the company’s third-largest shareholder. ... Citation: Alibaba IPO … Become your target audience’s go-to resource for today’s hottest topics. Developments in M&A regulations in China and impact on VIE structures, Understanding the VIE Structure: necessary elements for success and the legal risks involved, Listing VIE structures on the Hong Kong Stock Exchange: a brief guide for listing applicants using VIE structures, Variable interest entity (VIE) structures face additional scrutiny for Hong Kong listing. Ma will continue to serve as a partner of Alibaba. (,O��P���z�hJ���E��3[63��T"q���Yn���G�v~�8��s+�)m�w�m� ˷܅���s��V��-^j{/�p7{(�Hi��C�.��]Ԙ�ݙQ2�Kjq���u�3��ks2zx��u!��h�N��B�xO�)m=�}�˖�e/2�ueK\ �;d+��[���na�%c�~Pɉ �P]��h�u�F�Rws��LF;� �m���Mi��na���P�5c�����m����� �f@��������l�U::��&@)A ��a� � 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. Alibaba utilized the VIE structure to avoid PRC government restrictions. 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. VIE Overseas. And I don’t think anyone is arguing Alibaba needs more of those. Across a wide range of tests, including t-tests of sample means, OLS regressions with industry- and time-fixed effects and matched-sample tests, we provide consistent evidence that valuations are substantially lower among firms with the VIE structure. Please keep providing it. Taking Alibaba for example, its PRC counsel, Fangda Partners, has issued the legal opinion which commented on Alibaba's VIE structure as follows: The VIE structure might be considered as a “foreign investment enterprise”. As the founder himself observed in front of cameras at the New York Stock Exchange: “Today, what we’ve got is not money. with a VIE structure and Chinese firms listed in the U.S. without a VIE structure. h�bbd```b``Y "�Iɬ"���k��C`v6�� �/��0i&��`s|�$�I �Ti �?ՙ����3$��I�g�!� � f". 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. In September 2014, under the ticker symbol BABA, Alibaba went public on the NYSE at a VIE share price of around $68. The VIE structure employed for the Alibaba’s IPO is organised as follows. 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. h�b```f``����� ��A�X�����3:`�ð��+#��P@m��4�n��MQ���_�ж�����S�� �^����l��f6�d�>� c���+\�Y. The Sina listing in 2000 was especially notable because MII, being the industry regulator then, issued an opinion to SAIC recognising the spin- off of Sina’s internet content provider business to a domestic company, and granted permission for the newly-incorporated domestic entity to be issued with an operating permit as part of pre-IPO restructuring, which was probably the closest that VIEs ever got to getting the nod from MII. Or perhaps, it is the investors who are choosing to look the other way. For example, Alibaba set up its VIE in the Cayman Islands, outside of the Chinese government's jurisdiction. But VIEs are fraught with complexity and risk for investors, including vulnerability to Alibaba uses what is called a variable interest entity (VIE) structure, which has its roots in the collapse of the energy giant Enron in 2001 and could likewise be the downfall of investors in Alibaba and other Chinese stocks. However, Alibaba, in its filing, also states that the law firm giving the opinion acknowledges that “there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations.” Whereas the US stock exchange has embraced VIEs with all its shortcomings, the situation has been a lot more muted in Singapore, though this has not always been the case. 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. The DL framework holds much promise as a viable alternative to VIEs without all its attending problems – it is just waiting to be seized. Why? 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. Given the substantial legal risks involved, it is fascinating that VIEs even pass muster for listing at all. 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. invested in Alibaba through a variable interest entity (VIE) structure… So far, that fact hasn't been an issue, but legal loopholes are always at risk of being closed. The Alibaba IPO alone funneled more than US$30 billion, at the time to the Caymans/BVI and other shell companies. 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 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. Investors had been badly burned by Chinese stocks in the past few years, but they were en-thusiastic about Alibaba. Altaba. In 2005, Yahoo! However, investors were not really investing in Alibaba – they were investing in Jack Ma. Nearly every Chinese ADR has a similar structure. According to a post on the New York Times Deal book blog, Alibaba co-founders Jack Ma and Simon Xie actually own Alibaba. 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. The company also does not assure them of ethically maintaining their agreements, and in case of a … 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. In addition to the VIE ownership structure, Alibaba employs another 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 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. "I love the service. 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. ", © Copyright 2006 - 2020 Law Business Research. The regulatory philosophy in the US has long been, since the introduction of the Securities Act 1933, anchored in the ancient rule of caveat emptor (i.e. 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. Businesses such as Alibaba and rival JD.com Inc. that operate in sensitive industries like the internet use VIE structures to evade restrictions on foreign ownership when they go public overseas. Alibaba’s VIE structure: does it have a place in Singapore? ARTFUL DODGE. structure is kosher. 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. It’s a terrific time saver, very practical, very relevant, and very up-to-date. 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 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. The next generation search tool for finding the right lawyer for you. Many Chinese companies, including JD and Alibaba… In other words, the opaque VIE structure could create loopholes and trip up U.S. regulators and auditors. Chinese e-commerce companies turned to the VIE structure as a means to circumnavigate China’s restrictions against foreign ownership. “let the seller also beware”), which effectively places the burden of full disclosure on the seller. Alibaba Group confirmed that it has changed the shareholders of the VIE entity from Jack Yun and Xie Shihuang to the form of a limited liability company and limited liability partnership. 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. Understand your clients’ strategies and the most pressing issues they are facing. The best new legal resource I’ve come across in a long time. The Alibaba’s structure is a typical VIE arrangement: Zhejiang Alibaba, a private company held by Ma Yun and acting as an operating company, was in fact controlled by Alibaba Group Holding through a VIE arrangement. For exemple, as the online media company Sina Corp, or internet companies such as Alibaba (delisted from the HKEx in 2012), Baidu, Ctrip, Youku and Tencent. Anecdotally however, the CSRC approval process for the DL framework is expected to be that much quicker. Alibaba structure poses 'major risks' to investors. 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. The VIE structure involves control of a company through contracts instead of ownership. The structure entails the setting up of two entities, one in China and one abroad. They are enforceable only if Chinese courts are willing to uphold them, which is highly questionable when the structure is built for the very purpose of circumventing Chinese government regulations in the first place. Alibaba has attempted to address this risk by getting a legal opinion that the V.I.E. China VIE structure for foreign investment under attack from multiple directions: will it emerge (relatively) unscathed or is its very survival threatened? However, the C-C-F structure soon re-emerged in new forms and guises such as VIEs, which became and continue to be exceedingly popular among Chinese internet-based companies seeking to be listed in the US. 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. Take “variable interest entities” (VIEs), a kind of corporate architecture used mainly by China’s tech firms, including two superstars, Alibaba and Tencent. ... 'Chinese Google' and 'Chinese Twitter', risks could mount for unsuspecting US investors who buy into their precarious VIE structures." 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). ninety-five employ the VIE structure. 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. Jack Ma, chairman of Alibaba’s board of directors, has given up ownership of the company’s VIE structure, in a move designed to ease his administrative burden, The Paper reported. China’s Corporate Income Tax (CIT) law gives regulators the ability to adjust the tax for entities if there is non-compliance with the arms-length principle, as such tax positions are uncertain, rendering the ending economic value to foreign shareholder ambiguous. endstream endobj startxref 0 %%EOF 2553 0 obj <>stream 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. New VIE entrants have been virtually non-existent since the 2006 delisting of e- learning education service provider, ChinaCast Communications, which was one of the last notable VIEs in Singapore. 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. {.�� P�"%� �R�� endstream endobj 2529 0 obj <. 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. 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. "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 In the 1990s, the ‘Chinese-Chinese-Foreign’ (C-C-F) structure was first attempted by China Unicom to get around the prohibition against establishing mobile telecommunication joint ventures involving foreign investors. What we’ve got is trust from the people.”. The key is to control the domestic licensed company via multiple agreements under the VIE structure … Variable Interest Entities. Baidu, Sina and Alibaba are only a few of the hundreds of VIEs currently operating in China. 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. Alibaba as an example. 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. Now we come to the more interesting and difficult question. Alibaba stock bears often cite gov't influence and BABA's VIE structure as negatives. • 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 Once the VIE is established, the Chinese company and the VIE … VIE structure refers to Variable Interest Entities, also known as “protocol control,” which is essentially a way for domestic entities to achieve listing abroad. In September 2014, under the ticker symbol BABA, Alibaba went public on the NYSE at a VIE share price of around $68. Of course, if CSRC takes just as long to approve a listing under the DL framework as for a local PRC listing, the Chinese company might as well list in the PRC. The VIE structure is entirely reliant on related-party transactions which are not at arms-length. If anything, these are positives for BABA stock holders! 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. 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. 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. 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. 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 Second, the VIE structure was specifically created to circumvent Chinese laws. The contractual arrangements often include: (1) a technical  services agreement between the WFOE and the OpCo, where the OpCo’s revenue and profits are transferred to the WFOE, typically as service fees, before being repatriated to the HoldCo as profits; (2) a voting proxy from the Chinese shareholders of the OpCo granting the HoldCo or its affiliates the right to exercise shareholders’ rights and management control over the OpCo’s operations; (3) an equity pledge agreement between the OpCo’s Chinese shareholders and the WFOE, as security for the proper performance of the contractual arrangements; and (4) an option agreement granting the HoldCo or its affiliates the right to acquire, if and when permitted by PRC law, the equity interests in and/or assets of the OpCo for the lowest permissible price. Effectively places the burden of full disclosure on the new York Times Deal book blog, Alibaba set between! Also beware ” ), which effectively places the burden of full on! 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