VIE will accept supervision of the FCPA back to sight once again

Qin Wei Hong Kong correspondent reported

Recently, a report by the U.S.-China Economic and Security Review Commission has once again brought the issue of the structure of China's VIEs to overseas investors.

One of the details of this seemingly commonplace report is particularly noteworthy: Chinese internet companies listed in the United States also fall under the supervision of the FCPA, even though the "corrupt" behavior of these companies It may happen outside the United States.

At this juncture, it is still hard to tell whether this report will affect the Chinese Internet companies that plan to go public in the United States this year, especially the giant Alibaba. However, at least it will blow up to the hot American investors Cool breeze

Named risk

With the JPMorgan broke out that may involve improper access to the project by hiring the "official second generation," the scope of the US regulatory body's question has been extended to a number of large investment banks. For Chinese, the law, far beyond the ocean, Already not so strange.

"FCPA-related investigations are generally conducted by the U.S. Department of Justice and the SFC, which will require companies to submit their own reports." A Hong Kong lawyer familiar with the FCPA told 21st Century Business Herald that the FCPA's scope of application Those U.S. companies also cover companies listed in the United States, which is why China Internet companies listed in the United States need to be regulated by that law.

What is involved in China's Internet companies corruption, bribery? Report author Kevin Rosier pointed out that "delete business" is the most common corruption in China's Internet industry.

"Employees of Chinese Internet companies often accept bribes to help bribers remove the Internet negative news about them, and there have been many such bribery cases, and in China it is an ever-expanding black market," Rosier said.

As an example, in August 2012, three Baidu employees were arrested for accepting about $ 96 bribes and deleting negative online information about government officials and businesses. After that, the average price for removing negative content on Baidu rose to US $ 386. There are even reports that the price of US $ 4,800 can guarantee that the content will be deleted on all Internet terminals.

Alibaba, which plans to be listed in the United States in the third quarter of the plan, is another company named for corrupt practices. In August 2013, Yan Libin, former CEO of Alibaba, was arrested for accepting bribes (two luxury cars) and Yan Li-min was later sentenced to seven years' imprisonment by Hangzhou court. Several other Alibaba employees were also convicted of corruption. Although Alibaba dismissed it before the arrest of Yan, it issued a statement saying it would not tolerate such acts. However, the report pointed out that Alibaba "is not without history" in the matter of corruption. In 2011, about 100 Alibaba employees used the company's trading platform to forge a list of goods for personal gain.

The report also brought out "Internet PR Companies" (or "Black PRs") that contributed to the business of deleting posts - these companies act as intermediaries between Internet company staff and government officials and are responsible for paying bribe payments to Internet company employees. The case of Yagel, formerly owned by Rosalindus Guido, was founded by Rosier, pointing out that 60% of Yage's business time comes from smaller local government agencies demanding the removal of critical articles.

"Corruption exposes a potential risk to these companies as a potential investigation into the Department of Justice and the SFC." The aforementioned FCPA lawyers admitted frankly that although it is unclear whether U.S. regulators will start paying particular attention to these the company.

Under the SEC's guidelines for disclosure of information, Chinese Internet companies do not need to disclose their history of corruption or bribery, nor do they need to explain how to use the Chinese government's censorship mechanism to conduct unofficial censorship. "(However, it is a violation of the FCPA to act without the proper disclosure of material information about a company's business, including significant revenue, expenses, profits, assets or liabilities associated with bribing a foreign government official," the report notes.

VIE shareholder risk test

Under the VIE structure, holding companies, which are the mainstay of US-listed companies, are generally established in tax havens such as the Cayman Islands. Holding companies bridge the gap between US investors and Chinese companies through a series of complex contracts. Chinese companies are responsible The actual business operation.

"As a result of the contractual relationship replacing the parent-subsidiary relationship, the Chinese company is actually separated from the main body listed in the United States, despite being able to sue U.S. courts in the event of a loss of interest." Hong Kong One Legal person familiar with company law explains.

This is also the prime risk that Rosier believes Chinese Internet companies face when American investors invest in the VIE structure. Legal contracts exist between wholly-owned foreign-owned subsidiaries and VIEs established in China. The binding force and implementation of the contract depend on Chinese court support.

Another related risk is whether VIE's Chinese shareholders "steal" this entity and collapse the entire VIE structure. "In this case, the wholly foreign-owned subsidiary of the foreign party (the other party to the contract) will bring the VIE to court to require the court to enforce the contract, but the probable result is that the court in China will not approve the contract at all," the report said.

Rosier admitted that the existence of the VIE structure and the large number of VIE structures China Internet companies have chosen to go public in the United States have their own special background. On the one hand, foreign investment is restricted to the field of information and communication technologies in China; on the other hand, these companies are listed in China More restrictions, China's legal environment, there is uncertainty VIE legitimacy. However, the report argues that if more Chinese companies continue to go public in the United States, the VIE structure will not be a sustainable model.

"If US investors continue to buy shares in VIEs, once the VIE structure collapses, investors may once again experience the same kind of impact as the ripple in China's reverse takeover of 2001-2011 - up to $ 18bn." The report notes . (Editor Yu Xiaona)