Title 3. A Chance to Solve the _VIE Dilemma _ China Law Insight.pdf ✅

21/04/2023, 15:23 A Chance to Solve the "VIE Dilemma"! | China Law Insight https://www.chinalawinsight.com/2020/07/articles/corporate-ma/a-chance-to-solve-the-vie-dilemma!/#more-27286 2/10 April 20, SAMR took 88 days in total from the date of formal acceptance to complete the review and grant the unconditional clearance in the Phase II review period (rather than in the Phase I review period, like for most of other simplified cases), which substantially exceeded the average review period for simplified cases in the first quarter of 2020[1]. It was reported that the extended review period may have been due to the high market share in certain segmented area(s) of the relevant market of Shanghai Mingcha Zhegang Management Consulting Co., Ltd. (“SMZ”)[2]. In fact, this SMZ Case has attracted widespread attention since SMAR’s formal acceptance of the filing on April 20. SAMR’s publicly disclosed information specifically mentions that SMZ, one of the parties to the joint venture, is ultimately controlled by Leading Smart Holdings Limited through contractual arrangements. This is the first time that Chinese merger control authority(ies) have publicly accepted and unconditionally approved a case involving a VIE structure. Previously, according to the public record, the Chinese authority has never accepted and approved filing transactions involving VIE factors (even though they have met the merger filing thresholds). This article reviews the origins and dilemmas of merger filings involving the VIE structure in China, discusses possible changes of SAMR’s attitudes towards the VIE issue, and sets out some issues yet to be clarified. Companies are recommended to re-assess carefully their future merger filing strategies in China when facing VIE structure issues, and the impact of such changes on their transactions. 1 Questing for the Roots: Compliance Issues of the VIE Structure The VIE structure, i.e. the Variable Interest Entities structure, also called “contractual control” structure, refers to a method of control whereby a wholly-owned foreign enterprise (“WFOE”), invested by an offshore entity, is able to exercise control over a Chinese domestic operating entity through a series of contractual arrangements. In this way, the WFOE is able to exercise control over the domestic operating entity’s business operation decision-making, human resource matters, distribution of profit, issuance of securities, equity incentive plan and other key factors (without directly holding the equity thereof). This also enables the foreign shareholder to collect all the economic interest generated from the operation of the
21/04/2023, 15:23 A Chance to Solve the "VIE Dilemma"! | China Law Insight https://www.chinalawinsight.com/2020/07/articles/corporate-ma/a-chance-to-solve-the-vie-dilemma!/#more-27286 3/10 domestic entity, and consolidate the profit generated thereby into the offshore entity. A typical VIE structure is set out as follows: In practice, the application of VIE structure not only helps Chinese domestic companies to obtain overseas financing, but also allows foreign investors to go around China’s foreign investment restrictions. Since the successful listing of SINA at NASDAQ in 2000 by using the VIE structure, such structure has been widely applied in the fields of Internet, education, media, broadcast and other fields that are subject to foreign investment restrictions in China. On the other hand, with the implementation the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors in 2006, which requires any Chinese companies or persons to obtain an approval from MOFCOM for their acquisitions of domestic affiliated companies via overseas entities controlled by them (“Approval of Affiliated M&A “), the application of the VIE structure has been extended to the fields without foreign investment restrictions, and become an effective way to assist