China VIEs: Recent Developments and Observations

As many of our readers are aware, the “variable interest entity” (“VIE”) structure has proven popular over the past decade as a means to facilitate the offshore financing of PRC companies doing business in regulated sectors such as the Internet and value-added telecommunications. A VIE structure typically involves contractual arrangements pursuant to which an offshore entity (typically through one or more wholly foreign-owned enterprise (“WFOE”) subsidiaries established in China) controls, and consolidates for financial accounting purposes the operating results of, one or more Chinese onshore operating entities (an “OpCo”) whose equity is owned by People’s Republic of China (“PRC”) nationals.

A number of developments in the past 18 months have led to greater scrutiny of the VIE structure. This Alert reviews a recent decision of the Supreme People’s Court in the Chinachem case and an arbitral award in a contract dispute involving a Chinese domestic online gaming company operated by NASDAQ-listed GigaMedia utilizing a VIE structure, and considers the potential impact of these two cases on the use of the VIE structure going forward.

Please see full alert below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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