Mofo-20130815-China VIEs Recent Developments and Observations

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1、ClientAlertAugust15,2013ChinaVIEs:RecentDevelopmentsandObservationsByCharlesComey,PaulMcKenzie,SherryYinandMichelleYuanAsmanyofourreadersareaware,the“variableinterestentity”(“VIE”)structurehasprovenpopularoverthepastdecadeasameanstofacilitatetheoffsh

2、orefinancingofPRCcompaniesdoingbusinessinregulatedsectorssuchastheInternetandvalue-addedtelecommunications.AVIEstructuretypicallyinvolvescontractualarrangementspursuanttowhichanoffshoreentity(typicallythroughoneormorewhollyforeign-ownedenterprise(“WF

3、OE”)subsidiariesestablishedinChina)controls,andconsolidatesforfinancialaccountingpurposestheoperatingresultsof,oneormoreChineseonshoreoperatingentities(an“OpCo”)whoseequityisownedbyPeople’sRepublicofChina(“PRC”)nationals.Anumberofdevelopmentsinthepas

4、t18monthshaveledtogreaterscrutinyoftheVIEstructure.ThisAlertreviewsarecentdecisionoftheSupremePeople’sCourtintheChinachemcaseandanarbitralawardinacontractdisputeinvolvingaChinesedomesticonlinegamingcompanyoperatedbyNASDAQ-listedGigaMediautilizingaVIE

5、structure,andconsidersthepotentialimpactofthesetwocasesontheuseoftheVIEstructure1goingforward.THECHINACHEMCASEChina’sSupremePeople’sCourtrenderedarulinginOctober2012thatendeda12-yeardisputebetweenChinachemFinancialServices,aHongKongcompany(“Chinachem

6、”),andChinaSmallandMediumEnterpriseInvestmentCo.Ltd.,amainlandChinesefirm(“ChinaSME”).Thedisputeinvolvedownershipofsharesrepresentinga6.5%stakeintheChinaMinshengBankingCorporation(“Minsheng”)thatChinachemassertedownershipofviaanentrustment(委托投资)arran

7、gement.TheCourtruledthattwodeedsofentrustmentthroughwhichChinaSMEactedasChinachem’sproxytobuyandholdthesharesinMinsheng,togetherwithtwoloanagreementsthroughwhichChinachemlenttheinvestmentfundstoChinaSME,wereenteredintowiththeclearintentofcircumventin

8、gChina’srestrictionsonforeigninvestmentinChina’sbankingsectorandaccordinglywereinvalidandunenforceableunderArticle52ofthePRCContractLaw,whichprovidesthatcontractsareinvalidwherethey“concealillegalintentionswithinalawfulform”(“以合法的形式掩盖非法目的”).TheCourta