Home » China VIEs. Avoid, Avoid, Avoid.
China VIEs. Avoid, Avoid, Avoid.
Back in 2011, we were writing like crazy about the risks of China VIEs. And every time we did, someone with a financial stake in one would tell us that we were being too negative. VIE stands for variable interest entity and those are entities that are used to allow a company in China to technically be a Chinese domestic company, but de facto controlled by a foreign-owned entity or entities. VIE structures are usually used to allow foreign companies to get involved in various sectors of China’s economy that are forbidden to foreign companies.
None of this is actually new. These risks have long been known. However, the clarity of the Regulations means it is now nearly impossible to claim that Chinese law on these issues is ambiguous or unclear. Where Chinese law says that ownership by foreigners is restricted or prohibited, the law means what it says. Foreigners who invest in violation of the law are making a bet that the violation will be ignored. This is extremely unlikely in today’s China. Such bets are sucker’s bets and should be avoided at all costs.
We have been speaking out against VIEs for years and just about every time we do so, someone says that if they are illegal, why have so many large law firms, large accounting firms, and large companies gone along with them? The answer is simple. Money. Big money. Really big money. Now, some of these same law firms and accounting firms and companies are denying that anything has changed. And why is that? Again, money. Only this time they are taking positions not so much to make more money going forward, but to avoid losing through lawsuits the money they have already made.
And then we stopped. Not because our position on VIEs had changed, but because we had said our piece (way more than once) and it was time to move on.
I am writing on VIEs today not just to say to everyone who doubted us that we told you so, but to emphasize that whatever the risks were with VIEs back in late 2011, they are even greater now. They are even greater now because exactly what we said about China’s laws forbidding VIEs has been borne out by a recent China Supreme Court case with a very unfavorable ruling for those invested in a VIE.
We were not surprised. Were you?