Supreme court judgment again touches sensitive VIE nerve

In September 2011, a VIE (variable interest entity) analysis report purportedly issued by the China Securities Regulatory Commission (CSRC) caused a stir in the industry. After the news came out, the relevant regulators quickly refuted the rumour, saying the conjectured source of the report was false and the claim of a “high-level approval” was also baseless.

In the two years since then, regulators have kept mum on the legality of the VIE, both in word and in deed. Foreign securities regulators that had been in a high state of nervousness for a time, gradually relaxed their worries about the VIE framework. In recent foreign listing projects we have handled, even though foreign securities regulators still ask for further clarification of VIE frameworks, they maintain a relatively relaxed attitude towards the responses, not pursuing the issue to excess.

VIE panic

However, with the disclosure in June 2013 of the judgment of the Supreme People’s Court in the Chinachem entrusted investment case, the investment world has again fallen into a “VIE panic”. In the case, Chinachem wished to invest in and acquire an equity stake in Minsheng Bank, but, hemmed in by provisions of PRC laws that prohibit foreign investors from acquiring equity stakes in financial institutions, it entrusted China Small and Medium Enterprise Investment to invest in Minsheng Bank on its behalf in the latter’s name. Subsequently, as China Small and Medium Enterprise Investment refused to pay to Chinachem the dividends from Minsheng Bank, Chinachem sued it in court.

Vincent Mu is a senior associate at Martin Hu & Partners