VIE-structured companies have existed in
Has the SAMR started to review merger filings involving VIE-structured companies?
On
However, after a closer look at the "Yonghui transaction", the governance structure of the proposed joint venture seems to show that
When we are talking about VIEs, what are the relevant issues?
The VIE structure was created mainly to circumvent relevant Chinese regulatory requirements regarding foreign investment. Meanwhile, as the VIE structure is set up through a series of agreement ("control through agreement"), which is different from control through stocks or assets, it is not directly covered or regulated by the Provisions on Merger and Acquisition of
Thus, it can be concluded that there are two main legality issues for VIE structure: whether the structure itself is valid (the "validity issue"), and whether the investment itself is in compliance with relevant industrial policies (the "compliance issue"). We will then analyze how a merger filing review could touch upon the above two issues.
The SAMR is not in the position to opine on the "validity issue", and therefore an anti-monopoly approval does not equal to an acknowledgement of the legality of the VIE structure.
The SAMR was established in
As the predecessor for performing the merger filing review function, the MOFCOM on the other hand is also the authority that promulgated the No.10 Regulation, and it is known that so far, no "M&A with related party" (usually the preparatory process in offshore listing) as stipulated in the NO. 10 Regulation has been approved by the MOFCOM, and therefore the VIE structure was adopted as an alternative. Consequently, assuming that a merger filing involving VIE-structured companies is presented before the MOFCOM, there would be concerns about whether an approval would constitute an acknowledgement of the validity of VIE structure from the MOFCOM's standpoint. This is also showed in the filing review decision for the
However, the new SAMR could, from a relatively pure market regulation's perspective, review merger filings either involving companies in general sense or VIE-structured companies, and evaluate the competition concerns without much regard for the external form of the filing parties. More importantly, different from the MOFCOM, the SAMR is not the competent authority to opine on the "validity issue" of the VIE structures, an anti-monopoly approval only means that the SAMR recognizes the concentration would likely not harm competition in relevant market, but it does not acknowledge the legality of the VIE structure. With this in mind, it is suggested to think twice when evaluating whether to file for merger review or not for transactions involving VIE-structured companies.
The SAMR is also not in the position to opine on the "compliance issue", and therefore an anti-monopoly approval does not equal to an acknowledgement of the compliance of the foreign investment.
Except for the validity issue, another main difficulty is that the filing party shall commit in the merger filing form that it shall comply with Chinese laws and regulations. While the VIE structure remains in the grey area of law, some people argue that an approval by the SAMR could be viewed as an acknowledgement of the compliancy of the structure.
The 2015 Exposure Draft of the Foreign Investment Law sought to address the compliance issue of VIE-structured companies. For example, the Draft included relevant legal liabilities for making investment, through VIE or other methods, in prohibited industries or in restrictive industries without approval, and it also provided some available methods to deal with the preexisting VIE structures. However, given that there are a great many of domestically-operated companies notably in Internet, education and media industries, adopting VIE-structures and active in foreign capital markets, making enormous contribution to the development of Chinese economy, it is relatively difficult to figure out a satisfying way to handle the compliance issue from the general foreign investment regulation's perspective6. What's more, the SAMR or other administrative regulators-the governmental agencies in charge of the regulation of a company's general matters such as its establishment or change of company form- are not the competent authorities to solve this issue. Rather, industrial regulators-the governmental agencies in charge of the regulation of a company's operation in a specific industry- would be in a better position to fill in the blank. This is also reflected in
On the other hand, with the degree of market concentration continuously increasing in some industries, there have been voices raised against either specific transactions that might threaten or have already dampened competition, or the somehow established "no response" practice, especially when the law enforcement agency has the obligation, according to law, to investigate the transaction if the transaction has or may have anti-competition effect8. As long as the SAMR figured out its position for the "validity issue" and "compliance issue", it is foreseeable that it would at some time eventually step in to review such filings so as to ensure the fair market competition.
Other administrative regulators have already touched upon the VIE-structured companies. Let's wait for a little bit longer for the SAMR.
After discussing about the "validity issue" and "compliance issue", it seems that there is no material barrier for the SAMR to complete review of merger filings involving VIE-structured companies. Moreover, if the SAMR were to review such filings, it would not be the first one to touch upon the VIE-structured companies. Other administrative regulators such as the
As early as 2005, the SAFE issued No. 759 rule (now nullified), which stipulated "a round-trip investment means direct investment activities in
Similarly, VIE-structure or more generally, the "control through agreement" also appears in recent Chinese security regulation rules. In March and
To sum up, though the "validity issue" remains untouched in Foreign Investment Law, and different industrial regulators may have evolving opinions on the "compliance issue" for foreign investment in specific sectors along with
Looking forward and beyond: some initial advice for VIE-structured companies in merger filing review in
As previously demonstrated, though the SAMR has not genuinely touch upon VIE-structured companies in the "Yonghui transaction", this article believes that there is no material barrier for the SAMR to review filings involving VIE-structured companies. Moreover, as the SAMR is not the competent authority to examine the "validity issue" or "compliance issue" of VIE-structured companies, a review decision by the SAMR is not equivalent to an acknowledgement of the legality of the structure nor the compliancy of the foreign investment. As other administrative regulators such as the SAFE and the CSRC have already went a step further, it is believed that the SAMR would, quite possibly, be more proactive to review merger filings involving VIE-structured companies in the very near future.
Above all, it is suggested that relevant parties to the transaction have a merger filing lawyer to evaluate whether the VIE-structured company would be one of the "undertakings participating in concentration", whether the transaction needs to file for merger review, the time and strategy for conduct the filing, and etc., so as to minimize the anti-monopoly risks therein. For VIE-structured companies that are active in the M&A market, it is highly suggested to keep a critical mind when adopting the former "no filing strategy" for merger review in
Footnotes
1. The 2015 Exposure Draft of Foreign Investment Law made it clear that it would like to address the legal ambiguity for VIEs by requiring the identification of the de facto owner of the domestic entity, therefore bringing contractual or trust arrangements as well as VIE structures into the scope of regulation.
2. According to announcement of
3. According to public information, Linzhi
4. In No.10 Regulation, Article 11 stipulates that "where an domestic company, enterprise or natural person carries out an M&A of a domestic company that is related to itself, in the name of an overseas company duly established or controlled by such company, enterprise or natural person, an application shall be submitted to the MOFCOM for review and approval."
5. In 2011 Industrial Guide for
6. For example, when the
7. 长沙亚兴置业发展有限公司与北京师大安博教育科技有限责任公司合作合同纠纷上诉案[Changsha Yaxing v. Beijing Normal University Anbo on contract disputes] (2015)民二终字第117号,(The Civil Division II of the
8. Article 4 of Rules of the
9. Notice on Issues relating to
10. Though VIE is an accounting term, and "control through agreement" is a legal term, there is no significant difference for these two terms for the purpose of this article.
11. Notice of the
12. Notice of the
13. Opinions on setting up the Science and Technology Innovation Board and experiment of registration-based IPO system in
Originally published 2019-04-22
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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Tian Yuan Law Firm
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