Company constructions via fiscal paradises, VIE’s or variable interest entities, are regular ways to avoid corporate government restrictions in China, and under official attack just for that. The Supreme Court fielded a verdict on transactions by one of those VIE’s, but – says accounting professor Paul Gillis on his weblog, it did not clarify whether VIE’s might lose their validity.
The court upheld the transaction, saying that the VIE was a Chinese corporation and there was no basis to void a completed contract between two Chinese corporations. The court did ask the Ministry of Education about the nature of the arrangement, and while the Ministry of Education acknowledged it was a conventional VIE arrangement, they did not express an opinion as to whether the arrangement was legal.
What the decision appears to clarify is that the commercial transactions of a VIE are valid, and do not rest on whether the VIE is operating within the bounds of the foreign investment restrictions. The decision does not relate to the validity of the VIE contracts between Ambow’s VIE and Ambow’s wholly foreign owned enterprise (WFOE).
It is the enforceability of the VIE contracts between the WFOE and the Chinese shareholders of the VIE that are of greatest concern to investors. In the Gigamedia case, these contracts were found to be unenforceable. That concern remains.
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