VIE Structure
Date: October 22, 2012
Q1: What does the VIE stand for?
A1: It stands for the Variable Interest Entity. A VIE is an entity that is not owned by the public company, but is allowed to be consolidated in the financial statements because it is controlled through agreements.
Q2: What is the most popular place for the Chinese companies to choose to locate the holding companies, and why?
A2: Cayman Islands. Because it is a favored location for offshore companies due to its tax-free status and established legal system that is built on English law.
Q3: What is the usual way to prepare for an IPO by Chinese company?
A3: The usual way would be to contribute the shares of the Chinese operating company to a company located in the Cayman Islands so that the Chinese company becomes a wholly owned subsidiary of the company in the Cayman Islands.
Q4: What are the general steps under the VIE structure?
A4: Having the VIE, establish the Chinese subsidiary which should be the so called wholly foreign owned enterprise (WFOE). Conclude series of legal agreements to obtain control, such as the Loan Agreement, Equity Pledge Agreement, Power of Attorney.
Q5: What is the objective of the VIE structure?
A5: It should be to minimize the profits in the VIE. Residual profits in the VIE cause problems because the ultimate transfer of these profits to the public shareholders is difficult and expensive. While VIE agreements typically require the VIE shareholders to turn any dividends over to the public company, any distributions to the VIE shareholders would be subject to individual income tax in China, layered on top of corporate taxes already paid.
Q6: What is the “going concern opinion”?
A6: It is an opinion with an explanatory comment concluded by an auditor while doubting about the ability of a company to continue as a going concern. The issuance of such an opinion usually sets off an alarm in the financial markets. A bankruptcy filing often happens within days.
Q7: What should be taken into the consideration by the auditor when the going concern issue arises?
A7: Whether the company will be able to raise enough cash during the succeeding year to pay its bills when they become due and legal proceedings, legislation, or similar matters that might jeopardize an entity’s ability to operate.
Q8: Are VIE a going concern?
A8: The assumption that the U.S. listed company is a going concern may rest on whether those agreements are enforceable.
Q9: Under what condition the VIE structure would be collapse?
A9: There appear to be two ways that a VIE structure might collapse. The first would be an outright attack by the Chinese government. The other way a VIE structure might collapse is if the legal owner of the VIE decides to take his company back and breach the VIE agreements.
Q10: What kind of industry is the most user of the VIE structure?
A10: VIEs are used in a broad range of industries, yet they are highly concentrated in Business Services. 42% of U.S. listed Chinese companies use the VIE structure. The VIE structure is used by more than half of NASDAQ listed companies, with fewer companies on the NYSE and ASE using this structure.
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