MOFCOM's VIE mention explained

A Hong Kong-based lawyer at an international firm said that condition two specifies that once Niuhai has been acquired, Wal-Mart will not be able to participate in its VATB. For example, Wal-Mart would be unable to run a data storage platform that allows sellers to store and display photographs of their wares.

The third provision: closing a loophole

But the third condition is the most questionable. It has been translated as: 'After the completion of this transaction, Wal-Mart shall not carry out through VIE structure the VATBs currently operated by Yishiduo'.

The Hong Kong-based lawyer said that condition three is MOFCOM's confirmation that Wal-Mart will not come through and bypass conditions one and two by using a VIE structure to invest in Niuhai's VATB services.

Herbert Smith partner Michelle Chan and associate Peggy Chow agreed. They noted that MOFCOM's main focus was still on Wal-Mart's potential dominance in the VATB market and any anti-competitive effects if its acquisition was allowed to proceed. “In the absence of Wal-Mart having obtained the requisite foreign investment approval, the potential dominance in the VATB could still be achieved if Wal-Mart adopted the VIE structure to indirectly control the VATB operated by Yishiduo,” they said.

Further, the VIE mention has little bearing on MOFCOM's review condition that Wal-Mart cannot operate a VATB service.

A Shanghai-based partner at a US law firm stressed that it does not matter whether Wal-Mart uses a VIE structure or some other framework: if Wal-Mart controls Yishiduo's VATB services, together with its current business and competitive advantages, Wal-Mart may ultimately be able to restrict competition in China's VATB market.

Implications on VIE structures

Counsel are skeptical that MOFCOM's review has any bearing on the legality of VIE structures. The Hong Kong-based lawyer said: “If I were a corporate partner advising on VIE structures, I would ignore this decision because there's nothing that helps me understand MOFCOM's position better.”

Sources agreed, and generally doubted that MOFCOM tried to signal what can and cannot be done through a VIE. Though it consulted with relevant government agencies, industry associations and companies, this review focuses on competition rather than structuring.

If anything, MOFCOM may have specifically mentioned VIE structures to emphasise that it is not immune to merger control. “The anti-monopoly law specifically says that if there is a change of control through contract or equity agreements and the turnover thresholds are reached, MOFCOM must be notified, and VIEs are not exempt,” said the partner.

However, others are more optimistic about the review's implications. Some said that the ruling seems to suggest, although it cannot be verified, that PRC authorities will tolerate VIEs in respect of existing investments. However, it is unlikely that MOFCOM will grant unconditional clearance to proposed transactions involving VIEs.Bottom of Form

By Ashley Lee

This article first appeared in China Law & Practice's sister publication IFLR

Further reading:

A guide to China anti-monopoly reviews and disputes

Legal risks of the VIE Structure

Reconsidering the VIE structure