In the news: MOFCOM relaxes FIE requirements, US commission tackles Alibaba's VIE issues and Best Buy makes plans for China

MOFCOM eases FIE capital requirements

MOFCOM published an internal notice on June 24 that simplifies the capital registration system for foreign-invested enterprises (FIEs) in China. Though the amended PRC Company Law on March 1 substantially relaxed capital contribution and verification requirements for companies' establishment, it remained uncertain to what extent these new rules were applicable to FIEs, which were also regulated by an additional set of laws. This notice lifts this uncertainty and specifies that FIEs are to be governed by the Company Law amendments. FIE investors approved before March 1 2014 will continue to perform their capital contribution obligations under their original JV contracts and articles of associations, while recently-established FIEs can utilise the new flexibility and apply for amendments to their contracts and articles of association.

Source:
MOFCOM

Specifically, the changes include the replacement of the mandatory capital contribution with a subscribed capital system, the abolition of minimum registered capital requirements (except for businesses operating in certain sectors subject to industry-specific regulations) and the elimination of contribution verification requirements (except for FIEs in limited industries like financial sectors). These new rules will significantly ease burdens for FIEs being or already established in China – a good step forward given the longstanding controversy over the structure.

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US-China Economic and Security Review Commission reviews VIEs

Alibaba's upcoming US IPO has raised the urgency of tackling VIE structures from a regulatory perspective. Concerns over whether Alibaba's shareholders will actually own the business and the lack of clarity in Chinese laws regarding the structure have prompted the US-China Economic and Security Review Commission to publish a paper on June 18 on the legal risks of VIEs. The VIE structures/contracts are used by many Chinese companies to give offshore investors control and financial benefits from the PRC businesses they are not allowed to own directly. The US commission's paper has highlighted the “major risks” US shareholders are faced from these structures and has also called VIEs an “intricate ruse” which are “potentially illegal in China.”

Sources:
The Economic Times
China Accounting Blog
US-China Economic and Security Review Commission

Alibaba has said its businesses held through VIEs only account for 17% of its assets, with the rest held through wholly and majority foreign-owned enterprises. Another legal concern raised by the commission was that once Alibaba lists on a US exchange, it will be subject to new aspects of the FCPA, meaning that if it mis-documented corrupt payments, the US authorities can take action. Overall, the paper, written by a high-level authority, reminds investors of the inherent risks in both the uncertainty of Chinese legal arrangements and the certainty of the US laws' extraterritorial reach. The Alibaba case study embodies the clash between the two legal systems and how it plays out will determine the future of all companies with the structure.

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Best Buy brainstorms China expansion

Best Buy is considering a sale or partnership for its Chinese business. It is working with Bank of America Merrill Lynch on its options and sources have said the Chinese business could make around US$300 million. Best Buy has been evaluating its overseas portfolio for a while now, and last year it sold its 50% interest in Carphone Warehouse Group's European business back to the Group for US$775 million.

Source:
The Wall Street Journal

At the moment, Best Buy has stores in the US, Canada, China and Mexico. In China, the company operates under the names Five Star and Best Buy Mobile. It recently specifically attributed aggressive online competition in China for its declining international sales – numbers which hurt the rest of the business' global performance. In such an immense consumer market that is mostly driven by the internet, even a huge company like Best Buy needs to align its strategies with the latest trends to stay ahead, and even survive. It will be interesting to watch what type of company it decides to buy or partner up with, or which division it plans to sell off.

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