China: VIEs Alive and Well
The latest Draft Foreign Investment Law will be discussed at the upcoming plenary session of the National People’s Congress on 5 March, 2019. This new version underscores the Chinese government’s intention to further open up its markets to foreign businesses and also addresses issues raised by other countries, such as forced technology transfers. The key issues addressed in the draft law include prohibition against forcing technology transfers; providing equal treatment and market access to foreign companies (except for certain sectors specified on a negative list) but also reserving China’s right to retaliate against companies from countries which discriminate against Chinese investors. From a VIE perspective the original Draft Foreign Investment Law was colloquially dubbed by a number of hysterical commentators as “the VIE killer”. However, as its successor has dropped any reference to VIEs we believe it should be business as usual. From the standpoint of foreign investors, the key concern in a VIE structure is the enforceability of the contractual arrangements – these are core. We expect as China continues to open its market and the market becomes increasingly attractive where foreign investors facing restrictions will opt for “clever” VIE models. “Clever” will mean that the foreign investor will weigh whether it is practically feasible for a VIE; if it has found the right nominee shareholder and bespoke contractual arrangements and operational controls so risk is mitigated.