Vie Contractual Agreement
It is clear that more and more Chinese companies have adopted the LIFE structure since the issuance of the rules of the L-A. In the initial phase, the life structure was used almost exclusively for asset-light companies. However, after 2006, these heritage companies also opted for the use of the life structure. It is thought that one of the reasons for the increasing use of the LIFE structure is that the LIFE structure can avoid MOFCOM`s accreditation. Indeed, it is inconceivable and unreasonable that such assets are only able to relocate huge assets from China through several agreements without state authorization or other legal procedures. Chinese authorities may also be on high alert due to the misuse of the life structure in heritage industries. There are a few cases where the life structure has been taken over in the heritage industry and successfully listed abroad, but unfortunately we also understand that there are cases that were rejected at the time of the IPO to use the life structure in the heritage industry. GigaMedia is a NASDAQ-listed company that owns an online gaming business in China through the VIE structure. In 2010, GigaMedia announced that it was involved in the dispute with its former founder of the domestic company, which was removed from the national company, but refused to return the company`s seal, financial chops and other documents to GigaMedia. As a result, such a former founder continues to control the national company. Although there are a number of contractual agreements, GigaMedia has no choice but to launch a series of lawsuits against such a former founder, both inside and outside China. While GigaMedia can regain ownership and control of the domestic company, it is undeniable that such an event will have a negative impact on its activities in China and on its effective control over this national company. In addition, GigaMedia had already announced that it would de-break the finances of the national company that is in the process of resolving such a dispute.
In January 2015, the Ministry of Commerce published the Foreign Investment Act of the People`s Republic of China (Draft Comments) (« Project Comments 2015 »). In the 2015 draft opinion, THE VIE Structure was clearly recognized as a kind of foreign investment and was therefore included in the regulation of foreign investment. Article 15 provided that foreign investors who controlled or held rights to a domestic company through contracts, trusts or other methods are considered foreign investments and are subject to the provisions relating to first entry, security investigation and disclosure in the Foreign Investment Law. Section 18 provided that « control » included methods such as agreements, trusts or other means that could have a decisive influence on business, finances, personnel or technology. Examples of agreements granting effective control over LIFE: appeal option agreements, voting rights or agents, loan contracts. As shown in the graph above, foreign investors and CPP originaters create SPV1 in Cayman; then, SPV1 sets up a 100% SPV2 in Hong Kong; then SPV2 creates the all-foreign company (« WFOE ») in the PRC.