Issues to note amid wave of VIE dismantling to return as A-shares

Since the fourth quarter of 2014, restructurings involving the dismantling by Chinese companies of their VIE structures that they had originally erected to secure offshore financing have been occurring on a large scale. Certain US dollar funds that did not participate in the A-share market in the past have changed to agree with their portfolio companies in turning to Chinese capital markets, and in some instances systematically arranging for these companies to return in bulk. “Dismantling VIE” and “dismantling red chip” funds that specialize in engaging in this sector have also begun to appear.

The process of dismantling a VIE structure is different from dismantling a red chip structure. The VIE structure originally used by a wholly Chinese-owned operating company involved restrictions imposed by foreign investment policies, making it difficult to change to a Sino-foreign equity joint venture form after dismantling.

If a company is required to divest itself of a foreign investor and bring in a new Renminbi investor as per foreign investment policy, and it involves an adjustment of the equity structure at the level of the wholly Chinese-owned operating company, the core issue generally lies in the moneys invested by the RMB investor being used to satisfy the divestment requirements of the US dollar investor. This is usually accomplished by way of acquisition of a wholly foreign-owned enterprise (WFOE), with a number of issues to be resolved, as set out below.

Wu Guanxiong is a partner of Tian Yuan Law Firm in Beijing. He can be contacted on +86 10 5776 3600 or by e-mail at wgx@tylaw.com.cn