The golden days of unfettered growth for China’s homegrown tech companies could be coming to an end as regulators speed up data-oriented reforms. What are the legal pitfalls and the hefty consequences, and who will be most affected? Luna Jin reports

China’s massively successful big tech outfits are being reined in as the nation tightens its control over the data these companies manage – or may fail to manage.

There is no better example than Didi. Remember its big reveal back in 2015 of visits to and from government ministries? Initially a PR exercise in collaboration with Xinhua, this kind of data extraction by a company with almost 400 million active users becomes a matter of concern when such a company decides to list overseas.

After its US IPO, the app has been subject to a review by the Cybersecurity Administration of China (CAC) and blocked from accepting new users. The CAC removed 25 apps under the company, citing its “serious violations of laws and regulations pertaining to the collection of personal information”.

As a result of these actions, Bloomberg recently reported that Didi could face hefty fines and delisting or withdrawal of its US shares.

It remains uncertain what exactly triggered the investigation, but it is clear that tighter controls are intended for companies that have until now enjoyed virtually limitless operational freedoms.

The rapid progress of a recent series of top-down legislative and administrative efforts targeting leading internet platforms on antitrust and data compliance, however, have surely kept the market restless.

A revised draft of the Measures for Cybersecurity Review, issued on 10 July, provides that operators holding the personal information of more than a million users and planning to list on foreign markets, must apply for a review – which in China could apply to every known market player.

As a result, a number of Chinese tech startups have shelved their highly anticipated US IPOs, including Xiaohongshu, Himalaya and Keep. Meanwhile, Chinese stocks listed in the US have plunged, some by as much as half their value.

As suddenly as it has evolved, experts say none of this is un- expected. Jet Deng, a senior partner at Dentons in Beijing, points out that as early as last November the State Administration for Market Regulation (SAMR) had begun deploying anti-monopoly actions towards internet companies with a high-profile consultation process on the draft of the Anti-Monopoly Guidelines on the Platform Economy, a key document that fuelled a number of enforcement cases.

The guidelines were made official in February, and positioned the focus of the current regulatory campaign to a specific type of tech company – the platform operators, notes Rachael Li, a Beijing-based partner at Zhong Lun Law Firm.

Contrary to the harsh crackdown perceived by many, China is rather catching up with the rest of the world on antitrust governance in the tech sphere with a developing legal arsenal, albeit with a much more progressive approach.

“The concern of big tech and their social, economic and political influence has become a global phenomenon and, in this sense, China is doing something that other governments want to do but may not be able to do,” says Vincent Chan, the China strategist of investment consultancy firm Altheia Capital.

Companies must boost compliance to adapt. Still, more certainty from an improving regulatory environment, in the long run, will benefit the industry.

Closing the VIE loophole

In almost all jurisdictions, it is common practice for companies to file for merger review and obtain approval from the regulators before finalising major investment or M&A projects. However, until last year, Chinese internet companies had never filed for merger review for their M&A and joint venture (JV) establishment projects.

“This is illegal,” says Zhou Zhaofeng, the Beijing-based managing partner at Fieldfisher. “There was no other industry where anti-monopoly obligations were ignored as completely as the internet sector.”


Twenty years ago, as China restricted foreign investment in specific industries, related companies had very limited options to raise funds through the capital market. Against this backdrop, pioneered by Sina, a creative design of the variable interest entity (VIE) structure at the dawn of the century ushered in a new era of overseas listings for Chinese companies and brought about a rapid boom of the country’s internet industry.

The structure, created to circumvent Chinese law, however, had neither been directly nor positively acknowledged or denied by Chinese regulators – until last year. This left the investment and M&A activities of related companies falling into ambiguity, or even a regulation vacuum.

“Considering that the development of China’s internet industry started slightly later than Europe and the US, China has been adhering to an attitude of inclusive and prudent regulation to encourage the development of these companies,” notes Huang Wei, the Beijing-based managing partner at Tian Yuan Law Firm.

As technology progresses, China has developed well-capitalised internet conglomerates with strong market influence, which have ventured not only into people’s livelihood sectors but also into finance and other areas. “If they are not effectively regulated in anti-monopoly, a series of problems that harm consumers’ welfare, orderly competition and the safety of financial markets will occur,” says Huang.


In this sense, regulating companies with VIE structures is imperative. In July last year, a JV establishment transaction between Shanghai Mingcha Zhegang Management Consulting and Huan-sheng Information Technology (Shanghai) was unconditionally approved by the SAMR. This was the first time that Chinese merger control authorities had publicly accepted and unconditionally approved a case involving a VIE structure.

“It’s a clear signal that the VIE structure is no longer a grey area for the review of concentration of business operators,” says Scott Yu, a Beijing-based partner at Zhong Lun Law Firm and lead partner of the transaction. The rule is also made clear at the policy level in the above-mentioned guidelines.

Deng, of Dentons, points out that after the introduction of the guidelines up until now, the SAMR has imposed 44 penalties on failure to seek clearance with regard to transactions involving a VIE structure ever since the very first three cases last December, including Alibaba.

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