Robin Hui Huang (The Chinese University of Hong Kong – Faculty of Law; East China University of Political Science and Law; University of New South Wales – Faculty of Law), Youlu Yi (Jiangxi University of Finance and Economics), and Sunny Xiyuan Li (The Chinese University of Hong Kong) have posted The Legality of the VIE Structure in Overseas Listings of Chinese Companies: A Theory of Strategic Ambiguity (European Business Organization Law Review) on SSRN. Here is the abstract:
The legality of the structure of variable interest entity (VIE) has long been a subject of contention since it was first used by Chinese companies to get listed overseas in the early 2000s. The VIE structure allows foreign investors to participate in overseas-listed Chinese companies through contractual control rather than a shareholding relationship, thus bypassing relevant restrictions on foreign investment in China. This paper argues that China adopts a policy of strategic ambiguity about the legality of the VIE structure, so as to balance the need to protect national security and the need to facilitate overseas listing of Chinese companies. There are institutional reasons behind this policy, including interest group politics of regulatory agencies and rent-seeking activities of regulatory officials. The policy of strategic ambiguity will likely continue in the foreseeable future, and so will the uncertainty over the legality of the VIE structure. However, the level of uncertainty is not as high as perceived by some commentators arguing that there is no law or legal protection for investors in the VIE market. This has important practical implications for the overseas listing of Chinese companies and foreign investors therein, as well as theoretical implications for the international discourse on law and finance.
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