Variable Interest Entity (“LIFE”) is a term first used by the United States Accounting Standards Board (FASB) in Interpretation No.46. In China, THE LIFE Structure is also known as “agreement-based control,” i.e., a publicly traded foreign company controls a Chinese company through a series of contractual agreements to circumvent China`s restrictions and regulations regarding the first IPO of foreign investment, foreign mergers and acquisitions, and foreign listing. Variable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board (FASB) in FIN 46 to refer to an entity (the participating entity) in which the investor holds a dominant stake that does not rest on the majority of voting rights.  “THE VIEs operate on the basis of contractual agreements and not direct ownership, so that foreign investors no longer have rights to residual profits or control of the management of the company from which they would otherwise benefit from equity.”  v) the capital agreement between WFOE, the prc and the national enterprise, by which the prse, the prs, mortgaged their interests in the national company to WFOE as a guarantee of the performance of their obligations and the obligations of the national company arising from other agreements between the three (3) parties to the VIE structure; and examples of agreements granting effective control over LIFE: appeal option agreements, voting rights or agents, loan contracts. 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.
Article 9 of the Internal Regulation once again raises public concern that, with respect to the merger and acquisition (“ATM”) of the domestic company by foreign investors, the question of whether the merger is within the scope of the national security investigation is assessed on the basis of the material content and the actual influence of the transaction; foreign investors must not evade national security verification by any means, including, but not limited to, order-taking, trusts, multi-level investments, leases, loans, contractual control, foreign transactions, etc.Leave a reply