By Michael Yu｜Wu Wang｜Jessica Luo｜Lydia Liu
The HKEx Listing Decision (HKEx－LD43－3) on VIE Structure (the “VIE Listing Decision”) was initially promulgated in 2005 and subsequently revised in November 2011, August, November and December 2012 respectively in addition to its latest revision made in November 2013.
This article aims to give the readers an overview of the VIE Listing Decision in respects of: (i) the approach adopted by the HKEx to approving a listing application, (ii) the approach adopted by the HKEx to examining a listing application, (iii) the limitations on the application of VIE structure, (iv) the requirements on the contents of VIE agreements, (v) the requirements on the disclosure of VIE structure and (vi) the requirements regarding the PRC legal opinion.
1. Content and Structure of VIE Listing Decision
The VIE Listing Decision consist of 6 parts: Summary, Summary of Facts, Issue Raised for Consideration, Applicable Listing Rules or Principle, Analysis, and Decision. The most important component is considered to be the Decision part, which has been developed from one paragraph (Paragraph 15) to the current six paragraphs (Paragraphs 15-20).
2. Approach Adopted by HKEx to Approving a Listing Application (Paragraph 15)
Since the VIE Listing Decision’s inception, the HKEx has never changed its “disclosure-based approach” to approving a listing application and determining that an applicant and its business would be suitable for listing if disclosure and the risks associated therewith of the VIE agreements are properly made in the listing documents. Although it adopted a “disclosure-based approach,” the HKEx thereafter in terms of fact still imposed certain restrictions and requirements on the content and application of the VIE structure/agreements.
3. Approach Adopted by HKEx to Examining a Listing Application (Paragraphs 16-17)
Two approaches are adopted by the HKEx to examining a listing application:(i) the listing application will be examined on a case-by-case basis after full consideration of the reasons for adopting the VIE structure and subject to the conditions in the listing decision; and (ii) if non-restricted businesses are involved, the Listing Division will normally refer the case to the Listing Committee.
4. Limitations Imposed by HKEx on the Application of VIE Structure (Paragraph 16)
The attitude of HKEx towards the use of VIE structure for a foreign restricted business is different from that towards the use of VIE structure for a non-restricted business under the PRC’s laws.
On the one hand, for the non-restricted business, the HKEx does not explicitly prohibit the use of VIE structure. The HKEx only requires that the Listing Division should normally refer the case to the Listing Committee if the VIE structure is used for such non-restricted business.
One the other hand, for the foreign restricted business, the VIE Listing Decision added a Sub-paragraph 16A in its latest November 2013 update to further clarify and confirm that: (i) the use of VIE structure is permitted only to address the foreign ownership restriction; and (ii) for requirements other than the foreign ownership restriction, the HKEx requires that applicants should demonstrate to the satisfaction of the HKEx that they have, upon advice from their legal advisers, reasonably assessed the requirements under all applicable rules and have taken all reasonable steps to comply with them before listing (the “Sub-paragraph 16A”).
In China, the “restrictions” imposed on the foreign investors are reflected in 3 aspects: (i) restrictions on the foreign shareholding percentage; (ii) restrictions on the foreign investment manners (e.g., in a required manner of Sino-foreign equity joint venture or Sino-foreign cooperation joint venture); and (iii) restrictions on the foreign investors’ industrial background/qualifications.
One question may arise from the above Sub-paragraph 16A – whether the VIE structure should be permissible under Sub-paragraph 16A in case that the PRC laws and regulations only impose restrictions on the foreign investors’ industry qualifications but not on the foreign shareholding percentage (e.g., the current rules regulating the foreign investment in advertising business in China require the foreign investor should be advertising enterprises, but require nothing on the foreign shareholding percentage). In this regard, it is advisable to consult with HKEx in advance on a case-by-case basis.
5. HKEx’s Requirements on the Content of the VIE Contracts (Paragraph 18)
For the content of the VIE agreements, requirements on the power of attorney, dispute settlement and disposal of VIE company assets were added into the VIE Listing Decision in its 2011 revision for the purpose of protecting the interests of the listed company and the investors. Additionally, in this latest November 2013 revision, a new requirement on the repayment of consideration was added into the VIE Listing Decision and set out as below:
The applicant must unwind the VIE structure as soon as the law allows the business to be operated without them. The registered shareholders of the VIE company must undertake that, subject to the relevant laws and regulations, they must return to the applicant any consideration they receive in the event that the applicant acquires the shares of a VIE company when unwinding the VIE structure. The undertaking must be disclosed in the listing documents.
In this article, the “VIE company” refers to the onshore operation entity controlled by the offshore listed entity through VIE agreements.
6. Disclosure Requirement of HKEx on VIE Structure (Paragraphs 19-20)
For the disclosure of VIE structure, the HKEX requires the applicant to disclose the contents of the VIE agreement and the risks associated therewith. As for the content disclosure, attention should be paid to the following updates made in 2012, which specifically required that appropriate arrangements should be made to protect the applicant’s interests in the event of death, bankruptcy or divorce of the VIE company’s registered shareholders.
Since the “Divorce Event of Tudou.Com’s Founder” revealed that the divorce of the registered shareholder may affect the stability of VIE structure, how to properly keep away the risks arising from the death, bankruptcy or divorce of the VIE company’s registered shareholders has been a tough issue in the commercial world. This issue should be considered and addressed appropriately beforehand if the company has a plan to list in Hong Kong through VIE structure.
7. Requirements of HKEx Regarding the PRC Legal Opinion (Sub-Paragraphs 18A and 19(k))
In the latest November 2013 update, two new requirements regarding the PRC legal opinion were added into the VIE Listing Decision, including:
1. where the relevant laws and regulations specifically disallow foreign investors from gaining control of or operating a foreign restricted business through the use of a VIE structure (e.g., on-line game business in the PRC), the legal adviser’s opinion on the VIE agreements must include a positive confirmation that the use of the VIE structure does not constitute breach of those laws or regulations and that the VIE agreements will not be deemed invalid or ineffective under those laws and regulations. The legal opinion must be supported by appropriate regulatory assurance, where possible, to demonstrate the legality of the VIE contracts.
2. if the VIE company’s operations are conducted in the PRC, a positive confirmation from the PRC legal advisers that the VIE agreements would not be deemed as “concealing illegal intentions with a lawful form” and void under the PRC contract law.
We understand the above two requirements may have some connections with the listing of Forgame (484.hk), IGG (8002.hk) and Boyaa (434.hk), each of which is an online game company listed in Hong Kong respectively on 3 October, 18 October and 12 November of 2013.
Under the current legislation in China, it is rare to find a VIE structure which is explicitly prohibited in a foreign restricted business, thus the application of item (1) above is rather limited. However, item (2) above may be applied generally in the VIE-involved listings. Prior to this paragraph being issued by the HKEx, the PRC legal advisors would customarily render their legal opinions with qualifications in respect of the legality of the VIE agreements and opined that the possibility of the VIE agreements to be deemed as invalid by the further regulation promulgated by the PRC government, or judged as invalid by PRC court cannot be excluded.
According to the prospectus of Forgame (484.hk), IGG (8002.hk) and Boyaa (434.hk), all PRC legal advisors issued their legal opinions in accordance with the above requirements of HKEx respectively.
Mr. Michael Yu is a Beijing-based partner with Global Law Office who specializes in merger & acquisition, private equity investment, venture capital investment, foreign direct investment, corporate financing, and corporate public offering and listing. (E-mail: michael.yu@glo.com.cn)
Mr. Wu Wang is a Beijing-based senior associate with Global Law Office who specializes in merger & acquisition, private equity investment, venture capital investment, foreign direct investment, corporate financing, and corporate public offering and listing. (E-mail: wangwu@glo.com.cn)
Ms. Jessica Luo is a Beijing-based associate with Global Law Office who specializes in merger & acquisition, private equity investment, venture capital investment, foreign direct investment, corporate financing, and corporate public offering and listing. (E-mail: lan.luo@glo.com.cn)
Ms. Lydia Liu is a Beijing-based associate with Global Law Office who specializes in merger & acquisition, private equity investment, venture capital investment, foreign direct investment, corporate financing, corporate public offering and listing. (E-mail: lydia.liu@glo.com.cn)
