GeoInvesting: Chinese Company Variable Interest Entity (VIE) Corporate Structure Risk Could be a Reality
SKIPPACK, Pa., July 17, 2012 /PRNewswire/ -- With respect to U.S. Listed Chinese companies ("ChinaHybrids"), GeoInvesting views the VIE structure as potentially one of the greatest moral hazards threatening investing in the ChinaHybrid space today. This morning's press release by New Oriental Education & Technology Group Inc. announced an SEC investigation into the company and its VIE structure, adding credence to GeoInvesting's constant reminder that consolidation of financial statements of VIEs and their subsidiaries could be challenged by regulators. New Oriental's press release reads:
"On July 13, 2012, the Company was informed that the U.S. Securities & Exchange Commission (the "SEC") had issued a formal order of investigation captioned "In the Matter of New Oriental Education & Technology Group Inc." The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly-owned subsidiaries, into the Company's consolidated financial statements. The Company intends to fully cooperate with the SEC in its investigation." (Source: Pr Newswire)
GeoInvesting's Dan David met with Barron's Bill Alpert on May 5, 2012. During a Q&A session, the subject matter of VIE structure was discussed:
Mr. Alpert: Any other troubling trends for investors in China?
Mr. David: Just the longstanding moral hazard posed by the VIE structure that so many of these companies use.
Mr. Alpert: You mean the "variable-interest entity" arrangement in which U.S. investors don't really have an ownership in the Chinese businesses?
Mr. David: The VIE is a contract structure between a Chinese company and the investor that allows this entity to be listed here in the U.S. They agree to share the business' profits with the foreign investors. But the contract can be canceled at any time by the executives of this company. And they would break no Chinese law in doing so.
These VIEs include huge companies, by the way, such as Internet giants Sina and Baidu. The argument defending VIEs is, if the managers own 20% of the listed shares here in the United States, they have a vested interest just like other U.S. investors. The moral hazard is, what happens when keeping 100% of the profits in China is worth more than the 20% stake in the U.S.-listed entity? There is no Chinese law that says you can't get away with canceling this VIE contract.
For those money managers or investors who are interested in a list of companies with VIE structures or learning more about the risks associated with investing in China please join us on our web site www.geoinvesting.com and click on risk analysis link at the top of the website. For those who are interested in Chinese SAIC filings or our on-the-ground due diligence services, please contact Dan David directly at [email protected].
GeoInvesting Contacts:
Dan David, Vice President
Ph. 484-991-8426
Web site: http://www.geoinvesting.com/
SOURCE GeoInvesting
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