Antitrust and VIE | China Accounting Blog | Paul Gillis

Antitrust and VIE

China has proposed new legislation on how the antitrust laws apply to the platform economy. Many of China’s internet companies provide platforms for other companies (like restaurants and retailers) to push their wares. Some of these platforms are alleged to have engaged in monopolistic behavior, such as requiring that companies list only on their platforms. I think the legislation is focused on protecting consumers and the behaviors being banned would also be banned in most any Western country. If this proposed law is implemented, it may reduce the profitability of many overseas listed Chinese companies, and consequentially the share values of these companies have been hammered in recent days. 

There is a provision that deals with variable interest entities (VIEs). VIEs are extensively used by overseas listed Chinese companies to circumvent Chinese restrictions on foreign investment in certain sectors, including internet related companies. The draft legislation (Article 18) states that VIE arrangements fall within the scope of the proposed provisions and require advanced reporting to the Anti-monopoly Law Enforcement Agency of the State Council. It appears VIE arrangements cannot be implemented if not declared in advance. How this applies to existing VIE structures is unclear. 

It is not clear to me whether this is a meaningful change in China’s approach to VIEs. The VIE arrangement has always been on shaky legal ground and attempts to enforce VIE agreements in Chinese courts have often failed.   Nonetheless, the structure is ubiquitous, and it has been viewed that Chinese authorities have decided to look the other way because of the significance of these companies to the Chinese economy. Perhaps that is changing, but I think it is more likely these provisions are just a technical means of capturing the nature of the arrangements so as to mitigate any use that might circumvent the spirit of the antitrust law.  

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