Sullivan & Cromwell has published a brief, but excellent, guide to new requirements for listing companies using VIE structures in Hong Kong.
Hong Kong allows use of the VIE structure but is imposing more requirements than the SEC. For example, in cases where VIE structures are adopted for companies in unrestricted industries, the listing division refers the case to the listing committee, and if a business becomes unrestricted, it must be removed from the VIE. That is a requirement that New Oriental shareholders may wish was in place in the U.S.
VIE is actually a U.S. accounting term. Hong Kong requires use of HKFRS, which is essentially the same as IFRS. Nevertheless, similar rules apply under U.S. GAAP and IFRS for consolidation of VIEs and the same result can be obtained under either standard. You won't likely see the term VIE in Hong Kong financial statements, however. That has made it difficult to determine if a Hong Kong listed company uses a VIE structure. The new disclosure requirements, however, will make that clear.
The S&C brief has a list of the specific disclosure and review requirements in Hong Kong for VIEs. The U.S. SEC ought to adopt these. A couple of the requirements are interesting:
Appropriate regulatory assurance should be obtained from the relevant regulatory authorities or there must be an appropriate statement in the PRC legal opinion to the effect that all possible actions or steps to be taken to enable it to reach its legal conclusions had been taken.
Good luck with that.
Ensure that the Contractual Arrangements contain dispute resolution clauses that provide for arbitration and that arbitrators may award remedies over the shares or land assets of the OPCOs, injunctive relief or order the winding up of the OPCOs, and provide the courts of competent jurisdictions with the power to grant interim remedies in support of the arbitration pending formation of the arbitral tribunal or in appropriate cases;
Ensure that a liquidator, acting on the Contractual Arrangements, can seize the OPCO assets in a winding up situation for the benefit of the listing applicant’s shareholders or creditors.
What is missing from the Hong Kong disclosures is a requirement to disclose the assets and income of the VIE. That is a critical disclosure to identify the risk associated with asset-heavy VIEs. That disclosure is currently required under U.S. GAAP, and will become part of IFRS for periods beginning after January 1, 2013.
I do not think that many of the VIEs listed in the U.S. can meet the new Hong Kong requirements. I am not sure many of the VIEs currently listed in Hong Kong can meet them either.