There is a significant development with respect to the use of variable interest entities in China. Buddha Steel, Inc. (OTCBB:AGVO) filed an 8k on March 28, 2011 reporting that it had terminated the agreements with its VIEs because local government officials in Hebei Province had informed them that the agreements contravene current Chinese management processes related to foreign invested enterprises and, as a result, are against public policy. Readers of this blog will be aware that the government holding VIE agreements invalid was one of the two ways I saw VIE arrangements blowing up. I was not aware of this case when I wrote that.
The company also advised that their previously filed financial statements should not be relied upon. The company was in the process of doing a $38 million underwritten public offering that has now been pulled. Obviously, the company is no longer a going concern.
Thomas M. Shoesmith of Pillsbury Winthorp Shaw Pittman LLP has an analysis of this situation on the Pillsbury website. He speculates this might be a one-off event driven by local facts and circumstances. If not, investors in U.S. listed Chinese companies are in for quite a ride.
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