A recent China Supreme Court decision related to Ambow Education’s VIE appears to provide little comfort to investors in VIE structures.
I have had a chance to discuss this ruling with some Chinese experts, and provide here a layman’s interpretation while we await a good legal analysis in English.
The case was a suit brought by Hunan Changsha Yaxing Company (Yaxing) against Ambpw’s VIE. Yaxing had sold a school to Ambow’s VIE in 2009, taking part of the consideration in cash and part in Ambow stock. Ambow stock collapsed after it was delisted from the NYSE and put into receivership in the Cayman Islands. Yaxing sued to get the school back, arguing that the VIE could not legally own the school.
The court upheld the transaction, saying that the VIE was a Chinese corporation and there was no basis to void a completed contract between two Chinese corporations. The court did ask the Ministry of Education about the nature of the arrangement, and while the Ministry of Education acknowledged it was a conventional VIE arrangement, they did not express an opinion as to whether the arrangement was legal.
There has been an important decision in China with respect to the enforceability of VIE contracts.
The attached article (in Chinese) explains a decision of China’s Supreme Court upholding the enforceability of Ambow Education’s VIE contracts. I am going to wait for some Chinese lawyers to better explain the rationale of the case, but it seems to rest on the conclusion that the arrangements do not result in impermissible foreign control of restricted industries. That would seem to be contrary to earlier decisions.