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.
What the decision appears to clarify is that the commercial transactions of a VIE are valid, and do not rest on whether the VIE is operating within the bounds of the foreign investment restrictions. The decision does not relate to the validity of the VIE contracts between Ambow’s VIE and Ambow’s wholly foreign owned enterprise (WFOE).
It is the enforceability of the VIE contracts between the WFOE and the Chinese shareholders of the VIE that are of greatest concern to investors. In the Gigamedia case, these contracts were found to be unenforceable. That concern remains.