Since its first use by Sina Corporation in 2000, the VIE structure has been widely adopted by many Chinese companies to attract foreign investment and complete offshore listings. While companies operating under VIE structure will continue to be allowed to list in Hong Kong, the Hong Kong Stock Exchange in November 2011 imposed new requirements on listing applications involving a VIE structure.

In November 2011, the Hong Kong Stock Exchange (HKEx) adopted an amendment (Amendment) to its 2005 Listing Decision 43-3 (HKEx-LD43-3). The Amendment imposes additional requirements on the listing applications submitted by applicants operating under the VIE structure based on a series of contractual arrangements.

According to HKEx-LD43-3, a VIE structure would not render the applicant company unsuitable for listing in Hong Kong, as long as such contractual arrangements are narrowly tailored to achieve the applicant’s business purposes and minimize the potential for conflict with relevant laws and regulations of the People’s Republic of China.

In the Amendment, the HKEx reaffirmed that it will give full consideration of the reasons for adopting the VIE structure by an applicant and will continue to permit applicants using the VIE structure to list in Hong Kong on a case-by-case basis, provided they satisfy conditions and requirements listed in both HKEx-LD43-3 and the Amendment.

Restricted vs. Non-restricted Industries

One of the major features of the Amendment is that the HKEx clarified its position towards VIE structures adopted by applicants in non-restricted industries where foreign investment is permitted under PRC laws.

The Amendment first expressly requires an applicant and its sponsor to disclose reasons for the adoption of the VIE structure in the applicant’s business operation. If the VIE structure is adopted in an industry where foreign investment is neither prohibited nor restricted under PRC laws, the Listing Division of the HKEx will immediately refer the application to the Listing Committee for review. The chances for the Listing Committee approving individual applications referred to it by the Listing Division are generally low.

If the HKEx finds that PRC law allows the applicant to operate its business without the VIE structure, such VIE arrangement must be unwound immediately before the listing application can be approved.

For applicants that are involved in a restricted industry where foreign investment is limited or prohibited, the VIE structure is allowed in principle if the conditions set forth under HKEx-LD43-3 are met. However, in order to ensure that the VIE structure is proper and enforceable, the Amendment requires the applicant to terminate the contractual arrangements as soon as PRC laws permit the applicant to operate its business without a VIE structure. The Amendment also requires that the underlying contractual arrangements include the following provisions:

  1. a power of attorney by which the PRC operating company (OPCO) shareholders grant to the applicant’s directors and their successors the power to exercise all rights of the OPCO’s shareholders, including the right to vote in a shareholders’ meeting, sign minutes, and file documents with the relevant companies registry;
  2. dispute resolution clauses that:
  • provide for arbitration and authorize the arbitrators to award remedies over the shares or land assets of OPCO, injunctive relief (e.g., for the conduct of business or to compel the transfer of assets) or order the winding up of OPCO;
  • 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 other appropriate cases. Such courts of competent jurisdictions include courts of Hong Kong, the applicant’s place of incorporation, the OPCO’s place of incorporation, and the place where the applicant or the OPCO’s principal assets are located; and
  1. clauses empowering the applicant to manage the OPCO’s business, revenue and assets. This is to ensure that the liquidator, acting on the contractual arrangements, can seize the OPCO’s assets in a winding-up situation for the benefit of the applicant’s shareholders or creditors.