- CII Staff
- Press Releases
SEC Muzzles the Voice of Investors by Raising the Bar on Shareholder Proposals Leading Investor Group Seeks Strengthened Sustainability Reporting CII Virtual Fall Conference, September 17-22 Leading Investor Group Dismayed by SEC Proxy Advice Rules Leading Investor Group Calls for Action on Racism Amy Borrus to Become Executive Director of the
Council of Institutional Investors on July 1
CII Statement on Virtual Shareholder Meetings During Public Health Emergency CII Elects Board Members for 2020-2021, Approves Three Policies CII Spring Conference, March 9-11, Washington, D.C. Leading Investor Group Blasts SEC’s Proposed Rules for Proxy Advice and Shareholder Proposals CII Announces Advisory Council Members for 2020 Leading Investor Group Rebukes SEC for Proposed Rules That Undercut Critical Shareholder Rights Leading Investor Group Urges Companies to Commit to Long-Term Executive Compensation Council of Institutional Investors Board Appoints Amy Borrus to Succeed Ken Bertsch as Executive Director Media Advisory: CII Fall Conference, September 16-18, Minneapolis Council of Institutional Investors Responds to Business
Roundtable Statement on Corporate Purpose
Leading Investor Group Calls Out Directors Responsible for
Dual-Class Companies Without “Sunsets”
Leading Investor Group Petitions SEC to Require Clear Disclosure on CEO Pay Targets Council of Institutional Investors Says Lyft’s Planned Dual-Class Structure is Harmful to Investors Media Advisory
CII Spring Conference, March 4-6, Washington, D.C.
CII Statement on Share Buybacks CII Research and Education Fund Publishes
Guide to Disclosure of Board Evaluation Processes
Investor Group Applauds CommonSense Principles 2.0 CII Fall Conference, October 23-25, New York City Leading Investor Group Responds to President’s Tweet on Quarterly Financial Reporting Investor Group Responds to Wall Street Journal Editorial CII Applauds Shareholder Protections in House Bill CII Elects New Board, Names Florida SBA Executive
Director & CIO Ashbel Williams Chair
New Report Details Practical Steps Corporate Boards Can Take to Combat Sexual Harassment CII Applauds SEC Commissioner Jackson's Call for Listing Standards to Require Sunsets on Dual-Class Stock CII Spring Conference, March 12-14, Washington. D.C. CII Announces Advisory Council Members for 2018 CII Report Highlights Risks Associated with a Common Chinese Corporate Structure Institutional Investors Oppose Stitch Fix Dual-Class Structure but Welcome Sunset Provision Uber’s Governance — Investor Response Do Not Disadvantage US Investors on Research,
CII Asks SEC
CII Fall Conference, September 13-15, San Diego CII Welcomes S&P Dow Jones’ Decision to Ban New Multi-Class Companies from Key Stock Indexes CII Applauds FTSE Russell Decision to Set Voting Rights
Minimum for Inclusion on Indexes
Investor Group Urges Blue Apron to Ditch No-Vote Shares Institutional Investors Dismayed by House Passage of
Financial CHOICE Act
CII, Institutional Investors with $4+ Trillion in Assets Oppose
Anti-Shareholder Provisions of the CHOICE Act
- CII in the News
- Governance & Financial Information
- Join & Support
- Contact Us
CII Report Highlights Risks Associated with a Common Chinese Corporate Structure
Washington, D.C., Dec. 14, 2017 — A new report from the Council of Institutional Investors (CII) underlines the risks posed to investors by a corporate structure called a variable interest entity (VIE). Sixty two percent of Chinese companies listed on U.S. stock exchanges use a VIE, including internet giants Sina, Baidu, Alibaba and JD.com. U.S. exchanges are experiencing a surge of Chinese VIE IPOs, with 20 filings this year, including 15 since September 1, compared to six in 2016 and seven in 2015.
“Chinese companies using VIE structures have made a splash in the U.S. market and elsewhere, but investors should be aware that VIEs lack legal protections that investors normally expect,” said Ken Bertsch, CII’s executive director.
What is a VIE? The Chinese government restricts Chinese companies in certain industries from receiving foreign investment. To sidestep these regulations, companies seeking foreign capital have adopted the VIE structure by constructing a complex network of entities, one of which is an offshore shell company that conducts an IPO on a U.S. exchange. The operating company remains technically owned by Chinese nationals, not foreign shareholders, since the entities are connected through contractual arrangements rather than direct ownership.
Investors in companies with VIEs do not own equity in the Chinese company’s operations. Because the contracts are designed to evade foreign investment restrictions, they might be invalid under Chinese contract law. As a result, investors are left without any real right to residual profits, control over the company’s management or legal protections and recourse they would ordinarily enjoy through equity ownership.
Key takeaways for investors from the full report include:
- The shell company conducting the IPO typically neither has operations of its own nor directly owns a company with operations. Its financial statements consolidate the Chinese operating company since the contractual arrangements are designed to mimic direct ownership. Confusingly, the shell company often bears the same name as the Chinese operating company.
- Since the enforceability of the contracts is in question, investors could suffer financially if Beijing enforces its foreign investment restrictions or the Chinese company’s management expropriates the assets or earnings. A high profile case of expropriation took place between Alibaba’s Jack Ma and Yahoo in 2011 (see page 9 of the report).
- These companies could be subject to punitive levels of taxation in China as they move money through the structure, and this potential tax liability—possibly as high as 50%—is not fully reflected in the financial statements.
- The vast majority of Chinese VIEs state in their filings with the U.S. Securities and Exchange Commission (SEC) that they have no plans to pay dividends to investors and will reinvest their earnings in China indefinitely. Investors may have to rely solely on the appreciation of the company’s stock price for a return on their investment.
- These companies often adopt poor corporate governance practices. Sixty one percent that IPO’d in the last two years employ a dual-class structure with unequal voting rights. Among all Chinese VIEs, 83% are incorporated in the Cayman Islands or British Virgin Islands where required governance provisions are weak, and 56% rely on legal exemptions from board independence standards.
Click for PDF version. For media inquiries, please contact CII Editor Rosemary Lally.