Let me give you a report first to give you some inspiration:
Morning News (correspondent Wang Jianxin, reporter Jiang Haiping) Yesterday, Liu Hongru, former chairman of the China Securities Regulatory Commission, consulted on Shanghai Jinpingguo Investment Accompanied by President Yu Xiaoyang, the company came to Jinjiang to have a dialogue with the bosses of more than 10 companies in Jinjiang City on how private companies can go public. Using the power of capital to develop enterprises, the bosses of Jinjiang enterprises are still a little confused. They want to know about the support measures for private enterprises to go public, whether wholly foreign-owned enterprises can go public, and how to maintain enterprises after they go public.
Mr. Liu Hongru, who has been working in securities for 10 years, said, why do private companies want to be listed? What needs to be solved is to "pass the test" and move up to the next level. He does not advocate that all companies should be restructured and listed. He believes that the purpose of listing a company is to make the company bigger, enter the big market, and enter the international market. If you are determined, you have to pass.
Liu Hongru also said that it is not easy to think of a company going public, but once it is listed, there are many benefits. He believes that once a company is listed, its management transparency will be higher, and its reputation will be better. With better reputation, people in the industry will naturally like to do business with you. He said that he would also conduct research on the issue of listing private enterprises.
It is understood that Jinjiang City has Hengan Group and Huayi Company listed in Hong Kong. In the future, Jinjiang City's idea is to further guide enterprises to improve their core competitiveness, make the industry bigger, enterprises stronger, and brands better. At the same time, we should guide enterprises to move away from product management and towards capital management. It is reported that Jinjiang City is working hard to promote enterprises to carry out capital operations and strive to have 3-5 companies listed within 5 years.
How domestic companies can reorganize and list overseas
The U.S. securities market is the largest and most influential capital market in the world. In recent years, as Shanda Network (SNDA), Ctrip (CTRP), Linktone (LTON), eLong (LONG), etc. have been listed on Nasdaq, domestic private enterprises have become increasingly enthusiastic about listing in the United States. Since 2005, DXN Wireless (CNTF), Baidu (BIDU), Focus Media (FMCN), Vimicro (VIMC), etc. have successively listed on Nasdaq, and "Suntech" with Wuxi Suntech Solar Power Co., Ltd. as the main operating body Holdings" (STP), in just one year, successively completed international private equity and IPO, and was successfully listed on the New York Stock Exchange as China's first non-state-owned enterprise on December 14, 2005, further expanding the scope of Chinese enterprises in The listing space in the United States will surely guide more outstanding domestic companies to go public and raise funds in the United States.
However, according to the author’s experience as the Chinese legal counsel for many non-state-owned enterprises, including Suntech Holdings, in listing in the United States, due to the specific living conditions and legal environment, the process of listing Chinese private enterprises in the United States is difficult. China is faced with a series of practical problems, which are mainly reflected in the process of overseas restructuring. If these problems cannot be solved well, companies going public in the United States will face many difficulties or even fail.
Why choose red chip listing and overseas restructuring?
Non-state-owned enterprises (hereinafter referred to as "enterprises") are listed overseas, generally using the overseas red chip method, that is, the company's The investor (or actual controller) registers an overseas holding company established for the purpose of listing abroad (usually a tax-exempt company established in the British Virgin Islands, Cayman Islands, Bermuda or a Hong Kong company), through Overseas reorganization involves injecting all or a substantial part of a company's equity (including equity or assets) into the company, and listing the company overseas with the company as the main body.
Red chip listing is different from a domestic joint-stock company issuing shares in overseas securities markets and listing them overseas ("overseas issuance and listing"). From a practical point of view, red chip listing has more advantages than overseas issuance and listing.
Applicable laws are more likely to be accepted by all parties
Because the subject of red chip listing is an overseas holding company, the company itself should apply the law of the place where the offshore company is registered, that is, offshore The local law shall be the personal law of the listed entity. The offshore places usually chosen in operations are all former British colonies (such as the four famous offshore places mentioned above), and their laws originally belong to the Anglo-American legal system and have the same origin as American corporate law. Compared with Chinese laws, they are more likely to be International investors, U.S. regulators and exchanges understand and accept it. Among the above-mentioned offshore locations, the Cayman Islands is considered the best jurisdiction for overseas holding companies because of its complete judicial system, stable legal environment, good corporate governance standards and convenient company operating procedures, and is the most listed regulatory agency in the United States. generally accepted by exchanges. At present, most of China's non-state-owned enterprises listed in the United States through red chips are overseas holding companies registered in the Cayman Islands and used as listing entities. Therefore, the Cayman Islands are the first place for Chinese enterprises to list securities in the United States through red chips. The first choice for market issuance of stocks.
For international investors, if the listed entity can apply the laws of offshore places that belong to the common law system and at the same time be subject to the jurisdiction of the relevant courts under the common law system, it will make them more confident about investment security. The elimination of concerns will be beneficial to enterprises in financing and listing overseas.
For companies that are listed overseas, after the overseas issuance and listing is completed, they are still Chinese legal persons and must unconditionally apply Chinese laws, especially the laws of foreign-invested enterprises, because there is still a gap between Chinese foreign investment laws and British and American company laws. , Therefore, considerations about investment security in corporate laws and even Chinese legal system often affect international investors’ judgments about corporate investments. This point is particularly prominent in the international private equity process.
The approval process is simpler
Since the China Securities Regulatory Commission canceled the no-objection letter supervision on red chip listings in early 2003, Chinese companies themselves have listed overseas through red chips. There are no approval issues within the country. According to the requirements of the State Council's "Special Regulations on Overseas Raising and Listing of Shares by Joint Stock Companies" and the China Securities Regulatory Commission's "Notice on Issues Concerning Enterprises' Application for Overseas Listing", overseas issuance and listing must be approved by the China Securities Regulatory Commission before listing. Since the approval time of the China Securities Regulatory Commission for overseas issuance and listing is generally long and difficult to predict and grasp, listing through the red chip method is simpler in procedure and time is controllable.
Wide range of tradable stocks
During the red chip listing process, all shares of overseas holding companies are subject to the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934. Circulation on the exchange can be achieved through the prescribed legal registration procedures or limited sales in accordance with the provisions of the U.S. Securities and Exchange Commission (SEC) "Rule 144". In the process of overseas issuance and listing, except for the tradable shares listed on the stock exchange, the remaining shares generally cannot be directly listed and circulated on the stock exchange.
Convenient equity operation
According to the author's practical experience, the most prominent advantage of red chip listing in practice is the convenience of equity operation. Since all equity operations are completed at the overseas holding company level, the equity operations of overseas holding companies implement an authorized capital system. A large number of equity operation matters, including the issuance of common stocks and various types of preferred stocks with rights and obligations determined by the company itself, conversion to capital, equity transfer, share exchange, etc., can be handled by the company itself, and can authorize directors or boards of directors of overseas holding companies decision, and therefore has great flexibility. At the same time, the registered capital of an overseas holding company only needs to be subscribed at the time of establishment, and no actual payment is required, which greatly reduces the cost of the company's capital operation, which is especially suitable for Chinese enterprises that have not yet fully liberalized foreign exchange receipts and payments under capital projects.
At the level of overseas holding companies, the capital contributions of shareholders and external investors in private equity and the corresponding shareholder rights and obligations can be freely negotiated and determined by all parties. This is extremely important when attracting and introducing overseas capital. It is flexible and is of great significance to flexibly meet the requirements of all parties, including shareholders and private equity investors, during the corporate financing process.
Tax exemption
The most well-known and controversial thing about overseas holding companies is that the offshore government does not impose any tax on overseas holding companies except for registration, annual inspection and other fees. Taxation, in this way, will greatly reduce the costs for listed entities to carry out various flexible capital operations in the future. Tax exemption is also one of the important reasons why red chip listings can operate.
Overseas restructuring is the basic step for red chip listing. The purpose of overseas reorganization is to reorganize the company's rights and interests through legal channels and transfer the company's rights and interests into overseas companies, that is, the future listed entities. In the case of "Suntech" listing, it was through the establishment of a British Virgin Islands (BVI) company controlled by Mr. Shi Zhengrong - Power Solar System Co., Ltd., and through the BVI company, it directly or indirectly acquired the Sino-foreign joint venture Wuxi All the equity interests of the original shareholders of Suntech Solar Power Co., Ltd. (Wuxi Suntech), thus making the BVI company the shareholder that actually holds 100% of the equity of "Wuxi Suntech". Later, during the listing process, "Suntech Holdings" was established in the Cayman Islands. By exchanging shares of "Suntech Holdings" with the shares of shareholders of the BVI company, "Suntech Holdings" indirectly held "Wuxi Suntech" 100% of the equity, thus achieving the goal of the equity of domestic enterprises entering overseas listed entities.
Overseas restructuring plans depend on industrial policies
Overseas restructuring is not a simple change of shareholders. Since overseas holding companies belong to the category of "foreign investors", the result of overseas reorganization will result in "foreign companies" holding all or substantially the rights and interests of domestic enterprises. Therefore, overseas reorganization must comply with China's industrial policy on foreign investment. Overseas holding companies should comply with the " In accordance with the provisions of the "Interim Provisions for Guiding Foreign Investment" and the "Catalogue for Guidance of Industries for Foreign Investment" (revised in 2004), overseas reorganization is carried out to enter the industry where domestic enterprises are located, and based on the degree of openness of the industry in which the enterprise is located to foreign investment, determine whether the industry is allowed Wholly foreign-owned or controlled.
The issue of foreign business access directly affects the company’s overseas restructuring plan. When the industry in which the enterprise is located allows wholly foreign-owned holdings, the reorganization plan is relatively simple. Generally, round-trip investment is made through an overseas holding company, all equity of the domestic enterprise is acquired, and the enterprise is changed to a wholly foreign-owned enterprise, so that the overseas holding company can control the financial affairs of the enterprise. Effective consolidation of reports. "Wuxi Suntech", whose main business is the production of photovoltaic cell products, falls into this category.
When domestic enterprises are located in industries that do not allow wholly foreign-owned enterprises, different plans need to be adopted for reorganization.
The general approach is to establish a wholly foreign-owned enterprise in China through an overseas holding company in accordance with the requirements of "Variable Interests Entity (VIE)" under US accounting standards, acquire some assets of domestic enterprises, and provide monopoly rights to domestic enterprises. Obtain all or most of the income of domestic enterprises through consulting, management and services and/or monopoly trade. At the same time, the wholly foreign-owned enterprise should also obtain the right of first refusal, mortgage rights and voting rights for all equity interests of the domestic enterprise through a contract. Through the above arrangements, the enterprise becomes a variable interest entity of the overseas holding company, and the overseas holding company can effectively consolidate the enterprise's financial statements. Under this scenario, the restructuring should be conducted under the guidance of a financial advisor with practical experience in U.S. GAAP. At present, many Chinese Internet companies listed in the United States, including "Baidu", "Shanda" and "Sohu", have undergone overseas restructuring through similar plans as mentioned above because the telecommunications value-added services involved have not yet been opened to foreign investors.
It is more feasible for state-owned equity to exit through transfer
There may be state-owned equity in the equity structure of domestic companies. Can state-owned equity enter overseas holding companies through overseas reorganization? We often encounter this problem in practice. When domestic companies prepare for overseas red-chip listings, state-owned shareholders often hope to participate in overseas restructuring with other non-state-owned shareholders, inject their equity into overseas holding companies, and hold equity in overseas holding companies.
The State Council's "Notice on Further Strengthening the Management of Overseas Issuance and Listing of Stocks" stipulates that when transferring state-owned equity to overseas companies for listing overseas, domestic enterprises or domestic equity-holding units must first go through provincial-level approval according to their affiliation. The People's Government or the relevant competent departments of the State Council agree and submit it to the China Securities Regulatory Commission for review, and the State Council will review and approve it in accordance with national industrial policies, relevant regulations and annual total scale. Therefore, from a regulatory perspective, it is possible to inject state-owned equity into overseas holding companies. However, from a practical perspective, the approval process is complex, time-consuming, and the results are uncontrollable, which is the biggest problem with this plan. The above problems directly affect the process and timing of corporate red chip listings. Therefore, in practice, the above solution is generally not feasible. A more feasible solution is to exit the state-owned equity through transfer during the overseas restructuring process.
If a domestic enterprise transfers state-owned equity to an overseas holding company and withdraws, it must entrust an asset appraisal agency with corresponding qualifications in accordance with relevant regulations such as the "Measures for the Administration of State-owned Assets Appraisal" and the "Regulations on Several Issues in the Appraisal and Management of State-owned Assets" Conduct asset appraisals and, after approval or filing, serve as the basis for determining state-owned property rights and asset prices. Therefore, during the process of overseas reorganization, the acquisition of state-owned equity of domestic enterprises by overseas holding companies should follow the principles of evaluation and filing and the principle of determining the transfer price not lower than the evaluated value.
The acquisition price of foreign-invested enterprises is more flexible
The overseas restructuring process involves the acquisition of the interests of domestic enterprises by overseas holding companies, thus involving the determination and payment of the price. . In this regard, due to the different nature of domestic enterprises, the determination and payment of the price are different.
When an overseas holding company acquires a domestic enterprise for overseas reorganization, the "Interim Regulations on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors" ("M&A Regulations") shall apply. This provision applies to acquisitions (including equity mergers and asset acquisitions) of domestic non-foreign-funded enterprises, that is, domestic-funded enterprises, by foreign investors.
In terms of pricing, according to the "Mergers and Acquisitions Regulations", overseas holding companies and domestic enterprises should hire asset appraisal agencies to use internationally accepted appraisal methods to evaluate the value of the equity to be transferred or the assets to be sold, and based on The appraisal results are used as the basis for determining the transaction price. Both parties are not allowed to transfer equity or sell assets at a price that is significantly lower than the appraisal results, or transfer capital overseas in disguise. Regarding the assessment pricing principle, the "Mergers and Acquisitions Regulations" do not provide any exceptions. In terms of the consideration payment period, according to the "Mergers and Acquisitions Regulations", the overseas holding company shall pay the transferor within three months from the date of issuance of the foreign-invested enterprise business license after the merger ("one-time payment"). If an extension is required under special circumstances, upon approval by the approval authority, more than 60% of the total consideration shall be paid to the transferor within 6 months from the date of issuance of the foreign-invested enterprise business license, and the entire consideration shall be paid within 1 year ("Extension Payment") . Therefore, for the above-mentioned mergers and acquisitions of overseas holding companies, the price should actually be paid in accordance with the provisions of the contract. In terms of the effective period of the transferred equity, according to the "Merger and Acquisition Regulations", in the case of extended payment, the foreign investor's equity in the acquired enterprise shall distribute income according to the proportion of the capital contribution actually paid.
When the domestic enterprise is a foreign-invested enterprise, the equity reorganization of the foreign-invested enterprise by the overseas holding company is a change in the equity of the investors of the foreign-invested enterprise, and the relevant laws, regulations and provisions for foreign-invested enterprises shall apply. , especially the provisions of the "Several Provisions on Changes in Equity of Investors in Foreign-Invested Enterprises" ("Regulations on Changes in Foreign Equity").
Relevant laws and regulations on foreign-invested enterprises do not have special provisions on pricing and payment issues for equity transfers of foreign-invested enterprises in overseas reorganizations.
Although the "Mergers and Acquisitions Regulations" stipulate that foreign investors' equity acquisitions of domestic foreign-invested enterprises shall apply to the current laws and administrative regulations on foreign-invested enterprises and the "Regulations on Changes in Foreign Equity". If there is no provision therein, the "Mergers and Acquisitions Regulations" shall be followed. However, foreign investors must apply to domestic foreign-invested enterprises. The pricing and payment terms for mergers and acquisitions of equity held by investors of foreign-invested enterprises shall be determined in accordance with the agreements between the parties concerned and the provisions of the company's articles of association. The provisions on pricing and payment terms in the aforementioned "Mergers and Acquisitions Regulations" do not automatically apply.
This is because: First, foreign-invested enterprises have a strong human nature. The capital contribution of investors of foreign-invested enterprises can be currency, or buildings, factories, machinery and equipment or other materials. , industrial property rights, proprietary technology, site use rights, etc., the price can be determined through negotiation and evaluation by all parties, so its transfer can also be determined through negotiation between the transferor and the transferee with the consent of the investor, and it should be as it should be meaning.
Second, the relevant laws and regulations on foreign-invested enterprises and the "Regulations on Changes in Foreign Equity", in addition to stipulating that the transfer of state-owned equity must be evaluated, only stipulate that investors transfer all or part of their equity to a third party. , only with the consent of other investors, and there is no requirement for evaluation. Therefore, the above regulations actually exclude the requirement in the "Mergers and Acquisitions Regulations" to conduct evaluation on the transfer of non-state-owned equity. At the same time, investors in foreign-invested enterprises can agree on the method for determining the price of equity transfer, which has been recognized by the practice of equity transfer of foreign-invested enterprises in my country.
Therefore, we believe that in the process of overseas reorganization of the equity of foreign-invested enterprises, except that the transfer of state-owned equity must be subject to asset appraisal and the transfer price must be determined based on the appraised value, the overseas holding company’s foreign investment The equity transfer price for an enterprise's overseas reorganization shall be determined through negotiation between the transferor and the transferee, and only with the consent of other investors, and no evaluation is required.
Another feature of the overseas reorganization of foreign-funded enterprises that is different from the overseas reorganization of domestic-funded enterprises is that according to the "Regulations on Changes in Foreign Equity Equity", the time when the equity transfer takes effect must be approved by the competent foreign investment approval department. The approval certificate for foreign-invested enterprises shall be effective upon issuance or modification in accordance with the law, regardless of whether the equity transfer price is paid or not. Therefore, as long as the overseas holding company acquires the equity of the original investor of the foreign-invested enterprise and is approved by the foreign investment approval department, the overseas holding company has legally obtained the legal rights to the equity it acquired. This point has a great impact on determining the effective time of the acquisition in the audit.
The main solution to the source of funds for restructuring
The biggest problem faced by non-state-owned enterprises in the process of overseas restructuring is the source of funds used to acquire the equity of domestic enterprises. According to the "Mergers and Acquisitions Regulations", overseas holding companies should pay all consideration to the original shareholders of the domestic enterprise within 3 months from the date of issuance of the business license of the foreign-invested enterprise. If an extension is required under special circumstances, upon approval by the examination and approval authority, more than 60% of the total consideration shall be paid within 6 months from the date of issuance of the foreign-invested enterprise business license, and the entire consideration shall be paid within 1 year, and the actual capital contribution shall be paid Proportional distribution of proceeds. How to raise a large amount of funds required for overseas restructuring is a practical issue that must be considered in the process of overseas restructuring.
Since China implements strict management of foreign exchange under capital accounts, external foreign exchange payments under capital accounts must be approved by the foreign exchange management department. Only with the approval certificate can the foreign exchange sales and payments be handled at the bank. According to the above regulations, shareholders (including actual controllers) of domestic enterprises who transfer their cash assets cross-border to the name of an overseas holding company must go through the overseas investment approval procedures and obtain approval from the State Administration of Foreign Exchange before they can make external payments. At the same time, since a large amount of cash assets of shareholders of domestic enterprises exist in the form of RMB, they need to be converted into foreign exchange first, and China imposes strict restrictions on the use of foreign exchange purchased under the capital account of domestic residents. Therefore, for domestic enterprises and shareholders, relying on their own assets , it is more difficult to legally complete the payment of the restructuring price in the above-mentioned overseas restructuring. In the practical process of red chip listing, in order to solve the above problems, in practice, the following two solutions are usually adopted.
First, the overseas bridge loan method. That is, overseas qualified lending institutions provide overseas loans to overseas holding companies and their individual shareholders for payment of the acquisition price in overseas restructuring. The funds raised in this way are usually only used to pay for the overseas restructuring equity transfer price.
Second, the method of overseas issuance of convertible preference shares. That is, on the condition that the acquisition is completed, the overseas holding company conducts private placement and issues preference shares that can be converted into ordinary shares of the overseas company (commonly referred to as "preference shares") to overseas investors. The shareholding ratio between overseas holding company shareholders and new private equity investors in the overseas holding company shall be negotiated and agreed upon by both parties. Such preferred shares can be converted into ordinary shares at an agreed ratio after the reorganization is completed or after the company is listed. This method can be used to raise the price of equity transfer for overseas restructuring, and can also be used as a directional issuance of shares by overseas holding companies to raise operating funds required for operations.
The choice between the above two methods depends, to a large extent, on the company's operating conditions and its attractiveness to investors. The company's business and operating performance have experienced explosive growth, and the company's operating performance is sufficiently attractive to investors. The funds required for overseas restructuring can be completely raised through the issuance of preferred shares. The equity between the original shareholders of the overseas company and new investors The ratio shall be negotiated and resolved by both parties based on the company's operating and financial conditions.
The impact of U.S. GAAP on overseas reorganizations and their financial consequences
The impact of U.S. GAAP on overseas reorganizations and their financial consequences is mainly FASB 141 (" "FASB" refers to the United States Financial Accounting System Board, the abbreviation of "Financial Accounting Standards Board") and FIN 46 on variable interest entities (referring to FASB Interpretation 46).
The main impact of FASB 141 is that the different accounting treatments used for overseas reorganizations will directly affect the financial statements of listed entities after the overseas reorganization is completed. Under U.S. General Standards, there are two main methods for accounting treatment of overseas reorganizations, namely the purchase accounting method and the pooling accounting method. The purchase law treats overseas reorganization as the purchase of a domestic enterprise by an overseas holding company, thus treating it as a new entity that does not have a continuing operating relationship with the original enterprise, and requires the purchasing enterprise (overseas holding company) to record the purchase at the acquisition cost (acquisition price) Assets and liabilities of enterprises (domestic enterprises). At the same time, the purchase method introduces the concept of fair market value (FMV), which requires the evaluation of the fair market price of the net assets of the company and the difference between the acquisition cost and the fair market price. Goodwill is recognized and amortized. The equity pooling method regards the overseas holding company, the subject of the enterprise's overseas reorganization, as the continuation of the owner's equity of the domestic enterprise. The assets and liabilities of the enterprise are recorded at the original book value, and goodwill is not recognized, that is, the overseas holding company is considered to only It is the continuation of domestic enterprises.
The biggest difference between the purchase method and the equity method is their different financial impacts on overseas holding companies. Under the purchase method, the assets and liabilities of overseas holding companies must be reflected on the consolidated balance sheet at fair market value, and the difference between cost and fair value of net assets is recognized as goodwill amortization. This problem does not exist under the equity method. As a result, there will be a large difference in the earnings of listed entities in the future accounting period, thus affecting investors' enthusiasm for investing in the company. Due to the different financial impacts of the two methods on the enterprise, US accounting standards have always been restrictive in the choice of the pooled equity method, and recently canceled the application of the pooled equity method in the process of business mergers, only in the case of reorganization*** The pooling of interests method is only allowed to apply if the company has common control and meets certain standards and conditions. Therefore, how to conduct overseas restructuring in conjunction with the requirements of FASB 141, especially private placements, will have a direct impact on the financial consequences of listed entities.
Due to the different specific circumstances of overseas reorganization, the financial results of the company before and after the reorganization may be very different. In order to avoid major changes in the company's operating performance due to the above-mentioned financial treatments, which will then affect the listing process, during the planning and implementation of the overseas restructuring plan, we recommend that financial consultants who are proficient in US accounting standards and have practical operations should be actively introduced. Participate in planning and forming overseas restructuring plans.
FIN46 is FASB’s guidance on how to determine the variable interest entity (VIE) and consolidate it into the parent company when it is impossible to decide whether to consolidate financial statements based on traditional voting rights. The status of the company's financial statements. If an entity does not have an equity control relationship with another entity, but its returns and risks are completely dependent on the other entity, then the entity constitutes the VIE of the other entity, and the statements of both parties should be consolidated. The determination of VIE should usually meet the following two criteria: First, the risk capital of VIE is obviously insufficient, that is, if all its capital does not provide additional financial support from the merging party (parent company or its affiliates), the business operations will be unsustainable. Second, the shareholders of VIE are only shareholders in name of the law and do not enjoy actual voting rights. At the same time, their losses to the company are exempted due to the merging party's commitment or guarantee, and they have no effect on the company's operations. A real interest in the sense of a shareholder does not have the right to distribute the remaining property after the liquidation of the VIE company. When the above two conditions are met, the company should consolidate its financial statements with the parent company that actually controls it.
In the process of red chip listing, FIN 46 is usually used as the accounting basis for overseas restructuring plans when the industry engaged in by domestic enterprises is a licensed industry and cannot be directly controlled by foreign investors. Since an overseas holding company, as a foreign investor, cannot directly enter the industry where a domestic enterprise is located and wholly own or control the domestic enterprise, the original shareholders usually hold the domestic enterprise in name, and at the same time, the overseas holding company directly or through its own establishment in the country Foreign-funded enterprises monopolize all business activities of domestic enterprises and control all income and profits of domestic enterprises. Except for a very small amount of profits retained in the company, all the remaining income and profits flow to overseas holding companies through various operating arrangements. At the same time, the board of directors of the domestic company is entirely controlled by the person designated by the overseas holding company. The overseas holding company also pledges the equity of the original shareholders of the domestic company to achieve absolute control over the equity and board of directors of the domestic company.
Through the above series of arrangements, although domestic enterprises are still legally regarded as independent domestic enterprises and will not violate the regulations on restrictions on the transfer of foreign capital, in fact all operations of the company and its corresponding assets, income and profits are It belongs to an overseas holding company and is actually controlled by the overseas holding company. In this case, the domestic enterprise meets the above-mentioned VIE standards, that is, the VIE should be consolidated into the reporting scope of the overseas holding company.
Chinese Internet companies listed in the United States, such as Shanda and Sohu, have all completed overseas restructuring through VIE