Understanding and interpretation of agreement control in mainland China by Shanghai Nuo Di Law Firm

 2018-09-30  1510


Protocol control mode is also called "VIE model", referring to an overseas company with a special purpose separately sets up a wholly domestic foreign-owned enterprise, which signs a series of contracts or agreements with a business entity within the territory. Under the arrangement this package of contracts or agreements, the overseas company with a special purpose provides monopolic consultation, management and technical support and other services, thus obtains most of the economic interests in the form of "fees" from the business entity within the territory. At the same time, through the arrangement of contracts or agreements, the overseas company with a special purpose  obtains the preemptive right and mortgage right of all the equity, voting right and operational control right of domestic business entities, so as to indirectly realize the overseas offshore companies' control over domestic business entities.Through the above series of arrangements, although on the surface, domestic enterprises are still independent domestic enterprises, in fact, all the operations of the enterprise and its corresponding assets, income and profits belong to overseas companies and are actually controlled by overseas companies.


The lawyers of Shanghai Nuo Di Law Firm think that the agreement control also has great risk, which is shown as follows:

Firstly, it is risky that the agreement framework is not recognized.The designed agreement framework is rejected directly in the process of the administrative authority's approval, which is directly related to the law's attitude towards the VIE.In the case of unclear legal provisions, whether the construction of the agreement structure can pass the examination or approval will undoubtedly turn into a dish ordered by the examination and approval authority. If they like it, you will get it. If they don't like it, you have to give up. Such a risk is the first thing investors should consider before entering the framework.

Secondly, the risk of default by investors.For a compact of agreement, the integrity of the investor becomes the balance of the whole.The calculus behind the balance is to calculate the difference between default costs and default benefits all the time.If such a gap can yield attractive returns to investors, then moral hazard has risen dramatically. As a rational economic man, and driven by the self-interest of businessmen, it is not surprising to tear up a deal and opt for default. At the same time, investors are at a loss, like a well-fed chick that flies away when its wings are fully fledged, and will have to spend a lot of legal fees to claim paltry damages.

The third is the risk of internal control by the investing subject.Under the VIE framework, the internal management of the invested entity is far from the foreign investors.Therefore, the internal operation of the subject of investment and the behavior of the senior management can not be timely supervised by the investor, and the moral risk is very high.