VIE structures face increased scrutiny

On September 1 2011, a set of new rules came into effect that helps implement an earlier State Council circular that established an extensive national security review process for foreign investors seeking to acquire a local enterprise (the Circular on Establishment of the Security Review System in Respect of Acquisition of Domestic Enterprises by Foreign Investors (国务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知) (Circular 6)).

China's Ministry of Commerce (Mofcom) issued the Provisions for the Implementation of the System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors, Announcement No. 53 《商务部实施外国投资者并购境内企业安全审查制度的规定》（商务部公告2011年第53号）(the “Security Review Measures” or “Announcement No.53”) on August 25 2011.

Of particular concern to the hundreds of foreign-invested companies currently operating in China is that Announcement No. 53 specifically requires that a company may not circumvent a security review through the use of control arrangements, such as those commonly-used in a variable interest entity structure (VIE structure).