VIE structures under closer examination

Numerous recent PRC regulations have increased the number and complexity of requirements on foreign investors looking to acquire enterprises or assets in China. These new regulations raise questions about the validity of common transaction structures used by Chinese companies looking to list overseas. In March 2011, the Circular on the Establishment of a System for Security Review 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), issued by the General Office of the State Council (State Council), took effect and established an extensive national security review process for foreign investors seeking to acquire a local enterprise or an asset (on each such occasion, a “Security Review”). More recently, on August 25 2011, 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”), and it came into effect on September 1 2011 which helps implement Circular 6.

Circular 6 gives the PRC government broad powers to: (1) define what transactions may affect national security interests; (2) prevent transactions from taking place that are deemed to be detrimental to national security interests; and (3) change the terms of a transaction or even cancel it to mitigate any potential national security threats. Of particular concern to the hundreds of foreign-invested companies currently operating in China, Announcement No. 53 specifically requires that a company may not circumvent the Security Review through the use of control arrangements, such as those commonly used in a variable interest entity structure (VIE structure).