Operations. Dangdang`s registration statement does not contain details on how this will work, but there are some clues. The objective of each LIFE structure will be to minimize gains in LIFE. The remaining gains in the LIFE are problematic because the final transfer of these profits to public shareholders is difficult and costly. While life agreements generally require VIE shareholders to pay dividends to the limited company, all distributions to LIFE shareholders in China would be subject to an individual income tax, which is superimposed on corporate taxes already paid. This contribution explains the use of variable interest (EV) companies by Chinese companies listed in the United States. I have selected E-Commerce Dangdang, Inc. (NYSE: DANG) which will be listed on the NYSE at the end of 2010 as an example of the use of the VIE structure. I chose Dangdang because it follows the archetypal model of life structures, not because it has more or less high risks than other companies that use VIE. Power of attorney. The founders give Dangdang Information a power of attorney that gives it all normal shareholder rights, including voting, participation in shareholder meetings and the execution of the appeal option agreement. From the government`s point of view, while there is no clear ban on the structure of life in China, there is also no explicit support for the life structure.
As a result, the life structure has always been a grey area in the Chinese legal system. Although the life structure allows domestic and foreign investors to circumvent government audits and regulations, it also means that the life structure does not have the support of the Authority and that, therefore, the life structure has inherent flaws and presents potential legal and regulatory risks. Loan contract. The founders borrowed money from Dangdang Information to capitalize Dangdang Kewen. Using Dangdang information instead of the cayman island parent company to make the loan, the agreement between two Chinese companies, is the need to do with the state management of currencies. The VIE structure has been adopted in particular in the field of e-commerce. But also direct distribution and telecommunications, which require certain authorizations from the authorities. Reputable publicly traded companies use a VIE structure. For example, as an online media company Sina Corp or internet companies like Alibaba (removed from the list in 2012), Baidu, Ctrip, Youku and Tencent. The essence of the LIFE model lies in the fact that, despite the absence of a capital relationship between the listed company and the business company, the publicly traded company and the commercial enterprise it effectively controls can be consolidated because of the series of agreements between them.
Because the LIFE model comes from Sina, it is also known as the “Sina model.” For domestic companies, particularly those that do not have highly relevant means (such as the internet or telecommunications), the VIE structure has been widely used to enable them to obtain financing from the overseas market through overseas listings.