Alibaba’s Jack Ma is giving up ownership of Chinese entities – here’s what that means
VIEs are a way to sidestep restrictions in certain Chinese industries deemed sensitive, such as energy, technology and telecoms
In a securities filing in July, Alibaba Group disclosed that executive chairman Jack Ma will be stepping away from the company’s variable interest entities. This was disclosed about a month before Ma announced a succession plan with a transition period of a year.
What is a variable interest entity (VIE) and what companies use it?
A VIE is a legal business structure commonly used by mainland companies to establish ownership of a company through legal agreements, as opposed to direct share ownership.
Under a VIE structure, one or several Chinese citizens forms a domestic company – the actual VIE – and retains sole control of the entity. Separately, a wholly foreign-owned enterprise (WFOE) is then set up, fully owned by a firm that is incorporated offshore, in the Cayman Islands, for example.
The VIE, which usually owns assets of the company in which foreign ownership is restricted or prohibited, then signs contracts with the WFOE allowing it to control the assets, sales and profits belonging to the VIE.
Establishing VIEs is a way to sidestep restrictions in certain Chinese industries that are deemed to be sensitive, such as energy, technology and telecommunications. In these industries, companies are not allowed to issue stock to foreign investors.