Changes to China’s mergers and acquisitions rules that took effect on Thursday mean internet companies in the country are set to face greater scrutiny of the vehicles they have been using for more than a decade to circumvent foreign ownership restrictions in the sector.
The regulations, meant to clarify national security reviews of foreign investments in Chinese companies, stipulate that foreign investors will not avoid a review through techniques such as contracts that give them control over a domestic firm, or multi-level investments.
Under the practice, a domestic company, a so-called variable interest entity (VIE), holds the license necessary for operating a business such as running an internet search engine or an e-commerce platform in China, and the foreign-invested company secures control of that domestic business through a set of contracts instead of share ownership.