By Park Si-soo
Lotte, CJ and other major Korean companies may have to sell their stakes in Chinese companies they have effectively controlled using the variable interest entity (VIE) corporate structure.
The Chinese government plans to enact a new law banning foreign companies from using VIE to govern Chinese firms in sectors of the economy where foreign investment is restricted. Restricted sectors include online shopping and broadcasting.
Lotte Group is known to have governed Chinese TV home shopping channel Lucky Pie since 2010 using the VIE, while CJ Group has controlled another Chinese home shopping channel, Dongbang CJ Home Shopping, using the same method.
China's commerce ministry is reportedly moving to introduce the law prohibiting the use of VIE in these sectors.
If adopted, affected foreign companies would have to sell their controlling stakes using VIE to Chinese nationals.
Other non-Chinese companies that could be at risk from the proposed law include the Chinese operations of Amazon.com, Pearson PLC and CBS Corp. They also include three major U.S.-listed Chinese Internet companies: Sina Corp., Autohome Inc. and Weibo Corp., according The Wall Street Journal.
Lotte purchased a 63.2 percent stake in Lucky Pie in 2010 for $130 million. The company's home shopping sales in China reached 50 billion won last year, down from 75.8 billion in 2013. CJ Group has controlled Dongbang CJ Home Shopping since 2003. Dongbang reported 72 billion won in operating profit last year.
"The VIE structure has never been legal per se," Zhang Ning, a counsel in the Beijing office of the law firm O'Melveny & Myers, was quoted as saying in a report. He said the proposed legislation would remove the ambiguity by legalizing some VIE operations that are controlled by Chinese nationals.
Experts familiar with the issue said the draft law was published in January for comment, but is subject to change and will probably not become law for at least two years.
In a recent joint statement, the U.S. Chamber of Commerce, the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai called for a 25-year grace period or the grandfathering of existing VIEs.
Lotte, CJ and other major Korean companies may have to sell their stakes in Chinese companies they have effectively controlled using the variable interest entity (VIE) corporate structure.
The Chinese government plans to enact a new law banning foreign companies from using VIE to govern Chinese firms in sectors of the economy where foreign investment is restricted. Restricted sectors include online shopping and broadcasting.
Lotte Group is known to have governed Chinese TV home shopping channel Lucky Pie since 2010 using the VIE, while CJ Group has controlled another Chinese home shopping channel, Dongbang CJ Home Shopping, using the same method.
China's commerce ministry is reportedly moving to introduce the law prohibiting the use of VIE in these sectors.
If adopted, affected foreign companies would have to sell their controlling stakes using VIE to Chinese nationals.
Other non-Chinese companies that could be at risk from the proposed law include the Chinese operations of Amazon.com, Pearson PLC and CBS Corp. They also include three major U.S.-listed Chinese Internet companies: Sina Corp., Autohome Inc. and Weibo Corp., according The Wall Street Journal.
Lotte purchased a 63.2 percent stake in Lucky Pie in 2010 for $130 million. The company's home shopping sales in China reached 50 billion won last year, down from 75.8 billion in 2013. CJ Group has controlled Dongbang CJ Home Shopping since 2003. Dongbang reported 72 billion won in operating profit last year.
"The VIE structure has never been legal per se," Zhang Ning, a counsel in the Beijing office of the law firm O'Melveny & Myers, was quoted as saying in a report. He said the proposed legislation would remove the ambiguity by legalizing some VIE operations that are controlled by Chinese nationals.
Experts familiar with the issue said the draft law was published in January for comment, but is subject to change and will probably not become law for at least two years.
In a recent joint statement, the U.S. Chamber of Commerce, the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai called for a 25-year grace period or the grandfathering of existing VIEs.
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