(v) the capital agreement between WFOE, prC and the national company, whereby the PR persons pledged their interests in the national company in the WFOE as a guarantee of the performance of their obligations and the obligations of the national company arising from other agreements between the three (3) parties to the LIFE structure; and 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. As shown in the graph above, foreign investors and CPP originaters create SPV1 in Cayman; then, SPV1 sets up a 100% SPV2 in Hong Kong; then SPV2 creates the all-foreign company (“WFOE”) in the PRC. The national company is usually the one that holds licenses or authorizations for the company. However, due to restrictions on foreign investment, WFOE cannot obtain licences or authorizations from the Chinese authorities to operate in the desired sector. Through a series of contractual agreements between WFOE, cpp (generally, CPP members are the founders of the companies) and the national company, WFOE might effectively be able to control the domestic business, as if it owned the stakes directly in such a national enterprise. Thus, SPV1 can consolidate the finances of the national company in the group`s overall financial statements, which is approved and accepted by U.S. general accounting principles. A number of contractual agreements between investors, companies and other market participants have no difficulty in establishing that the life structure is designed to eliminate any risk of loss of control of the domestic company or its assets. Due to the reluctance of the parties to disclose the entire structure of the merger, the implementation of such agreements in China appears difficult.
Even if contractual agreements are finally enforced under CPP law, the damage to the business will be significant to investors. Finally, to some extent, contractual agreements cannot be compared to direct ownership of the national enterprise through equity.