With the current interest shown in the GigaMedia case it seems prudent to offer some sobering reminder of how, at times, big events can change so little.
First a very quick look at what has happened so far according to the company filings. For a more elaborate description please look here.
After Mr. Wang usurped the company’s China operations, by holding onto the official chops and other documents, the company proceeded to file suits in various courts with a number of claims against the former head of China operations.
After initially forecasting quick resolution, litigation seemed to have hit on problems and the references became increasingly bleak in their outlook, referring in part to the complexity of the procedure. This culminated in the company basically admitting defeat on the issue by setting up a new China organisation from scratch.
From what we know of the process, however, it appears that the question of the VIE contracts were not tried at any stage. In fact the only real mention of them is to conclude that the equity pledges are unenforceable due to not being registered.
Although we may speculate that the reason for GigaMedia to suddenly give up its attempt to enforce control over the WFOE and the VIEs was that the contracts would not have been enforceable. There is actually no legal judgement to say that it is so, and therefore nothing has actually changed when it comes to clarifying the gray area in which VIEs operate.
As this is the case, the fact that GigaMedia has just lost their entire China operations will not result in any change to the current risk disclosures associated with SEC filings for VIEs. There are still substantial uncertainties as to the enforceability of the contracts, and so far there’s still only the possibility that courts will find them unenforceable.
The lasting effects of the case will more likely be in how investors read the statements, rather than the statements themselves. Rather than just being empty words, the “substantial uncertainty” can now be said to be so great that a company gave up trying to regain control over its operations. Further, the statement that contracts “may not be as effective as equity ownership” might well do with being read as “will not be as effective as equity ownership”.
More than anything this case shows us what can happen when disputes arise within companies with VIE structures. They may be solid as long as no one within the organisation rocks the boat, but the question of who exactly owns the VIEs is now clearly more pressing than before. Yet here, again, we might in fact not see any change in the corporate filings presented.
As there is no change in disclosures to guide the reader as to how the VIE situation is progressing, more and more pressure is being put on investors to stay a jour with developments to be able to adjust their risk evaluations.