The founder, CEO and Chairman of one of China’s biggest companies, Liu Qiangdong (JD US) was arrested in Minneapolis on the suspicion of rape on 3rd of September. WSJ notes;

Chinese billionaire Liu Qiangdong was arrested last week on suspicion of rape, Minneapolis police said on Tuesday as they continue to investigate the entrepreneur’s actions during a residency at the University of Minnesota.

Mr. Lui was then released and quickly left the country whilst the investigation continues. JD.Com (JD US) which is a fierce competitor of Alibaba (BABA US) is run by Mr. Liu. He, unlike Mr. Ma of Alibaba who has little to do with day to day operations, exerts full control of the company and runs JD. The company share price fell sharply as a result of the arrest, on top of being down over 47% this year (note the massive volume spike as well).

Source: Bloomberg

Mr. Liu situation raises substantial issues that apply with all Chinese companies listed in the US through VIE structure. First and foremost Mr. Qiangdong controls over 80% of the voting shares despite owning only 16% of the shares. In addition, he has almost complete control of the company as South China Morning Post writes;

According to the company’s official by-laws, “Mr. Liu has considerable influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions.”

Moreover, under the current rules of, “the board of directors will not be able to form a quorum without Mr. Liu for so long as Mr. Liu remains a director.”

JD’s corporate by-laws state that all board meetings must include Liu unless he is “permanently unable to attend board meetings and manage the business affairs of the Company as a result of incapacity solely due to his physical and/or mental condition (which, for avoidance of doubt, does not include any confinement against his will).”

In essence, the company is not able to basically do anything without Mr Liu.

Furthermore due to the VIE structure that (JD US) has, if Mr. Liu faces charges and refuse to go the US, US shareholders are completely powerless. Bloomberg notes

Under the VIE corporate structure, sensitive assets like operating licenses and core technologies are controlled by Liu and a handful of key employees., the listed entity, in turn signs contracts with Liu and others for the right to glean profits and dividends from the business.

“VIE structures are relatively loose in terms of shareholder rights,” said Frank Bi, a partner at the law firm Ashurst in Hong Kong, which focuses on IPOs, compliance and mergers and acquisitions. “Basically, you’re using contracts to control the fund flow and collect your dividends and profits so you could simply breach or not honor the terms that are in the contract.”

In another words, shareholders should not expect to have their voices heard, let alone receive any type of compensation should the shareholder try the legal way.

All the issues with VIE structure have not really been a problem for larger companies such as (JD US) and Alibaba (BABA US), as there has as of yet not been any problems. But, as we previously have written, with the President Xi and communist party taking more control over companies and US regulators stepping up their oversight, there might be additional risks with being invested and trading these US listed Chinese companies.

Be careful when watching those Black swans as they are unknown unknowns.