China’s Tudou.com Readies IPO After Settling Executive’s Marital Lawsuit

Chinese online video website Tudou.com has updated its filings with the U.S. Securities and Exchange Commission for a planned initial public offering this week.

The company’s IPO plans to generate around USD145 million were re-invigorated a few weeks ago after a lawsuit between Chairman and CEO Gary Wang and his ex-wife was settled in a Shanghai court. The lawsuit reportedly gave Wang full control of Quan Toodou Network Science and Technology, which is the China-based variable interest entity that actually generates the bulk of the revenue for the hodgepodge of companies that combine to make Tudou.com.

The lawsuit between Wang and his ex-wife over ownership of one of Tudou’s VIEs illustrates the immense downsides to investing in Chinese Internet businesses. A VIE is a wholly-owned Chinese company that, through a labyrinth of legal documents, becomes a business that a foreign company can effectively control. Under U.S. GAAP accounting rules, the non-Chinese company can apparently record the profits and losses of the Chinese VIE as its own.

However, the precarious legal position of VIEs in China has been in dispute, and there is fear among investors, business owners, and legal scholars that the Chinese government can claim that VIE structures are illegal. If that happens, the connections between an offshore company and its Chinese VIE would be severed, leading to investors effectively owning not much of many of these Chinese Internet companies.

Tudou also has many rivals operating in China. Youku.com went public late last year, and while its shares more than doubled at one point, the stock has been trading at or below its IPO price in recent days.

More importantly, Tudou competes directly with Chinese government television stations, who have increasingly been placing their content online.