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  "documentTitle": "New Oriental Education & Technology Group (EDU)",
  "authorId": "51_Muddy_Waters",
  "authorName": "Carson Block",
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  "presentationDate": "2012-07-18 00:00:00",
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  "notes": "The slide uses a comparative analysis to expose the risks in EDU's corporate structure relative to the industry standard (BIDU).",
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      "kind": "callout",
      "text": "EDU's WFOEs have very little business substance within them, which increases the temptation for EDU management to use the operating company to enrich itself.",
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      "kind": "paragraph",
      "text": "Software and Other License Agreements. BIDU's WFOE owns key software code... Of course the main substance of EDU's business is the learning centers, which are owned by the schools, which are owned by the VIE. In this way, EDU leaves substantially all of the value in the operating company, which Chairman Yu now wholly owns.",
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      "kind": "paragraph",
      "text": "Operating Agreement. This agreement places a good deal of management substance in BIDU's WFOE. It requires BIDU's operating company to appoint directors the WFOE designates. BIDU's WFOE receives the right to appoint the operating company's senior executives.",
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      "text": "BIDU's agreements reflect an attempt to place as much of the substance of BIDU's business operations into the WFOE in order to decrease the standalone value of the operating company to BIDU management (should management go rogue).",
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      "kind": "paragraph",
      "text": "BIDU: Technology Consulting Service Agreement and Business Cooperation Agreement. These agreements provide that the public company's WFOE subsidiary will provide key operating services to the operating company, including: secondment of employees, internet search services, and internet advertising services.",
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      "text": "However, EDU's WFOEs have very little business substance within them, which increases the temptation for EDU management to use the operating company to enrich itself. It is troubling EDU's VIE package would have been structured this way.",
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      "text": "BIDU's operating agreement therefore places a substantial amount of control over BIDU's operating company in the hands of the WFOE... These controls represent best practices and are common to VIE structures. EDU has few such controls.",
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      "text": "The acronym is pronounced “woofie.” It means wholly foreign-owned enterprise, which has legal significance in China.",
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