Latest Legal News

THE CONSERVATION RIGHT: A NEW PROPERTY RIGHT FOR SUSTAINABILITY

Article by Dr. Jaime Ubilla, the original proposer of the ´conservation right´,  in the webpage of the International Union for the Conservation of Nature (IUCN)

 

In order to see the full article with references, please visit here:
http://www.ub-co.com/wp-content/uploads/2019/04/THE-CONSERVATION-RIGHT-A-NEW-PROPERTY-RIGHT-FOR-SUSTAINABILITY-BY-JAIME-UBILLA.pdf

 


New Guidelines on China Outbound Investment

On August 18 2017, China’s State Council published Guiding Opinions on Further Guiding and Regulating Outbound Investment Orientation (the “Guidelines”) which are collectively issued by the National Development and Reform Commission (“NDRC”), Ministry of Commerce (“MOFCOM”), People’s Bank of China (“PBOC”) and Ministry of Foreign Affairs.

Comparing to the previous regulations such as Outbound Investment Management Measures (2014) and Management Measures on Approval and Record of Outbound Investment Projects (2014), the Guidelines formally establish the principle of guiding and regulating the outbound investment – “the record-filing management system together with the mode of "encouraging development and negative list".

The main contents of the Guidelines are as follows:

1.     The Guidelines classify the overseas investment into three categories:

Encouraged investment

Competent and qualified Chinese enterprises are encouraged to actively engage in:

i.              Promoting outbound investment in the construction of "One Belt, One Road" initiative and interconnection with surrounding infrastructure;
ii.          Carrying out outbound investment that can drive China’s production capacity, high-quality equipment and technical standards;
iii.        Strengthening investment cooperation with overseas high-tech and advanced manufacturing enterprises and encouraging the establishment of R&D centers abroad;
iv.        Participating in offshore oil and gas, mineral and other energy resources exploration and development;
v.          Striving to expand agricultural cooperation with foreign countries and carrying out mutually beneficial and win-win investment in the fields such as agriculture, forestry, animal husbandry, side-line production and fishery;
vi.        Promoting outbound investment in services such as business, culture and logistics, supporting qualified financial institutions in establishing branches and service networks abroad.

Restricted investment

Chinese enterprises are restricted in carrying out outbound investment that is inconsistency with China's foreign policies of peaceful development, mutually beneficial win-win and opening up strategy as well as macro-control policies, including:

i.               Outbound investment carried out in sensitive countries and regions that have not established diplomatic relationship with China, those with wars or those restricted by bilateral or multilateral treaties or agreements concluded by China;
ii.          Outbound investment in real estate, hotels, cinemas, entertainment and sports clubs, etc.;
iii.        Setting up equity investment funds or investment platforms abroad without specific industrial projects;
iv.        Outbound investment carried out by using backward production equipment that fails to meet the technical requirements of the investment destination countries;
v.          Outbound investment that fails to meet the environmental protection, energy consumption or safety standards of the investment destination countries.

Please notice that the first three categories of restricted investment mentioned above are subject to the approval system of outbound investment by the Chinese authorities.

Prohibited investment

Chinese enterprises are prohibited from participating in outbound investment that endangers or may endanger the national interests or state security of China, including:

i.              Outbound investment involving the export of core technologies and products in the military industry without the approval of China;
ii.          Outbound investment by using technologies, techniques or products prohibited from exporting by China;
iii.        Outbound investment in gambling or sex industry, etc.;
iv.        Outbound investment prohibited by international treaties concluded or participated by China;
v.          Other outbound investment that endangers or may endanger national interests or security of China.

2.     The Guidelines clarify certain supporting measures to facilitate and secure the outbound investment, including:

a. Improve services for enterprises in respect of taxation, foreign exchange, insurance, customs and information for encouraged categories of outbound investment;

Guide enterprises to participate in a prudent manner and give necessary tips for restricted categories of outbound investment;

Take effective measures on the strict management and control for prohibited categories of outbound investment.

b. Strengthen the review of authenticity and compliance of outbound investment;

Establish an outbound investment blacklist system;

Establish an inter-department information sharing mechanism;

Establish and improve decision-making system, financial management system and accountability system for the violation of regulations for outbound investment;

Establish an outbound investment capital system for state-owned enterprises;

Improve the outbound investment auditing system for state-owned enterprises.

c. Establish a code of conduct for outbound investment to guide enterprises to establish and improve overseas compliance risk review, control and decision-making system;

Strengthen institutional cooperation with relevant countries in respect of investment protection, finance and personnel exchanges;

Support the development of service providers such as assets assessment, legal services, accounting services, tax services, investment consultants, design consulting, risk assessment, certification and arbitration, in order to serve the enterprises carrying out outbound investment.

d. Regularly release Country-by-Country Reports on the Facilitation of Investment Operation;

Strengthen guidance and supervision for the enterprises to carry out investment in countries and regions with high risks, timely give warning and notification of the political, economic and social major risks in relevant countries;

Urge enterprises to carry out safety risk assessment on outbound projects, to properly forecast and respond to project safety risks, to establish and improve the security system, to strengthen security training and to enhance safety.

3.     Comments

The Guidelines create the clear framework of supervision and management over the outbound investment through the principle of record-filing based and negative list management system, which will improve the facilitation level of outbound investment and further promote the reform of streamlining administration, combination of decentralization and control, as well as government service optimizing.

The Guidelines add two categories below to restricted outbound investment, which will apply to the approval management system for outbound investment instead of record-filing system, so that we need to pay attention to this change in order to understand the new trend of restrictions on certain fields of outbound investment:

i.               Outbound investment in real estate, hotels, cinemas, entertainment and sports clubs, etc.;
ii.          Setting up equity investment funds or investment platforms abroad without specific industrial projects.

The Guidelines establish categories and support measures which will help to improve the management of outbound investment. However, such regulations seem to be broad and may bring the difficulties during the application of the Guidelines. Therefore, the detailed implementational measures need to be published to specify those uncertainties in future.


New Revision on Record-filing of the Establishment and Change of Foreign-invested Enterprises

On July 30, 2017, the Ministry of Commerce (“MOFCOM”) issued two important regulations relating to foreign investment in China, one is the Decision on Revising the Interim Administrative Measures for the Record-filing of the Establishment and Change of Foreign-invested Enterprises (the “Decision”) and the other is Notice on Matters Related to the Administration of the Record-filing of the Establishment and Change of Foreign-invested Enterprises (the “Notice”). These two regulations have taken into effect on the same day of issuance.

Comparing to the rules regulated in Interim Administrative Measures for the Record-filing of the Establishment and Change of Foreign-invested Enterprises published on October 8, 2016 (the “Measures”), the main changes according to the Decision are as follows:

  1. The record-filing system on merger and acquisition transactions

The record-filing system will apply to transactions of merger and acquisition of domestic enterprises (excluding the foreign invested enterprises in China) and strategic investments in listed enterprises in China by foreign investors.

Before the Decision, all merger and acquisition transactions shall be subject to the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (“M&A Provisions”), which means that M&A transactions shall be reviewed and approved by the Chinese government.

However, the Decision significantly changes this rule so that the record-filing system will replace the review and approval system for M&A transactions except special cases mentioned below.

  1. The exception of application of record-filing system in the Decisiona. Special administrative measures

Special administrative measures stipulated in the “Catalogue on Industry Guidelines for Foreign Investment (2017)” out of pilot free trade zone (“FTZ”) and “Special Administrative measures on Foreign Investment in the pilot free trade zone (Negative List) 2017” within the FTZ.

The foreign investment subject to the restricted and prohibited categories in the Negative List shall not apply to the record-filing system. Instead, it shall be approved by MOFCOM.

This regulation increases the close connection between the record-filing system and negative list system in respect of the application on the subject of merger and acquisition transactions in China.

b. Merger and acquisition with related parties

Transactions of merger and acquisition with related parties will not apply to the record-filing system. Instead, it shall be still subject to Article 11 of M&A Provisions “If domestic enterprises or individuals merge with or acquire their related domestic enterprises through a duly established or controlled company out of China, such merger and acquisition shall be approved by MOFCOM.”

The exclusion of merger and acquisition with related parties from the record-filing system explicitly shows the strict attitude of MOFCOM on such transactions.

  1. New requirement of disclosure of final beneficiary ownership structure of foreign invested enterprises

Based on the previous requirement, the party who is responsible for the record-filing only needs to provide the final beneficiary information in the application form for record-filing. However, the Decision added the new requirement to the record-filing procedure that the complete information of final beneficiary ownership structure shall be disclosed and submitted. According to our analysis, such information will probably range from the foreign invested enterprise under the merger and acquisition transaction eventually to the final beneficiary.

This requirement may create the possibility of discretion applied by MOFCOM during the review of record-filing documents and the information control of final beneficiary by MOFCOM. The real intention of this new requirement will depend on the result of the implementation of this rule in practice in future.

  1. Condition and Procedure of Cross-Border Equity Swapa. Condition of Cross-Border Equity Swap

According to M&A Provisions, if a foreign investor intends to merge with or acquire a domestic enterprise (excluding a foreign-invested enterprise in China) by using its equity over a foreign company out of China which is regarded as a cross-border equity swap (the “Equity Swap”), this overseas company involved in the Equity Swap must be an overseas listed company or a special purpose vehicle (“SPV”).

The analysis on Article 8 of the Decision and application form for establishing the foreign invested enterprise (for M&A) attached in the Notice may only make us conclude in this stage that even though the Decision allows the foreign investor to use the equity over a foreign company as one of the payment methods for the Equity Swap, it doesn’t explicitly release the condition of identification of the overseas company – listed company or SPV.

As a result, whether the equity of other ordinary overseas companies can be used for the Equity Swap is not clear in the Decision. It will be verified based on the practice of implementation of the Decision by the relevant authorities in future.

b. Procedure of Cross-Border Equity Swap

Procedure of operation of Cross-Border Equity Swap is adjusted according to the Decision.

According to M&A Provisions, the foreign investor shall apply for the approval of M&A transaction and finish the registration change of the foreign-invested enterprise in China with the local Administration of Industry and Commerce (“AIC”). Then the foreign investor (as one shareholders of foreign-invested enterprise in China) shall apply for the permission of overseas investment with MOFCOM and foreign exchange department since it will hold the equity of the overseas company after the Equity Swap.

However, the Decision requests the foreign-invested enterprise or its investors shall apply for the approval of overseas investment permission to obtain the Certificate of Overseas Investment (“Certificate”). Then they could submit all documents including this Certificate for the registration change of the foreign-invested enterprise in China.

The reason of such change of procedure under this matter is not clear right now. The real influence will come out after the operation of the relevant authorities for certain period.

  1. Commentsa. Firstly, the Decision achieves that the record-filing system will apply to transactions of merger and acquisition of domestic enterprises (excluding the foreign invested enterprises in China) and strategic investments in listed enterprises in China by foreign investors, which is the most important and positive change in the field of foreign investment in China. This change completely proves that the Chinese government is deepening the performance of national treatment of foreign-invested enterprises in China, which will become one of the fundamental basis (together with the Negative List System) of the establishment of Foreign Investment Law of China.

b. Secondly, the application of record-filing system on M&A transactions subject to the Decision will simplify the required application documents and increase the efficiency of the relevant procedure, which reflects that the management of market entry for foreign investment will be gradually changed and improved from prior approval system to the supervision during and after the foreign investment procedure.


Catalogue on Industry Guidelines for Foreign Investment (2017 Revision)

On June 28, 2017, the National Development and Reform Commission and the Ministry of Commerce jointly issued the Catalogue on Industry Guidelines for Foreign Investment (2017 Revision) (hereinafter referred to as the "Catalogue 2017"), and it will take into effect on July 28, 2017.

The main changes between Catalogue 2017 and the previous version in 2015 (“Catalogue 2015”) shall be as follows:

  1. Further expand fields for the foreign investment

With respect to the measures, Catalogue 2017 further reduces the restrictive measures and liberalizes the foreign investment threshold, comparing to Catalogue 2015. Catalogue 2017 includes 63 restrictive measures in total (35 restrictive measures and 28 prohibitive measures), which is 30 measures less than those in Catalogue 2015. Meanwhile, the encouraged measures are kept almost the same, which continue to encourage the foreign investment in fields of advanced manufacturing, high-technology, energy saving and environmental protection, modern service industry and other fields.

With respect to the industries, Catalogue 2017 further increases the level of openness in the service industry, manufacturing, mining and other areas. For service industry, the restriction on the road passenger transportation, foreign tally, credit investigation and rating services, accounting and audit, agricultural products wholesale market access, are cancelled. For manufacturing industry, the restriction on the rail transportation equipment, automotive electronics, new energy automotive batteries, motorcycles, edible oil, fuel ethanol, etc., are cancelled. For the mining industry, the unconventional oil and gas, precious metals, lithium, etc., are cancelled. Meanwhile, in order for the industry restructuring and adjustment, the special medical use formula food, virtual reality (VR) / enhanced reality (AR) equipment, 3D printing equipment, key parts, urban parking facilities, etc., are added to the encouraged measures.

  1. Filing management system replaces the approval system regarding the foreign mergers and acquisitions not involving foreign restrictive measures, except mergers and acquisitions with related parties

Regarding the negative list in the Catalogue 2017, where the domestic company, enterprise or natural person use the overseas company which they legally establish or control, to merge or acquire the domestic company which is related to the final beneficiary, the corresponding projects and establishment or registration changes still need the review and approval by the Chinese authority according to the current regulation (Merger and acquisition with related parties in the "Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors"). Except the rule mentioned above, foreign mergers and acquisitions not involving foreign restrictive measures, including the strategic investment to the listed company in China by foreign investors, will be applied to the filing management system. This change will definitely simplify the procedure of foreign mergers and acquisitions, which will create more flexible arrangements on the foreign investment in order to meet the real request of transactions in the market.

  1. Propose a negative list for the foreign investment

Another main change in the Catalogue 2017 is the adjustment of the structure, which refers to the explicit establishment of special management measures on the market entry of the foreign investment (negative list of foreign investment market entry). In September 2016, the filing management system was regulated to apply to the foreign invested enterprises in which the special management measures are not involved. In October 2016, the National Development and Reform Commission and the Ministry of Commerce issued a public notice where the scope of special management measures for foreign investment market entry shall be implemented in accordance with Catalogue 2015. Based on the requirements on the reform of the negative list model, Catalogue 2017 will integrate part of the original encouraged measures, the restricted and prohibited measures as the negative list of foreign investment market entry, which will be regarded as the legal basis on the model management of application of national treatment before the market entry plus the negative list regarding the foreign investment in China. In principle, the fields out of the negative list shall not apply to the restrictive measures of the foreign investment market entry. The foreign investment projects and enterprises establishment shall apply to the filing management system.

Catalogue 2017 has removed the restrictive measures of the equal treatment between domestic and foreign investment included in Catalogue 2015. The “11 items” in the original restricted and prohibited measures are managed according to the principle of equal treatment between domestic and foreign investment. For instance, the large-scale theme park construction is required to fulfill the project approval procedures. New golf courses and villas are prohibited to develop for both domestic and foreign investment. Gambling industry and sex industry are always prohibited for both domestic and foreign investment.


General Rules of the Civil Law of the People’s Republic of China

On March 15, 2017, the General Rules of the Civil Law of the People's Republic of China (hereinafter the “General Rules of the Civil Law) were promulgated, which will take into effect on October 1, 2017. The General Rules of the Civil Law are regarded as the most basic and framework legislation in the civil field, which has a milestone significance in the history of civil legislation in China. This means that China has taken an important first step on the path of the civil law codification.

The full text of the General Rules of the Civil Law includes a total of 11 chapters and 206 Provisions including supplementary provisions. Comparing to the General Principles of Civil Law with respect to the contents of rules and principles, the General Rules of the Civil Law have established and included many important new requirements, which are worthy of attention.

We hereby select part of most important new rules in the chart below to draw your attention.

Article Remark
Article 9 All civil activities conducted by civil subjects shall be conducive to saving resources and protecting the ecological environment. The environment protection principle is regulated in the civil law system for the first time.
Article 10 Civil disputes shall be resolved in accordance with the law; where there are no relevant provisions prescribed in the law, customs may be followed but public order and good customs shall not be infringed upon. The policies are removed from one of the legal resources and customs are kept as one of the legal resources.
Article 16 Where a foetus is involved in inheritance or acceptance of gifts or other protection of the interests of the foetus, the foetus shall be deemed as having civil rights. However, if the foetus was born dead, the capacity for civil rights shall be deemed as non-existent since the beginning. The regulation regarding the benefit protection of a foetus is confirmed explicitly in the civil law system for the first time.
Article 19 A minor aged 8 is of limited capacity for civil conduct and shall be represented in the performance of civil juristic acts by his/her legal agent or shall obtain the consent or acknowledge by such agent. However, a minor may independently perform any civil juristic act that has a nature of pure benefit without obligation or the performance of which is compatible with his/her age and intelligence thereof. The starting age of the limited capacity for civil conduct is reduced to 8 from 10 according to the society development of China.
Article 76   The legal persons established for the purpose of obtaining profit and distributing to shareholders and other investors are legal persons for profit.

The legal persons for profit include limited liability companies, company limited by shares, and other corporate legal persons.

Four types of legal person are explicitly regulated in the civil law system. Meanwhile, the basic information, structure and requirements of each type of legal person are regulated accordingly.
Article 87   Legal persons established for the purpose of public welfare or other non-profit purposes, which do not distribute earned profit to the investors, founders or members, are non-profit legal persons.

The non-profit legal persons include public institutions, social groups, foundations, and social service agencies.

Article 96   The governmental legal persons, the legal persons of rural collective economic organizations, and the legal persons of basic-level People's self-governing organizations are the special legal persons.
Article 102   The non-incorporated organizations are organizations that have no legal personality but may lawfully engage in civil activities under their own names according to law.

The non-incorporated organizations include individual-owned enterprises, partnerships, and professional services without legal personality.

Article 111  Natural persons' personal information shall be protected by law. Any organizations and individuals who need to obtain personal information of others shall obtain the information according to law and shall ensure the information safety. It is not allowed to illegally collect, use, process or transfer the personal information of others. It is illegal to buy and sell, supply or publish the personal information of others. The protection of individuals’ personal information is explicitly regulated in the civil law system for the first time in order to enhance such protection.
Article 127 The provisions on the protection of data or network virtual properties shall be abided by. The civil law regulates explicitly for the first time that the principle that the data and virtual properties shall be protected.
Article 132 The civil subjects shall not abuse the civil rights and damage the national interests, the social public interests or the legitimate rights and interests of others. The civil law regulates the principle explicitly for the first time that abuse of civil rights shall be prohibited.
Article 188  The limitation of action of an application to a people's court for protection of civil rights are three years, unless otherwise provided by law.

Limitations are calculated from the date on which the right holder knows or ought to be aware of the damage to the rights and the obligor, unless otherwise provided by law.

If it has been more than 20 years since the date of the damage, the People's Court shall not give protection; in exceptional circumstances, the People's Court may extend the limitations in accordance with the application of the right holders.

The normal limitation period of legal action is increased to 3 years (from 2 years).

The Application of the Company Law regarding the Corporate Resolution

On April 12, 2016, the Supreme People’s Court issued the Provisions of the Supreme People’s Court on Issues Relating to Application of Company Law of the People’s Republic of China (IV) (Draft for Public Comments) (“Provisions”).

The Provisions mainly focus on the following contents:

1.    The validity of the board of shareholders' meeting resolution, or the board of directors’ meeting resolution (“Resolution”);
2.    The protection of the shareholders’ right to know;
3.    Shareholders’ right to request the profit distribution;
4.    The preemptive rights when the shares are transferred;
5.    Cases on direct litigation and shareholder representative litigation.

The Provisions include 36 clauses covering five parts mentioned above. Among others, twelve clauses relating to the Resolution will be discussed hereof, which shall be regarded as the core of the Corporate Governance.

1.    Scope of the Plaintiff in a Declaratory Litigation regarding the Invalidation of the Resolution

The litigation regarding the invalidation of a Resolution (“Litigation”) belongs to a declaratory litigation. Theoretically, any party who has direct rights/interest over the Resolution could initiate such Litigation. However, the current applicable Company Law of the People’s Republic of China (“Company Law”) doesn’t make this point clear.

Subject to Article 1 of the Provisions, a shareholder, director or supervisor of a company, a senior executive, an employee or creditors of a company, who have the direct interest over the Resolution could initiate the Litigation based on the regulation in Article 22 of the Company Law.

However, considering that the Resolution is the internal decision of the company, in order for creditors to initiate such Litigation, we believe that Article 1 will apply to the creditor under one potential condition that the Resolution has already been executed as a company’s action which has affected the creditors’ interest.

2.    Declaratory Litigation regarding Absence of a Resolution and Failure to Form a Valid Resolution

2.1    Absence of a Resolution

Subject to Article 4 thereof, where a plaintiff specified in Article 1 of the Provisions has the evidence to prove any of the following facts and requests the court to confirm the absence of the Resolution, such request shall be supported by the court:

a.    The company fails to hold any board of shareholders' meeting, or board of directors’ meeting (“Meeting”) subject to the Company Law; and
b.    The company has held a Meeting but does not arrange the vote for the Resolution.

2.2    Failure to Form a Valid Resolution

Subject to Article 5 thereof, where the company has held a Meeting, but the plaintiff specified in Article 1 of the Provisions has the evidence to prove any of the following facts and requests the court to confirm the failure to form a valid Resolution, such request shall be supported by the court:

a.    Quorum or voting right held by shareholders fails to be in compliance with the articles of association of the company;
b.    Affirmative votes for the Resolution fail to be in compliance with the Company Law or the articles of association of the company;
c.    Certain signatures on the Resolution are forged and not recognized by the shareholders or directors whose signatures are forged;
d.    Contents of the Resolution are beyond the authority of board of shareholders or board of directors.

For Fact c) mentioned above, there is another official opinion among the legislators that certain signatures on the Resolution are forged and not recognized by the shareholders or directors whose signatures are forged, and meanwhile, the number of affirmative votes after deducting the forged ones fails to be in compliance with Company Law or the articles of association of the company.

Theoretically, we believe that the latter opinion is more proper than the former one because the Resolution is an internal document related to Corporate Governance. Therefore, the judicial intervention regarding the Resolution shall be limited. After erasing the forged signatures, if the Resolution could still be passed, it shall be valid. Otherwise, it would ultimately appear as a punishment and as an excessive interference to the company´s autonomy.

3.    Cause of Invalidation of the Resolution

Subject to Article 6 thereof, the Resolution shall be deemed invalid under any of the following circumstances:

a.    Certain shareholders abuse their shareholders' rights to pass the Resolution, which causes damages to the company or other shareholders;
b.    The Resolution allows the excessive distribution of profits of the company or major improper affiliated transactions, which causes damages to the creditors of the company; and
c.    Other circumstances in which the contents of the Resolution violate compulsory provisions specified in Chinese laws and administrative regulations.

We believe that such regulation will better prevent the majority shareholder or the actual controlling party of the company from abusing their powers to control the company and cause damages to the minority shareholders or creditors of the company.

4.    Cause of Revocation of the Resolution

Subject to Article 22 of the Company Law, where the “convening procedures” and “voting method” of the Meeting violate the provisions of Chinese laws and administrative regulations or the articles of association of the company, the shareholders may apply to the court for the revocation of the Resolution made during such Meeting. However, the definition of the “convening procedures” and “voting method” remains obscure.

Article 7 of the Provisions clarifies such ambiguous description of "convening procedures" and "voting methods" in Article 22 of the Company Law as follows:

a.    A notice of the company’s Meeting;
b.    Shareholding registration;
c.    Determination of proposal and agenda of the Meeting;
d.    Chairing, voting, counting, announcement of voting results;
e.    Resolution formation, Meeting Minutes and the signing matter.

Such clarification will definitely provide a clear guidance for the company to improve the rules of procedure in order to facilitate the Meeting and make it more efficient.

5.    Preservation of Conduct regarding Prohibiting the Implementation of the Resolution

Subject to Article 10 of the Provisions, where the implementation of the Resolution cannot resume the original status, or will cause irreparable damages to the legitimate rights and interests of involved parties or interested parties, the implementation of the relevant Resolution may be prohibited for the implementation as applied by the plaintiff.

In order to take measures on the preservation of conduct as specified in the paragraph mentioned above, the court may order the plaintiff to provide corresponding guarantee as applied by the company or ex officio. The implementation of the Resolution shall be prohibited if the plaintiff has provided such guarantee.

After investigation, where the court holds that the plaintiff's claim is filed in order to maliciously intervene with or defer the implementation of the Resolution, the claim shall be rejected.

This clause clearly shows the clear tendency to protect the benefit of the minority shareholders of the company and other relevant third parties, in particular, the creditors’ legitimate interest.

Comments:

Overall, the Provisions, to a large extent, clarify the judicial application of the principles and rules regarding corporate Resolution(s) specified in the Company Law, providing necessary legal basis for the corresponding judicial assessment.

However, there still remain unclear issues in the Provisions. Some definitions are still ambiguous. For instance, regarding Article 6 of the Provisions (Part 3 hereof), what is the standard of “excessive distribution of profits” and “major improper affiliated transactions”? Which circumstances would cause hazard to the creditors of the company?

It is suggested that the legislator shall further clarify those queries. On one hand, it will be easier for the shareholders or creditors to balance the cost to initiate the corresponding litigation. On the other hand, it will prevent the shareholders or creditors from obstructing the execution of the corresponding Resolution through lawsuit abuse.


1 Article 22 (1) of the Company Law: A resolution passed by the board of shareholders or a shareholders' meeting or the board of directors which violates the provisions of laws and administrative regulations shall be void.


Analyses on Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Property Law of the PRC (I)

The Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Property Law of the PRC (I) (the “Interpretation”) was promulgated on February 22, 2016, and came into effect on March 1, 2016.

1. Registration of Immovable Property and Confirmation of the Ownership of Property Rights

1.1 The Filing of Immovable Property Disputes

After the Property Law came into force on October 1 2007, many judges held the opinion that the records in the immovable register (the “Register”) is the only basis to determine the ownership of immovable property. Therefore, if disputes arise due to the legally registered immovable property, parties concerned shall firstly apply for cancellation or alteration registration. Subject to the PRC Administrative Law, the registration of immovable property is an administrative act. As a result, parties concerned shall firstly request to cancel or alter the controversial registration through the administrative remedy, which makes the legal measure inefficient.

In order to improve this situation, the Interpretation formulates that the civil actions brought by the parties concerned for disputes due to the ownership of immoveable property right, or due to the basis of registration of immovable property such as sale, donation or mortgage, shall be accepted by the court in accordance with the law, except that the parties concerned have applied for the administrative proceedings to solve all the aforesaid civil disputes and the court has heard the disputes together.

1.2 The Confirmation of the Ownership of the Controversial Property Rights

Subject to Article 2 of the Interpretation, if the parties concerned have the evidence to prove that the Register does not match the real status and they are the true owners of these immovable property, such requests for confirmation of their property rights shall be supported.

This provision has clearly clarified the principle to determine the ownership of the immovable property. Namely, when dealing with such confirmation of property rights, the judges shall investigate and consider the substantial element instead of prima facie evidence.

1.3 The Legal Effect of Prior Notice Registration

Comparing to the Property Law, Article 4 of the Interpretation further formulates the protection measures for creditors regarding the prior notice registration.

Among others, the key measure is that without the consent of the applicant of prior notice registration, the transfer of immovable property or the establishment of other property rights such as construction land use right, easement or mortgage, shall be regarded as invalid.

2. The Judicial Protection of the Preemptive Right of the Co-owner by Shares

2.1 The Exception of Exercising the Preemptive Right

Subject to Article 9 and Article 13 of the Interpretation, if one co-owner by shares intends to transfer his shares, the other co-owner(s) could not exercise the preemptive right to purchase those shares under the following circumstances, unless it is otherwise agreed by the co-owners by shares:

a. Changes of holders of co-owned shares due to inheritance, bequests, etc.;
b. Transfer of co-owned shares between the co-owners by shares instead of the transfer to the external party.

2.2 The Protection of the Preemptive Right

In order to better protect the preemptive right, Article 11 of the Interpretation clearly stipulates the specific period for exercising the preemptive right.

The period for exercising preemptive right to purchase the shares shall comply with the agreement between co-owners by shares; in the absence of such agreement or if the agreement is not explicit, it shall be determined according to the following rules:

a. If the period for exercising such right is stated in the notice of the assignor to the other co-owners by shares with equal conditions, such period shall prevail;
b. If the period for exercising such right is not stated in the notice, or the period stated is less than 15 days after the notice is served, 15 days shall apply;
c. If the assignor fails to issue a notice, it shall be 15 days as of when the other co-owners by shares know or should know the same conditions finally determined; and
d. If the assignor fails to issue a notice, and cannot confirm whether the other co-owners by shares know or should know the same conditions finally determined, it shall apply to six months after the date of transfer of ownership of co-owned shares.

2.3 Definition of “Equal Conditions”

Subject to Property Law, a co-owner by shares may transfer its share over the jointly owned immovable or movable property to external parties, and the other co-owners by shares shall have the pre-emptive right to purchase those shares under equal conditions. However, there is no provision thereof stipulating explicitly the definition of equal conditions in the Property Law.

According to Article 10 of the Interpretation, the term of "equal conditions" shall be determined upon comprehensive consideration of factors such as transfer price, payment method and duration of the co-owned shares.

Meanwhile, Article 12 (2) also formulates that if the other co-owners request substantive changes such as decrease of transfer price, increase of the burden of the assignor, such request shall not be supported by the court.

2.4 The Principle of Proportionality under the Concurrence of Preemptive Right

According to Article 14 of the Interpretation, if two or more co-owners by shares requesting to exercise their preemptive rights to purchase the shares fail to reach an agreement after the negotiation but continue to request to exercise their preemptive rights based on their respective proportion of shares for the share transfer, such request shall be supported by the court.

3. Bona Fide Purchase

3.1 The Identification of Bona Fide Purchaser

Subject to Article 15 of the Interpretation, when being assigned immovable property or moveable property, if the assignee does not know that the assignor has no right to dispose of such property or is in gross negligence, the assignee shall be regarded as the bona fide purchaser.

Therefore, the application precondition of bona fide depends on whether the assignor has the authorized disposition right, no matter the transfer contract is valid or not.

3.2 How to Identify the Assignee does not Constitute Bona Fide

a. For Immovable Property

According to Article 16 of the Interpretation, any of the following circumstances shall be deemed that the assignee of an immovable property knows that the assignor has no authorized disposition right:

a) There is the valid dissidence registration in the Register;
b) It fails to obtain the consent from the right holder of prior notice registration within the valid period of such registration;
c) Relevant matters have been recorded in the Register that judicial institutions or administrative institutions have ruled or decided to seize or restrict immoveable property in other forms in accordance with the law;
d) The assignee knows the subject of rights recorded in the Register is wrong; and
e) The assignee knows that other parties have enjoyed immovable property right in accordance with the law.

If the real holder of prior notice registration has the evidence to prove that the assignee of the immovable property should know that the assignor has no authorized disposition right, the assignee shall be regarded as guilty of gross negligence.

b. For Movable Property

Subject to Article 17 of the Interpretation, when the assignee receives a moveable property, if the object, place or timing of the transaction is not in conformity with the transaction practice, the assignee shall be regarded as guilty of gross negligence.

c. Reasonable Price

If the transaction price of immovable or movable property is not reasonable, the assignee shall not constitute bona fide.

Subject to Article 19 of the Interpretation, the “reasonable price” shall be justified based on factors such as the nature and amount of the subject matter transferred and payment method with reference to the market price and transaction practice at the transaction place at the time of transfer.

3.3 The Timing to Identify Bona Fide

According to Article 18 of the Interpretation, “the timing to identify bona fide” refers to the time when the transfer of immovable property right is registered in public registry or the moveable property is delivered.

3.4 The Exception of the Application of Bona Fide

Subject to Article 21 of the Interpretation, under any circumstance as follows, the people's courts shall not support the assignee's claim for obtaining the property ownership based on bona fide:

a. The transfer contract is regarded as invalid due to the breach of Article 52 of the Contract Law; and
b. The transfer contract is cancelled due to statutory circumstances such as fraud, coercion or taking advantage of others' difficulties by the assignee.

This provision embodies the value that stipulation would never protect illegal transactions.

Comments:

In order to specify the general provisions of the Property Law and make it clear for the legal practice, the Interpretation formulates 22 articles in total. And these articles cover certain important issues established in the Property Law, including the registration of immovable property, co-ownership by shares and bona fide purchase, etc. Therefore, the Interpretation will provide a more specific guidance for the civil practice of the court for property right related disputes.


[1] In any one of the following situations, a contract shall be identified as invalid:
(1) one party concludes the contract through the use of fraudulent or coercive methods, causing detriment to the interests of the State;
(2) the contract involves a malicious conspiracy which is detrimental to the interests of the State, a collective or a third party;
(3) illegal intentions are concealed beneath an appearance of legality;
(4) there is detriment to social and public interests; or
(5) the mandatory provisions of laws and administrative regulations are violated.


Reforming on Registered Capital Registration System of Foreign Invested Enterprise

On October 28, 2015, the Ministry of Commerce of People’s Republic of China issued the Decision of the Ministry of Commerce on Revising Certain Regulations and Normative Documents (“Decision”), which took effect on the same day. The Decision aims to deepen the reform of foreign investment enterprises (“FIE”) in respect of registered capital registration system and the transformation of government functions, move forward the facilitation of the business registration system, effectively optimize the business environment, and further stimulate the vitality of market.

According to the Decision, the main changes are listed as follows:

1.    Modifications regarding the Establishment and Annual Inspection of FIE

The Decision abolishes the requirements and restrictions on the minimum registered capital, the time limit of capital contribution, the percentage of first-time capital contribution, percentage of contribution by cash, and further simplifies the procedure of the establishment and the annual joint inspection, and the following kinds of enterprises shall be applicable:

a.    Foreign Investment Joint Stock Companies;
b.    Foreign Invested Venture Capital Enterprises; and
c.    Foreign-Invested Commercial Enterprises.

2.    Merger and Division of FIE

The Decision abolishes the following requirements:

a.    Any merger and division of foreign-invested enterprises shall be not allowed until the foreign investors have paid up their capital contribution or provided cooperation conditions pursuant to the provisions of the company's contract and articles of association and actually commenced production and operation; and
b.    Any merger or division of the FIE shall submit the capital verification reports to relevant approval authorities.

3.    Reinvestment of the FIE

The Decision abolishes the following requirements:

a.    Before making investments in China, the FIE shall pay up the registered capital;
b.    When the FIE reinvests in China, its accumulated investment shall not exceed 50% of its net assets; and
c.    Where the FIE reinvests in any encouraged or permitted sector to establish any new entity, the FIE will not be required to submit the capital verification reports, which demonstrates that the registered capital has been paid up in full amount.

4.    Equity Contribution of the FIE

The Decision abolishes the following requirements:

a.    The equity shall not be used for the capital contribution under the circumstances that the registered capital of the FIE has not been paid up and the FIE fails to participate or pass the joint annual inspection of the previous year;
b.    The total amount of equity contribution by all shareholders of the FIE and other non-monetary contributions shall not exceed 70% of the registered capital of the invested enterprise; and
c.    Where the FIE intends to make equity contribution, it shall submit relevant certificate to the approval authority in order to prove it has passed the joint annual inspection.

5.    Minimum Registered Capital Reform regarding Several Industries

The Decision abolishes the requirements on the minimum registered capital of the FIEs in the following industries:

a.    Lease sector;
b.    International freight forwarding sector;
c.    Refined oil market;
d.    Contract work on outbound construction projects; and
e.    Logistics sector.

Comments:

The Decision further loosens the strict requirement on FIEs especially regarding the registered capital registration system, which is consistent with the reform of registered capital registration system for domestic enterprises. In a word, the capital registration system for both FIEs and domestic enterprises are almost unified.

However, the Decision still couldn’t sort out relevant regulations thoroughly. For instance, regarding the investment FIE setup, although the Decision abrogated the requirements on minimum registered capital of USD 30 million, there are still provisions concerning such minimum registered capital exiting in Provisions on the Establishment of Investment Companies by Foreign Investors.


Opinions of the State Council on the Implementation of the Market Access Negative List System

On October 02, 2015, State Council of People’s Republic of China (the "China") released Opinions of the State Council on the Implementation of the Market Access Negative List (the “Negative List”) System (the "Opinions"). The Draft will come into effect as of December 1, 2015 and shall remain in force till December 31, 2017. The Draft, once taken into effect, will affirm the equal basis for all the market entities to invest in the different industries, sectors and businesses not included in the Negative List, which is comprehensively used by other countries to administrate domestic market, administrating state-owned enterprises, non-state-owned enterprises, domestic enterprises and foreign invested enterprises on an equal basis. The implementation of the market access negative list system is a significant change of approach and framework regarding administration of Chinese government from government-led administration to a looser resident self-governance.

1.    Background

The world's second-largest economy, which grew 7 percent in the first half from a year earlier, is experiencing its slowest economic expansion during the last 25 years in 2015. Therefore, nowadays, China has made its decision to slacken restrictions on its manufacturing and service sectors as it tries to improve inefficient state-owned firms by adopting market-friendly policies to stave off slowing growth. The concept of the Negative List with respect to foreign investment was introduced to China in bilateral investment treaty negotiations with the United States. The market access negative list system (the “Negative List”) establishes that any administration of the authorities contrary to the national treatment and most favored nation treatment for the foreign investments, shall be clearly included in the Negative List, and the foreign investors will be entitled the same market access right.

2.    Overview

a)    Classification

Pursuant to Article 6, the Negative List, including both the prohibited access list and the restricted access list, is applicable to the investments, operations and other market access activities of various market entities via initial investment, expansion of investment as well as merger and acquisition, etc.

The Opinion has the clear access requirements for both the prohibited access list and the restricted access list. As for the fields included in the prohibited access list, the entities are prohibited to invest in and the authorities shall not examine or approve the market access or handle the relevant procedure. As for the fields included in the restricted access list, the entities may submit an application for the authorities to decide whether to approve the market access.

Further, as for the fields not included in the Negative List, all the entities may enter the market on an equal basis in accordance with the law.

b)    Conditions for Application

Pursuant to Article 7, it clarifies the conditions for determining the prohibition and restriction for operations and other market access activities of various market entities. The authority may utilize the qualification of market entities, shareholding ratio, scope of businesses, status of operation, business mode, regional layout, land development and protection and other relevant administrative measures in accordance with the law, regulations and decisions of the State Council as the market access qualification in some specific fields.

We notice that the Opinion provides a standard to distinguish the prohibited and restricted fields. The national safety, the national layout of major productive powers, development of strategic resources, major public interests will be majorly taken into consideration for the prohibited and restricted field.

c)    Major Types of Negative List and Their Application

Pursuant to Article 8, there are two main negative lists, including the market access negative list and the foreign investment negative list. The market access negative list applies to both the domestic and foreign investors and constitutes the uniform requirements of market access for various market entities. Meanwhile, the foreign investment negative list only applies to the investments by foreign investors in China and constitutes the special management measure for market access of foreign investment.

In Article 8, the foreign investment negative list will be formulated with the subject of diplomatic talks concerning foreign investment taken into comprehensive consideration, with the relevant rules to be separately prescribed by the State.

We understand that Article 8 is a reserve of Chinese government for future negotiation with other countries, especially with USA. When the market access negative list applies to the foreign investors, the investments by the foreign investors also has to be ruled a special foreign investment negative list, which means that if some conflicts exist between such two lists, the foreign investment negative list shall apply. In a way, it is a drawback for the market access negative list system and it has not substantially realized the national treatment for all entities.

d)    Formulation, Implementation and Adjustment Procedure

Pursuant to Article 10 and 11, the Negative List will be uniformly formulated and announced by the State Council and will follow the principles of carrying out pilot programs and gradual expansion, from December 1, 2015 to December 31, 2017. The negative list system will be launched on a pilot basis in some areas to accumulate experience and gradually improve and the unified nationwide market access negative list system will be formally enforced from 2018.

National Development and Reform Commission and Ministry of Commerce will be authorized by State Council to lead in the establishment of cross-sectorial deliberation and coordination mechanism, which will be responsible for the routine work in implementing the negative list system.

We notice that the Opinion has not provided a clear timeline for implementation of the Negative List and it only provides a general principle of carrying out pilot programs and gradual expansion. We understand that this probably is another element for Chinese government to negotiate with other countries.

e)    Conclusion

The Opinion has great significance in releasing the decisive role of the market in allocating resources and further developing the role of government, and in establishing a commercial environment based on the rule of law and building a new open-style economic system. Meanwhile, the final implementation of the Opinion is still subject to some uncertainties regarding the foreign investment negative list and the non-existence of timeline of implementation.


Reply of the Supreme People’s Court on the Request of the Shanghai High People’s Court for Instructions on the Cases Involving the Judicial Review of Arbitration Awards Made by the CIETAC and its Former Sub-Commissions

On July 15, 2015, the Supreme People’s Court has issued the Reply on the Request of the Shanghai High People's Court for Instructions on the Cases Involving the Judicial Review of Arbitration Awards Made by the CIETAC and its Former Sub-Commissions (the "Reply"). The Reply, once taking into effect dated on July 17, 2015, will solve the disputes over the issues regarding the validity of relevant arbitration awards and the right to accept arbitration cases, the jurisdiction over arbitration cases and the enforcement of arbitration awards of several arbitration agencies.

Background

A dispute between the central Beijing commission of the China International Economic and Trade Arbitration Commission ("CIETAC") and its Shanghai sub-commissions and South China sub-commissions has arisen as the two sub-commissions refused to comply with the new arbitration rules issued by CIETAC that took into effect on May 1, 2012. As a result, on August 1, 2012, the central Beijing commission suspended the authority of arbitration to the Shanghai and South China sub-commissions. Correspondingly, the former South China sub-commission changed its name to the South China International Economic and Trade Arbitration Commission (“SCCIETAC”) and the former Shanghai sub-commission changed its name to the Shanghai International Economic and Trade Arbitration Commission (“SHIAC”).

As a result, after names were changed (“Rename Date”), SCCIETAC and SHIAC became independent from CIETAC. However, it also caused several disputes over the issues such as the validity of relevant arbitration awards and the right to accept arbitration cases, etc.

Reply of the Supreme People’s Court

In order to solve the disputes in practice, the Supreme People’s Court confirmed in the reply as follows:

(1)    Before the Rename Date, where the parties agree to submit their disputes to "CIETAC South China Sub-Commission" or "CIETAC Shanghai Sub-Commission" for arbitration, SCCIETAC or SHIAC shall have jurisdiction over these arbitration cases. Where any party of the dispute requests the people's court to determine the arbitration agreement to be invalid or applies for the revocation or non-enforcement of the arbitration award on the ground that SCCIETAC or SHIAC has no right to arbitrate, the people's court shall reject such request.

(2)    After the Rename Date, where the parties agree to submit their disputes to "CIETAC South China Sub-Commission" or "CIETAC Shanghai Sub-Commission" for arbitration, CIETAC shall have jurisdiction over these arbitration cases. However, if one party applies to SCCIETAC or SHIAC for the arbitration and the respondent raises no objection to the jurisdiction of the SCCIETAC or SHIAC, and after an arbitration award is made, any party of the dispute applies for the revocation or non-enforcement of the arbitration award on the ground that SCCIETAC or SHIAC has no right to arbitrate, the people's court shall reject such application.

(3)    After the Reply takes into effect, where the parties sign an arbitration agreement and agree to submit their disputes to "CIETAC South China Sub-Commission" or "CIETAC Shanghai Sub-Commission" for arbitration, CIETAC shall have the jurisdiction over these arbitration cases.

(4)    Where the applicant in an arbitration case requests the arbitration committee to decide the jurisdiction over the case, and after the arbitration committee determines that the arbitration agreement is valid and it has jurisdiction over the case, the respondent files a lawsuit with the people's court before the first hearing, applying for confirming the validity of the arbitration agreement, the people's court shall accept the lawsuit to make a judgment. Where the applicant or the arbitration committee claims that the people's court shall not accept the lawsuit filed by the respondent, the people's court shall reject such claim.

(5)    Where, before this Reply takes into effect, an arbitration case that shall not be accepted by CIETAC, SCCIETAC or SHIAC according to Article 1 of the Reply has been accepted and the arbitration committee has made the award, such award is effective and binding.

(6)    Where, before this Reply takes into effect, CIETAC has accepted the same arbitration case with SCCIETAC or SHIAC, the arbitration committee that first accepted the case shall have jurisdiction over the case.

Comment

The Reply has clarified the queries during the arbitration practice among different arbitration commissions. As a result, the contradiction of jurisdiction over cases among arbitration commissions is solved to some extent and the status of SCCIETAC and SHIAC has been confirmed in a formal way.