Doing Business in China
– recent developments
Vivienne Bath
Senior Lecturer and Director of the
Centre for Asian and Pacific Law
Legislative change
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Proliferation of new legislation post-WTO
accession
Significant new legislative developments in
the corporate and business sector over the
last year
Themes: modernisation of corporate
legislation; introduction of bankruptcy
regime; possible step back from totally
open-door policy for foreign investment
Legislation
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Changes to Company Law and Securities Law
2005
New Bankruptcy Law 2006
Changes to mergers and acquisitions regime
2006
Draft anti-monopoly law – 2007?
Amendments to Criminal Law 2006
Proposed changes to Trademark Law, Patent
Law, draft Property Law, draft Labour Contract
Law
Company Law
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First effective 1 July, 1994
Most recently amended 2005, effective 1
January 2006
Deals with
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Limited liability companies
Joint stock companies (companies limited by
shares)
Foreign investment enterprises, except to
extent FIE laws otherwise provide
Limited liability companies –
changes to capitalisation
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Registered capital, not shares
Minimum amount RMB30,000 ($5,000)
May be paid over 2 years (5 for an investment
company)
Must pay in 20% or statutory minimum amount
as initial contribution
May be paid in cash (at least 30%), in kind, in
IPR, land use rights or other non-monetary
contributions
One shareholder companies now possible
Flexibility to nominate legal representative
Implications for Foreign Investors
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Limited liability companies for Chinese
investors only
Now referred to as “foreign invested
companies” (FICs), with numerous subclassifications
Single shareholder rules apply to WFOEs
with one shareholder
Provisions relating to capital contributions
apply to FICs
Implications for Foreign Investors
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Previous limit on investing more than 50%
of assets removed
Requirement for FICs to go through
special procedure to invest in Chinese
companies also removed
Shareholder rights
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Duties of shareholders (Art 20)
Controlling shareholder and officers (Art 21)
Resolution of shareholders or directors that
violates a law or administrative regulation – null
and void (Art 22)
Resolution at meeting improperly convened
under law, regulation or AA – shareholder may
apply to court to revoke it (Art 22)
Duties of officers
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Art 147: restrictions on acting as a
director, supervisor or senior manager
Art 148: duty of fidelity and diligence to
company
Art 149: acts by director or senior
manager inconsistent with the obligation
of fidelity – income belongs to the
company
Duties of officers
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Art 150 – obligation of Ds, Ss and senior
managers to compensate company for loss to
the company due to breach of laws, regulations
or AA in carrying out duties
Art 151 – right of shareholders to require D, S or
senior manager to attend meeting and answer
questions
Art 152 – right of shareholders to take action in
case of Art 150 infringement
Art 153 – right of shareholders to bring lawsuit
for action infringing shareholders’ interests
Securities Law
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Establishes sponsor system for public
offerings
Requires deposit of investor funds into
separate bank accounts
Contemplates establishment of State fund
to protect investors and allow for
compensation
Increased penalties for illegal acts – fraud,
insider trading
Securities Market
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Gradual sell-off of State shares
Merger of A and B share markets?
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QFIIs and their role in the A share market
Strategic investments in A shares
Expansion of Chinese companies and
interests outside China
Bankruptcy Law - Issues
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What should the law cover?
Role of government – court run process
Financial institutions
Role of the administrator
Rehabilitation
Priorities in distribution of assets
Cross-border bankruptcies
Enterprise Bankruptcy Law
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Comes into effect 1 June 2007
Applies to state-owned enterprises, private
companies, financial institutions and FIEs
Special section on financial institutions
Law applicable “by reference” to
organisations other than enterprise legal
persons
Grounds for Bankruptcy
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Entity is unable to pay debts when due
and does not have sufficient assets to pay
debts or clearly demonstrates that it lacks
the ability to meet payments
Parties
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Debtor may file a petition with People’s
Court for rehabilitation, composition or
bankruptcy liquidation
Creditor may file if debtor becomes
insolvent
Person with legal responsibility for
liquidating an enterprise legal person
which cannot pay its debts must file
Bankruptcy Law
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Options: declare bankruptcy; undergo
reorganisation (rehabilitation); reach
settlement with creditors (composition)
Participation of courts required
Position of secured creditors preserved
Priority of payments: liquidation debts,
payment to employees (wages and social
security benefits); social insurance and
taxes; general creditors
Bankruptcy Law
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Liquidators/administrators to be appointed by
court: government officials; lawyers,
accountants and insolvency specialists – may be
individual or a firm
Creditors’ meeting (creditors who have
submitted claims) – verifies claims; supervises
administrator; appoints members of creditors’
committee; adopt scheme for realization and
distribution of bankruptcy property
Bankruptcy Law
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Creditors’ committee: supervises
management of property; distribution;
convenes creditors’ meetings
Penalties on senior management for
mismanagement
‘Policy bankruptcies” for approximately
2000 failing SOEs possible in next year
Rehabilitation
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Debtor (or 10% of shareholders) or creditor may
file with court a request for rehabilitation
Court may order rehabilitation
During rehabilitation period, debtor manages
property under supervision of administrator or
administrator manages property
Exercise of security prohibited; no distribution of
profits; no assignment of equity
Rehabilitation
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Court can order termination and
bankruptcy if continued deterioration;
fraud; debtor stops administrator from
acting
Rehabilitation plan must be approved by
creditors, employees, etc.
At conclusion, debtor no liability for debts
discharged under the rehabilitation plan
Composition
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Debtor may file petition for composition at
any time, including after acceptance of
bankruptcy petition
Must submit composition agreement
Must be approved by half of creditors with
not less than 2/3rds of claims
No effect on secured creditors
If composition agreement not satisfied,
court will order bankruptcy
Cross-border bankruptcy provisions
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Judgment of People’s Court has effect in
relation to assets of debtor outside China
Judgment of foreign court affecting assets
inside China recognised and enforced
pursuant to treaties or principles of
reciprocity
If no basic principles of PRC law, national
sovereignty, security, interests of general
public or creditors within PRC undermined
Draft Anti-monopoly Law
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Applies to: monopolistic behaviour within
China; monopolistic behaviour outside
China that has “eliminative or restrictive”
effects on competition in the Chinese
domestic market
Prohibits monopoly agreements
Prohibits resale price fixing
Draft Anti-monopoly Law
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Prohibits collusion on bids
Prohibited agreements void ab initio
Allows some defences to monopoly
agreements and resale price fixing
Draft Anti-monopoly Law
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Prohibits abuse of dominant market
position to eliminate or restrict
competition
Abuse includes: monopoly pricing;
predatory pricing; refusing to trade;
mandatory or exclusive trading; tying;
differentiated treatment without valid
reasons.
Draft Anti-monopoly Law
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Ability of Anti-monopoly Authority to
prohibit or impose conditions on a
“concentration” (merger or acquisition) if
may have effect of excluding competition
Notification requirement if
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All parties have worldwide turnover exceeding
RMB12billion
One party has China turnover exceeding
RMB800million
Draft Anti-Monopoly Law
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Prohibits abuse of administrative powers
by administrative organs or public
organizations to
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Require enterprises and individuals to deal in,
or purchase or use products of designated
entities
Hinder free circulation and adequate
competition in commodities
Restrict participation in bidding
Draft Anti-monopoly Law
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Restrict investment or establishment of
branches
Compel undertaking to engage in
monopolistic conduct
Create rules with content which eliminates or
restricts competition
Draft Anti-monopoly Law
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Anti-monopoly Commission under State Council
– policy, supervision of enforcement authority
and harmonisation of handling of major cases
Anti-monopoly Law Enforcement Authority under
State Council – guidelines; investigations;
mergers and concentrations
Protection of whistle-blowers - confidentiality
Draft Anti-monopoly Law
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Liabilities
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Fines (1%-10% of previous year’s turnover or up to
RMB2million if agreement not implemented)
Confiscation of illegal gains
Order to cease offending act
Order to cease concentration or sell assets
Criminal liability if relevant
Exceptions: law does not apply to agricultural
producers and farmers’ associations
Draft Anti-monopoly Law
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Issues and complaints
Unclear definitions of “dominance”, “market share” and
“unfair prices”
Automatic assumption of dominance if company holds a
set share
Local nexus for “concentrations” (RMB800million) too
low (international is RMB12billion)
Fines on turnover do not specify whether turnover is
Chinese or international
Not clear who would investigate or punish misbehaviour
by administrative bodies
Not clear what power local investigating bodies will have
or whether can institute actions on their own.
Mergers and Acquisitions
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M&A with domestic enterprises Provisions on
the Acquisition of Domestic Enterprises by
Foreign Investors effective 8 September 2006
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Replaces 2003 Tentative Provisions
Deals with foreign investor doing M&A deal
with existing Chinese (not state-owned
company)
Emphasis on control over acquisitions by
Chinese-owned overseas enterprises
Mergers and Acquisitions
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M&A means:
Purchase of an equity interest in a domestic
enterprise (not an FIE)
 Subscribing to the increased registered capital of a
domestic enterprise
 Establishing an FIE which will acquire the assets of
a domestic enterprise and use assets for
operations
 Purchasing assets of a domestic enterprise and
using them as investment to establish an FIE to
operate the assets
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Mergers and Acquisitions
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Resulting entity must be an FIE
 Entitled to FIE benefits only if foreign investor
holds 25% or more
 If foreign entity is Chinese owned, only
entitled to FIE benefits if foreign entity
contributes an extra amount equal to 25% of
more of capital
Provision for independent appraisal –
particularly if parties affiliated
MOFCOM review in certain circumstances
Mergers and Acquisitions
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Necessary to provide employee allocation
plan to make clear what will happen to
employees
Equity purchase agreement/asset
purchase agreement to be governed by
Chinese law
Provisions provide for share swaps
Special provisions on Chinese-owned
special purpose companies
Mergers and Acquisitions
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Must submit report to MOFCOM if project meets
conditions relating to annual revenue (where Chinese
party revenue exceeds RMB1.5 billion), has 10
enterprises in China, one party has market share in
China of more than 20% or transaction would enable
relevant party to hold market share in China of 25%
May in any event be required to submit a report and
MOFCOM or industry associations and domestic
competitions can request hearing on request of domestic
competitor if MOFCOM believes project involves
significant market shares or important elements affecting
market competition
Requirements also in relation to offshore mergers
Takeover Provisions
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Measures for the Administration of the
Acquisition of Listed Companies
Allow for partial bids
Government approval required for takeovers by
foreigners, and where state industrial policies,
state-owned shares etc involved
Limits on purchasers
CSRC to set up a takeover committee to review
proposed takeovers
Disclosure requirements (from 5% holding)
Draft Labour Contract Law
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Requires severance pay when contracts not
renewed – not just on termination
One-time compensation equal to annual salary
to enforce non-competition agreement (for
maximum of 2 years)
Increased employee participation in drafting of
employers rules and regulations affecting
employees
Increases involvement of unions – must be
advised on termination prior to event,
regardless of cause
Requirement of collective contracts
Summary
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Increasingly willingness of Chinese legislators to
legislate with extraterritorial effect
Proliferation of legislation – difficult to absorb;
difficult to enforce
Increase in number of regulatory bodies? (e.g..,
Anti-Monopoly?)
Concern about issues arising from modernisation
– protection of labour; protection of state
assets; foreign domination of Chinese markets
Backlash against foreign investment?