Doing Business in China – recent developments Vivienne Bath Senior Lecturer and Director of the...

Doing Business in China Doing Business in China – recent developments– recent developments

Vivienne BathVivienne Bath

Senior Lecturer and Director of the Senior Lecturer and Director of the Centre for Asian and Pacific LawCentre for Asian and Pacific Law

Legislative changeLegislative change

Proliferation of new legislation post-Proliferation of new legislation post-WTO accessionWTO accession

Significant new legislative Significant new legislative developments in the corporate and developments in the corporate and business sector over the last yearbusiness sector over the last year

Themes: modernisation of corporate Themes: modernisation of corporate legislation; introduction of legislation; introduction of bankruptcy regime; possible step bankruptcy regime; possible step back from totally open-door policy for back from totally open-door policy for foreign investmentforeign investment

LegislationLegislation

Changes to Company Law and Securities Changes to Company Law and Securities Law 2005Law 2005

New Bankruptcy Law 2006New Bankruptcy Law 2006 Changes to mergers and acquisitions Changes to mergers and acquisitions

regime 2006regime 2006 Draft anti-monopoly law – 2007?Draft anti-monopoly law – 2007? Amendments to Criminal Law 2006Amendments to Criminal Law 2006 Proposed changes to Trademark Law, Proposed changes to Trademark Law,

Patent Law, draft Property Law, draft Patent Law, draft Property Law, draft Labour Contract LawLabour Contract Law

Company LawCompany Law

First effective 1 July, 1994First effective 1 July, 1994 Most recently amended 2005, Most recently amended 2005,

effective 1 January 2006effective 1 January 2006 Deals withDeals with

Limited liability companiesLimited liability companies Joint stock companies (companies Joint stock companies (companies

limited by shares)limited by shares) Foreign investment enterprises, except Foreign investment enterprises, except

to extent FIE laws otherwise provideto extent FIE laws otherwise provide

Limited liability companies – Limited liability companies – changes to capitalisationchanges to capitalisation

Registered capital, not sharesRegistered capital, not shares Minimum amount RMB30,000 ($5,000)Minimum amount RMB30,000 ($5,000) May be paid over 2 years (5 for an May be paid over 2 years (5 for an

investment company)investment company) Must pay in 20% or statutory minimum Must pay in 20% or statutory minimum

amount as initial contributionamount as initial contribution May be paid in cash (at least 30%), in kind, May be paid in cash (at least 30%), in kind,

in IPR, land use rights or other non-in IPR, land use rights or other non-monetary contributionsmonetary contributions

One shareholder companies now possibleOne shareholder companies now possible Flexibility to nominate legal representativeFlexibility to nominate legal representative

Implications for Foreign InvestorsImplications for Foreign Investors

Limited liability companies for Limited liability companies for Chinese investors onlyChinese investors only

Now referred to as “foreign invested Now referred to as “foreign invested companies” (FICs), with numerous companies” (FICs), with numerous sub-classificationssub-classifications

Single shareholder rules apply to Single shareholder rules apply to WFOEs with one shareholderWFOEs with one shareholder

Provisions relating to capital Provisions relating to capital contributions apply to FICscontributions apply to FICs

Implications for Foreign InvestorsImplications for Foreign Investors

Previous limit on investing more than Previous limit on investing more than 50% of assets removed50% of assets removed

Requirement for FICs to go through Requirement for FICs to go through special procedure to invest in special procedure to invest in Chinese companies also removedChinese companies also removed

Shareholder rightsShareholder rights

Duties of shareholders (Art 20)Duties of shareholders (Art 20) Controlling shareholder and officers (Art Controlling shareholder and officers (Art

21)21) Resolution of shareholders or directors Resolution of shareholders or directors

that violates a law or administrative that violates a law or administrative regulation – null and void (Art 22)regulation – null and void (Art 22)

Resolution at meeting improperly Resolution at meeting improperly convened under law, regulation or AA – convened under law, regulation or AA – shareholder may apply to court to revoke shareholder may apply to court to revoke it (Art 22)it (Art 22)

Duties of officersDuties of officers

Art 147: restrictions on acting as a Art 147: restrictions on acting as a director, supervisor or senior director, supervisor or senior managermanager

Art 148: duty of fidelity and diligence Art 148: duty of fidelity and diligence to companyto company

Art 149: acts by director or senior Art 149: acts by director or senior manager inconsistent with the manager inconsistent with the obligation of fidelity – income obligation of fidelity – income belongs to the companybelongs to the company

Duties of officersDuties of officers Art 150 – obligation of Ds, Ss and senior Art 150 – obligation of Ds, Ss and senior

managers to compensate company for loss managers to compensate company for loss to the company due to breach of laws, to the company due to breach of laws, regulations or AA in carrying out dutiesregulations or AA in carrying out duties

Art 151 – right of shareholders to require Art 151 – right of shareholders to require D, S or senior manager to attend meeting D, S or senior manager to attend meeting and answer questionsand answer questions

Art 152 – right of shareholders to take Art 152 – right of shareholders to take action in case of Art 150 infringementaction in case of Art 150 infringement

Art 153 – right of shareholders to bring Art 153 – right of shareholders to bring lawsuit for action infringing shareholders’ lawsuit for action infringing shareholders’ interestsinterests

Securities LawSecurities Law

Establishes sponsor system for public Establishes sponsor system for public offeringsofferings

Requires deposit of investor funds Requires deposit of investor funds into separate bank accountsinto separate bank accounts

Contemplates establishment of State Contemplates establishment of State fund to protect investors and allow fund to protect investors and allow for compensationfor compensation

Increased penalties for illegal acts – Increased penalties for illegal acts – fraud, insider trading fraud, insider trading

Securities Market Securities Market

Gradual sell-off of State sharesGradual sell-off of State shares Merger of A and B share markets?Merger of A and B share markets?

QFIIs and their role in the A share QFIIs and their role in the A share marketmarket

Strategic investments in A sharesStrategic investments in A shares Expansion of Chinese companies and Expansion of Chinese companies and

interests outside Chinainterests outside China

Bankruptcy Law - IssuesBankruptcy Law - Issues

What should the law cover?What should the law cover? Role of government – court run Role of government – court run

processprocess Financial institutionsFinancial institutions Role of the administratorRole of the administrator RehabilitationRehabilitation Priorities in distribution of assetsPriorities in distribution of assets Cross-border bankruptciesCross-border bankruptcies

Enterprise Bankruptcy LawEnterprise Bankruptcy Law

Comes into effect 1 June 2007Comes into effect 1 June 2007 Applies to state-owned enterprises, Applies to state-owned enterprises,

private companies, financial private companies, financial institutions and FIEsinstitutions and FIEs

Special section on financial institutionsSpecial section on financial institutions Law applicable “by reference” to Law applicable “by reference” to

organisations other than enterprise organisations other than enterprise legal personslegal persons

Grounds for BankruptcyGrounds for Bankruptcy

Entity is unable to pay debts when Entity is unable to pay debts when due and does not have sufficient due and does not have sufficient assets to pay debts or clearly assets to pay debts or clearly demonstrates that it lacks the ability demonstrates that it lacks the ability to meet paymentsto meet payments

PartiesParties

Debtor may file a petition with Debtor may file a petition with People’s Court for rehabilitation, People’s Court for rehabilitation, composition or bankruptcy composition or bankruptcy liquidation liquidation

Creditor may file if debtor becomes Creditor may file if debtor becomes insolventinsolvent

Person with legal responsibility for Person with legal responsibility for liquidating an enterprise legal person liquidating an enterprise legal person which cannot pay its debts must filewhich cannot pay its debts must file

Bankruptcy LawBankruptcy Law

Options: declare bankruptcy; undergo Options: declare bankruptcy; undergo reorganisation (rehabilitation); reach reorganisation (rehabilitation); reach settlement with creditors settlement with creditors (composition)(composition)

Participation of courts requiredParticipation of courts required Position of secured creditors preservedPosition of secured creditors preserved Priority of payments: liquidation debts, Priority of payments: liquidation debts,

payment to employees (wages and payment to employees (wages and social security benefits); social social security benefits); social insurance and taxes; general creditorsinsurance and taxes; general creditors


Liquidators/administrators to be appointed Liquidators/administrators to be appointed by court: government officials; lawyers, by court: government officials; lawyers, accountants and insolvency specialists – accountants and insolvency specialists – may be individual or a firmmay be individual or a firm

Creditors’ meeting (creditors who have Creditors’ meeting (creditors who have submitted claims) – verifies claims; submitted claims) – verifies claims; supervises administrator; appoints supervises administrator; appoints members of creditors’ committee; adopt members of creditors’ committee; adopt scheme for realization and distribution of scheme for realization and distribution of bankruptcy propertybankruptcy property


Creditors’ committee: supervises Creditors’ committee: supervises management of property; management of property; distribution; convenes creditors’ distribution; convenes creditors’ meetingsmeetings

Penalties on senior management for Penalties on senior management for mismanagementmismanagement

‘‘Policy bankruptcies” for Policy bankruptcies” for approximately 2000 failing SOEs approximately 2000 failing SOEs possible in next yearpossible in next year

RehabilitationRehabilitation

Debtor (or 10% of shareholders) or creditor Debtor (or 10% of shareholders) or creditor may file with court a request for may file with court a request for rehabilitationrehabilitation

Court may order rehabilitationCourt may order rehabilitation During rehabilitation period, debtor manages During rehabilitation period, debtor manages

property under supervision of administrator property under supervision of administrator or administrator manages propertyor administrator manages property

Exercise of security prohibited; no Exercise of security prohibited; no distribution of profits; no assignment of distribution of profits; no assignment of equityequity

RehabilitationRehabilitation

Court can order termination and Court can order termination and bankruptcy if continued bankruptcy if continued deterioration; fraud; debtor stops deterioration; fraud; debtor stops administrator from actingadministrator from acting

Rehabilitation plan must be approved Rehabilitation plan must be approved by creditors, employees, etc.by creditors, employees, etc.

At conclusion, debtor no liability for At conclusion, debtor no liability for debts discharged under the debts discharged under the rehabilitation planrehabilitation plan

CompositionComposition

Debtor may file petition for Debtor may file petition for composition at any time, including composition at any time, including after acceptance of bankruptcy after acceptance of bankruptcy petitionpetition

Must submit composition agreementMust submit composition agreement Must be approved by half of creditors Must be approved by half of creditors

with not less than 2/3rds of claimswith not less than 2/3rds of claims No effect on secured creditorsNo effect on secured creditors If composition agreement not satisfied, If composition agreement not satisfied,

court will order bankruptcycourt will order bankruptcy

Cross-border bankruptcy provisionsCross-border bankruptcy provisions

Judgment of People’s Court has effect in Judgment of People’s Court has effect in relation to assets of debtor outside Chinarelation to assets of debtor outside China

Judgment of foreign court affecting Judgment of foreign court affecting assets inside China recognised and assets inside China recognised and enforced pursuant to treaties or enforced pursuant to treaties or principles of reciprocityprinciples of reciprocity

If no basic principles of PRC law, national If no basic principles of PRC law, national sovereignty, security, interests of sovereignty, security, interests of general public or creditors within PRC general public or creditors within PRC underminedundermined

Draft Anti-monopoly LawDraft Anti-monopoly Law

Applies to: monopolistic behaviour Applies to: monopolistic behaviour within China; monopolistic behaviour within China; monopolistic behaviour outside China that has “eliminative outside China that has “eliminative or restrictive” effects on competition or restrictive” effects on competition in the Chinese domestic market in the Chinese domestic market

Prohibits monopoly agreementsProhibits monopoly agreements Prohibits resale price fixingProhibits resale price fixing


Prohibits collusion on bidsProhibits collusion on bids Prohibited agreements void ab initioProhibited agreements void ab initio Allows some defences to monopoly Allows some defences to monopoly

agreements and resale price fixingagreements and resale price fixing


Prohibits abuse of dominant market Prohibits abuse of dominant market position to eliminate or restrict position to eliminate or restrict competitioncompetition

Abuse includes: monopoly pricing; Abuse includes: monopoly pricing; predatory pricing; refusing to trade; predatory pricing; refusing to trade; mandatory or exclusive trading; mandatory or exclusive trading; tying; differentiated treatment tying; differentiated treatment without valid reasons.without valid reasons.


Ability of Anti-monopoly Authority to Ability of Anti-monopoly Authority to prohibit or impose conditions on a prohibit or impose conditions on a “concentration” (merger or acquisition) “concentration” (merger or acquisition) if may have effect of excluding if may have effect of excluding competitioncompetition

Notification requirement if Notification requirement if All parties have worldwide turnover All parties have worldwide turnover

exceeding RMB12billionexceeding RMB12billion One party has China turnover exceeding One party has China turnover exceeding

RMB800millionRMB800million

Draft Anti-Monopoly LawDraft Anti-Monopoly Law

Prohibits abuse of administrative Prohibits abuse of administrative powers by administrative organs or powers by administrative organs or public organizations topublic organizations to Require enterprises and individuals to Require enterprises and individuals to

deal in, or purchase or use products of deal in, or purchase or use products of designated entitiesdesignated entities

Hinder free circulation and adequate Hinder free circulation and adequate competition in commoditiescompetition in commodities

Restrict participation in biddingRestrict participation in bidding


Restrict investment or establishment of Restrict investment or establishment of branchesbranches

Compel undertaking to engage in Compel undertaking to engage in monopolistic conductmonopolistic conduct

Create rules with content which Create rules with content which eliminates or restricts competitioneliminates or restricts competition


Anti-monopoly Commission under State Anti-monopoly Commission under State Council – policy, supervision of Council – policy, supervision of enforcement authority and harmonisation enforcement authority and harmonisation of handling of major casesof handling of major cases

Anti-monopoly Law Enforcement Authority Anti-monopoly Law Enforcement Authority under State Council – guidelines; under State Council – guidelines; investigations; mergers and investigations; mergers and concentrationsconcentrations

Protection of whistle-blowers - Protection of whistle-blowers - confidentialityconfidentiality


LiabilitiesLiabilities Fines (1%-10% of previous year’s turnover or up Fines (1%-10% of previous year’s turnover or up

to RMB2million if agreement not implemented)to RMB2million if agreement not implemented) Confiscation of illegal gainsConfiscation of illegal gains Order to cease offending actOrder to cease offending act Order to cease concentration or sell assetsOrder to cease concentration or sell assets Criminal liability if relevantCriminal liability if relevant

Exceptions: law does not apply to Exceptions: law does not apply to agricultural producers and farmers’ agricultural producers and farmers’ associationsassociations

Draft Anti-monopoly LawDraft Anti-monopoly Law Issues and complaintsIssues and complaints• Unclear definitions of “dominance”, “market Unclear definitions of “dominance”, “market

share” and “unfair prices”share” and “unfair prices”• Automatic assumption of dominance if company Automatic assumption of dominance if company

holds a set shareholds a set share• Local nexus for “concentrations” (RMB800million) Local nexus for “concentrations” (RMB800million)

too low (international is RMB12billion)too low (international is RMB12billion)• Fines on turnover do not specify whether turnover Fines on turnover do not specify whether turnover

is Chinese or internationalis Chinese or international• Not clear who would investigate or punish Not clear who would investigate or punish

misbehaviour by administrative bodiesmisbehaviour by administrative bodies• Not clear what power local investigating bodies Not clear what power local investigating bodies

will have or whether can institute actions on their will have or whether can institute actions on their own.own.

Mergers and Acquisitions Mergers and Acquisitions

M&A with domestic enterprises M&A with domestic enterprises Provisions on the Acquisition of Domestic Provisions on the Acquisition of Domestic Enterprises by Foreign Investors Enterprises by Foreign Investors effective effective 8 September 20068 September 2006 Replaces 2003 Tentative ProvisionsReplaces 2003 Tentative Provisions Deals with foreign investor doing M&A Deals with foreign investor doing M&A

deal with existing Chinese (not state-deal with existing Chinese (not state-owned company)owned company)

Emphasis on control over acquisitions by Emphasis on control over acquisitions by Chinese-owned overseas enterprisesChinese-owned overseas enterprises

Mergers and Acquisitions Mergers and Acquisitions

M&A means: M&A means: Purchase of an equity interest in a domestic Purchase of an equity interest in a domestic

enterprise (not an FIE)enterprise (not an FIE) Subscribing to the increased registered Subscribing to the increased registered

capital of a domestic enterprisecapital of a domestic enterprise Establishing an FIE which will acquire the Establishing an FIE which will acquire the

assets of a domestic enterprise and use assets of a domestic enterprise and use assets for operationsassets for operations

Purchasing assets of a domestic enterprise Purchasing assets of a domestic enterprise and using them as investment to establish and using them as investment to establish an FIE to operate the assetsan FIE to operate the assets

Mergers and AcquisitionsMergers and Acquisitions

Resulting entity must be an FIEResulting entity must be an FIE Entitled to FIE benefits only if foreign Entitled to FIE benefits only if foreign

investor holds 25% or moreinvestor holds 25% or more If foreign entity is Chinese owned, only If foreign entity is Chinese owned, only

entitled to FIE benefits if foreign entity entitled to FIE benefits if foreign entity contributes an extra amount equal to contributes an extra amount equal to 25% of more of capital25% of more of capital

Provision for independent appraisal – Provision for independent appraisal – particularly if parties affiliatedparticularly if parties affiliated

MOFCOM review in certain circumstancesMOFCOM review in certain circumstances

Mergers and AcquisitionsMergers and Acquisitions

Necessary to provide employee Necessary to provide employee allocation plan to make clear what allocation plan to make clear what will happen to employeeswill happen to employees

Equity purchase agreement/asset Equity purchase agreement/asset purchase agreement to be governed purchase agreement to be governed by Chinese lawby Chinese law

Provisions provide for share swapsProvisions provide for share swaps Special provisions on Chinese-Special provisions on Chinese-

owned special purpose companiesowned special purpose companies

Mergers and Acquisitions Mergers and Acquisitions Must submit report to MOFCOM if project meets Must submit report to MOFCOM if project meets

conditions relating to annual revenue (where conditions relating to annual revenue (where Chinese party revenue exceeds RMB1.5 billion), Chinese party revenue exceeds RMB1.5 billion), has 10 enterprises in China, one party has market has 10 enterprises in China, one party has market share in China of more than 20% or transaction share in China of more than 20% or transaction would enable relevant party to hold market share would enable relevant party to hold market share in China of 25%in China of 25%

May in any event be required to submit a report May in any event be required to submit a report and MOFCOM or industry associations and and MOFCOM or industry associations and domestic competitions can request hearing on domestic competitions can request hearing on request of domestic competitor if MOFCOM believes request of domestic competitor if MOFCOM believes project involves significant market shares or project involves significant market shares or important elements affecting market competitionimportant elements affecting market competition

Requirements also in relation to offshore mergersRequirements also in relation to offshore mergers

Takeover ProvisionsTakeover Provisions

Measures for the Administration of the Measures for the Administration of the Acquisition of Listed CompaniesAcquisition of Listed Companies

Allow for partial bidsAllow for partial bids Government approval required for Government approval required for

takeovers by foreigners, and where state takeovers by foreigners, and where state industrial policies, state-owned shares etc industrial policies, state-owned shares etc involvedinvolved

Limits on purchasersLimits on purchasers CSRC to set up a takeover committee to CSRC to set up a takeover committee to

review proposed takeoversreview proposed takeovers Disclosure requirements (from 5% holding)Disclosure requirements (from 5% holding)

Draft Labour Contract LawDraft Labour Contract Law

• Requires severance pay when contracts Requires severance pay when contracts not renewed – not just on terminationnot renewed – not just on termination

• One-time compensation equal to annual One-time compensation equal to annual salary to enforce non-competition salary to enforce non-competition agreement (for maximum of 2 years)agreement (for maximum of 2 years)

• Increased employee participation in Increased employee participation in drafting of employers rules and drafting of employers rules and regulations affecting employeesregulations affecting employees

• Increases involvement of unions – must Increases involvement of unions – must be advised on termination prior to event, be advised on termination prior to event, regardless of causeregardless of cause

• Requirement of collective contractsRequirement of collective contracts

SummarySummary

Increasingly willingness of Chinese legislators Increasingly willingness of Chinese legislators to legislate with extraterritorial effectto legislate with extraterritorial effect

Proliferation of legislation – difficult to Proliferation of legislation – difficult to absorb; difficult to enforceabsorb; difficult to enforce

Increase in number of regulatory bodies? Increase in number of regulatory bodies? (e.g.., Anti-Monopoly?)(e.g.., Anti-Monopoly?)

Concern about issues arising from Concern about issues arising from modernisation – protection of labour; modernisation – protection of labour; protection of state assets; foreign domination protection of state assets; foreign domination of Chinese marketsof Chinese markets

Backlash against foreign investment?Backlash against foreign investment?

Doing Business in China – recent developments Vivienne Bath Senior Lecturer and Director of the...

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