Doing Business in China

1
Doing Business in China recent developments

• Vivienne Bath
• Senior Lecturer and Director of the Centre for
  Asian and Pacific Law

2
Legislative change

• 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

3
Legislation

• 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

4
Company Law

• First effective 1 July, 1994
• Most recently amended 2005, effective 1 January
  2006
• Deals with
• Limited liability companies
• Joint stock companies (companies limited by
  shares)
• Foreign investment enterprises, except to extent
  FIE laws otherwise provide

5
Limited liability companies changes to
capitalisation

• 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

6
Implications for Foreign Investors

• Limited liability companies for Chinese investors
  only
• Now referred to as foreign invested companies
  (FICs), with numerous sub-classifications
• Single shareholder rules apply to WFOEs with one
  shareholder
• Provisions relating to capital contributions
  apply to FICs

7
Implications for Foreign Investors

• 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

8
Shareholder rights

• 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)

9
Duties of officers

• 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

10
Duties of officers

• 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

11
Securities Law

• 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

12
Securities Market

• Gradual sell-off of State shares
• Merger of A and B share markets?
• QFIIs and their role in the A share market
• Strategic investments in A shares
• Expansion of Chinese companies and interests
  outside China

13
Bankruptcy Law - Issues

• 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

14
Enterprise Bankruptcy Law

• 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

15
Grounds for Bankruptcy

• 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

16
Parties

• Debtor may file a petition with Peoples 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

17
Bankruptcy Law

• 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

18
Bankruptcy Law

• 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

19
Bankruptcy Law

• 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

20
Rehabilitation

• 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

21
Rehabilitation

• 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

22
Composition

• 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

23
Cross-border bankruptcy provisions

• Judgment of Peoples 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

24
Draft Anti-monopoly Law

• 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

25
Draft Anti-monopoly Law

• Prohibits collusion on bids
• Prohibited agreements void ab initio
• Allows some defences to monopoly agreements and
  resale price fixing

26
Draft Anti-monopoly Law

• 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.

27
Draft Anti-monopoly Law

• 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
• All parties have worldwide turnover exceeding
  RMB12billion
• One party has China turnover exceeding
  RMB800million

28
Draft Anti-Monopoly Law

• Prohibits abuse of administrative powers by
  administrative organs or public organizations to
• 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

29
Draft Anti-monopoly Law

• Restrict investment or establishment of branches
• Compel undertaking to engage in monopolistic
  conduct
• Create rules with content which eliminates or
  restricts competition

30
Draft Anti-monopoly Law

• 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

31
Draft Anti-monopoly Law

• Liabilities
• Fines (1-10 of previous years 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

32
Draft Anti-monopoly Law

• 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.

33
Mergers and Acquisitions

• MA with domestic enterprises Provisions on the
  Acquisition of Domestic Enterprises by Foreign
  Investors effective 8 September 2006
• Replaces 2003 Tentative Provisions
• Deals with foreign investor doing MA deal with
  existing Chinese (not state-owned company)
• Emphasis on control over acquisitions by
  Chinese-owned overseas enterprises

34
Mergers and Acquisitions

• MA 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

35
Mergers and Acquisitions

• 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

36
Mergers and Acquisitions

• 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

37
Mergers and Acquisitions

• 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

38
Takeover Provisions

• 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)

39
Draft Labour Contract Law

• 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

40
Summary

• 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?