Major Changes Under PRCs 2005 Company Law 2005

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Major Changes Under PRCs 2005 Company
Law2005???????????

• New provisions for-
• Corporate governance
• Lifting of corporate veil
• Ultra vires doctrine
• Protection for minority shareholders/corporate
  actions
• Changes-
• Requirements of incorporating limited liability
  companies
• Requirements for joint stock limited companies

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FOREIGN INVESTMENT ENTERPRISES FIE??????

• FORMS
• Equity joint ventures EJV
• Contractual joint ventures CJV
• Wholly foreign owned enterprises WFOES
• CORPORATE STRUCTURES
• Limited liability entities/legal persons
• (including LLP introduced in 2007)

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FIEs taking the form of a legal
person?????????????

• Under dual supervision of Company Law 2005 and
  FIE-related law
• Solution to potential conflict Article 218 of
  Company Law 2005
• the limited liability companies and joint stock
  limited companies invested by foreign investors
  will be governed by the present joint venture and
  investment laws
• Company Law will prevail where FIEs-related laws
  and regulations are silent

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ULTRA VIRES????

• PREVIOUS POSITION
• Business scope spelt out in the articles and co
  must carry out business within such a scope
  (article 11 of the old Company Law)
• Replaced by article 12 of the Company Law 2005 A
  company has to have its business objectives in
  its articles and it may modify the articles.
• Amendments subjected to approval if there is
  impact on the national economy and the peoples
  livelihood.

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Corporate Governance ????

• Corporate veil
• The concept of lifting the corporate veil
  recognised for the first time
• Piercing the corporate veil A controlling
  shareholder may be personally liable for abusing
  the benefits of limited liability
• Directors of Chinese public listed companies are
  not allowed to vote in any matter in which they
  have an interest
• Access to the corporate records (Art 6)
• Any member of the public can apply to the State
  Administration of Industry and Commerce (SAIC)
  or its local bureaus for such data

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LIFTING THE CORPORATE VEIL??????

• Article 20 of the Company Law 2005
• A shareholder may be personally liable for acting
  in a fraudulent manner to the detriment of the
  company or engaging in evasive acts to the
  detriment of the creditors.
• A single shareholder company cannot separate his
  assets from that of the company.
• Current judicial interpretations.

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Minority Shareholders Protection ??????

• Minority shareholders can now request the company
  to buy back their shares when-
• they have not received dividends for 5
  consecutive years when it is profitable
• they do not consent to any disposal of its core
  assets or when they do not approve of any merger
  or acquisition
• Breach of fiduciary duties by directors-
• 3 of the total shareholders can request the
  Board of directors to consider their submitted
  proposals whenever there is an infringement of
  the articles or existing laws
• minority shareholders representing 10 of the
  shareholding may petition to the Peoples
  Intermediate Court for a liquidation of the
  company.

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Enforcement of corporate rights???????

• Articles 150 and 152 of the Company Law
• Derivative or representative actions
• Definition of defendant and plaintiff. The
  company is not named as a nominal defendant.
• 2 step procedure
• Request to the board of directors or board of
  supervisers to initiate proceedings and no action
  is taken within 30 days, then the defendants can
  bring lawsuit to the courts. Requirement 1 of
  the shareholding will suffice.
• Administrative remedies SAIC

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Limited Liability Companies ??????

• Removal of 50 ceiling on any forms of investment
  in another entity by a company
• Non cash contribution has been increased from 20
  to 70
• Privilege does not extend to FIEs
• For intellectual property contributions Assets
  need to be transferable and can be properly
  appraised.
• The minimum registered capital has been reduced
  from Rmb100,000 to Rmb30,000
• Payment by installments now allowed
• Maximum time frame of within 2 years
• Does not apply to limited company with one
  natural person as its single shareholder
• Vice chairman or the managing director can now be
  legal representative besides Chairman

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Joint Stock Companies ????

• Registered capital reduced from RMB 10 million to
  RMB 5 million, subject to any existing PR Chinese
  law to the contrary
• Payment by installments allowed
• Maximum time frame of within 5 years
• Promoters are allowed to transfer their shares
  after a lapse of one year from the date of
  incorporation of their company
• If company is publicly listed, directors, senior
  managers and supervisors may dispose of their
  shares after a lapse of one year from the date
  when its shares are listed for trading on the
  stock exchange

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Foreign Invested Partnership Enterprise
FIPE????????

• Governing laws
• Partnership Enterprise Law
• Revised version comes into force 1st July 2007
• All domestic or foreign-invested enterprises
  shall be treated the same
• Administrative Measures of FIPE
• Features
• The form of "limited partnership and "limited
  liability partnership" is permitted
• The legal entity is entitled to engage in a
  partnership enterprise
• No minimum registered capital or other
  market-entry conditions required
• FIPE needs to be examined and approved by the
  Department of Foreign Trade of MOF

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Duties and Liabilities of Company
Directors??????????

• Duty of loyalty
• Chinese Company Law (CCL)
• Article 148The directors must fulfill the duties
  of loyalty to company
• Article 21 (1), 148(2), 149 Certain explicit
  duties
• directors to exercise their powers in the best
  interest of the company
• gain of a director from any act in violation of
  the duty of loyalty will belong to the company
• The directors will be liable for participating in
  resolutions of the board of directors that harm
  the company

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Duties and Liabilities of Company Directors
(contd)??????????(??????)

• Duty of diligence
• Chinese law
• Company Law and Code on Listed Company Governance
  
• Article 150 Any director, who acts in
  derogation of any law, administrative regulation,
  or the articles of association during the course
  of performing his duties, will be liable for
  compensation

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THE COMPANY CONSTITUTION????

• ARTICLES OF ASSOCIATION Mandatory items include
  business scope, registered capital and name of
  legal representative. Method of distribution,
  dissolution and liquidation are mandatory for
  joint stock companies.
• CONTRACTUAL EFFECT Binding on the company,
  shareholders, directors, supervisers and senior
  managers (article 11)

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CORPORATE MANAGEMENT????

• Division of management between the Board of
  directors and General Meeting.
• Directors Composition and qualifications.
• Employees representation mandatory for companies
  with state funded investors.
• Shadow, alternate and executive directors
• Company secretary mandatory for listed joint
  stock limited companies (article 124)
• Senior managers are akin to officers.

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INSIDER TRADING MARKET MANIPULATION IN
CHINA????????????

• See articles 74-76 of China Securities Law
• Who is an insider Directors, supervisers,
  senior managers and shareholders who hold 5 of
  the shares to personnel from underwriting firms,
  securities firms and regulatory bodies.
• Penalties disposal of the securities, fine and
  even imprisonment.

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UNIFIED TAX STRUCTURE???????

• Rationale for the unified tax structure
• Preferential tax treatment given to FIEs in SEZs
  and Economic Technological Development zones
  ETDZs.
• Domestic enterprises were disadvantaged.
  Circumvented with SPVs.
• Impact of WTO Fair equitable tax treatment for
  both foreign and domestic enterprises.
• 15 for FIEs operating in SEZs or ETDZs and most
  domestic enterprises were levied at 33

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UNIFIED TAX STRUCTURE???????

• Enterprise income tax 2007 All domestic and
  foreign enterprises are taxed at 25
• Small business enterprises with low profit margin
  are taxed at 20
• Preferential tax treatment still given to FIEs
  with transfer of higher grade technology,
  environmental protection, agriculture, forestry
  etc. Taxed at 15. Even after expiry of the
  exemption period, FIEs may benefit from a further
  3 years extension by another 50.

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