Qian Zhan East China Normal University August 6, 2014 qzhan@law.ecnu.edu.cn 1
Introduc)on China s Accession to WTO: Dec 2001 Ø Significant event: Chinese + Foreign Investors Ø Expected Result: Trade Liberalization + increased opportunities Ø Fastest growth rate: Large markets for international business 2
Introduc)on Content Part I China Legal System Part II Foreign Investment Enterprises State structure Legislation Judicial system Five FIE vehicles Pros & Cons Key considerations 3
1.1 The overall state structure I General Government (Central) Six Levels State Hierarchy 5 Ethnic Autonomous Regions 4 Municipalities Directly under Central Government II. 23 Province 2 Special Administrative Regions Xinjiang Tibet Inner Mongolia Ningxia Guangxi Beijing Shanghai Tianjin Chongqing III. Municipality IV. Country V. Township Hong Kong 1997 Macau 1999 VI. Village 4
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1.1 The state structure: Central Level Central level National People s Congress & Standing Committee Legislative power Highest Organ Political power Communist Accountable Party 1921 Executive power Judicial power Procuratorial power Military power State council Highest Organ Supreme People s Court Supreme People s Procuratorate Central Military Commission Ministries Commissions 6
1.1 The overall state structure National People s Congress 1. Citizens exercise power; Composed of deputies elected (3000) 2. Highest organ of state power + Highest legislative body 3. Term: 5 years; In session annually 4. Main functions: A. amends the Constitution and supervises; B. enacts and amend basic laws C. appoints and removes top officials D. examines and approves state budget E. approves the establishment of political regions 5. Permanent body: NPC Standing Committee 7
1.1 The overall state structure State Council 1. Highest organ of state administration 2. Composition: Premier, Vice Premier, State councilors, Ministers, Auditor-general, and Secretary-general 3. Term: same as NPC; No more than two consecutive terms. 4. Main functions: A. Adopts and enacts administrative regulations B. Issues decisions and orders in accordance with the Constitution and laws; C. Formulate and implements national economic plan and state budget; 8
China: Separa)on of Power? Q: Whether China has the doctrine of separation of power? YES---Various organs hold different power; perform different functions 9
China: Separa)on of Power? Q: Whether China has the doctrine of separation of power? NO--- NPC have the highest power and supervise all other organs; power to interpret laws 10
1.1 The state structure: Local Level Local level Same structure Local People s Congress & Standing Committee Legislative power Highest Organ Higher-level Local Government Accountable Higher-level Court Higher-level Procuratorate Local Government People s Court People s Procuratorate Supervisory power Municipal vs Provincial Village vs Township 11
1.2 Legisla)on Constitution Adopted and Amended By NPC Legis lation In China Basic Laws Administrative Regulations Government Rules NPC & Standing Committee (Criminal/civil/ government organ) State Council (Implement basic law) 1. Ministerial & Departmental rules 2. Local Governmental rules Local Regulations Local People s Congress (Actual circumstance; practical needs) Self-governing regulation Specific rules People s Congress: Auto-Regions (political, economic, cultural; Adaption) 12
1.2 Hierarchy of legal norms Conflicts in norms: Specific over General New over Old Constitution Supreme law Not Contravene Basic Laws Administrative Regulations Take 2 nd precedence Take 3 rd precedence Local Regulations Local Rules Local regulations take precedence over local rules enacted by the same level 13
1.3 Interpreta)on of legal norms Legal Significance Greatest weight NPC Standing Committee Legal Interpretation Middle weight State Council Subordinates 1981 NPC Resolution Least weight Supreme People s Court Legislative Interpretation (Laws) Where necessary: Concrete meaning Legal basis Same effect as law Administrative Interpretation (Administrative regulation) (Governmental rules) Non-trial application Exclusive interpreters Supplement and clarify limits Common to indicate Judicial Interpretation (Laws) No authorization Uniform application At Trial Source of law 14
1.3 Judicial System Four Levels Jurisdiction Two-trial system Supreme People s Court High People s Court (32: 23 province; 5 auto-regions; 4 municipalities directly) Intermediate People s Court (380: municipalities) Basic People s Court (3000:country) Divisions: Criminal Civil Administrative Special Courts: Forest Railway Military Maritime 15
2. Foreign Investment Enterprises in China According to the statistics: from Jan to Dec 2013, Newly Approved Foreign-invested Enterprises amounted to 22,773; Actual use of foreign investment reached USD 117.586 billion. 16
2.Foreign Investment Enterprises in China Top 10 nations investment 1. Hong Kong (USD 78.302b), 2. Singapore (USD 7.327b), 3. Japan (USD 7.064b), 4. Taiwan Province(USD 5.246b), 5. U.S.A. (USD 3.353b), 6. R.O.K.(USD 3.059b), 7. Germany (USD 2.095b), 8. Holland (USD 1.281b), 9. U.K. (USD 1.039b) 10. France (USD 762million) 17
2. Foreign Investment Vehicles China open its door in 1978 Business Vehicles Decide appropriate forms Depend on business strategy Representative Office/ Branch Sino-foreign Equity Joint venture (EJV) Sino-foreign Cooperative Joint venture (CJV) Wholly Foreign Owned Enterprise (WFOE) Foreign Companies Limited by Shares Preparatory Nature Limited Business Activities Foreign Investment Enterprises (FIEs) Chinese legal person Core FDI instruments Limited Liability Company Vs Company Limited by Shares 18
2.1 Representa)ve Office Applicable laws Regulations on Administration of Registration of Resident Offices of Foreign Enterprises (2011 by State Council) Requirements 1. Definition: working bodies established by foreign enterprises within CN 2. Legal Status: Not legal person 3. Title: Country + Enterprise Name + City Name + RO 4. Composition: A chief representative + 1-3 representatives 5. Scope of Activities: No profit-making activities 1 Market surveys, displays and campaigns; 2 Liaison activities (sales, service, procurement and investment) 19
2.1 Representa)ve Office Formal Application Direct Applications Domicile certification 2-year Business license Articles of Association Organization Agreement Commission Documents State AIC & Authorized Local AIC Identification papers & Resumes Certificate of capital credit (issued by financial institutions) Lawful right to use residency site 20
2.2 Equity Joint Ventures (EJV) Applicable laws 1. Sino-Foreign Equity Joint Ventures Law (1979) (1990/2001) 2. Sino-Foreign EJV Implementing Regulations (2001) Framework Definition: An equity joint venture is a Chinese legal person with limited liability, which is established on the basis of a joint venture contract between Chinese and foreign parties after approval by the Ministry of Commerce. Investor: Foreign companies, enterprises, economic entities, individuals Form: Limited liability company (Chinese legal person) 21
2.1 EJV: Applica)on Procedure Project Proposal + Pre Feasibility Report (Chinese party) MOFCOM Government Preliminary Approval Assessment of Economic viability Complete Documents Application Form Joint Feasibility Report Legal Documents List of Candidates Joint Venture Agreement VS Joint Venture Contract (Centerpiece) Articles of Association Major points and principles Right & Liability Governed by CN law Objectives Organizational principles Management methods 22
2.2 Equity Joint Ventures Requirements 1. Capital: No less than 25% registered capital; Capital ratio Total Capital US $ 3 million US $ 3 10 million US $ 10 30 million US $ 30 million VS Registered Capital At least 70% At least 50% At least 40% At least 33% 2. Investment: cash, in kind contributions (machinery equipment and materials), buildings, factory premises, Industrial property rights or technologies, right to use a site. 23
2.2 Equity Joint Ventures Requirements 3. Liability: Share profits/bear risks in proportion to contribution 4. Equity transfer: Consent of other parties; Approval of authority 5. Term stipulated in Contract: Typically fixed term: 15-50 years depending on size and nature Indefinite terms: project encouraged or permitted by government Fixed term: service industries; land development; real estate; natural resource exploration. 24
Dongfeng Auto Company 25
China First Auto Works 26
2.3 Coopera)ve Joint Ventures (CJV) Apart from EJV, foreign investors may also invest by means of CJV, in which Chinese and foreign parties cooperate on the basis of joint venture agreement, which became common in the early 1980s. Applicable laws 1. Sino-Foreign Cooperative Joint Ventures Law (1988/2000) 2. Sino-Foreign CJV Law Implementing Rules(1995) Requirements 1. Investor: Foreign enterprises, economic organizations, individuals 2. Two different legal forms: Framework Hybrid CJV Separate entity Limited liability company Legal person VS Pure CJV No legal entity Contractual agreement Non-Legal person 27
2.3 Coopera)ve Joint Ventures Similar to EJV Application Procedure Department Foreign Investment Administration (Ministry of Commerce) Approval People s Government Various Levels Required Documents Proposal for Establishment Feasibility Report Legal Documents Business License List of Candidates Joint Venture Joint Venture Articles of Agreement Contract Association Key Documents: required by law to contain certain provisions 28
2.3 Coopera)ve Joint Ventures Requirement 3. Contribution: 25%; Ratio requirement (Same as EJV ) cash, in-kind contributions, industrial property, no-patented technologies. 4. Rights and Liabilities 1 Liability: Hybrid (investment) vs. Pure (independently) 2 Profits: need not in proportion; distributed as stipulated (Vs. EJV) 5. Term of Protection: 1 Duration: Determined by parties in the contract; 2 No maximum or minimum; Extension 180 days. 6. Recoup of investment: (Vs EJV) 1 Fixed assets given to Chinese party 2 All loss has been covered 29
Examples of CJV China Oil & Foodstuffs Corporation COFCO-Cocacola Sino-US CJV 30
Examples of CJV Taylor Nelson Sofres CVSC-TNS RESEARCH Sino-French CJV 31
2.4 Wholly Foreign- owned Enterprise WFOE is a separate business entity and china legal person Main difference with JV: 100% owned, no local party Applicable laws 1. Wholly Foreign-owned Enterprises Laws (1986) 2. Wholly Foreign-owned Enterprises Implementing Rules (1990/2001) Restrictions on WFOE 1. Prior to 2000: use advanced tech or export 50% products 2. Amendment: Article 3 Rules eliminated this requirement Ø Ø Ø Benefit the china economy; Encourage establishment of Tech-Ad-E Result: A wider range of WFOEs; Still impose greater restrictions Prohibited industries: press; publishing; insurance; radio; post & com 32
2.4 WFOE: Applica)on Procedure Easier than JV Harder than RO Approved by Examination Authorities Formal Application for Establishment (CN) Feasibility Report Project Application Report Preliminary Approval Articles of Association(CN) List of Representatives No assistance of Chinese party Registration certificate Credit worthiness List of materials need import 33
2.4 Wholly Foreign- owned Enterprise Requirements 1. Subject: Foreign enterprises, economic organizations, individuals 2. Two Forms: 1 Limited liability company: liable within the limits of investment 2 Other types of liability: pursuant to Chinese laws and regulations 3. Capital: 100% foreign owned; 1 Same ratio requirements as EJV 2 Reduce, Transfer, Increase: Obtain approval 3. Investment: convertible foreign currency, machinery, equipment; Industrial property rights or technologies. 34
Examples of WFOEs 35
2.5 Foreign Companies Limited by shares Applicable laws Provisional Rules on Several Issues Concerning the Establishment of Foreign Companies Limited by Shares (1995; Ministry of Commerce) Definition Foreign Company Limited by Shares: Ø Entire capital being divided into shares of equal value (Vs LLC) Ø Shareholders responsibilities: to the extent of the number of the shares Ø Company responsibilities: for its debts with all its assets Ø Chinese and foreign shareholders jointly hold the company's stock Ø foreigner hold more than 25% of the company's registered capital. 36
2.5 Foreign Companies Limited by shares Requirements 1. Establishment of Companies Sponsorship: requirements in Company Law; one foreign promoter Subscription: one foreign promoter: successively made profits in last 3 years 2. Capital Minimum amount: RMB 30 million; 25% foreign shareholding Capital Transfer: Remaining 25%; promoters: 3 years after registration 3. FIE s Reorganization Existing CJV, EJV, WFOE: making profits for 3 consecutive years Original investors promoters: sign agreement & articles Submit additional documents to original authorities Assumed all rights and obligations; specified in agreement & articles 37
2.5 Foreign Companies Limited by shares Formal Application Feasibility Report Articles of association Promoters Agreement Asset-evaluation Report Names, domiciles, representative Promoter Name, domicile, objective Company Means of establishment Information about shares Offer: Production, operation situation of promoter Details on capital investment Business scope Time of application Signature and seals 38
2.5 Foreign Companies Limited by shares Formal Application Original Contract Articles of association Feasibility Report Agreement on termination of original documents Articles of association Promoters Agreement Asset-evaluation Report Other Documents Decision on reorganization Certificate of approval Financial reports 3 consecutive years Promoters' credit references 39
Comparisons of Different FIE Vehicles FIE Forms Purpose Pros Cons Representati ve Office (RO) Market research; Liaise with home country company Attractive way; Easiest type No registered capital Monitor market; Quality control Sector prohibited/restricted Limited business scope Not profit-making Not legal person Size limit; Hiring Equity Joint Venture (EJV) Industries that by law require a local partner Local partner s existing facilities, workforce, Sales channels, raw materials Familiar with environment Reduce startup cost and risk Find suitable partners Split profits Less management control Technology transfer/ip risks Cooperative Joint Venture (CJV) Project-oriented Commercial complex Infrastructure; Hotel Mining projects More flexibility than EJV Profit sharing; risk bearing Investment recover Two legal forms Same as EJV Not used for manufacturing Wholly Foreignowned Enterprises (WFOE) Manufacturing Service Providing R & D 100% ownership Full management control Less government interference Better IP protection Easy to terminate Capital requirement Expensive; time-consuming More investment risks Limited sectors Foreign Company Limited by Shares Reorganization of current FIEs Raise capital by offering shares to public; more financial strength Operate on a larger scale in a wider range of business activities Compliance with provisional rules & laws and regulations on securities 40
2.6 FIEs in China 41
2.6 FIEs in China SUM: 22514 SUM: 16187 42
2.7 Key FIE Considera)ons 1. Business Scope Definitive; Business license; Approved by authorities Brief and Specific: Negotiation Careful drafting: Wide / Narrow Key Considerations 2. Capitalization 25% Registered Capital; 30 million Ratios requirement; Contribution forms Vary by industry and region 3. Term of Operation Common fixed terms: 15-50 years Extension: consent and approval Limitation: retailor/wholesale 30 43
Thanks for your attention 44