Notes on the 2013 Amendments to China’s Company Law

Although we now normally refer to China’s national corporations law as the 2005 (or 2006 by the year of effectiveness) Company Law, it is actually the 2013 version since a range of significant amendments were made by the NPC, China’s national lawmaking body, to the Company Law. These amendments reduced the minimum registered capital to zero, and greatly simplified the incorporation process. Below are a few pratice notes by law firms on these amendments.

Appendix 1: PRC Company Law (2014), see also the MOFCOM version.

VIE: An Otherwise Unnecessary Legal Innovation to Connect Chinese Companies to the World

Alexandra Stevenson’s “VIE: an acronym every investor in Chinese companies should know about” on FT.com offers a simple but clear introduction about the variable interest entity (VIE) structure which has been adopted by a number of China’s tech giants, including Alibaba, whose IPO in 2015 “shows foreign investors able to skirt risks“.

“Created to circumvent ownership restrictions of companies in sectors considered sensitive by the Chinese government, VIEs are contracts that give a foreign-listed company control of a local company without direct share ownership.”

The VIE structure does however present real legal risks, as, in case of insolvence, foreign investors would find no real assets in the company. See the case of Dongfang Shipbuilding.

Other discussions on the VIE:

  • China law blog: http://www.chinalawblog.com/2011/10/to_vie_or_not_to_vie_in_china_that_is_the_question.html
  • China accounting blog: http://www.chinaaccountingblog.com/weblog/are-vies-a-going-concern.html

 

China’s 2017 Foreign Investment Catalogue: Liberalization, Control, and both

On 28 June 2017, China’s Ministry of Commerce released the long-expected Foreign Investment Industrial Guidance Catalogue (Amended in 2017) [《外商投资产业指导目录(2017年修订)》], which is the seventh revision of the catalogue, a positive list of economic sectors in which foreign investors are allowed to invest, with various degrees of restrictions and incentives.  Below are a few online discussions on the new catalogue:

 

China renews its commitment to liberalization and openness, again?

The SCMP reports on  17 August 2017 that “China orders ministries to open up more of economy to foreign investors“, based on the 《国务院关于促进外资增长若干措施的通知》(the “2017 FDI Circular”, hereafter) released by the State Council, which is the official name of China’s Central Government.  The Circular offers 22 measures aiming to attract more foreign investment to China as well as comfort foreign investors in China who have expressed increasing frustration over market access limitations and discriminations against foreign companies.

This is just another such normative document issued by the State Council. Early this year, it released the 《国务院关于扩大对外开放积极利用外资若干措施的通知》,which was viewed as Premier Li Keqiang’s efforts to further open up his country, the world’s second largest economy.  A summary of these 20 measures can be found here.

Given the increasingly tighten political environment within China, it’s curious whether these measures would indicate significant policy change, or just indicate China’s desperation for more foreign investment.

Mixed Ownership: Alibaba and Tencent among investors in China Unicom
        An FT report, Alibaba and Tencent among investors in China Unicom from the Financial Times, suggests that “China’s biggest technology companies, including Alibaba, Tencent and Baidu, are investing $11.7bn in China Unicom, the country’s second-largest wireless telecom, as they seek to revitalise the state-owned group with private capital.” In total,
        “Ten private and state investors will buy 35.19 per cent of the company’s Shanghai-listed unit China United Network Communications by purchasing both new and existing shares, the company said in a statement on Wednesday. China Unicom’s shareholding in the listed unit will fall to 36.67 per cent from above 62 per cent.”
        This is part of China’s “mixed ownership” (混合所有制)reform, which aims to lure private capital into SOEs while keeping state control in those entities. Recent signs demonstrate that the so-called “state control” will be the “control of the Party-State”.
FT: CCP and Corporate Charter

Two recent reports from the Financial Times descripe how the CCP, China’s ruling party, seeks direct control in state-owned enterprises:

  • China’s Communist Party writs itself into company law, 14 August 2017, at https://www.ft.com/content/a4b28218-80db-11e7-94e2-c5b903247afd
  • China’s Communist Party seeks company control before reform, 15 Auugst 2017, at https://www.ft.com/content/31407684-8101-11e7-a4ce-15b2513cb3ff

On how the CCP currently plays a role in the coprorate governance of China’s state-owned enterprises, see Wang, JiangYu, The Political Logic of Corporate Governance in China’s State-Owned Enterprises (December 1, 2014). Cornell International Law Journal, Vol. 47, No. 3, 2014. Available at SSRN: https://ssrn.com/abstract=2574111.

A general, yet rather negative overview of China’s state-owned economy, see “China’s state-owned zombie economy”, at https://www.ft.com/content/253d7eb0-ca6c-11e5-84df-70594b99fc47.