Haworth & Lexon Law Newsletter (8)

Haworth & Lexon Law Newsletter

No.4, 2002 (Total:No.8)    April. 20th, 2002

Edited by Haworth & Lexon

Haworth & Lexon Law Newsletter is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, E-commerce, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.


How Foreign-Invested Joint Stock Companies Apply to IPO

Less Limitation for Obtaining Certification of Conducting Foreign Trade, which also benefits IT enterprises

Latest Laws and Regulations

1             Regulation of Shanghai Municipality on Labor Contract shall enter into force on May 1st

1             Regulation on Administration of Judicial Testimony Upon Entrustment by People’s Court shall enter into force on April.1st

1             Regulation on Handling Medical Accidents shall enter into force on September 1st 2002

1             Some Opinions Relevant to Reform and Innovation on Administration System of Nation  High-Tech Development Zone is promulgated


How Foreign-Invested Joint Stock Companies Apply to IPO

With the gradually opening up of Chinese Securities market, foreign invested enterprises even foreign enterprises’ Initial Public Offering (IPO) has become the focus these days.  Actually, Chinese relevant ministries and departments have approved some individual foreign invested companies’ listing. But the issue for foreign invested joint stock companies IPO is factually on agenda just after the promulgation of Some Opinions Relevant to Foreign Investment in Listed Company.  Then how foreign invested stock companies apply to IPO?

First, the foreign-invested joint stock company applying to list must be an enterprise that has been established or has changed its form of organization in accordance with Interim Provision on Some Issues of Establishment of Foreign Invested Stock Companies, and shall be filed in and approved by Ministry of Foreign Trade and Economic Cooperation in accordance with the established procedures.

Second, the foreign-invested joint stock company must comply with foreign investment industrial policies and requirements for listing and issuing stocks, when applying to list and issue A shares or B shares in mainland China. Apart from “Company Law” and other laws and relevant regulations issued by China Securities Regulatory Commission, conducting IPO of foreign invested enterprises shall comply with the following requirements:

1.             Having passed jointly annual check for foreign investment enterprises for continuous 3 years before applying to list

2.          The business scope shall comply with “The Regulations on Guiding the Direction of Foreign Investment” and “The List for Guidance on Foreign Investment in Industries

3.          Foreign equities shall take up at least 10% of the total equities, after IPO

4.             In light of relevant regulations, where there are special requirements on percentages of Chinese party’s shares holding, such as requirement for Chinese party’s dominant position (including relevant dominant position), Chinese party shall continue to hold dominant position or required percentage shares

5.             Comply with other requirement stipulated by relevant regulations

Third, apart from general requirements for the content and format of prospectuses issued by China Securities Regulatory Commission, the content and format of the prospectuses of foreign-invested joint stock limited companies shall be in accordance with special requirements, esp. in the aspect of information disclosure.

The detailed disclosure includes: the overseas raw material supplier, overseas clients, risks of overseas technology service, risks for possibly changes to China’s tax preferential laws, regulations and policies on foreign investment, residence place of foreign shareholders, risks of changes to laws in headquarter jurisdictions on China investment and technology transfer and risks of exchange rate risks.  Meanwhile, at least 5% of foreign holders’ residence places, laws in shareholder jurisdictions on China investment and technology transfer shall be disclosed in details too.  Besides, there are also special requirement on disclosure on affiliate trade with shareholders and nationalities and permanent residences of directors and senior managerial personnel


Less Limitation for Obtaining Certification of Conducting Foreign Trade in Pudong New Area, which also benefits IT enterprises

The new policy---registered domestic funded production enterprises, commercial and trade enterprises with register capital respectively of RMB 500,000 and 1,000,000 can apply to power of management over import and export business in foreign trade---has been issued by Shanghai municipal foreign economic and trade committee, and shall be valid on March 28th, 2002

10 years ago, Shanghai municipal foreign economic and trade committee was vested with the right of self-approval of the power to engage in foreign trade of enterprises in Pudong new area.  And in the past 10 years, the requirements for foreign trade power have become less and less strict.  Since last July, ratification system has been applied to the domestic funded enterprises’ application for power to engaging in circulation of foreign trade.  As to manufacture enterprises and scientific institutions, registration system has been applied to their application for power of self import and export.  And according to the latest regulation, the limited condition---the enterprises have right to apply to power of management over import and export business in foreign trade only when they have been registered to exist for one year---is canceled.  The register capital of the various commercial and trade enterprises has been reduced from the originally RMB3,000,000 to RMB 1,000,000 now, while that of manufacture enterprises (including mechanical electrical products, hi-tech enterprises, scientific institutions) has been reduced from RMB 1,000,000 to RMB 500,000, which is the same with the floor level of the registration of industrial and commercial enterprises.  The enterprises, when in accordance with the above requirements, can obtain qualification certificate of PRC’s import and export enterprises

Regarding the issues on software export of software production enterprises, six ministries, including MOFTEC issued a notice in 2001, stipulating that the software enterprises with the register capital of at least RMB 1,000,000 can enjoy self export right of software.  But in light of the notice issued by Shanghai municipal foreign economic relations and trade committee, the software enterprises with requirements of Pudong registration and at least register capital of RMB 500,000can enjoy self export right of software.

According to statistics, in 2001, 217 domestic funded enterprises (including 93 private enterprises) in Pudong area obtained the power to engage in foreign trade by the way of ratification or registration, which take up 40.8% of the whole city’s newly approved foreign trade enterprises (except foreign-funded enterprises) in that year.  And the total number of foreign trade enterprises in Shanghai has been reached to 25,000, but compare to 90,000 in HK, and 80,000 to Singapore, this number is still too small.  While the changes to rules this time surely will attract more domestic enterprises, medium or small sized enterprises, and private enterprises to expand their foreign trade business in Shanghai.

Comparing to the less limitation for domestic foreign trade enterprises, the joint venture foreign trade companies have still been listed as restricted investment industries.  There are strict limitations on qualifications to joint venture parties, and the register capital shall be at least RMB 100,000,000.

Of course, if the wholly foreign trade company founded in Shanghai WaiGaoQiao Bonded Zone, meanwhile using at least 20-squaremeter registered place as office, then the register capital is only required for USD 200,000, and among which, USD 50,000 shall be input before the issuing of the business license, and the rest shall be input within six months after obtaining the business license. 

  Latest Laws and Regulations

Regulation of Shanghai Municipality on Labor Contract adopted by the Session of the Stand Committee of the Shanghai People’s Congress, will come into effect on May 1st, 2002.  With 7 Chapters, and 62 Articles, the Regulation provides the details for the conclusion, performance, alternation, dissolution and termination of the labor contracts within the Shanghai area.  The regulation also provides that the labor contract parties can include confidentiality clause in their labor contracts or reach secret information agreement separately.  For laborers who are in breach of the service period or trade secret, the penalties can be imposed.  Besides, the regulation also stipulates that the labor relationships shall be established as long as the obligation has been performed in spite of the conclusion of the labor contracts.  Special articles for non-fulltime worker, in other words, worker by hours have been included in the regulation. Articles for labor contracts from Regulation of Shanghai Municipal on Personnel Administration for Foreign Invested Enterprises will not be applied to the labor contracts concluded after implementation of the Regulation of Shanghai Municipality on Labor Contract

Regulation on Administration of Judicial Testimony Upon Entrustment by People’s Court issued by the Supreme People’s Court shall enter into force on April.1st.  This is the first systematic judicial interpretation on judicial testimony upon entrustment, which is the core of the judicial testimony.  The setup of the institutions for judicial testimony upon entrustment has been provided in the regulation.  “The judicial testimony institutions of the people’s court shall be recognized as the institutions for judicial testimony upon entrustment, or for organizing the judicial testimony”.  The judicial testimony institutions shall set up social testimony institutions and list expert examiners, and shall organize the involved parties to conduct entrustment for judicial testimony in light of the principles of party autonomy choice and designation by the people’s court.  If the litigation parties can not reach the agreement, the expert examiner in the list shall be chosen by the judicial testimony institution, while the chosen examiner has the obligation to be questioned on court.  Meanwhile, the regulation also provides that the work of the judicial testimony shall be guaranteed through the supervision, organization, coordination by the judicial testimony institution of the people’s court.

The newly amended Regulation on Handling Medical Accidents, issued by the State Council, shall enter into force on September 1st.  The new method has expanded the definition of the medical accidents, and imposed stricter liability on the medical institutions and medical workers.  The medical accidents have been categorized into 4 grades in the new method, and the regulation also provides 6 situations, which are not subject to medical accidents.  In accordance with the new method, the conduction right of the accident appraising has been shifted to medical committee.  In case the involved party discontent with the conclusion of the first medical appraising, the party has right to apply for second appraising to the local administration organization of health within 15 days upon receiving the first appraising conclusion.  The patient has right to photocopy or copy his case history of ambulatory or hospitalization, etc.  The special chapter on the medical accident compensation has been included in the new method.  In the spirit of that, the patient or the hospital etc, have right to choose mutual consultation, application of administrative mediation or file of civil lawsuit as the solution.  The compensation items and standard have also been clearly provided in the new method.

Some Opinions Relevant to Reform and Innovation on Administration System of National High-Tech Development Zone has been promulgated by Ministry of Science and Technology recently.  New requirements and development orientation of reform and innovation on administration system of national high-Tech development zone have been put forward in the opinion.  The opinion permits the positive exploration and implementation of the new method on distribution at the same time when acceleration of development of the high technology.  The pilot work for equity stimulation system shall be promoted in accordance with the relevant national regulations, and the more support shall be given to the growing high-tech enterprises.  The overseas and domestic non-governmental capital shall be utilized encouragingly to set up the venture capital investment institutions.  Giving full play to the intermediate service institutions has been emphasized in the opinion as well.  Various intermediate service institutions shall be well attracted, organized and coordinated in order to provide high-tech enterprises services on the area of management, technology, marketing, information, human resources, finance, legal, etc.  The protection of the intellectual property shall be emphasized and strengthened.  With the purpose of promoting effectively protection and extensively utilization of the intellectual property of the zone’s enterprises, and promoting the development of the intermediate services institutions engaging in the legal affairs of intellectual property, measures shall be taken to help the development of professional institutions for intellectual property protection, such as patent firms, trademark firms, copyright agencies, law firms, etc.