Haworth & Lexon Law Newsletter (18)

Haworth & Lexon Law Newsletter
No.2, 2003 (Total:No.18)    March20th, 2003
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, Intellectual property rights, 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.

Guidelines

 New regulations on enhancement of foreign investment, acquisitions and mergers of domestic enterprises by foreign investors
 Breakthroughs in foreign invested venture enterprises
 Latest Laws and Regulations
 Circular on Taxation Policies in Relation to the 29th Olympic Games
 Regulations over Administrations Regarding Foreign Invested Urban Planning Service Enterprises
 Provisionary Rules on Establishment of Sino-Foreign Enterprises in Foreign Trade Regard


New regulations on enhancement of foreign investment, acquisitions and mergers of domestic enterprises by foreign investors

On 7 March, the Provisionary Rules on Acquisitions and Mergers of Domestic Enterprises by Foreign Investors was jointly promulgated by the Ministry of Foreign Trade and Economic Cooperation (hereafter referred as MOFTEC), the State Administration of Taxations (hereafter referred as SAOT), the State Administration for Industry and Commerce (hereafter referred as SAIC) and the State Administration of Foreign Exchange (SAFE), will come into force on 12 April, 2003. Some important provisions are as set out below:

1) Means of mergers and acquisitions

Foreign investors may merge or acquire the enterprises (non-foreign invested enterprise) by adopting either share take over or asset purchase.

2) Payment of consideration and its time limit

Generally, the payment of consideration should be made within three months following the date on which the business license is issued; in some special circumstances, after getting approval, the first installment at sixty percent of the consideration should be made within six months following the issuance date on which the business license is conferred, and the rest should be paid within one year.

In case that capital increase, caused by the share's take-over, and purchase of assets appear, the clauses which include contribution time limit should be put into the contract and articles of association of the designed foreign invested enterprises.

At the same time, in case that the proportion of capital contribution is below 25 percent of the whole capital, the corresponding investors should fulfilled their contribution obligations within three months in relation to cash contribution or within six months regarding the tangible assets and industrial property etc.

3) Handling of debts and credits

a) In case of the share take-over, the new established foreign invested enterprise should be the successor of the original debts and credits. While in case of the asset purchase, the selling enterprise should be the successor of the original debts and credits. Provided that a required notice and announcement should be made to creditors, and the creditors are entitled to request the selling enterprise to provide corresponding guarantees.

b) The parties to the deal may reach a settlement agreement on the handling of the original debts and credits, provided that such agreement may not damage certain benefits of any third party or the social public. The reached settlement should submit to the authority which has the power to approve such agreement.

4) Anti-trust legislation

It should be noted that this new rule has provided the legal ground for domestic anti-trust.

Under this rule, should some acquisitions and mergers cause domestically so over-centralized that such acts would harm proper competition and consumers' benefits, the investor should report the related circumstances to the MOFTEC and SAIC, and the two governing bodies should themselves or with other authorities hold a hearing procedure and then make a final decision whether approve or not. For example, if one foreign party has in China possessed the assets worth RMB30 billion or has on China market a revenue worth RMB 15 billion above. Of course, in some situations, the concerned party may apply for examining immunity from the two governing bodies said above.

This rule has also made a clear provision about the document that should be submitted by parties to the acquisitions and mergers, procedure and approving time limit etc

It should be also highly noted that this rule hall be applied to those acquisitions and mergers occurred in China by foreign investors. As to other actions that target foreign invested enterprises in China should be under current laws and regulations and the Regulations on Changes to Shareholders of Foreign Invested Enterprises.


Breakthroughs in foreign invested venture enterprises

The MOFTEC and other four related authorities had promulgated the regulation--the Provisionary Rules on Establishment of Foreign Invested Venture Enterprises in past, unfortunately, it received not good responses in practical applications. On 30 Jan. 2003, the MOFTEC, the Ministry of Science and Technology (hereafter referred as MOST), the SAIC and other two concerning authorities jointly promulgated the regulation on management of foreign invested venture enterprises, which has gone into force since 1 Mar. 2003, in order that such activities could enjoy a more comfortable policy environment.

This Provision has laid down the detailed following requirements: condition for establishment, procedure, materials that should be submitted, contribution of capital and changes, organizational administration, operational management and examination and supervision etc.

Under this provision, an Essential Investor must be included among those investors and such investor should satisfy the following conditions: 1) before the application, during the previous three year period, the total aggregated capital that has been in its management should not be less than US 1 billion, and at least US 50 million has been put into venture investment (the foreign parties); 2) In case that a venture enterprise is not a legal person, the promised capital contribution and actual contribution should not, respectively, be less than 1 percent of the total promised contribution and actual one, in addition, such Essential Investor should be jointly responsible for the debt of the venture enterprise; 3) in case that the venture enterprise is a legal person, the promised capital contribution and actual contribution should, respectively, be not less than 30 percent of the total promised contribution and actual one.

This provision also states that, when submitting documents to the approving authorities, the investor should produce the legal opinion by practicing lawyer on that the Essential Investor is legally exiting and its written declaration has obtained effective authorization and been duly executed.

With respect to the registered capital, in case that the venture enterprise is not a legal person, the investor should promise that its minimum contribution be US 10 million; in case that the venture enterprise is a legal person, the investor should promise that its contribution minimum be US 5 million.

In relating to the form, enterprises may either be a corporation or a non-legal person, namely, limited partnerships. Furthermore, the investor may make a stipulation, under which, the Essential Investors should be jointly responsible for the debt of the venture enterprise, in case such enterprise has gone into a situation where its assets is unable to pay its debt.

Under this provision, a united administering commission should be established in a venture enterprise which is not a legal person, while, a directors board should be set up in a venture which is a company. Under the commission or board said above, an operation management may be placed or not. In lack of the operation management, the daily managing task may be entrusted to a venture capital management enterprise or another venture enterprise, including overseas venture capital management enterprises. Highly bear in mind that in whatever case, the two sides should conclude a contract and such contract should be effective only after getting the official approval by the authorities.

In exiting system, besides that the investors may transfer part of all of the shares of the venture enterprise to other investor, or transfer its shares by listing the venture enterprise onto the securities market at home or abroad, the investor my reach an re-purchase agreement with the venture enterprise, provided the concerning detailed means would be specially made.

With respect to distribution system, the investor may prescribe the internal profit and benefit distribution mechanism and incentive one in line with international practice. In addition, this provision has stipulated the practical means about how foreign investor to remit the profit and other benefits out of China.

Particularly, the provision has made regulations about permitted business and prohibited activities. In addition, investment activities, use of the money, preferential tax policy applying conditions etc have been concretely prescribed. Further more, the condition and procedure for establishing a venture investment management enterprise have also been stipulated there.


Latest Laws and Regulations

Circular on Taxation Policies in Relation to the 29th Olympic Games
On 22 Jan. 2003, the Circular on taxations policies in relation to the 29th Olympic Games was jointly promulgated by the Ministry of Finance, the General Administration of Taxation and the General Customs Office. Under which, the organization commission of the 29th Olympic Committee, the international Olympic committee and other Olympic related participants shall enjoy a series preferential tax policies, those policies are mainly focused on the following kinds: value added tax, consuming tax, revenue tax, land value added tax, vehicle purchase duty, customs duty, stamp duty, income tax etc. according to this circular, when calculating the taxable incomes, the enterprise, social organization and union shall enjoy a full deduction of the amount which has been given as a gift or assistance in form of money or property; as to the income tax which should be borne by the participating athlete, the amount obtained by the athlete by means of incentive money and other incentive income should be exempt from income tax in accordance with the current concerning laws and regulations.

Regulations over Administrations Regarding Foreign Invested Urban Planning Service Enterprises
The Regulation on Administrations Regarding Foreign Invested Urban Planning Service Enterprises has jointly issued by the Ministry of Construction and the MOFTEC and will become effective on 1 May 2003. The regulation has placed some provisions relating to the following: design of urban planning with respect to foreign investment, the establishing procedure and condition with regard to consulting activity etc. under this regulation, foreign investor may take the form of solely foreign invested, joint venture and cooperative to participate in services regarding urban planning, provided that a Qualification Certificate for Foreign Invested Enterprise Engaging Urban Planning should be issued by the governing authorities. In this regulation, the proportion of foreign technology personnel, the stay and serving time have been provided. For example, such time should not be less than 6 months in terms of aggregated amount of stay time.

Provisionary Rules on Establishment of Sino-Foreign Enterprises in Foreign Trade Regard
The MOFTEC, on 31 Jan. 2003 issues a Provisionary rules on establishment of sino-foreign enterprises in foreign trade regard, which has been in force since the date which is 30 days from the issuance. This rule has laid the regulations on the condition, set-up procedure and necessary material relating to the investors, whether foreign or domestic. Bear in mind that, the standard laid to the investors should be considerably high, such requirements are the following: 1) foreign investor should, during the previous three year period before the application have a trading volume worth more than US 30 million with China (or more than US20 million in case such enterprise would be set up in mid or western areas in China); 2) the Chinese investor is entitled to foreign trade, and should, during the previous three year period before the application, have a import and export trading volume worth more than US 30 million (or more than US 20 million in case that the enterprise would be set up in mid or western areas in China); and 3) the registered capital should not be less than RMB 30 million. In addition, before 11 Dec. 2003, if the proportion of the registered capital of Chinese investor is not more that 51 percent, such application shall, temporarily, not be accepted.