Haworth & Lexon Law Newsletter
No.3, 2003 (Total:No.19)    April20th, 2003
Edited by Haworth & Lexon

Guidelines

The new requirement about the prospectus of stock has been made by the CSRC
The decision about amendment to provisionary regulations on foreign investment company has been in force since 7 Apr. 2003
The latest laws
The circulation on issues relating to foreign exchange regarding foreign invested fund management
The rules on administration of foreign invested enterprises engaging in books, newspapers and magazines areas will be effective on 1 May 2003
The non-argument letter, which had been required by the CSRC has been abolished

The new requirement about the prospectus of stock has been made by the CSRC

In order to improve the disclosing quality of information and cut relevant costs, on 24 Mar. 2003, the CSRC made a new amendment to the No. 1 standard disclosing content and form requirement---the prospectus of stock publicly issued by the company. This new amendment entered into force on the same day.
Under the amendment, the applicant who would issue and list their stocks, should formulate and print the prospectus of stock and its abstract, both which should be submitted by the applicant, in purpose for its first time to publicly issue its stock, to the CSRC as the necessary legal document, and such document should also be disclosed in accordance with governing rules. By contrast, in past, only was the abstract of the prospectus of stock necessary. Among other things, the following aspects need be noted highly:
1) the effective period and its starting date of the prospectus. Under old rules, the effective period should be three months, and be calculated from the date of its approval issuance by the CSRC. According to this new amendment, the effective period of the prospectus shall be six months, and be calculated from the date on which the prospectus is lastly signed prior to the issuance of the approval by the CSRC.
2) Re-examination and approval. In case that some significant changes appear, the application for the public issuance of stock, if necessary, may be made again.
3) Formulation and disclosure of the prospectus brief. This new amendment requires the followed things be done: a) the purpose of the prospectus is only to provide the public brief information, not including all parts of the major contents; b) the abstract of the prospectus should utmost use some professional and technical expressions which are not familiar to investors, and should adopt graphs or other straightforward methods in accurately disclosing the products and financial situation of the company in pursuit of brief, simple, plain and clear disclosure; c) the abstract should not be inconsistent with the total contents of the prospectus and should be strictly loyal to the prospectus; 4) the abstract should be published on the newspapers and magazines designated by the CSRC, and which should not be more than one page. The smallest size of the word should not be less than No.5 and the space between lines should not be less than 0.35 centimeter.
4) The completeness of the financial statement. Under this new provision, the responsible person of the company, the person in charge of the accounting, and the responsible person of the accounting department, should make sure that the financial and accounting statement is true and complete.
5) Definition and prevention of the risks. In seeking of risk reminding, this new provision requires the following reminder: should investors have any doubt regarding the truth of the prospectus, they should consult their own stock brokers, lawyers, professional accountants and other professionals. At the same time, this new rule says that, risk factors are referred to all those that might impair issuer's achievements and substantial operations. But the old provision merely pointed that, the risk factor means those that all significant uncertain factors relating to the issuer.
6) Disclosing contents of issuer. As to the issuer's history and the course of the system reform, this new rule says that, the following contents should be added to its disclosing list: a) the major asset and actual major business of the major promoter prior to the establishment of the issuer; b) the major asset and the major actual business possessed by the issuer; and c) the major asset and the actual major business of the major promoter after the establishment of the issuer.
7) Connected transaction. The new provision requires that in need of opinion regarding connected transaction from independent director and supervisory board, a disclosing of the justified opinion regarding the connected transaction should be made. The old rules had no such requirement.
8) Definition of shareholder as a family unit. With respect to a shareholding family unit of director, supervisor and other high management officers, the new definition is referred to the parents, spouse and the children of the said above officers. In old provision, the extent is limited to spouse or their children less than 18 years old.
9) Regarding the abstract. There have been large changes compared to those old regulations. Especially the following reminders have been required to list into the abstract: a) the purpose of the abstract is merely to provide the related information about the issuing, and not to cover every part of the whole contents of the prospectus. All the contents are published on XXX web site. Before the decision is made, the investor should carefully peruse the entire contents of the prospect, and base them to make the investing decision. b) the CSRC and other governmental bodies are not the substantial judge or guarantor regarding the share's value or investor's profit, even such bodies have made some decision or opinion concerning the public issuance of the stock in any respect. Any declaration contrary to the above said statement should not be true one.
In addition, the new provision has also covered other areas, such as particular reminder and particular risk reminder, outline of the issuance, basic information of the issuer, arrangement of the money contributed by the investors, risk factors and other important information, arrangement of the participants and timing of the issue, attachment and various documents.

The decision about amendment to provisionary regulations on foreign investment company has been in force since 7 Apr. 2003

On 7 Mar. 2003, the MOFTEC promulgated this decision. In this decision, the contribution forms, business scope, preferential treatment and status of promoter etc have been regulated.
1) foreign investors should use freely convertible currency or RMB obtained from the profit of the already invested company or legal RMB incomings obtained from transfer of shares and clearing activities to contribute to their investment company as the registered capital.
2) Business scope. Upon approval of the establishment of the investment company, such company is entitled to conduct various businesses based on its actual need to carry out the operation and activities.
3) The status of the company as a promoter. The investment company may be as promoter to establish a foreign invested stock limited liability company or hold the stock, which cannot be traded on the stock market because its share holder is a legal person, of a foreign invested stock limited liability company. The investment company may also be a share -holder, who are unable to trade such shares on the stock market because it is a legal person, of other domestic stock limited liability company in line with concerning regulations. Being a promoter, the investment company should be treated as a foreign promoter or shareholder.
4) Service to its invested company by conducting various operations. The investment company, upon approval by the department in charge of foreign trade and economic at various levels such as province, autonomous region, municipality and city directly under the State Council, may conduct various businesses based on its actual business need. Provided that the investment company should satisfy the following conditions: it has done the business legally, without record of unlawful activity, and made its contribution in compliance with the Articles of Association and the actual contribution has not been less than US30 million and such money has been put into its invested venture.

The circulation on issues relating to foreign exchange regarding foreign invested fund management

The State Foreign Exchange Control Office on 29 Mar. 2003 issued this circulation regarding the foreign exchange control of the fund management company invested by foreigners. Under this regulation, the foreign invested fund management company should include such companies in which the foreigner is a investor by accepting shares outside China, by purchasing shares of a domestic fund management company, or by jointly establish a fund management company with domestic investors.
This circulation has focused its attention on the opening of a foreign exchange account, clearance of foreign exchange and procedure for remittance of foreign profit.

The rules on administration of foreign invested enterprises engaging in books, newspapers and magazines areas will be effective on 1 May 2003

As about this rule, the following conditions on how to establish such a company should be noted particularly:
1) with respect to whole sale company, the conditions set out below should be satisfied:
a) both Chinese and foreign sides are able to independently take civil responsibilities, to conduct business of books, newspapers and magazines, without record of unlawful and illegal activities in immediate last three years; b) the legal representative or general manager should obtain middle-grade above publication distributor certificate, and the distributor personnel should possess initial grade above publications distributor certificate; c) the fixed premise should suit the whole sale business, the business place should not be less than 50 square meters, the independently set business premise should not be less than 500 square meters; d) the registered capital should not be less than RMB 30 million; e) the business period should not be more than 30 years.
2) As to retail company, the following conditions should be satisfied:
a) The fixed premise should suit the relevant business; b) the registered capital should not be less than RMB 5 million; c) other conditions are same with those said above.
It should also be noted that, if the Chinese investor contribute by using state-own asset, including evaluation or as cooperation condition, an assessment and ratification (or record) of the result should be made in accordance with relevant regulations.

The non-argument letter, which had been required by the CSRC has been abolished

The Examination on Legal Opinion from Chinese Lawyers Regarding Public Issuing and Listing of Stock on Overseas Market by an Overseas Company with Domestic Interests has been abolished since 27 Feb. 2003 by the CSRC. In past the examination had in fact postponed the relevant process. After the abolishment, the CSRC will strengthen its supervision by making administration regulation and standard, in spirit of prudential supervision, perfect relevant means, and emphasize inspection of the event and correspondent punishment, in order to protect interest of investors.