Haworth & Lexon Law Newsletter
No.4 2011 (Total:No.111) May.15, 2011
Edited by Haworth & Lexon
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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.
Guidelines:
The News:
Haworth & Lexon Chongqing Office Lawyer Was Reinvited to the Law Forum of CCTV 12
Latest Laws and Regulations:
Catalogue for Guiding Industrial Restructuring (2011 version)
Guidelines on Participation of Qualified Foreign Institutional Investors in Stock Index Futures Trading
Services Rules on Third Party E-commerce Transaction Platform
Notice on Interpretation of Article 14 of the Provisions on Clearly Marking the Prices of Commodities and Services
Administrative Measures for the Pre-income-tax Deduction of Asset Losses of Enterprises
Opinions of the Supreme People’s Procuratorate on Several Issues concerning Application of the Amended State Compensation Law of the People’s Republic of China
Interpretation of the Supreme People’s Court on the Issue concerning the Retroactivity of the Amendment (VIII) to the Criminal Law of the People’s Republic of China, Provisions of the Supreme People’s Court on Several Issues concerning the Trial Procedures for Restrictions on Commutation of Suspended Death Penalty Cases
Accreditation and Administration Measures of State Industrial Exemplary Bases for Invigorating the Marine Undertaking with Science and Technology (for Trial Implementation)
Regulation on Individual Industrial and Commercial Households
Interim Administrative Measures of Shanghai Municipality for Examination and Approval of Foreign Investment Projects
Legal Practices:
Explanation of Shanghai Municipality’s Policy for Trial Implementation of Foreign-funded Equity Investment Enterprise
The Legal Validity of General Manager’s Appointment and Dismissal Terms under Relevant Company Bylaw—A Case Study on Revoking the Decision of the Executive Director
A Brief Analysis on the Trademark Infringement as a Criminal Offense
Price Monoply Issues Involved in Distribution Agreement
Column for Haworth & Lexon Branch Offices:
The “Executive Director” Highlights the Conflict in Administrative Concepts, under which Circumstances a Broader Mind is Indispensable for Attracting Investment
The News
Haworth & Lexon Chongqing Office Lawyer Was Reinvited to the Law Forum of CCTV 12
On May 12 and May 13, 2011, CCTV-12, the Society and Law Channel of CCTV, broadcasted the Law Forum where attorney Chen Jing with Haworth & Lexon Chongqing Office was invited to give a lecture regarding laws and regulations for the TV program. As a keynote speaker, Attorney Chen enlightened us on the Law of Succession and the Marriage Law by narrating two cases—What a Will Tells and A Dangerous Relationship. For more information, please click the video link: http://news.cntv.cn/program/falvjiangtang/20110512/109948.shtml.
Law Forum is a key law popularization program sponsored by CCTV-12, the Society and Law Channel of CCTV. This program, in the form of lectures given by legal experts, introduces to the audience legal principles and legislative background of relevant laws and regulations in China as well as judiciary history of China and foreign countries. Law Forum is oriented to real life and common people by properly combining law principles, ideas and stories, thus having a very high audience rating all over the nation. As for Attorney Chen, this is the second time for her to attend this program.
Latest Laws and Regulations
The Catalogue for Guiding Industrial Restructuring (2011 version)
The National Development & Reform Commission issued the Catalogue for Guiding Industrial Restructuring (2011 version)[hereinafter referred to as the Catalogue (2011 version)] on March 27, 2011 and put it into force as of June 1, 2011.
The Catalogue (2011 version) keeps the categories of the 2005 version, namely, the encouraged category, the restricted category and the eliminated category. This amendment deleted 175 items from the encouraged category and added another 413 items to it. With regard to the restricted category, 70 items are deleted, and 12 items are shifted to the eliminated category and another 85 items are added; within the eliminated category, 157 items are deleted and another 189 items are added.
The Catalogue (2011 version) comprehensively demonstrates the content and trend of restructuring and industrial upgrading. Fourteen (14) sub-categories have been added to the encouraged category, including new energy, urban rail transit equipment, integrated transportation system, public safety, emergency products, etc. There are 35 items within the sub-category of public safety and emergency products, covering major fields of monitoring and early warning system, emergency disposal equipment and rescue services. The civil explosive products sub-category has been added to the restricted category while the shipping sub-category and the civil explosive products sub-category have been added to the eliminated category. The new energy item covers 10 sub-items, including solar power, biomass energy, wind power, marine energy, etc. Among all these sub-items, the significance of solar power is highlighted, including the system of solar thermal power generation from thermal storage, the development and application of the integration technique in the solar photovoltaic power generation system, etc.
The Catalogue (2011 version) emphasizes the development and independent innovation of strategic emerging industries, which is reflected in the increase of items within the encouraged category for strategic emerging industries. For example, within sub-categories like equipment, automobile and shipping, some items have been added, including the automatic control system of major equipment, the high-speed precision bearing, the rail vehicle AC traction and transmission system, key components of new energy automobiles, special work ships for marine engineering and marine engineering equipment. Within the textile sub-category, the “high-tech fiber and application” item highlights the significance of encouraging the industrialization of biomass fiber with independent innovation and environmental protection techniques, speeding up the development and production of high-performance fiber and products (composites) and technical textiles.
The Catalogue (2011 version) provides more support for the service industry. In the Catalogue for Guiding Industrial Restructuring (2005 version), the service industry comes under the sub-category of “other service sectors” within the encouraged category and covers 33 items. This Amendment has reclassified these “other service sectors” and set up 7 new sub-categories, including “modern logistics”, “financial services”, “scientific and technological services”, etc. There are now 112 items under the encouraged category of the service industry.
In addition, this Amendment also focuses on the restriction on and guidance for industries with an excessive production capacity. Within the eliminated category, the Catalogue (2011 version) emphasizes more on the restriction on and guidance for industries with an excessive production capacity. On setting up the items within the restricted category, the Catalogue (2011 version) highlights the restriction on industries with an excessive production capacity and low-level redundant construction, clearly defining the realm of restriction (from product standard, product parameter, production device scale and so on) and accordingly improving the access criterion.
Guidelines on the Participation of Qualified Foreign Institutional Investors in Stock Index Futures Trading
China Securities Regulatory Commission (CSRC) issued the Guidelines on the Participation of Qualified Foreign Institutional Investors in Stock Index Futures Trading on May 4, 2011, and put them into effect on the same day.
The term “stock index futures” means financial futures contracts, the subject matter of which is a stock price index, that are approved by the China Securities Regulatory Commission (CSRC) and are listed and traded on China Financial Futures Exchange (CFFEx).
A Qualified Foreign Institutional Investor (hereinafter referred to as QFII) participating in stock index futures trading shall, in addition to relevant regulations of CSRC, abide by the following two principles. Firstly, at the end of any trading day, the value of stock index futures contracts held by a QFII shall not exceed its investment quota. Secondly, during any trading day, a QFII’s trading amount of stock index futures (except closing positions) shall not exceed its investment quota. Investment quota refers to the amount of original capital for investment as actually remitted inwards by a QFII with the approval of the State Administration of Foreign Exchange (SAFE) or as adjusted and confirmed by the SAFE. In case the value of futures contracts held by a QFII does not conform to the aforesaid provisions due to price fluctuations and other factors in the securities and futures market, the QFII shall complete adjustments within 10 trading days.
A QFII participating in stock index futures trading shall apply to CFFEx for a trading code for each fund account opened with the approval of the People’s Bank of China and SAFE. A QFII participating in stock index futures trading through different fund accounts shall ensure the independence of each fund account. A QFII may entrust stock index futures trading to three (3) domestic futures companies at most.
Services Rules on Third Party E-commerce Transaction Platform
On April 12, 2011, the Ministry of Commerce issued the Services Rules on Third Party E-commerce Transaction Platform (hereinafter referred to as the Services Rules). The whole technical content of the Services Rules is recommendatory. The Service Rules stipulate the code of conduct for services and business operations on third party e-commerce transaction platform, unless otherwise stipulated by laws and regulations.
The Services Rules have 32 articles in 9 chapters, and clarify responsibilities and protect rights of all parties in five (5) aspects: the establishment of platform and code of conduct, platform operators’ administration of and guidance for operators within the site, legal protection for consumers, coordination with and supervision over the relevant service providers.
The Services Rules establish three (3) principles for platform operators: the principle of fairness, impartiality and openness; the principle of business segregation (which means that if platform operators concurrently conduct business within the site on the platform, they shall separate the platform services from the business within the site, and announce this on their third party platform) and the principle of encouragement and motivation.
The Services Rules require the platform operators to supervise and administer the operators within the site from 8 aspects: member registration, contract specification, code of conduct, information management, order maintenance, mis-trade treatment, IPR protection and prohibited act. For example, with regard to member registration, a natural person or a legal person is required to produce an identity proof or business license and provide its business address, contact information and other necessary information when applying for a membership. The third party e-commerce transaction platform shall check the business license, tax registration certificate and various business certificates of operators within the site. Platform operators shall have an annual and regular check on the registration information of real-name registered operators within the site, and shall mark out those unverifiable operators within the site. With regard to prohibited act, it is primarily stipulated that the third party platform and its self-owned platform concurrently conducting online commodities (services) trading shall not act in collusion with each other, and shall not take advantage of their own convenience to manipulate the market price so as to raid the market and cause damages to legal rights and interests of other operators or consumers.
Notice on Interpretation of Article 14 of the Provisions on Clearly Marking the Prices of Commodities and Services
The National Development & Reform Commission issued the Notice on Interpretation of Article 14 of the Provisions on Clearly Marking the Prices of Commodities and Services (hereinafter referred to as the Notice) on April 22, 2011.
As per article 14 of the Provisions on Clearly Marking the Prices of Commodities and Services, operators of open-shelf counters, automatic vending machines, supermarkets, etc. where commodities are sold in an optional manner shall use a coding machine to stick price tags on the commodities or packages and shall clearly mark the prices at the store counter (shelf) in accordance with the varieties of commodities as per article 13 of Provisions on Clearly Marking the Prices of Commodities and Services. However, as the provisions of Article 14 do not conform to the current situations, as per the Notice, the operators under article 14 are not required to use a coding machine to stick price tags on the commodities or its packages any more, and yet they shall differentiate between the varieties of commodities and mark out the prices of commodities at the store counter (shelf) as per the Provisions on Clearly Marking the Prices of Commodities and Services, and shall at the same time clearly mark the prices with flexible and convenient means like bar codes, computer query, electronic signs, etc. Operators who do not clearly mark the price or do not clearly mark the price as per relevant regulations shall be punished in accordance with the Provisions on the Administrative Punishment of Price-related Violations.
Administrative Measures for the Pre-income-tax Deduction of Asset Losses of Enterprises
The State Administration of Taxation issued the Administrative Measures for the Pre-income-tax Deduction of Asset Losses of Enterprises (hereinafter referred to as the New Administrative Measures) on March 31, 2011 and put into effect on the same day.
Compared with the original Administrative Measures, the New Administrative Measures have the major differences as listed below:
1. The New Administrative Measures stipulate inventory declaration and special declaration deduction, different from the original self-declaration deduction and examination and approval deduction, and abolish the provision on declaration to tax authorities for examination and approval within 45 days after the year end. The inventory declaration is equivalent to the self-calculation deduction under the old Administrative Measures; An enterprise may make classifications and summarizations in accordance with the accounting subjects and then submit the summarized inventory to tax authorities and keep the auditing and rate-paying materials for future reference. With regard to the special declaration, the enterprise shall submit application letters item by item (case by case) to the tax authorities, together with the auditing materials and other relevant rate-paying materials. When conducting annual tax filing and declaration of enterprise income, the enterprise shall file asset losses declaration form and rate-paying materials to tax authorities as the annex of the annual rate-paying declaration form of enterprise income tax.
2. The scope of asset losses deduction has been appropriately expanded. As per the New Administrative Measures, enterprise assets include cash, bank deposits, account receivable and prepayments (including notes receivable, various advance payments, receivables and accredited payables) and other monetary assets, inventory, fixed assets, intangible assets, projects under construction, productive biological assets and other nonmonetary assets, debt investments and equity investments. The asset losses approved to be deducted before enterprise income tax refer to reasonable losses incurred during the disposal and transfer of the aforementioned assets and those that have not been disposed of or transferred by the enterprise but conform to No.88 [2009] of the State Administration of Taxation and have been confirmed after being calculated with the specification under the New Administrative Measures. Compared with the original provisions, in the New Administrative Measures, the receivables and prepayments of asset losses have increased various advance payments, receivables and accredited payables and intangible assets; and substantial damages incurred before the disposal and transfer of enterprise assets can also be deducted before the tax as per the new provisions.
3. Provisions on the administration of summarized rate-paying asset losses have been added. Affiliated branches shall submit summarized inventories to the local competent tax authority and also to the head office. The head office shall declare to the competent local tax authority in the form of inventory declaration on asset losses reported by the affiliated branches. Asset losses incurred by affiliated branches owing to bundling, packaging and transferring assets shall be specially declared by the head office to the competent local tax authority.
4. The losses incurred by the account receivable overdue for 3 years or above can be declared to be deducted. The New Administrative Measures stipulate that the account receivable overdue for 3 years or above that has been treated as losses in accounting may be deemed as a bad debt loss, but this shall be specified, for which a special report shall be produced. Account receivables (single sum ≤ RMB 50,000 or ≤ 0.1‰ of total enterprise annual revenue) overdue for 1 year or above that have been treated as losses in accounting can be deemed bad debt losses, but this shall be specified, for which a special report shall be produced. Compared with the original provision, account receivables overdue for 3 years or above shall be specified, for which a special report shall be presented.
Opinions of the Supreme People’s Procuratorate on Several Issues concerning the Application of the Amended State Compensation Law of the People’s Republic of China
The Supreme People’s Procuratorate issued the Opinions of the Supreme People’s Procuratorate on Several Issues concerning the Application of the Amended State Compensation Law of the People’s Republic of China on April 25, 2011 and put them into effect on the same day.
In case infringements upon the legitimate rights and interests of citizens, legal persons and other organizations by the People’s Procuratorate and their functionaries in performing their functions occur after December 1, 2010, the amended State Compensation Law shall apply to such infringements; in case infringements upon the legitimate rights and interests of citizens, legal persons and other organizations by the People’s Procuratorate and their functionaries in performing their functions occur before December 1, 2010, the former State Compensation Law shall apply to such infringements, unless the compensation claim is filed after December 1, 2010, or no effective compensation decision has been made for the compensation claim filed before December 1, 2010.
The People’s Procuratorate shall continue to handle pending criminal compensation confirmation cases accepted before December 1, 2010. In case a confirmation is made and the compensation procedure is initiated according to law, the amended State Compensation Law shall apply to the handling of such cases; in case any protest is filed against a rejection of confirmation, the former State Compensation Law shall apply to the handling of the protest.
In case a compensation claimant files an appeal against a criminal compensation decision of the People’s Procuratorate which came into force before December 1, 2010, the People’s Procuratorate shall apply the former State Compensation Law to it; the People’s Procuratorate shall reject any appeal filed by a compensation claimant only for any compensation item or rate newly added in the amended State Compensation Law.
Interpretation of the Supreme People’s Court on the Issue concerning the Retroactivity of the Amendment (VIII) to the Criminal Law of the People’s Republic of China, Provisions of the Supreme People’s Court on Several Issues concerning the Trial Procedures for Restrictions on Commutation of Suspended Death Penalty Cases
The Supreme People’s Court issued the Interpretation on the Issue concerning the Retroactivity of the Amendment (VIII) to the Criminal Law of the People’s Republic of China (hereinafter referred to as the Interpretation), and Provisions on Several Issues concerning the Trial Procedures for Restrictions on Commutation of Suspended Death Penalty Cases (hereinafter referred to as the Provisions) on April 25, 2011 which came into effect as of May 1, 2011.
The Interpretation has 8 articles in total that mainly stipulate the specific applicable criminal law for the criminal cases tried by the People’s Court after May 1, 2011. The Interpretation stipulates that, as for a crime committed before April 30, 2011 by a convict who shall be sentenced to control or a probation according to law, the People’s Court, in light of the crime committed, may deem it necessary to announce an injunction in accordance with the amended Criminal Law. In case a crime is committed before April 30, 2011 by a convict who is sentenced to a suspended death penalty, Article 50 of the Criminal Law before amendment shall apply; however, in case a defendant is a repeat offender, or the crime he committed is murder, rape, robbery, abduction, arson, bombing, distribution of hazardous substances or organized violence, and the criminal offense is extraordinarily serious, and the principle of suiting punishment to crime cannot be reflected if he is sentenced to a suspended death penalty in accordance with the Criminal Law before amendment, while, according to the amended Criminal Law, he may be imposed upon due penalties if he is sentenced to a suspended death penalty and it is also decided by the court to put restrictions on commutation of his sentence, the provisions of the amended Criminal Law shall apply.
The Provisions stipulate on the trial procedures for the relevant cases. Firstly, as for a repeat offender or a convict of murder, rape, robbery, abduction, arson, bombing, distribution of hazardous substances or organized violence who is sentenced to a suspended death sentence, the People’s Court may, when making a judgment, decide to put restrictions on commutation of the sentence in light of the circumstances of the crime and dangerousness of the offender or the convict, among other circumstances. Secondly, it is specified what trial procedure shall be adopted to handle an appealed case when the Higher People’s Court is trying or reviewing it, holding that the original judgment is improper in restricting commutation or commutation shall be restricted. Thirdly, if the Supreme People’s Court, when reviewing a death sentence case, holds that the defendant may be sentenced to a suspended death and restrictions may be put on commutation, it shall make a ruling on disapproving the death penalty, reversing the original judgment and remanding the case for retrial. If two or more defendants in a case are sentenced to death, and upon review the Supreme People’s Court amends the judgment to sentence some of the defendants to a suspended death sentence, it may decide to put restrictions on the commutation of the sentence at the same time if the provisions of paragraph 2 of Article 50 of the Criminal Law are met. Fourthly, it clarifies the written judgment, legal basis, etc. for determining the restriction on commutation.
Accreditation and Administration Measures of State Industrial Exemplary Bases for Invigorating the Marine Undertaking with Science and Technology (for Trial Implementation)
The State Oceanic Administration issued the Accreditation and Administration Measures of State Industrial Exemplary Bases for Invigorating the Marine Undertaking with Science and Technology (for Trial Implementation) (hereinafter referred to as the Measures) on April 21, 2011 and put it into effect on the same day.
Exemplary bases refer to industrially distinctive areas or enterprises and public institutions that conform to needs for invigorating the marine undertaking with science and technology and developing the state marine high technology and strategic emerging industries. They are equipped with a combination of research and development, incubation, production, transaction, training and services, playing an exemplary, supportive and motivative role in the transformation of marine scientific and technological achievements and the development of marine high technology. Exemplary bases have two categories—special and integrated.
The Measures clarify the accreditation criterion for the exemplary bases. For example, an exemplary base shall have an independent legal entity with a complete organizational and administrative system as the organizing and conducting entity, and shall have advantages in technology and talents, and shall have preliminarily fostered one or more marine high technology industrial cluster(s), and shall have specific development plans and goals, etc. As for the accreditation and evaluation criterion, it includes the industrial agglomeration degree, innovation capability and industrial development environment.
In addition, the Measures also make specific provisions on the declaration and accreditation procedures, the administration of exemplary bases, etc.
Regulation on Individual Industrial and Commercial Households
The State Council issued the Regulation on Individual Industrial and Commercial Households (hereinafter referred to as the New Regulation) on April 16, 2011 and shall put into effect on November 1, 2011.
The New Regulation abolishes the limitation on the identity of applicants. The Interim Regulation on the Administration of Urban and Rural Individual Industrial and Commercial Households currently in effect stipulates that an industrial and commercial household shall be “unemployed people in cities and towns, rural villagers and other people permitted by national policies, etc. who are capable of running a business”; but in accordance with the New Regulation, an industrial and commercial households shall be a citizen capable of running a business and be engaged in industrial and commercial business operations after registration with the administration for industry and commerce. An industrial and commercial household may conduct both individual operation and household operation.
The New Regulation has abolished the limitation on the number of employees engaged in the industrial and commercial households business. An individual industrial and commercial household may hire employees as needed by its business operations.
In addition, the Interim Regulation on the Administration of Urban and Rural Individual Industrial and Commercial Households currently in effect puts some restrictions on the scope of the industrial and commercial households business, i.e. “manufacturing, handicraft, construction, communications and transportation, commerce, catering, service, repair and other industries within the scope allowed by state laws and policies”. The New Regulation eases the limit, stipulating that any industry not prohibited by laws and regulations can be selected as the industrial and commercial households business.
The New Regulation also abolishes the administration fees for the industrial and commercial households.
Chinese Citizens who are permanent residents in Hong Kong Special Administrative Region or Macao Special Administrative Region and residents in Taiwan region may apply for registration as an individual industrial and commercial household as per the relevant provisions of the state.
Interim Administrative Measures of Shanghai Municipality for Examination and Approval of Foreign Investment Projects
Shanghai Municipal People’s Government endorsed the Interim Administrative Measures for Examination and Approval of Foreign Investment Projects formulated by the Shanghai Municipal Development and Reform Commission on April 11, 2011 and put it into effect on the same day.
In accordance with the classification under the Industrial Catalogue for Guiding Foreign Investment, any project within the encouraged and permitted category with a total investment quota of USD 300 million or more, and any project within the restricted category with a total investment quota of USD 50 million or more or any other specially stipulated project shall be first subject to the examination and approval of the competent municipal administration of foreign investment projects and then be forwarded to the National Development and Reform Commission (hereinafter referred to as the NDRC) for approval. The competent municipal administration of foreign investment projects shall be responsible for the examination and approval of foreign investment projects within the authority of Shanghai Municipality. With regard to a foreign investment project with a total investment quota of USD 30 million or more approved by the project examination and approval organ, the competent municipal administrative organ of foreign investment projects shall send a copy of the project approval document to the NDRC within 20 working days as of the date of approval of the project.
If it is necessary to solicit the opinions of the municipal industrial administrative department regarding the acceptance of a foreign investment project application, or if there are major issues needing to be evaluated and demonstrated, the project examination and approval organ shall issue to the municipal industrial administrative department a letter for soliciting opinions accompanied by the relevant materials, or engage a qualified consulting agency to conduct evaluation and demonstration.
The project examination and approval organ shall, within 20 working days as of the date of accepting the project application, complete the examination and approval of the project application, or forward it to NDRC within 20 working days after the examination and approval.
The term of validity of the approval document issued by the project examination and approval organ is 2 years. Thirty (30) days before the expiration, the project applicant can apply for an extension of one (1) year.
Once there is a change of construction site, investor or equities, major construction contents and major products, and once the total investment quota exceeds 20% or more of the originally approved investment quota with regard to the foreign investment project approved by the project examination and approval organ, an application for modification shall be filed to the original project examination and approval organ.
Legal Practices
Explanation of Shanghai Municipality’s Policy for Trial Implementation of Foreign-funded Equity Investment Enterprise
The Shanghai Municipal Government issued in January 2011 the Measures for Trial Implementation of Foreign-funded Equity Investment Enterprise (hereinafter referred to as the Measures), for the purpose of reviewing the foreign-funded equity investment enterprise (PE), and it is vested in the joint conference to grant foreign-funded PE the qualification of pilot enterprise. It is reported that the municipal regulatory authority has approved 5 pilot enterprises, namely, Carlyle-Fosun, Blackstone, DT Capital Partners, Golden Sun-CLSA (Shanghai) Equity Investment Management Company and TPG. Shanghai Municipal Finance Service Office revealed the ideas on pilot enterprise examination and approval and specific pilot policies of the municipal regulatory authority in recent interpretation conference on pilot working policies.
I. Principles for Assessing Pilot Enterprises
1. The fund management group shall be experienced in investment in China, especially in successful withdrawal;
2. Giving priority to the guidance funds (including foreign pension funds, charity fund, college fund, etc.), enterprises domestically funded by state-owned or private-owned enterprises, etc.;
3. Giving priority to the 7 emerging industries whose investment orientation is specified in the 12-year plan and experienced in group administration;
4. Enterprises with clear and clarified organizational structure, investment plan and investment subject, etc.
II. Foreign Investment Ratio and Settlement of Capital Fund in Pilot Enterprise
1. Foreign capital quota in pilot enterprise:
As for pilot enterprises, the municipal regulatory authority has not set a limit on foreign capital investment ratio which may theoretically reach 100%. However, when reviewing pilot enterprise, the municipal regulatory authority attaches more importance to enterprises domestically funded (especially by the guidance funds, state-owned and private-owned enterprises). Meanwhile, the previous public predication crumbles to dust when the State Administration of Foreign Exchange does not set a limit with a maximum foreign exchange quota of USD 3 billion on pilot enterprise in Shanghai.
2. The foreign exchange fund of pilot enterprise can be settled at the fund level and does not need to be declared sum by sum to the State Administration of Foreign Exchange for approval:
The accredited pilot enterprise can handle foreign exchange registration and account-opening for itself and its foreign limited partners; the foreign-funded PE with projects in hand is allowed to be settled at the fund level. In a word, foreign capital may invest officially in RMB denominated funds through channels permitted by pilot measures. After obtaining the approval for establishment, the foreign-funded equity investment enterprise for trial implementation may directly handle the foreign exchange settlement through a custodian bank when executing project investment. After being exchanged into RMB, the foreign-funded equity investment enterprise for trial implementation may allocate a sum of money to the investee project company, without the need to apply to State Administration of Foreign Exchange for approval of the foreign exchange settlement quota required by each project.
III. Requirements on the Examination and Approval Materials Submitted by Pilot Enterprise
The application materials submitted to the joint conference (specifically to Shanghai Finance Service Office) for the qualification for pilot enterprise shall include totally 11 items of materials, including the pilot application and legal opinions (original) produced by the institutional investor on the authenticity and validity of the source of fund, agreement or draft agreement of partnership (including the fund scale, contribution ratio of each partner, fund duration, investment strategy and profit allocation scheme, etc.), resumes of the fund management personnel, etc.
IV. Application by Foreign-funded Equity Investment Management Company (GP) for Pilot Enterprise Qualification
Foreign-funded GP raising RMB denominated funds may apply for the pilot enterprise qualification in accordance with the Measures by investing foreign exchange funds in its equity investment enterprise; the sum of the foreign exchange fund shall not exceed 5% of the total fund quota raised. If the foreign-funded GP does not have an overseas LP (limited partner), the foreign exchange fund can enjoy “national treatment” while bypassing the limitation on investment fields. However, the municipal regulatory authority proposes that foreign-funded GP shall think over any possible requirement raised by the IPO examination and approval department on a certain case if the invested project falls into the prohibited foreign investment fields.
Pursuant to pilot measures, the power is vested in the government department at the municipal level to examine and approve the foreign-funded equity investment management enterprise and equity investment enterprise that apply for pilot enterprises. Therefore, if foreign-funded GP was originally examined and approved by the government department at the district and county level while now intends to raise RMB denominated funds pursuant to the Measures, it shall declare to the Municipal Commerce Commission for examination and approval. The Municipal Commerce Commission will mainly examine and approve the application for pilot enterprises (the application shall be in detail, with the feasibility analysis report, experience of major investors, etc.) and resumes of major managers submitted by foreign-funded GP.
V. Other Pilot Policies
1. Custodian bank
Pilot enterprise has to choose a custodian bank that shall report quarterly conditions concerning pilot enterprise’ fund-raising, investment and capital flow at the moment of withdrawal. At present the custodian bank is SPD BANK, but not limited to it.
2. Administration of Archival Filing
No.253 [2011] of the National Development and Reform Committee requires of the administration of archival filing of equity investment enterprise in pilot areas by the National Development and Reform Committee. At present, Shanghai Municipal Government has confirmed that Shanghai Finance Service Office and Shanghai Development and Reform Committee are jointly as the assistant department for the administration of archival filing. However, the administration of archival filing is still being cautiously carried forward, and has yet to be officially launched.
3. Registration address
The competent registration department of Shanghai Administration of Industry and Commerce has made it clear that foreign-funded GP and their self-sponsored equity investment enterprise may use the same registration address, which, yet shall be voluntarily distinguished, such as Zone A, Room 307 and Zone B, Room 307.
(The author’s contact information: baileyxu@hllawyers.com, celinechen@hllawyers.com)
The Legal Validity of General Manager’s Appointment and Dismissal Terms under Relevant Company Bylaw—A Case Study on Revoking the Decision of the Executive Director
[Case Profile]
A limited liability company was originally established by several natural persons of A-shareholder, but due to the debt problem, several natural persons of B-shareholder have become the shareholders of the company by increasing their shares. The cooperation agreement on share increase clearly stipulates that Chairman of the Board is assumed by a person of A-shareholder while the General Manager by a person of B-shareholder. Soon afterwards, pursuant to the Resolution of Shareholders’ Meeting concluded by all A-shareholder and B-shareholder, shareholder C of A-shareholder was elected Executive Director of the company and shareholder D of B-shareholder was elected General Manager pursuant to Executive Director’s nomination. Meanwhile, the Letter of Appointment signed and sealed by Executive Director reads: “As per the Resolution of Shareholders’ Meeting and under the consensus of all shareholders, D is appointed General Manager of the company and is obliged to perform due obligations under the company bylaw.”
What attributes to dispute in the case is that: in the new company bylaw filed by the Administration of Industry and Commerce, it is stipulated that “the company shall have one general manager, who shall be elected by the shareholders’ meeting”, but terms regarding the powers and functions of Executive Director have been indiscriminately copied from the provisions on the powers and functions of the Board of Directors under the Company Law and stipulates that Executive Director is entitled to determine the appointment and dismissal and remunerations of General Manager. Accordingly, shareholder D appealed to the court, demanding that the Resolution on the Dismissal of General Manager be revoked.
[Legal Analysis]
This case is a common one in the matter of dispute against the revocation of the board decision, but it has involved many legal issues to be concerned and disposed, in light of the distinctiveness of company administrative institution as well as the conflict in provisions on the appointment and dismissal of General Manager under the company bylaw.
First of all, let us take a look at provisions on the appointment and dismissal of General Manager in a limited liability company:
(1) As per article 47 of the Company Law, the Board of Directors shall be responsible for the shareholders’ meeting and exercise the following functions: …… (9) Making decisions on hiring or dismissing the company’s manager and his salary and compensation…… (11) Other functions as specified in the bylaw.
(2) As per article 50 of the Company Law, a limited liability company may have a manager, who shall be hired or dismissed upon decision of the Board of Directors. The manager shall be responsible for the Board of Directors and shall exercise the following functions……
This shows that the Company Law actually set rules on the appointment and dismissal of General Manager of a limited liability company by the Board of Directors.
Judging by the relation between the Company Law and the company bylaw, the latter shall not contain terms that conflict with, contradict with or disagree with legal mandatory provisions. As in the following, whether the bylaw of a limited liability company can stipulate the appointment and dismissal of General Manager by the shareholders’ meeting actually is the validity problem of General Manager’s being appointed and dismissed by the shareholders’ meeting under the company bylaw. This validity problem amounts to whether the special provision on the change of the powers and functions of the Board of Directors is a breach of the company mandatory norms, further equivalent to whether article 47 of the Company Law on the powers and functions of the Board of Directors is a mandatory norm.
We have noted that article 47 of the Company Law on the powers and functions of the Board of Directors does not have any specific facultative wording similar to “unless it is otherwise provided for by the bylaw” or “shall be specified in the bylaw unless it is otherwise provided for by this Law”. However, article 4 of the Company Law stipulates that shareholders of a company shall be entitled to choose managers, while article 38 grants the shareholders’ meeting the right to perform “other functions as specified in the bylaw”. On the basis of the legislation of the Company Law and the spirit and legal principle of its amendment, as for a closely-held limited liability company emphasizing “human and nature”, provisions related to company institutions and its selection method, the powers and functions and rules of debate shall be included in the scope of company autonomy; the company bylaw can make special provisions on these on the premise of causing no harm to the interests of minority shareholders and their third-party members. Therefore, in this case, we claim that shareholders of the company may, in accordance with actual needs of company operation and administration, appoint a person from A-shareholder as Chairman of the Board, a person from B-shareholder as General Manager, and further stipulate in the bylaw the mechanism of equality and balance where both Executive Director and General Manager are elected by the shareholders’ meeting.
2. In case the powers and functions of the shareholders’ meeting conflict with that of the Board of Directors (or Executive Director) under the company bylaw, how to handle this?
.In case the company bylaw can stipulate that the shareholders’ meeting determines the appointment and dismissal of General Manager whereas Executive Director is entitled to determine the appointment and dismissal and remunerations of General Manager, there consequently will be two conflicting provisions on the powers and functions of the shareholders’ meeting and Executive Director. With regard to this, we propose that the following principles be obeyed so as to determine the legal force of the bylaw provisions:
(1) The powers and functions of the shareholders’ meeting shall be given the first priority to.
As per article 37 of the Company Law, the shareholders’ meeting is the authority of the company. Whereas article 47 of the Company Law stipulates that the Board of Directors shall be responsible for the shareholders’ meeting; article 51 of the Company Law stipulates that the powers of Executive Director shall be stipulated by the company bylaw. This shows that, as executive body of the company, the nature of the Board of Directors and Executive Director determines that their powers and functions come from the mandate (part is stipulated in a legal form) of shareholders. Meanwhile, according to legal principle, the powers and functions of the shareholders’ meeting are subject to legalism while that of Executive Director are subject to conventionalism. Therefore, in case the powers and functions of the shareholders’ meeting conflict or coincide with that of the Board of Directors (or Executive Director), any explanation and definition shall be based on the principle that the powers and functions of the shareholders’ meeting shall be given the first priority to.
(2) Respect the principal’s declaration of true intention
As per provisions under the cooperation agreement on share increase between A-shareholder and B-shareholder, Chairman of the Board is elected from A-shareholder while General Manager is elected from B-shareholder. This has actually given birth to the check-and-balance mechanism of appointment and dismissal of Chairman and General Manager respectively by A-shareholder and B-shareholder. Accordingly, the provision on the election of both Executive Director and General Manager by the shareholders’ meeting under the bylaw demonstrates the true intention of shareholders’ establishment of internal administrative institutions. Otherwise, if General Manager is appointed and dismissed by Executive Director, the rights and interests of B shareholders cannot be effectively protected.
As a matter of fact, the Resolution of Shareholders’ Meeting and the Letter of Appointment prove that General Manager of the company is elected by the shareholders’ meeting, which also confirms the true intention of the provision on the appointment of General Manager by the shareholders’ meeting under the company bylaw. Therefore, the procedure of dismissing General Manager shall conform to such procedure as mentioned above.
Finally, the court judges that “the provisions of the two articles conflict with each other; as per the Company Law, the shareholders’ meeting is the authority of the company and the power of Executive Director is obtained from mandate; therefore it is the right of the shareholders’ meeting to decide whether or not to dismiss the General Manager.”
[Lawyer’s Note]
Company bylaw is the fundamental basis of the company’s existence and operation and is the basic principle for standardizing the company’s organization and code of conduct, with binding force on the company, shareholders, directors, supervisors and senior managers. On one hand, bylaw has the statutory force, with the Company Law stipulating the indispensable items for it; formulation and modification of the bylaw are subject to strict legal procedures and it has obtained the public force after the completion of registration procedure. On the other hand, the company bylaw is autonomous in nature, granting bylaw-makers a certain extent of freedom of the will while standardizing company’s internal affairs and influencing the whole company’s managerial hierarchy and related external stakeholders. The Company Law has granted the company shareholders more self-determination power to deal with the internal relations between shareholders, company governance structure, management and administration, etc., so a legal and valid, complete and workable bylaw is vital for protecting shareholders’ rights and for formulating an effective operation model, which requires more attention from shareholders in conducting investments and business operations.
(The author’s contact information: terryxie@hllawyers.com)
A Brief Analysis on the Trademark Infringement as a Criminal Offense
On April 26, 2011, the State Administration of Industry and Commerce announced on its website page 10 typical trademark-related cases transferred to public security organs by administrations of industry and commerce. The 10 typical cases include online sale of commodities bearing registered trademarks “BURBERRY”, “ZEGNA”, “PRADA”, “VIDTORINOX” (investigated and punished by the Bureau of Industry and Commerce, Bingjiang Branch, Hangzhou Hi-Tech Industry Development Zone, Zhejiang Province), sale of commodities bearing counterfeited registered trademarks “LV”, “BURBERRY”, “VACHERON CONSTANTIN”, etc.. (investigated and punished by the Bureau of Industry and Commerce, Pudong New Area Branch, Shanghai), sale of commodities bearing counterfeited registered trademark “IPHONE” (investigated and punished by the Market Administration of Shenzhen Municipality, Shenzhen). These cases are investigated by administrations of industry and commerce and legally transferred to public security organs when the former discovered that the number of products that infringe the trademark right of renowned enterprises has reached the criminal prosecution criterion.
Since acts of seriously infringing IPR (Intellectual Property Rights) such as counterfeiting the registered trademark have been defined clearly as crime in the Criminal Law in 1997, criminal means have become the powerful weapon to combating trademark infringement, patent infringement and other serious infringements. In order to achieve unity in the punishment criterion for IPR infringement, the Supreme People’s Court and the Supreme People’s Procuratorate issued Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate Concerning Some Issues on the Specific Application of Law for Handling Criminal Cases of Infringement upon Intellectual Property Rights (hereinafter referred to as Interpretation I) in December 2004 and Interpretation II of the Supreme People’s Court and the Supreme People’s Procuratorate of the Issues concerning the Specific Application of Law in Handling Criminal Cases of Infringement upon Intellectual Property Rights (hereinafter referred to as Interpretation II) in April 2007. According to statistics, over a decade, IPR criminal cases of first instance accepted and heard by all levels of courts throughout the nation have amounted to nearly 10,000. This shows that the criminal protection of IPR has become an important constituent part of IPR protection system.
Under which circumstance shall the trademark infringement be deemed as a criminal offense? As per the Criminal Law, any of the following acts shall be deemed as counterfeiting the trademark and shall be prosecuted for criminal responsibility: (1) using a registered trademark which is identical with or similar to the registered trademark on the same kind of commodities or similar commodities without a license from the registrant of that trademark and constitutes a crime; (2) counterfeiting, manufacturing without authorization the marks of a registered trademark of others, or selling the marks of a registered trademark counterfeited or manufactured without authorization and constitutes a crime; (3) knowingly selling commodities bearing counterfeited registered trademarks and constitutes a crime. The trademark infringer may be sentenced to a maximum of 7 years in prison or/and imposed a fine. The following issues need to be taken into consideration when judging the crime of trademark infringement:
1. The trademark infringer is on subjective intent.
It shall be particularly noted that selling commodities bearing a counterfeited registered trademark constitutes a crime on the premise of “knowingly” doing it. And as per provisions under Interpretation I, any of the following circumstances shall be regarded as falling under the definition of “knowingly”: (1) Knowing that registered trademarks on the commodities that one sells have been altered, replaced or covered; (2) Selling the same commodities for which one has already been given administrative penalty or has borne civil responsibilities for selling commodities bearing counterfeited registered trademarks; (3) Counterfeiting or altering the authorization documents of the registrant or knowing such documents have been counterfeited or altered; (4) Other circumstances in which the fact that registered trademarks borne by the commodities are counterfeited is known (e.g. a commodity bearing a counterfeited reputed trademark is always sold at a price far below its authentic common price).
2. On determining the value of infringing products
The value of infringing products is one of the major criteria to determine whether trademark infringement has been incurred. If the number of infringing products is relatively small, it is rested in industrial and commercial administrations to make investigations and punishments; only when the number reaches the legal prosecution criterion, a crime will then be constituted.
In accordance with provisions under Interpretation I, whoever counterfeits any other’s products shall, in any of the following circumstances, be sentenced to a fixed-term imprisonment for no more than 3 years or criminal detention for the crime of counterfeiting others’ registered trademarks: (1) The amount of proceeds arising from illegal business operations is no less than RMB 50,000 or the amount of illegal proceeds is no less than RMB 30,000; (2) One counterfeits two or more of others’ registered trademarks, with the proceeds arising from illegal business operations to be no less than RMB 30,000 or the amount of illegal proceeds to be no less than RMB 20,000; (3) Other circumstances in which the consequences are serious. In any of the following circumstances, one shall be deemed to have caused “the particularly serious consequences”, and shall be sentenced to a fixed-term imprisonment of no less than 3 years but no more than 7 years for the crime of counterfeiting registered trademarks: (1) The amount from illegal business operation is no less than RMB 250,000 or the amount of illegal proceeds is no less than RMB 150,000; (2) One counterfeits two or more registered trademarks, with amount of proceeds arising from illegal business operations to be no less than RMB 150,000 or the amount of illegal proceeds to be no less than RMB 100,000; (3) Other circumstances in which the consequences are particularly serious.
Whoever sells commodities bearing counterfeited registered trademarks when he/it clearly knows the fact, with the sales amount to be no less than RMB 50,000, it shall be deemed that “the amount is relatively large” as prescribed in article 214 of the Criminal Law, and the offender shall be sentenced to a fixed-term imprisonment for no more than 3 years or criminal detention for the crime of selling commodities bearing counterfeited registered trademarks, and/or be imposed upon a pecuniary fine. If the sales amount is no less than RMB 250,000, it shall be deemed that “the amount is large” as prescribed in article 214 of the Criminal Law, and the offender shall be sentenced to a fixed-term imprisonment of not less than 3 years but no more than 7 years for the crime of selling commodities bearing counterfeited registered trademarks, and be concurrently imposed upon a pecuniary fine.
The term “amount of illegal operation” as mentioned herein refers to the value of the infringing products which the actor has manufactured, stored, transported or sold in the process of infringing IPR. If the violator commits the act of infringing IPR for more than one time, but has not been given any administrative or criminal punishment, the amount of proceeds arising from illegal business operations, the amount of illegal proceeds, or the sales amount shall be calculated accumulatively. The total value is calculated in accordance with 3 standards: (1) the value of sold infringing products shall be calculated at the actual sales price, e.g. by referring to the sales record kept by the sellers; (2) the value of the manufactured, stored, transported or unsold infringing products shall be calculated at the marked price or at the mean actual sales price of the ascertained infringing products; (3) if no price is marked on the infringing products or the actual sales price cannot be ascertained, the said value shall be calculated at the mean market price of the product under infringement. Of course, the first 2 standards are more favorable to the convict who has committed the crime of trademark infringement. In case the convict destroy related evidence to cause the first 2 standards immeasurable, the 3rd standard will apply.
3. On identification of counterfeited products
In practice, some suspects usually insist that the products they sell are not counterfeits, under which circumstance the judicial authority would transfer the counterfeits to the trademark obligee for identification. The trademark obligee would determine whether the product is produced by itself, unless the suspect can produce counterevidence (such as a legal proof of purchase) overturning the resolution of the trademark obligee whose expert conclusion could be deemed as an effective qualitative proof for the case concerned.
The judgment of the trademark infringement as a criminal offense is relatively indifficult, but there are still some uncertainties in practice. For example, “more than two registered trademarks are falsely used”: there is not yet a specific provision on the “two registered trademarks” herein with regard to whether they refer to two different registered trademarks or two different brands. This also causes dispute in judicial practice. Therefore, it still depends on the Supreme People’s Court and the Supreme People’s Procuratorate to promulgate more specific judicial explanation to clarify this.
(The author’s contact information: kevincheng@hllawyers.com)
Price Monopoly Issues Involved in Distribution Agreement.
In practice, suppliers usually establish a product distribution relationship with sales agents (hereinafter referred to as the distributor) to entrust the latter to distribute their products within a certain area, in order to better popularize and sell their products. Under this model, suppliers would sign a distribution agreement with the distributor and meanwhile set requirements on the distribution area, conditions, price, quantity, etc. of the distributor with regard to the market share, product image, etc. of the distributor’s products.
The mandatory requirements on distribution price set by suppliers in the distribution agreement may be deemed as price monopoly and be governed by the Anti-monopoly Law of the People’s Republic of China (hereinafter referred to as the Anti-monopoly Law) and relevant matching provisions, so as to bring unfavorable legal consequences to suppliers.
As per article 14 of the Anti-monopoly Law, business operators are prohibited from reaching any of the following monopoly agreements with their transaction counterparts:
(1) Fixing the price of commodities for resale to a third party;
(2) Restricting the minimum price of commodities for resale to a third party;
(3)Other monopoly agreements as identified by the Anti-monopoly Law Enforcement Agency under the State Council.
The Anti-monopoly Law and the Provisions against Price Fixing issued on and effective as of February 1, 2011 by the National Development and Reform Committee have made no more interpretation and explanation on the identification of the price monopoly agreement listed in article 14 of the Anti-monopoly Law.
(1) Fixing the price of commodities for resale to a third party
Fixing the price of commodities for resale to a third party refers to that the operator has entered into an agreement with the transaction counterpart, demanding that the counterpart shall only resell such commodities to the third party at a fixed price. As per the aforementioned provisions, if the supplier clarifies in the distribution agreement the price of the products to be sold to the third party by the distributor, then the distribution agreement may be determined as the price monopoly agreement.
But it needs to be considered that in the distribution agreement the supplier usually does not directly set mandatory requirements on the price of the products to be resold by the distributor, but takes measures such as fixing manufacturer’s suggested retail price (MSRP) and making punishment or reward policy in order to restrict or fix the price of commodities for resale to a third party.
We understand that the Anti-monopoly Law and Provisions against Price Fixing do not elaborate and broaden article 14 of the Anti-monopoly Law: “fixing the price of commodities for resale to a third party”, but we claim that such prices as the manufacturer’s suggested retail price (MSRP), the suggested retail price and other price punishment or reward measures formulated by the supplier have in essence affected the decision of the distributor on the retail price when reselling commodities to a third party and consequently led to the decision-making power loss of the distributor who therefore has to execute the price or price terms fixed by the supplier. Under such circumstance, the aforementioned prices or measures shall be determined as “fixing the price of commodities for resale to a third party” and shall be governed or punished by the Anti-monopoly Law.
(2) Restricting the minimum price of commodities for resale to a third party
Restricting the minimum price of commodities for resale to a third party refers to that the operator has entered into an agreement with the transaction counterpart, demanding that the counterpart shall only resell such commodities to the third party at a price no lower than the minimum price.
As previously mentioned, restricting “the minimum price of commodities for resale to a third party” under the Anti-monopoly Law does not merely restrict the “minimum price” term specified by the supplier under the distribution agreement. Likewise, measures taken by the supplier including restricting the rate of price difference, profit margin or price range of the commodity to be resold by the distributor to a third party are committed to restricting the minimum price of commodities for resale to a third party. With regard to such term fixed by the supplier in the distribution agreement, it has actually played a role in restricting the minimum price of commodities to be resold by the distributor to a third party, and meanwhile may be deemed as “fixing the price of commodities for resale to a third party” and shall be consequently governed or punished by the Anti-monopoly Law.
Therefore, the supplier shall avoid price terms concerning restricting or controlling the distributor or retailer on the minimum retail price, profit, sales promotion or discounts, etc. under the distribution agreement between the distributor or the retailer.
Certainly, it shall be noted that provisions on restricting the maximum price of commodities to be resold by the distributor to a third party under the distribution agreement are not included in the scope of governance by the Anti-monopoly Law. The distribution agreement with provisions on restricting such maximum price shall not be determined as the Price Monopoly Agreement.
(3) Rules of exception determined by the price monopoly agreement
It shall be noted that, the distribution agreement is not necessarily determined as the Price Monopoly Agreement if it just agrees upon a fixed price or sets limits on the minimum price. Article 15 of the Anti-Monopoly Law makes rules of exception: if the distributor can prove that the agreement upon a fixed price or the restriction on the minimum price conforms to the provisions of article 15 of the Anti-Monopoly Law, then such distribution agreement will not be determined as the Price Monopoly Agreement. Certainly, it is not easy to cite the rules of exception specified in article 15 of the Anti-Monopoly Law. The distributor shall not only conform to one of the conditions listed in the rules of exception, but also prove that such distribution agreement will not have serious restrictions on related market competitions and will enable consumers to enjoy the interests arising therefrom.
However, the Anti-Monopoly Law and the Provisions against Price Fixing have neither elaborated and explained specific proving standards and conditions, nor clarified the scope and definition of the “serious restrictions” and “consumers”, nor fixed a criterion for judgment and confirmation.
Therefore, as for suppliers, they shall be cautious in setting relevant terms on price in the distribution agreement so as to avoid being determined as the price monopoly act and being consequently punished by administrative departments for law enforcement.
(The author’s contact information: jasonxia@hllawyers.com.)
Column for Haworth & Lexon Branch Offices
The “Executive Director” Highlights the Conflict in Administrative Concepts, under which Circumstances a Broader Mind is Indispensable for Attracting Investment
[Case Profile]
In 2005, a Taiwan businessman invested in an electric wires and cables project in a province in China and incorporated an electric wires and cables limited company with the local state-owned enterprise in the form of joint venture. Under the company bylaw, 3 out of the 5 directors in the board are appointed “Executive Director”, holding concurrent posts as General Manager, Deputy General Manager and Chief Financial Officer. However, this is deemed as illegal by the local department of industry and commerce, for under the Company Law, a company can only choose one between the board of directors and executive directors, either of which cannot coexist with the other. The Taiwan businessman insisted that in Taiwan and Hong Kong it was quite normal for a company to set up both the board of directors and executive directors, and his branch in Shanghai was doing the same.
[Lawyer Analysis]
Article 51 of the Company Law stipulates that “a limited liability company with only a few shareholders may have an executive director without establishing a board of directors”(note: the 1993 edition of the Company Law applied then, the Company Law currently in effect has taken effect as of 2006, whereas article 51 of either edition equals the other). Accordingly, it is a common practice that a company does not set up concurrently the board of directors and executive directors.
However, when further analyzing article 51, it clarifies that “may have an executive director without establishing a board of directors”, which is an authorizing norm, not equal to “cannot have a board of directors and several executive directors at the same time”. The lawyer did some searches, to find that the board structure disclosed by some listed companies includes both general directors and executing directors. Accordingly, the lawyer for the Taiwan businessman deemed that his principal did not make any illegal requests.
The Taiwan businessman thus stuck to his point and threw doubt upon the local investment environment. It seemed a pity that a major project would possibly be pocketed due to a seemingly inconspicuous problem as this. Worried about this, the shareholders of the state-owned enterprise in the joint venture reported to and negotiated with relevant leaders by all means, but the handling personnel in the department of industry and commerce were rather insistent with their understanding of the article and claimed that it was unprecedented in their competent area that a company should have an executive director together with a board of directors.
Later, with the efforts of all parties concerned, the article under the company bylaw is revised as “the company consists of 5 directors, 3 of whom are ‘directors managing company affairs’”.
The author learned that companies in Hong Kong and Taiwan often have executive directors. Dating back to period of the Republic of China, most companies then in China had “managing directors”, for the reason that there are both some titular directors and some directors directly engaged in company operation and administration. Frankly speaking, the request of the Taiwan business man is fair and reasonable without any breach of the mandatory provisions under the Company Law. It is really a pity that the handling personnel of the department of industry and commerce applied mechanically the article under the Company Law.
It is encouraging that some relevant departments in Chongqing have indeed taken a new step in broadening their mind. For example, in August 2010, Chongqing Administration for Industry and Commerce issued 33 opinions on attracting investments, including but not limited to some breakthrough provisions, namely, allowing the investors to apply for extension of the investment period. Be these provisions good or bad, the broad mind reflected herein deserves our praise and support.
(The author’s contact information: garyjia@hllawyers.com)
