On 23 November 2009, the Supreme People’s Court (SPC) of China issued the Regulations of the Supreme People’s Court on Several Issues Regarding Trial of Dispute Cases Relating to Foreign Invested Enterprises (I) (draft) (Draft Regulations). The court is currently seeking comments or suggestions on the Draft Regulations. Comments and suggestions must be sent in writing to the No. 4 Civil Division of the Supreme People's Court at No. 27, Dongjiaomin Lane, Dongcheng District, Beijing, 100745, or, alternatively, may be submitted online at www.chinacourt.org/wsdc/. The deadline for comments and suggestions is 8 December 2009.
The Draft Regulations touch upon the following matters.
Contract-Approval Requirement
Contracts made by a foreign-invested enterprise during the course of its establishment or change shall come into force upon the approval of the competent examination and approval authority for foreign-invested enterprises, in accordance with laws or administrative regulations. Contracts that have not been approved in such manner shall be deemed invalid by the people’s court.
In the case of a supplementary agreement that has been reached by the concerned parties and which concerns provisions of relevant contracts, the people’s court shall not hold such supplementary agreement invalid on grounds that it has not yet been approved, if such provisions do not constitute material or substantial changes to the content of the contract already approved by the competent examination and approval authority for foreign-invested enterprises.
Material or substantial changes, as specified in the preceding paragraph, may include a change of registered capital, type of company, business scope, business term, capital contribution made by shareholders or capital contribution method; a merger or separation of a company; as well as a change of address or transfer of equity under the jurisdiction of other examination and approval authorities.
Existing Contracts
Although a contract comes into force upon the approval of a competent examination and approval authority for foreign-invested enterprises, pursuant to laws and administrative regulations, the people’s court shall nonetheless deem such a contract invalid or cancellable under circumstances as prescribed in Article 52 or Article 54 of the Contract Law of the People’s Republic of China. Where a relevant contract is deemed invalid or cancellable, the people’s court shall determine the legal consequences and civil liabilities to be borne by the parties concerned, in accordance with Article 58 of the Contract Law of the People’s Republic of China.
Breaches of Contract Related to Capital Contribution or Provision of Cooperation Condition
If a Sino-foreign equity joint venture contract or a Sino-foreign cooperation joint venture contract specifies that the capital contribution or provision of cooperation condition is subject to the registration of the change of ownership of any land or building to be handled by a party to the contract, and such party fails to do so, the people’s court shall hold that there has been a breach of contract.
If the subject matter of such capital contribution or provision of cooperation condition has already been delivered to and used by the foreign invested enterprise, and the formalities regarding the registration of a change of ownership can still be undertaken, the people’s court may, according to the litigation brought by the party concerned, order the capital-contribution party or cooperation party to go through the formalities for the registration of change of ownership, provided that the court shall not also hold that the capital-contribution party or cooperation party has failed to perform its obligation of capital contribution or provision of cooperation condition.
With regard to the subject matter of a capital contribution or provision of cooperation condition that has not been delivered to and actually used by the foreign-invested enterprise, or that has been actually delivered but the registration of the related change of ownership cannot be handled, the people’s court shall hold that the capital-contribution party or cooperation party has failed to perform its obligation to the capital contribution or provision of cooperation condition and shall, according to the litigation brought by the party concerned, order such capital-contribution party or cooperation party to assume damages and bear any related liability for breach of contract.
Foreign-Invested Enterprise Equity Transfer Contracts Not Yet Approved
After a foreign-invested enterprise equity transfer contract is concluded, if such contract has not been submitted to the competent authority for foreign-invested enterprises for approval and the transferee requires the transferor to perform the obligation of submitting the contract for approval, the people’s court shall consider the foreign invested-enterprise to be a third party in the concerned lawsuit, and order the transferor and such foreign-invested enterprise to jointly undertake the submission and approval procedure within a specified time limit.
If the party that is obliged to undertake the submission and approval procedure fails or delays to do so, and the transferee brings legal action demanding the cancellation of the contract and return of the transfer proceeds already paid or compensation for losses, the people’s court shall provide support. The scope of compensation may include the difference between the amount of equity transfer proceeds determined at the conclusion of the contract and the amount thereof at the time during the litigation, the transferor’s return on equity, and other reasonable losses suffered by the transferee.
Alternatively, if the party that is obliged to undertake the submission and approval procedure fails to do so within the time limit specified in the judgment, the people’s court may, according to the specific circumstance of the case and at the request of the party seeking submission and approval, order the demanding party to undertake the process with the competent examination and approval authority for foreign-invested enterprises, and to do so at the expense of the party that is failing to perform the obligation of submitting the contract for approval.
Failure to Receive Approval of Foreign-Invested Enterprise Equity Transfer Contract
Where the party concerned has submitted the foreign-invested enterprise equity transfer contract for approval in accordance with Paragraph 1 of Article 4 of the Draft Regulations, if the approval is not obtained from the competent examination and approval authority, and the transferee brings legal action demanding the transferor to return the transfer proceeds already paid, the people’s court shall support the demand. If the party concerned demands compensation for the losses it suffers arising therefrom, the people’s court shall order the other party concerned to bear the liability for compensation based on whether such party has any fault and the degree of such fault.
Cancellation of Non-Approved Foreign-Invested Enterprise Equity Transfer Contract
Where the submission and approval procedure cannot be undertaken because of the transferor’s fault, causing the failure of the foreign-invested enterprise equity transfer contract to be approved by the competent examination and approval authority for foreign-invested enterprises, the transferee may request the cancellation of the contract and the return of the transfer proceeds already paid or compensation for losses. If so, the people’s court shall support the request. The scope of compensation may include the difference between the amount of equity transfer proceeds determined at the conclusion of the contract and the amount thereof at the time during the litigation, the transferor’s return on equity, and other reasonable losses suffered by the transferee.
Transferee Breach of Foreign-Invested Enterprise Equity Transfer Contract
After the foreign-invested enterprise equity transfer contract is concluded but has not yet been approved by the competent examination and approval authority for foreign-invested enterprises, if the transferee has actually exercised its shareholder rights but has not paid the transfer proceeds, and the transferor has requested that the transferee pay the transfer proceeds, the people’s court shall suspend the trial and require the transferor to undertake the submission and approval procedure with the competent examination and approval authority for foreign-invested enterprises within a specified time limit. The court shall resume the trial after the competent examination and approval authority for foreign-invested enterprises has made an examination and approval decision. If the competent examination and approval authority for foreign-invested enterprises approves the equity transfer contract, the people’s court shall support the transferor’s legal action; if the competent examination and approval authority for foreign-invested enterprises does not approve the equity transfer contract, the people’s court shall dismiss the transferor’s legal action.
Right of First Refusal in Connection with Sino-Foreign Equity Joint Venture Equity Transfer
Where a shareholder of a Sino-foreign equity joint venture intends to transfer all or part of its equity to a third party other than the shareholders, and where the equity transfer contract has been approved by the competent examination and approval authority for foreign-invested enterprises, if other shareholders request the cancellation of the equity transfer contract entered into by and between the transferor and transferee on grounds that the equity transfer fails to protect their right of first refusal, the people’s court shall support such a request (with the exception of the shareholder who fails to claim the right of first refusal within the time limit specified in the foreign invested contract, its articles of association, or laws or administrative regulations).
Where the transferor or transferee requests that the court hold the equity transfer contract invalid on the ground that it fails to protect the foregoing shareholders’ first right of refusal, the people’s court shall not provide support.
Non-Approved Foreign-Invested Enterprise Equity Pledge Contracts
The equity pledge contract concluded by the shareholder(s) and creditor(s) of the foreign invested enterprise shall come into force as of the conclusion thereof, unless otherwise specified by laws or administrative regulations or otherwise agreed upon in the contract. The validity of the contract shall not be affected if the pledge registration has not been undertaken.
Where the party concerned claims the equity pledge contract invalid or unenforceable on grounds that the contract has not been approved by the competent examination and approval authority on foreign-invested enterprises, the people’s court shall not provide support.
Where the pledge registration has been conducted for the equity pledge contract pursuant to the relevant provisions of the Property Law, the pledge rights on the equity rights shall be set up at the time of registration.
Legal Relationships in Investment by Trust
If the parties concerned enter into an agreement under which one of the parties is the actual investor who is entitled to the shareholder’s rights and interests and the other party acts as the nominal shareholder of the foreign-invested enterprise, the agreement shall be held valid under the circumstances that it does not violate the laws and mandatory provisions of administrative regulations of China and harm social public interests.
If the investor acting as the trustor requests the acknowledgement of its shareholder qualification, or seeks to change itself into the shareholder of a foreign-invested enterprise, the people’s court shall not support the request, unless such actual investor obtains approval for changing into the shareholder of the foreign-invested enterprise from the competent examination and approval authority for foreign-invested enterprises prior to the completion of the court debate in the trial of first instance.
Where an actual investor asks the nominal shareholder of the foreign-invested enterprise to act as the trustee to perform relevant obligations, and the request is agreed to by both parties, the people’s court shall support such a request.
Where the parties concerned have not reached an agreement on the benefit allocation in the trust investment agreement, and if the actual investor asks the court to order the nominal shareholder of the foreign-invested enterprise to pay the benefit it obtains from the foreign-invested enterprise, the people’s court shall support such request. If such nominal shareholder asks the actual investor to pay necessary remuneration, the people’s court shall support such a request at its discretion.
Cancellation of Trust Investment Agreement
Where a nominal shareholder of a foreign-invested enterprise, as mentioned in Article 10, fails to perform the agreement entered into with the actual investor, and the failure causes the actual investor to be unable to fulfill the purpose of the agreement, the actual investor may request the cancellation of the agreement, return of investment proceeds and compensation for losses. In such a case, the people’s court shall support such request.
Requests of Actual Investors in Foreign-Invested Enterprise
If an actual investor asks the foreign-invested enterprise to distribute profits, or exercises other shareholder’s rights pursuant to the agreement entered into between the actual investor and the nominal shareholder of the foreign-invested enterprise, the people’s court shall not support the request.
Legal Consequences of Invalid Trust Investment Agreement
Where the trust investment agreement is adjudicated as invalid, and the value of the equity under the name of the nominal shareholder of the foreign-invested enterprise is higher than the actual investment amount, the people’s court shall order the nominal shareholder of the foreign-invested enterprise to return the investment proceeds to the actual investor. The people’s court shall also conduct reasonable distribution of the return on equity between the two parties in accordance with the actual investment of the actual investor as well as the operation and management of the foreign-invested enterprise carried out by the nominal investor. If the value of the equity under the name of the nominal shareholder of the foreign-invested enterprise is less than the actual investment amount, the people’s court shall not order the nominal shareholder of the foreign invested enterprise to return the investment proceeds to the actual investor. Instead, after determining the loss predicated on the current value of the equity, the court shall order the two parties to share the loss according to the degree of fault of the parties concerned.
Legal Relationships in Investment Under Another Party’s Name
Where the actual investor uses another party’s name to invest and asks the foreign-invested enterprise to undertake the submission and approval procedure for a change of shareholder with the competent examination and approval authority for foreign-invested enterprises, and if such an actual investor has actually participated in the operation and management of the foreign-invested enterprise, or the other shareholders of the foreign-invested enterprise are aware that it is the actual investor, the people’s court shall support such a request.
If the nominal shareholder of the foreign-invested enterprise whose name is being used has not conducted any actual investment and requests the rights of an exercising shareholder with the foreign-invested enterprise, the people’s court shall not support the request.
Disputes Regarding Failure to Obtain Shareholder Qualification Due to Submission of False Materials
If one party obtains shareholder qualification under false pretenses (such as submitting false materials to the competent examination and approval authority for foreign-invested enterprises or by any other improper means), causing the other party concerned to fail to obtain the corresponding shareholder qualification, and the other party concerned asks the people’s court to affirm the infringement and to require the infringing party to compensate for losses, the people’s court shall support the request.
If the party concerned asks the people’s court to directly acknowledge its shareholder qualification in the foreign-invested enterprise, the people’s court may also order the infringing party and the foreign-invested enterprise to undertake the submission and approval procedure for change of shareholder with the competent examination and approval authority for foreign-invested enterprises, within a specified time limit.
Disputes Regarding Loss of Shareholder Qualification Due to Submission of False Materials
Where the foreign-invested enterprise uses false pretenses (such as submitting false materials to the competent examination and approval authority for foreign-invested enterprises or by any other improper means) in its application for a change in the shareholder specified on the certificate of approval for establishment of enterprises with foreign investment, causing the original shareholder to lose shareholder qualification, and the original shareholder requests the acknowledgement of its shareholder qualification and compensation for losses, the people’s court shall support the request.
If the foregoing circumstance is the fault of the controlling shareholder or director of the foreign-invested enterprise, and the original shareholder requests the controlling shareholder or director to bear corresponding liability for compensation, the people’s court shall support the request.
Governing Laws on Foreign-Invested Enterprise Established Jointly by Two or More Foreign Investors
Disputes arising from a contract concluded by two or more foreign investors to establish a foreign-invested enterprise within the territory of China shall be governed by Chinese law. Therefore, provisions governed by foreign laws as selected by the parties concerned shall be void.
For additional information regarding the Draft Regulations, please click here.
To view an unofficial translation of the Draft Regulations, click here.
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