|
China’s new Company Law allows domestic firms the liberties
–and tougher corporate governance standards – long granted
foreign investors in China.
There's been plenty of expectation and ballyhoo about it, but
could China’s new Company Law makes doing business in China
easier? Technically, yes. The long-awaited new law, which came
into force in January this year, brings treatment of domestic
firms in line with favorable treatment long afforded to foreign
invested enterprises (FIEs). Domestic investors for example get
the right to contribute registered capital in installments, a
right FIEs have enjoyed for years. But while regulations in the
new code apply to foreign investors only in cases where pre-existing
legislation on FIEs is silent, “there are indirect benefits
for foreign investors,” says Charles Desmeules, an associate
in the Beijing office of law firm Norton Rose.
The new Company Law is not a revolution for foreign investors
or Chinese companies, reckons Desmeules, but it is a big step
towards streamlining China’s complex corporate legal code.
He ought to know: a graduate in foreign direct investment and
enterprise law from elite Peking University, Desmeules has watched
China’s corporate law evolve up close. While the proof of
the new law will however be in its implementation, he believes,
foreign investors should nonetheless benefit indirectly from several
clauses. Those include lowering of capitalization requirements
and relaxations of rules on establishing subsidiaries. The minimum
registered capital required to establish a limited liability company
has been cut to RMB30,000 under the new law, while the minimum
registered capital for a company limited by shares has been reduced
from RMB10 million to RMB5 million. But the lowering of registered
capital is indicative at best. While authorities require foreign
investors establishing a limited liability company to pay RMB
30,000 minimum in registered capital, in practice that is often
“six times the figure required of domestic investors,”
according to Desmeules.
The new law does however broaden the range of methods foreign
investors have to contribute registered capital. Non-cash assets
such as intellectual property rights can account for up to 70
percent of the firm’s total registered capital – though
unfortunately the law doesn’t state if shares can be considered
non-cash assets, Desmeules points out. Similarly, a clause in
the new Law allowing a domestic limited liability company to be
established by a single shareholder will be an indirect plus for
foreign investors, who will be able to create joint ventures with
a Chinese individual through their single-shareholder firm, said
Desmeules. Previously such ventures had to be established with
incorporated companies of multiple shareholders. “It also
gives foreign investors in a joint venture another exit option:
their assets can be transferred to the Chinese partner’s
single-shareholder company,” explains Desmeules.
But there are limits too to the single-shareholder concept. A
Chinese national may establish only one such firm, which is in
turn forbidden from investing in or establishing other single-shareholder
companies. Still, the introduction of “One Shareholder Company
Limited” will be the most important clause in the new law
for foreign investors, says Jan Borgonjon, president of InterChina
Consulting, who advises foreign investors on moves into China.
Foreign investors, he adds, will now technically be able to incorporate
firms more easily. “They can use non-cash assets to do so
hence Chinese partners to a JV won’t necessarily have to
re-capitalize or restructure in order to contribute to the paid
in capital, as often happens.”
A sign that China’s regulators are more outward looking
comes in a provision of the law allowing foreign firms to use
China-based assets to secure the overseas assets of a mother company.
Again practice may prove different to legal theory, and much depends
on how the law is interpreted, says Desmeules. “It remains
to be seen how the law will play with State Administration of
Foreign Exchange regulations for the provision of foreign guarantees,”
he says.
More clear-cut is the elimination in the new law of a previous
cap on investments between a company and its subsidiaries. Under
the new law joint ventures seeking to establish subsidiaries will
no longer be limited from exceeding 50 percent of the company’s
net assets, explains Jan Borgonjon. But, again there’s a
snag for foreign investors: wholly foreign owned enterprises won’t
be able to enjoy the relaxation until a similar restriction on
inter-company investments, effective since 2000, is repealed by
the Ministry of Commerce.
Foreign investors will nonetheless be reassured by improvements
in the transparency of Chinese companies demanded by the new law,
says Desmeules. The State Administration of Industry and Commerce,
he points out, is obligated under the law to provide search facilities
to investors seeking to view and copy Articles of Agreement, financial
reports, balance sheets and company minutes. This new stress on
accountability to shareholders will make it easier for foreign
investors to assess the corporate structure of potential Chinese
partners of acquisitions. “There’s tendency in China
for investors to open and close companies, causing headaches for
foreign investors. It will be easier to see more clearly who is
involved in what.” To improve corporate governance, the law
also allows for a controlling shareholder who abuses the rights
of incorporation to be held personally liable for company debts
Other good news in the law for foreign investors is the greater
autonomy it allows shareholders in organizing the corporate life
of the company and relations among shareholders. Companies are
given more flexibility in appointing a legal representative: the
new law omits the requirement that the chairman of the board should
be the legal representative of the company. Rather, the mechanism
for appointing a chair and vice-chair must simply be stipulated
in the company’s Articles of Association (AoA). Laws on joint
ventures still stipulate however that the chairman is the legal
representative. The new Law also allows the AoA of a limited company
to allocate voting rights between shareholders in proportions
other than the shareholders’ contributions – a major
shift for China. But given that joint ventures and wholly foreign
owned enterprises are not required by law to hold general shareholders’
meetings the new rule won’t impact on FIEs that don’t
allow for shareholders’ general meetings in their AoA.
Overall, the new law is a mixed bag that awaits the interpretation
of the courts. But it’s surely good news that government
is letting business get on with it. “With the new law regulators
have become less involved in a company’s legal affairs and
instead create a better legal environment by proposing more options
for investors,” says Charles Desmeules.
|
