How to Solve the Shortage of Funds for FIEs in China
1. Digest
In recent years, China has adhered to implementing a tight monetary policy. It has issued some new foreign exchange policies to limit the “hot money” into China, which result in the shortage of funds for some FIEs. In confronting this dilemma, it is imperative for FIEs to find a solution that is both economical and time efficient. The following case may shed some light on the recent developments in Chinese monetary policy and the adequate response strategies.
2. Facts
We have two customers as FIEs: one is a Japanese company, established for many years in China, and other is a U.S. company that has been operational for less than a year. The Japanese company seeks capital to fuel the expansion of its business, while the American company seeks a new lifeline after depleting its registered capital. Despite differing circumstances, the dilemmas of the two firms are indistinguishable: a shortage of funds. In addressing this issue, both firms came to us and asked for a complete solution.
3. The Legal Solution for This Dilemma
There are two solutions applicable to these two companies:
Solution 1: making a loan from domestic institutions or from abroad
A company can make loans from banks, individuals and other financial institutions; however, a loan between two companies is prohibited according to Chinese law. Furthermore, caution must be taken with foreign loans, due to strict restrictions for amount of the loan. According to the law concerning foreign investment, the external debt amount of a FIE is the balance between FIE’s total investment and registered capital. Additionally, external debt is divided into two types: Short-term and Long-term.
The loans with a term of 1 year (ST external debt) are calculated on basis of its balance, but the loans more than 1 year (LT external debt) shall be calculated by its accumulated amount. For example, if you are only allowed $10 million in loans and you have borrowed $5 million (LT external debt), the remaining amount you can borrow again at a later time is only $5 million, regardless of whether you have repaid the former $5 million; however, in the case of ST external debt, if you have borrowed $5 million (ST external debt) and then repaid in full, the remaining amount you can borrow again is still $10 million.
The external debt must also be registered with the local Administration of Foreign Exchange.
Solution 2: increasing registered capital
If both of companies stated above increase the registered capital, the proportion of the additional registered capital and the increased amount of investment shall be subject to the following provisions:
1. Where the total amount of investment is less than 3,000,000 U.S. dollars (including 3,000,000 U.S. dollars), the registered capital shall account for seven tenth of the total amount of investment at least.
2. Where the total amount of investment is between over 3,000,000 U.S. dollars to 10,000,000 U.S. dollars (including 10,000,000 U.S. dollars), the registered capital shall account for half of the total amount of investment at least. Where the total amount of investment is less than 4,200,000 U.S. dollars, the registered capital shall be not less than 2,100,000 U.S. dollars.
3. Where the total amount of investment is between over 10,000,000 U.S. dollars to 30,000,000 U.S. dollars (including 30,000,000 U.S. dollars), the registered capital shall account for two fifths of the total amount of investment at least. If the total amount of investment is less than 12,500,000 U.S. dollars, the registered capital shall be not less than 5,000,000 U.S. dollars.
4. Where the total amount of investment is over 30,000,000 U.S. dollars, the registered capital shall account for one third of the total amount of investment at least. If the total amount of investment is less than 36,000,000 U.S. dollars, the registered capital shall be not less than 12,000,000 U.S. dollars
Company shall submit the following documents to local Foreign Economic Relation &Trade Committee for approval, including but not limited to:
1. The application
2. Board Resolution
3. Capital Verification Report
4. Auditing Report of current year
5. Certificate of Approval & Business License
6. other required documents
When completing the above steps, the company shall apply for registration to the Administration for Commerce and Industry.
By Allen & John Law Firm
Vincent Sun
Attorney at Law
Dissolution & Liquidation of Foreign Investment Enterprises
The Foreign Investment Enterprise herein refers to CHINESE-FOREIGN EQUITY JOINT VENTURES, CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES and WHOLLY OWNED FOREIGN ENTERPRISE.
I Application of the Law
In the former, the dissolution & liquidation of FIEs applies to the MEASURES FOR LIQUIDATION OF FOREIGN INVESTMENT ENTERPRISES promulgated as of 1996. Whereas, the measures had been cancelled by Regarding the decision of abolishing parts of administrative regulations by State Council, and now the Corporation Law of PRC prevails.
In accordance with of new corporation law, the limited liability companies and joint stock limited companies invested by foreign investors shall be governed by the present Law. Where there are otherwise different provisions in any law regarding foreign investment, such provisions shall prevail.
According to the principle of special law has priority to common law, the laws of CHINESE-FOREIGN EQUITY JOINT VENTURES, CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES and WHOLLY OWNED FOREIGN ENTERPRISE shall be applied first upon the issues of dissolution & liquidation of FIEs.
I I Reasons of Dissolution
As for the reasons are specified in Article 90 of the implementation regulations of the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, article 48 of implementation regulations of the law of Chinese-foreign contractual joint ventures and article 72 of implementation regulations of the law of wholly owned foreign enterprise. The specific circumstances are as follows:
1. maturity of business term;
2. occurrence of serious loss and no ability to operate continuously;
3. one party failed in performing obligation prescribed in agreement, contract or article of association, therefore causing no ability to operate continuously
4. one party of Equity Joint Ventures failed in achieving its goal of business, meanwhile lacking development future.
5. suffered by Force Majeure such as act of god, war etc, causing no ability to operate continuously
6. enterprises are ordered to close due to violating the law and administrative regulation;
7. occurrence of the reasons of dissolution & liquidation specified in contract or article of association;
8. ordered to dissolute because of court decision or arbitration award.
Otherwise except provisions mentioned above, new corporation law specifies other reasons of dissolution:
* The shareholders’ meeting or the shareholders’ assembly decides to dissolve it;
* It is necessary to be dissolved due to merger or split-up of the company;
* Where a company meets any serious difficulty during its operation or management so that the interests of the shareholders will be subject to heavy loss if it continues to exist and it cannot be solved by any other means, the shareholders who hold ten percent or more of the voting rights of all the shareholders of the company may plead the people’s court to dissolve the company.
III Liquidation
i Common Liquidation
For CHINESE-FOREIGN EQUITY JOINT VENTURES, where meeting the requirements of (ii), (iv), (v), (vii) mentioned above, the board of director shall bring forward the dissolution application and submit it to approval authority for approval.
For CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES, where meeting the requirements of (ii), (v) mentioned above, the board of director or Joint Management Committee shall bring forward the dissolution application and submit it to approval authority for approval..
For WHOLLY OWNED FOREIGN ENTERPRISE, where meeting the requirements of (ii), (iv) mentioned above, the management institution shall bring forward the dissolution application and submit it to approval authority for approval.
ii Special Liquidation
Where failed in organizing the liquidation committee by enterprise themselves, the authority institution, creditors or investor shall apply for special liquidation through submitting to approval authority or arbitration committee or court.
If submitting the case to court for dissolution, the People’s court only made actions upon the matters concerning validity of joint venture contract, breaching responsibility and whether to terminate the contract or not, have no legal basis to decide the liquidation process.
iii Composition of Liquidation Committee
According to the implementation regulations of the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, the member of liquidation committee shall be designated among the members of the board of directors; where directors failed or was not applicable to assume the member of liquidation committee, enterprise may employ the accountants or lawyers who registered in China to conduct liquidation function, if necessary, the approval authority may designate somebody to supervise the process.
According to the implementation regulations of the law of wholly owned foreign enterprise, the liquidation committee shall be comprised by the legal representative, representative of creditors or representative of competent authority, and employ the accountants or lawyers who registered in China to conduct liquidation process.
IV How to Specify Precaution Provisions to Avoid Deadlock of Operation
i The Designation of General Manager, Vice Manager
According to article of association, the general manager shall be designated by foreign investor and the vice manager shall be designated by Chinese party. To prevent the candidate of general manager or vice manager was constantly rejected by other party, therefore causing deadlock and impact on normal operation, article of association or joint venture contract shall be specified that one party can only veto two times for tow different candidates designated by another party and the third candidate can not be vetoed.
ii As for Enlarging Investment
If it is necessary to increase investment in order to enlarge scale or to improve economic benefits, the article of association can specify that if one party is unable to increase investing capital , he may not be against the other party to increase investment. Meanwhile, the investment proportion shall be adjusted in accordance with the increasing amount.
iii FIEs May Take Full Use of Arbitration Provisions Agreed by Both Parties to Solve the Deadlock of Operation
V The Flow Chart of Liquidation of FIEs
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By Vincent Sun
Attorney at Law
Allen & John Law Firm May 20, 2008
Difference Of Profit Distribution Between Equity Joint Venture & Contractual Joint Venture
Digest: This real case show how important the company’s legal structure . There are three main legal structure of foreign investor to set up a company in China: first is Wholly Foreign Owned Enterprise ( WFOE ); second Sino-Foreign Equity Joint Venture ( JV ); third Sino-Foreign Contractual Joint Venture ( CV ). The most foreign investors choose to set up a JV rather than CV if they can not open a WFOE in certain limited business areas due to their ignorance of the difference of profit distribution between JV & CV. Through this case readers will see how we help our client to convert its JV into CV, then it can legally wire out all its ten year’s business income in China to its mother company in Canada.
Facts: Back to 1997, a Canadian Media Company formed a JV called W Mass Media Consulting Co. with a state owned China company. At that time the Chinese law only permits the foreign investor to hold not more than 49% shares in such JV. However, China company had no enough money to hold 51% shares. Therefore, two partners drafted two agreements: one for government registration; one for themselves. In first registered agreement CMC has 49% shares and shall be distributed all business profits according to this ratio; in second non-register agreement CMC has 85% shares and shall be distributed all business profits according to this new ratio. In fact, CMC invested all register capital and cash flow into WMMC. Ten years later WMMC has made a lot of money, however, CMC can not get 85% shares income and only can wire out its income according to 49% shares ratio by registered legal documents. CMC came to us and asked for a complete solution.
Legal Issues:
- General background of relating foreign investing laws & regulations.
- The key difference of profit distribution between JV & CV.
- The legal solution for CMC’s problem.
Analysis: Read more