SUMMARY OF CONTENTS

FOREIGN STRATEGIC INVESTMENT IN LISTED COMPANIES

The Ministry of Commerce (“MOFCOM”), the China Securities Regulatory Commission, the State Administration of Taxation, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange jointly promulgated the Measures for the Administration of Strategic Investment of Foreign Investors in Listed Companies 外国投资者对上市公司战略投资管理办法 on 31 December 2005. The Measures, which came into force on 31 January 2006, for the first time allow foreign investors other than qualified institutional investors to acquire A-shares of PRC listed companies.

Strategic investment
The Measures are applicable to foreign investors who wish to make long or medium-term strategic investments of a certain scale in A-shares in the following types of company: listed companies that have completed share allocation reform and companies that have been newly listed following share allocation reform. MOFCOM approval is required prior to the foreign investor making the strategic investment.

Acquisition method 
The Measures permit a foreign investor to acquire a strategic investment in three ways: a private share assignment agreement, a private placement or any other method sanctioned by PRC law. The Measures do not elaborate on the other methods, but open market acquisitions do not appear sanctioned. 

Conditions
The Measures require that the strategic investments comply with certain principles, including respect for state laws and industrial policies, the protection of the lawful rights of listed companies and their shareholders, the promotion of long-and mid-term investment, the prohibition of speculation and the prevention of restrictions on competition.

Strategic investment is subject to the following conditions:

• the A-shares must be acquired by means of contractual assignment, private placement of new shares or other lawful means; 

• the investment may be conducted in stages, provided that the proportion of shares obtained upon completion of the initial investment accounts for at least 10% of the shares issued by the target company; 

• the acquired A-shares may not be transferred within three years;

• the investor’s shareholding must comply with restrictions on foreign shareholding existing in certain industry sectors and no strategic investment is permitted in industry sectors closed to foreign investment; and

• if shareholders of state-owned shares in listed companies are involved, the regulations regarding the administration of state assets must be complied with. 

Investor requirements
The foreign investor engaging in strategic investment must satisfy the following conditions:

• it is a foreign legal person or other organisation that is established and operates lawfully, is financially stable, creditworthy and has mature management experience;

• it or its parent company owns overseas actual assets of not less than US$100 million or manages overseas actual assets of not less than US$500 million;

• it has a sound structure of governance, a good internal control system, and standard operating rules; and

• neither it nor its parent company has been subject to a serious penalty imposed by Chinese or overseas regulatory institutions in the past three years.

If the investor does satisfy these criteria a qualifying parent may undertake joint and several liability for the investment. The Measures require a report to MOFCOM prior to any transfer of the parent’s investing subsidiary.

Procedure
The Measures set forth the procedures through which a foreign investor can make a strategic investment in a Chinese public company. The procedures vary depending on whether the acquisition is completed by means of a private share assignment agreement or a private placement. The procedures for both acquisition methods have in common that they require the approval of MOFCOM. Upon completion of the investment, the listed company is required to obtain an approval certificate of a foreign investment enterprise. Director and shareholder approval from the target are also required for the investment. The transaction must be completed within 180 days of preliminary approval by MOFCOM.

Treatment
A listed company in which foreign investors have acquired at least 25% of the shares qualifies as a foreign investment enterprise and may enjoy the preferential treatment that goes with this status.

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provincial approval of commercial fies

The Ministry of Commerce (“MOFCOM”) issued the Notice of the Ministry of Commerce on Entrusting Local Authorities with the Examination and Approval of Commercial Enterprises with Foreign Investment 商务部关于委托地方部门审核外商投资商业企业的通知 on 9 December 2005. The Notice, which became effective on 3 March 2006, is expected to reduce the time required for setting up a commercial enterprise with foreign investment (“commercial FIE”).

Delegation of approval authority
The establishment of a commercial FIE is governed by the Measures for the Administration of Foreign Investment in the Commercial Sector 外商投资商业领域管理办法 (“Commercial Measures”) which took effect on 1 June 2004 (as discussed in issue 2004.2 of China Legal Update). The Commercial Measures set forth a two-step process for the establishment of a commercial FIE: initial review by the provincial level commerce authorities and final examination and approval by MOFCOM.

Pursuant to the Notice, MOFCOM has delegated the power to approve the establishment of commercial FIEs to the provincial level commerce authorities. The provincial level commerce authorities now have the authority to approve commercial FIEs and are only required to report the matter for the record to MOFCOM. The provincial level commerce authorities are not permitted to approve certain types of commercial FIE as MOFCOM reserved the approval right for a commercial FIE if:

• its mode of operations involves sales through television, telephone, mail order, internet or automatic vending machines, etc.; or

• it distributes important industrial raw materials such as steel, precious metals, ironstone, fuel oil, natural rubber or the products that are specified in Articles 17 and 18 of the Commercial Measures such as books, newspapers, periodicals, processed oil, pharmaceuticals, automobiles, pesticides, mulching film, salt, tobacco, grain, vegetable oils, edible sugar and cotton.

The above provisions also apply if an existing FIE applies to expand its business scope with distribution rights.

Retail outlets
The Notice further authorises provincial level commerce authorities to approve the establishment by commercial FIEs engaged in retail activities of retail outlets within the province or state-level economic and technological development zone in which they are located in the following circumstances:

• the area of a single outlet does not exceed 5,000 square meters and there are not more than three outlets in total, and the foreign investor has not opened more than 30 outlets in the same class in China through commercial FIEs; or

• the area of a single outlet does not exceed 3,000 square meters and there are not more than five outlets in total, and the foreign investor has not opened more than 50 outlets in the same class in China through commercial FIEs; or

• the area of a single outlet does not exceed 300 square meters. 

The provincial level commerce authorities may approve such outlets on their own and are only required to report the matter to MOFCOM.

It is anticipated that the devolution of approval authority for these enterprises should significantly reduce approval time.

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PROVINCIAL APPROVAL OF FIES IN OTHER SECTORS

The Ministry of Commerce (“MOFCOM”) issued the following notices on 20 January 2006: the Notice on Entrusting the Provincial Level Authorities in Charge of Commerce with the Examination and Approval, and Administration of Non-Vessel Carrier Enterprises with Foreign Investment 关于委托省级商务主管部门审核管理外商投资无船承运企业的通知, the Notice on Entrusting the Provincial Level Authorities in Charge of Commerce with the Examination and Approval, and Administration of Road Transportation Enterprises with Foreign Investment 关于委托省级商务主管部门审核管理部分外商投资道路运输企业的通知, the Notice on Entrusting the Provincial Level Authorities in Charge of Commerce with the Examination and Approval, and Administration of Construction Enterprises with Foreign Investment 关于委托省级商务主管部门审核管理外商投资建筑业企业的通知, the Notice on Entrusting the Provincial Level Authorities in Charge of Commerce with the Examination and Approval, and Administration of Construction Project Design Enterprises with Foreign Investment 关于委托省级商务主管部门审核管理外商投资建设工程设计企业的通知 and the Notice on Entrusting the Provincial Level Authorities in Charge of Commerce with the Examination and Approval, and Administration of Printing Enterprises with Foreign Investment 关于委托省级商务主管部门审核管理外商投资印刷企业的通知. The Notices, which became effective on 31 March 2006, are aimed at simplifying the approval system for the setting up of foreign investment enterprises (“FIEs”) in the various sectors concerned.

Delegation of approval authority
Under the Notices, MOFCOM delegates authority over FIEs in the non-vessel carrier, road transportation, construction, construction project design and printing sectors to the authorities in charge of commerce of the provinces, autonomous regions, municipalities directly under the central government, the municipalities with independent development plans and the Xinjiang Production and Construction Corps (“provincial commerce authorities”) and the administrative committees of state level economic and technological development zones (“zone committees”).

The authority granted to the provincial commerce authorities and zone committees includes the power to examine and approve the establishment of, and subsequent changes in, FIEs which are active in these sectors. The provincial commerce authorities and zone committees are further put in charge of the administration of these FIEs. The relevant authorities are required to abide by the various regulations pertinent to the establishment and operation of FIEs in the industry sectors concerned. The general foreign investment approval procedures will still apply.

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IMPLEMENTATION OF COMPANY LAW EXPLAINED

The State Administration for Industry and Commerce, the Ministry of Commerce, the General Administration of Customs and the State Administration of Foreign Exchange jointly issued the Implementing Opinion on Several Issues in the Laws Applicable to the Examination and Approval, Registration and Administration of Foreign Investment Enterprises关于外商投资的公司审批登记管理法律适用若干问题的执行意见的通知 on 24 April 2006. The Opinion clarifies, amongst other items, how the recently revised Company Law of the People’s Republic of China 中华人民共和国公司法 (as discussed in issue 2005.3 of China Legal Update) relates to the laws and regulations specifically applicable to foreign investment enterprises (“FIEs”).

Expanded forms of FIE
By applying the provisions of the Company Law to foreign investors, the Opinion permits new forms of foreign investment enterprise (“FIE”) to be created. In addition to the already available Chinese-foreign equity and cooperative joint venture enterprises (“Chinese-foreign JVs), wholly foreign-owned enterprises (“WFOEs) and foreign-invested companies limited by shares (“Foreign-Invested Share Companies”), the Opinion also provides for equity joint venture enterprises between foreign parties (“Foreign-Invested JVs”) and single-person limited liability companies established by foreign natural persons (“Natural Person WFOEs”).

Minimum registered capital
The Opinion provides that a single-person limited liability company established in the form of a WFOE shall comply with the minimum registered capital requirements for a one-person limited liability company under the Company Law, i.e. its registered capital shall not be less than RMB 100,000.

Governance
The Opinion clarifies that the highest organ of authority of Chinese-foreign JVs and Share Company FIEs shall be the board of directors and that their organisational structure shall follow the provisions of the relevant laws applicable to Chinese-foreign JVs, the Company Law and their articles of association. WFOEs, Foreign-Invested JVs and Foreign-Invested Share Companies shall have an organisational structure which complies with the Company Law and their articles of association.

Establishment procedure
The Opinion introduces a new requirement with respect to the documentation required to establish an FIE. The application shall now also include a Legal Document Service Power of Attorney entered into between the applicant and an authorised person inside China. This Power of Attorney shall clearly specify the person authorised to receive service of documents inside China. This authorised person may be a branch organisation established by the foreign investor, the proposed company or another unit or person inside China. An existing FIE that adds a foreign investor is required to submit a Power of Attorney to its examination and approval authority.

The Opinion abolishes the requirement to submit the joint venture contract, articles of association and the proof of creditworthiness to the company registration authority when registering a new FIE or an equity assignment in an existing FIE.

Capital contributions
The capital contribution to an FIE with the status of a limited liability company shall be paid within six months of the establishment date if the capital contribution is paid in one instalment. If the capital contribution is paid in multiple instalments, the first instalment shall be at least 15% of the total capital contribution or the statutory minimum registered capital and shall be paid within three months of establishment. The balance may be paid in accordance with the provisions of the Regulations of the People's Republic of China for the Administration of the Registration of Companies 中华人民共和国公司登记管理条例 (“Company Registration Regulations”) (as discussed in the next article of this China Legal Update) and the laws on FIEs. The Company Registration Regulations require that shareholders of FIEs pay up the balance of their capital contributions within two years of establishment. 

If an existing foreign-invested company increases its capital, it shall pay up 20% of the increase on the date on which it applies for the registration of the capital increase. The balance is to be paid in accordance with the provisions of the relevant laws and regulations.

The Opinion provides that as long as no specific regulations have been promulgated by the competent authorities, permitted in-kind capital contributions shall be valued by a valuation organisation inside China and verified upon their contribution by a capital verification organisation inside China. An exception to this rule is that the shareholders in a Chinese-foreign equity joint venture may agree between themselves on the value of non-monetary contributions such as capital goods, industrial property rights, etc.

Relocation
The Opinion clarifies the procedure to be followed when an FIE relocates its legal address. The FIE shall submit an application for the relocation to its original examination and approval authority. If the new location is outside the jurisdiction of the original examination and approval authority, the FIE shall also submit an application to the examination and approval authority in its new location. Once approval has been obtained, the FIE shall submit applications to its original registration authority and the registration authority in its new location.

Miscellaneous
The Opinion specifies that an existing FIE engaging in investment activities inside China no longer needs to obtain a qualification certificate from the company registration authority.

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REGISTRATION OF COMPANIES

The State Council issued the Regulations of the People's Republic of China for the Administration of the Registration of Companies 中华人民共和国公司登记管理条例 on 18 December 2005. The Regulations have replaced 1994 regulations of the same name with effect from 1 January 2006. The revisions to the Regulations bring the rules for company registration in line with the amended Company Law of the People’s Republic of China 中华人民共和国公司法 (“Company Law”) (as discussed in issue 2005.3 of China Legal Update). 

Payment of registered capital
The Regulations follow the revised provisions of the Company Law on the payment schedule for the registered capital of limited liability companies. The shareholders in a limited liability company with foreign investment shall pay up the total amount of registered capital within two years from the date on which the company has obtained its business licence. In the case of a holding company, the time for paying up the capital contributions is five years. The two-year time limit does away with the practice to date that allowed the shareholders in most types of foreign investment vehicle such as the equity and cooperative joint venture and wholly foreign-owned enterprise to contribute capital over a longer period of time, subject to approval of the contribution schedule. The Regulations fail to clarify whether foreign investment enterprises which have been approved before the date on which the Regulations entered into effect are required to comply with the new requirements or can follow the relevant provisions on the payment schedule in their constitutional documents.

Other provisions
The Regulations introduce company registration by means of mail, fax or email. The Regulations lower the establishment registration fee from 0.1% to 0.08% of the amount of registered capital. If the registered capital is more than RMB 10 million, the registration fee payable on the portion of the registered over this amount shall be 0.04% while no fee shall be payable on the portion over RMB 100 million.

The Regulations further alter the period during which the local administrations for industry and commerce are to carry out the annual inspection of companies. Starting from this year, the inspection will take place during the period from 1 March to 30 June rather than from 1 January to 30 April as was previously the case.

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UPDATED EXPORT PROCESSING REGULATIONS

The Ministry of Commerce (“MOFCOM”) promulgated the Provisional Measures for the Administration of Processing Trade in Export Processing Zones 出口加工区加工贸易管理暂行办法 on 22 November 2005. The Measures replace regulations of the same name with effect from 1 January 2006.

Definitions
The Provisional Measures define an export processing zone (“Zone”) as a specified area subject to closed supervision by the Customs. Export processing trade is defined as the production and business activity whereby an enterprise inside a Zone (“Zone enterprise”) processes or assembles goods with raw materials, parts and components, elements, packaging materials, etc. purchased outside or inside China and ships the finished goods out of China.

Zone enterprises shall be enterprises established in the Zones with independent legal person status. If they are foreign-invested, the relevant formalities shall be completed in accordance with the regulations regarding the administration of foreign investment enterprises.

Establishment
In order to engage in export trading, a Zone enterprise must, upon the strength of its valid establishment approval document, submit to the administrative committee of the Zone a written application report. For projects where special requirements apply, it may also be necessary to submit an approval document issued by the relevant authority. If the application satisfies the conditions, the administrative committee shall issue an “Approval Certificate for Processing Trade Business in an Export Processing Zone” within 10 working days from the date of receipt of the application.

Operations
The Provisional Measures provide that goods leaving a Zone to an area outside China or entering a Zone from outside China are not subject to the import and export quota or permit system unless otherwise prescribed by the state. If goods leave a Zone to, or enter a Zone from, China proper, the relevant import or export procedures have to be attended to and if the goods fall under the import and export permit system, relevant documentation shall be submitted to the administrative committee of the Zone. The Provisional Measures permit enterprises in Zones to provide after-sales maintenance services for electro-mechanical products exported from China.

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FOREIGN-INVESTED INTERNATIONAL FREIGHT FORWARDING ENTERPRISES

The Ministry of Commerce (“MOFCOM”) promulgated the Measures for the Administration of International Freight Forwarding Enterprises with Foreign Investment 外商投资国际货物运输代理企业管理办法 on 19 October 2005. The Measures, which entered into force on 11 December 2005, repeal regulations of the same name and their supplementary regulations issued in 2003.

WTO obligations
The Measures implement China’s WTO obligation to allow wholly foreign-owned investment in the international freight forwarding sector four years after China joined the WTO, i.e. from 11 December 2005. International freight forwarding enterprises with foreign investment (“freight forwarding FIEs”) may from this date onward take the form of wholly foreign-owned enterprises as well as of Chinese foreign equity or cooperative joint ventures.

MOFCOM is responsible for the approval and administration of freight forwarding FIEs engaged in international express delivery services, while the provincial level commerce authorities are in charge of other types of freight forwarding FIEs.

Establishment
The Measures do not impose any qualification requirements on the foreign or Chinese investors in freight forwarding FIEs. The Measures lower the minimum registered capital requirement for the establishment of a freight forwarding FIE to the same level as those applicable to similar companies with only domestic investment. The Regulations of the People's Republic of China for the Administration of the International Freight Forwarding Industry 中华人民共和国国际货物运输代理业管理规定 of 1994 set forth the following minimum registered capital requirements for domestic international freight forwarding companies:

• those engaging in ocean international freight forwarding services shall have a minimum registered capital of RMB 5 million;

• those engaging in air international freight forwarding services shall have a minimum registered capital of RMB 3 million;

• those engaging in land international freight forwarding or international express delivery services shall have a minimum registered capital of RMB 2 million.

Those engaging simultaneously in more than one of the above services shall satisfy the higher minimum registered capital requirements.

Business 
Freight forwarding FIEs are allowed to conduct some or all the business services detailed below:

• booking (leasing of ships, and chartering of airplanes and shipping space), consignment, warehouse storage and packing;

• supervising loading and unloading, container grouping and unpacking, allocating goods, providing transit as well as related short-distance transport services;

• arranging customs declarations, customs examination and inspection, and insurance;

• filling out of relevant documents, payment of transportation fees, settlement of accounts and miscellaneous freight charges;

• agency business of international exhibits, personal items and transportation of transit cargoes;

• arranging international multimodal transportation and container transport (including the packing of containers);

• international express delivery (excluding personal mail and postal services for official documents of provincial or higher branches of the party, government or military); and

• consultancy and other international forwarding agency business.

Other provisions 
Freight forwarding FIEs which have been in operation for one year and have paid up their entire registered capital may apply to set up branch companies in other places in China.

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FOREIGN DEBT ADMINISTRATION

The State Administration of Foreign Exchange (SAFE”) issued the Notice on Issues Relating to the Improvement of the Administration of Foreign Debt 关于完善外债管理有关问题的通知 on 21 October 2005. The Notice entered into effect on 1 December 2005 and governs various aspects of the PRC regime for the control of foreign debt.

Foreign investment below 25% 
The Notice clarifies the issue of whether a foreign investment enterprise (“FIE”) in which the foreign investor or investors hold less than 25% of the registered capital contributions shall comply with the foreign debt regulations applicable to FIEs or with those applicable to purely domestic enterprises. The Notice specifies that such FIE is to be treated as a purely domestic enterprise for the purpose of foreign debt control.

Total investment and registered capital
The Notice further addresses the issue of FIEs whose total investment amount is equal to the amount of registered capital, or whose total investment amount has not been specified. If such FIEs wish to take out foreign debt, they are required to apply to their original examination and approval authority to have their total investment and registered capital verified again. After such reverification, the FIEs can borrow foreign debt in accordance with the administration principle of "difference between total investment and registered capital". In other words, such FIEs will be permitted to borrow up to an amount equal to the difference between the total investment amount (as fixed upon reverification) and the amount of registered capital.

Holding companies
The Notice provides that the maximum foreign debt of a holding company with foreign investment shall be administered in accordance with the following principles:

• if it has registered capital of at least US$30 million, the total of its short-term foreign debt balance and the aggregate of its medium and long-term foreign debt may not exceed four times its paid up registered capital; 

• if it has registered capital of at least US$I00 million, the total of its short-term foreign debt balance and the aggregate of its medium and long-term foreign debt amount may not exceed six times its paid up registered capital.

Domestic loans secured by foreign guarantees
The Notice changes the registration system for domestic Renminbi loans that are secured with a foreign guarantee. Where the debtor was previously required to register each amount taken out, under the new system the creditor shall carry out registration procedures periodically. The system with respect to such loans is further changed from a system under which the loans were subject to foreign debt administration based on the contracted amount to a new system based on the exercise amount. In other words, the debtor must from now on only carry out foreign debt registration procedures if the foreign guarantee is exercised.

Whereas in the past, domestic Chinese-invested enterprises were not permitted to take out Renminbi loans from domestic financial institutions secured by a foreign guarantee, the Notice opens up this possibility. The Notice states that such loans are subject to the approval of the SAFE.

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LETTER OF CREDIT DISPUTES

The Supreme People’s Court promulgated the Regulations of the Supreme People's Court on Several Issues in the Hearing of Cases Involving Disputes over Letters of Credit 最高人民法院关于审理信用证纠纷案件若干问题的规定 on 14 November 2005. The Regulations entered into effect on 1 January 2006 and provide clearer guidance not only on how PRC courts should deal with cases involving disputes over letters of credit (“LC disputes”) but also on the general operation of letters of credit (“LCs”) in China.

Applicable regulations
The Regulations define LC disputes as disputes arising from the opening, notification, amendment, cancellation, confirmation, negotiation and acceptance of LCs. When the parties in an LC dispute have agreed that the relevant international practices or other regulations are applicable, then the people’s court shall respect the parties’ agreement. If the parties have not reached such an agreement, the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce and other relevant international practices shall be applicable.

Acceptance of LC disputes
The Regulations specify that after the LC issuing bank has committed to pay or accept an LC or to perform other obligations under an LC, as long as there is prima facie conformity between the bills and the clauses of the LC and amongst the bills themselves, the issuing bank is required to perform it payment obligation within the time limit specified in the LC. Even if there is a prima facie discrepancy between the bills and the clauses of the LC and amongst the bills themselves, they will still be deemed to conform to each other if the discrepancy does not lead to any ambiguity. The people’s court will not support an LC dispute based on the claim that there is a dispute regarding the underlying transaction between the applicant and the beneficiary of the LC, except in the case of LC fraud.

Inspection
An LC issuing bank has the right and obligation to inspect the bills. It may decide on its own whether there is a prima facie conformity or whether to accept any non-conformity between the bills and the clauses of the LC and amongst the bills themselves. When an LC issuing b