Name: Provisions on Several Issues Concerning Trial of Disputes Relating to Foreign Invested Enterprises (Part I) (《关于审理外商投资企业纠纷案件若干问题的规定（一）》(the “Interpretations”)
Issuing authority: The Supreme People’s Court (the “SPC”)
Effective date: 16 August 2010
Subject: Disputes relating to Foreign Invested Enterprises ( “FIEs”)
With the issue of the Interpretations, the SPC has helped to clarify a number of uncertainties often faced by FIEs and their shareholders in China. Notably, this is the first time that the SPC has expressed its view in this area by systematic judicial interpretations. The Interpretations should assist in streamlining differing local practices and interpretations within China.
Highlights:
Validity of Amendments to an FIE’s Joint Venture Contract
- Where the parties enter into a supplemental agreement which does not constitute a “material or substantial amendment” to the original agreement (which has been approved by a competent authority, such as an FIE joint venture contract), the supplemental agreement will not be regarded as not having taken effect solely due to lack of approval by the relevant authority. The Interpretations go on to provide a non-exhaustive list of “material or substantial amendments”, which broadly include changes to the business scope or registered capital of an FIE, amendment of the method of capital contribution by investors of an FIE and changes to the provisions concerning transfers of interests in an FIE.
Equity Transfer
- Where a transferor fails to apply for regulatory approval in respect of an equity transfer agreement which has been entered into, a court will, at the request of the transferee, order the transferor, together with the FIE, to make the application for approval. If the transferor and the FIE do not do so, the transferee may bring a further claim for termination of the equity transfer agreement and damages for any loss suffered.
- The Interpretations reinforce the pre-emptive rights of non-transferring shareholders of an FIE. For example, an equity transfer agreement may be nullified by the court at the request of non-transferring shareholders if their pre-emptive rights have been prejudiced. Claims must be brought within one year of the non-transferring shareholders becoming aware of, or when they ought to have been aware of, the execution of the equity transfer agreement.
Nominal Shareholders
- Arrangements under which a nominee holds an interest in an FIE on behalf of a third party will not automatically be struck down by a court, unless it is clear that the purpose of the arrangement is aimed at avoiding a mandatory statutory restriction or requirement.
Validity of Equity Pledge Agreement
- An equity pledge agreement takes effect upon execution, unless otherwise stated in the agreement or provided for under laws or administrative regulations.
If you would like to discuss anything regarding this Alert please contact Fang Jian.
