China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

 By Li Jinnan and Jiang Hualiang, King & Wood's Banking & Finance Practice

With the recent development of the service outsourcing industry, an increasing number of financial institutions (including banks, securities companies, insurance companies and fund management companies) use financial service outsourcing to reduce costs, enhance core competitiveness, and accomplish strategic goals. Financial institutions are able to benefit significantly from IT outsourcing, which is an important part of financial service outsourcing. At the same time, they must also confront the managing risks that are associated with IT outsourcing. Based on our past experience with counseling on IT outsourcing to financial institutions, the followings are the primary legal issues relating to the terms in and execution of  IT outsourcing agreements, using banking institutions ("banks") as examples. The discussion will focus on how banks should manage potential risks from negotiating such an agreement.

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By Li Jinnan, Partner, King & Wood's Banking & Finance Group

In order to support outbound investment projects of domestic PRC entities, to meet the policy demands of domestic credit support, and to further facilitate trading and investing, the State Administration of Foreign Exchange ("SAFE") on July 30th, 2010 promulgated the Notice on the Administration of Overseas Security by Domestic Entities (the "Notice"), which came into effect as of the date of promulgation. This Notice relaxes the restrictions on financing of outbound projects.

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By Guan Feng and Wu Sijie, King & Wood's Litigation & Arbitration Group

In 2008, a financial derivatives dispute arose between a foreign-funded bank (the "Bank") and a local Chinese company (the "Company"). Although both parties executed certain documents to conclude the transaction, due to adverse changes in the international financial environment, the Company denied that the parties had entered into any contract regarding the derivative transaction and refused to perform. As a result, the Bank initiated a lawsuit against the Company to seek damages.
 

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By Wang Fengli and Wang Jiangang, King & Wood's Dispute Resolution Group

For many people, their main wealth management strategy involves purchasing financial products promoted by banks. Since the first impact of the global financial crisis was felt in 2008, the performance of different bank-issued financial products has varied greatly. Some Chinese investors have lost money as a result of buying financial products promoted by foreign-funded banks, and some have even sued those banks for compensation. Since financial products are generally quite complex, hurt investors often make their claim against a bank on the grounds that the bank failed to give clear notice about the risks inherent in the financial product which it was promoting and that the bank induced the investor into purchasing a product while concealing important facts.

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The People's Government of Shanghai Pudong New Area promulgated on June 2, 2009, the Pilot Measures for the Establishment of Foreign-invested Equity Investment Management Enterprises in the Pudong New Area of Shanghai ("Pilot Measures"). The Pilot Measures provide guidance on registration and incorporation of equity investment management companies in Pudong New Area to be established by foreign equity investment capital firm including private equity investment and venture capital.
 

By Zhang Yi, Partner at King & Wood's Corporate Group

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I. First Law Governing State-Owned Assets in China

The Enterprise State-owned Assets Law of the People's Republic of China ("State-owned Assets Law") was adopted on the fifth session of 11th Standing Committee of the National People's Congress on October 28, 2008 and become effective on May 1, 2009. The State-owned Assets Law, which had been drafted and deliberated for more than ten years, is China's first law addressing state-owned assets.  

By Su Zheng, Partner at King & Wood, and Hu Ping

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On June 9, 2009, the State Administration for Foreign Exchange (“SAFE”) issued the Notice on Certain Issues Relating to Foreign Exchange Administration on Offshore Lending by Domestic Enterprises (the “Notice”) effective as of August 1, 2009, in an effort to deal with the difficulties faced by offshore Chinese-funded enterprises that have “gone abroad” in obtaining financing offshore and increasing working capital, to encourage more domestic enterprises with strong capital strength to “go abroad”, and to enhance the use of funds by domestic enterprises.
 

King & Wood's Finance Group

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Stellar Megaunion Corporation ("SMC") was in serious debt, as it could barely repay its liabilities. New World China Land ("NWCL"), which was seeking an opportunity to go public, proposed to acquire SMC as a shell company which has no assets, but is publicly listed. To achieve this goal, NWCL conducted several rounds of negotiations with SMC's creditors to settle SMC's debts and clear the roadblocks for the acquisition. However, the parties were unable to make much progress in the negotiations due to the large number of SMC's creditors involved. As SMC needed to solve its debt crisis as soon as possible and its negotiations with NWCL were deadlocked, the company decided to reorganize to completely release itself from the heavy debt burdens in a short period time.

SMC's Reorganization
A. Reorganization initiated by SMC's creditors
As SMC failed to repay it debts due, a third party creditor petitioned the proper Intermediate People's Court (the "Court") to reorganize SMC. The Court accepted the petition on March 11, 2008 ([2008] Yusanzhongbozi No.1).

B. Confirmation of Creditors' Rights
According to the proposed reorganization plan the administrator of SMC (the "Administrator") submitted to the Court and the first SMC creditors' meeting, 70 creditors filed claims and the total value of confirmed claims was nearly RMB 2.5 billion. [continue reading to find out the outcome]
 

Liu Yanling, Partner and head of King & Wood's Bankruptcy, Restructuring & Insolvency Practice.

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After the Qualified Domestic Institutional Investor scheme (QDII) was implemented in April of 2006 to help relieve pressure on the RMB by promoting capital outflows and Chinese companies in various industries in the private sector were encouraged to go abroad, China’s outbound investment totaled approximately $20 billion in 2007.

In the first half of 2008, overseas investment of Chinese companies has more than doubled from last year. This year, Chinese outbound investment has already reached 16 billion euros (nearly $23 billion) according to Bloomberg.

Correspondingly, we have seen an increasing number of our domestic Chinese clients invest abroad for both market seeking and resource seeking opportunities. We expect this trend to accelerate in the coming years as outbound rules continue to be relaxed and domestic companies shift their strategies to compete globally.

This trend, coupled with close working relationships with a significant number of American companies and law firms have lead King & Wood to establish its New York office opening September 9th, 2008. As a firm with an extensive client list in the banking industry, our location on Madison Avenue will serve as serve as a local presence for many of our American clients and also provide international support for our clients at home. Since 2001, King & Wood has made a series of international moves such as San Francisco, Hong Kong, Tokyo and most recently with our Sydney Strategic Alliance at the end of 2007.

For years we have seen U.S. and European law firms expand into China. As the global clout of Chinese companies grows, we will see continue to see Chinese law firms expand with them. 

Duncan Hwang, Foreign Lawyer, FDI

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A Brief Analysis on the New Administrative Rules on Foreign Exchanges

Background

On August 5, 2008, the Premier of the PRC State Council, Mr. Wen Jiabao, issued the State Council Order No. 532, which promulgates the newly revised “Administrative Rules of the People’s Republic of China on Foreign Exchanges” (hereinafter referred to as the “New Rules”). This document came into force upon its promulgation, and to a large extent changes the rules of the old foreign exchange supervision system. This tremendous change in the regulatory system is for the purpose of accommodating the rapid development of China’s economy and the material transformation in the international economic fields in recent years.

By King & Wood’s Banking Regulation & Compliance Practice

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2008 is destined to be an extraordinary year for global cross-border M&A. King & Wood, as a leading law firm deeply rooted in this activity in China, has noticed the following trends in the second half of 2007 and the first half of 2008...

By Wang Junfeng, Partner 

Edward Jing, King & Wood’s Securities Group

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To echo the enactment of the PRC Property Law, the State Administration of Industry and Commerce in October 2007 published the Movables Mortgage Registration Measures (“Measures”). The Measures, which have replaced the 1995 Enterprise Movables Mortgage Registration and Administration Measures, are aimed at reflect the Property Law’s intention to throw more movables into the pool of mortgage-able properties and to direct local bureaus of industry and commerce on the procedures of movable mortgage registrations. Detailing on the scope of movables subject to mortgages, the effect of mortgage registrations, the documents required to support registrations and the standard of document examination, the Measures are expected to clarify many of the confusions that have impeded the efficiency of the security registration system in China and to enhance availability of financing to small and mid-sized companies.
 

By Li Jinnan, Partner and Pan Ye, associate.

CONTINUE READING... 

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In the final quarter of 2007, the National Association of Financial Market Institutional Investors (“NAFMII”) was authorized by the People's Bank of China to release a standardized Master Agreement and supplements (“Master Agreement”) to serve as uniform documentation of inter-bank market participants in financial derivatives transactions. For those familiar with the International Swaps and Derivates Association Master Agreement (“ISDA Agreement”), its influence is evident in the newly adopted Master Agreement. Similar to the ISDA Agreement, the Master Agreement addresses an extremely wide variety of transactions, including most if not all derivatives allowed by Chinese law.

There are three very prominent features of the Master Agreement. First, it adopts the “single agreement” scheme. The single agreement scheme combines all the necessary schedules, confirmations, and CSAs into the one Master Agreement. Second, the concept of “netting” is utilized. Parties can choose netting not just within one transaction, but across different transactions if specified. In the event of early termination close-out netting is even allowed, minimizing loss upon credit failure. Third, close-out amounts are narrowly tailored to the Chinese market. An example of such a Chinese-specific provision is that tax–related aspects are largely ignored since it is assumed that the Master Agreement will be used for domestic dealings.

The Master Agreement is not without its flaws, but they are far outweighed by the progress that it represents. Issues such as the validity of netting in bankruptcy situations and uncertainties regarding alternatives for documentation are comparatively minor and can be settled by practice. There is little doubt that this significant advancement will notably promote prosperity within the domestic financial derivatives market.

By Liu Zhigang, Partner and Lv Yinghao, associate

CONTINUE READING... 

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On March 13, 2008, the General Office of the State Council promulgated the Opinions of the General Office of the State Council on Implementing Some Policies and Measures for Accelerating the Development of the Utility Sector. (No.11 [2008] of the General Office of the State Council) In this opinion, it is clearly stated that “The market-oriented reform of municipal public utilities may be promoted continuously and stably. The operations of water, heat and gas supply, public transportation, sewage disposal and waste disposal, etc. may be entrusted to private enterprises.” This article ended the long-lasting controversy of “whether China’s water market will continue to open up”.

China now is facing a very serious water shortage, and the water consumption and water demand between districts is uneven. As China’s water market keeps on opening up, it is believed that more and more investors will put their money on the exploration and utilization of water resources.

By Li Qiang, Partner 

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