Why not Use the Time of Telework to Amend the AOA of FIEs?

By Wu Ye, Kuang Jingting and Tan Lanwei

Why Amend

The Foreign Investment Law of the People’s Republic of China (the “Foreign Investment Law”) that issued last year came into effect on  January 1, 2020 together with the supporting Regulations for the Implementation of the Foreign Investment Law of the People’s Republic of China (the “Implementation Regulations”). Upon its taking effect, the Foreign Investment Law repealed the three fundamental laws which previously regulated foreign-invested enterprises (“FIEs”) in China – the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures (the “Equity Joint Ventures Law”), the Law of the People’s Republic of China on Sino-foreign Contractual Joint Ventures (the “Contractual Joint Ventures Law”) and the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (collectively referred to as the “Three Laws governing FIEs”), together with their corresponding implementation regulations and detailed implementation rules, were repealed thereafter.  As a result, the relevant provisions on corporate governance and control in the Three Laws governing FIEs no longer apply.

The Foreign Investment Law prescribes a five-year transitional period for –the FIEs established and operated in accordance with the Three Laws governing FIEs prior to 1 January, 2020.  These pre-existing FIEs shall adjust the forms and structures of their organizations and complete registration of such changes in accordance with the Company Law of the People’s Republic of China (the “Company Law”) or the Partnership Enterprise Law of the People’s Republic of China (as applicable), and other laws by no later than January 1, 2025. This has brought new challenges to a vast number of existing FIEs – how should these enterprises amend their articles of association (“AOA”) to comply with the applicable law?

This article will provide you with insights on how to amend the AOA of FIEs in accordance with the Company Law.[1]

 

What to Amend

 

The differences between the corporate governance structure of Sino-foreign equity joint ventures (“Equity Joint Ventures”) and Sino-foreign contractual joint ventures (“Contractual Joint Ventures”, this article only discusses contractual joint ventures with a corporate structure) under the Three Laws governing FIEs and that of limited liability companies under the Company Law provide the best illustration of what to amend[2]. Therefore, below we will summarize and provide our advice with reference to the terms to be amended under the typical AOA of equity joint ventures/contractual joint ventures.[3]

 

1.Total Investmentand Registered Capital

 

There was a unique concept called “total investment” for FIEs under the Three Laws governing FIEs, which does not apply to domestic enterprises. FIEs are also subject to the statutory requirement on the ratio between total investment and registered capital, and may only borrow foreign debts not exceeding the difference between the above two under relevant laws. After the Foreign Investment Law came into effect, there is no provision on total investment under the Company Law, and neither the Foreign Investment Law nor the Implementation Regulations specifies whether to retain this concept. Pursuant to the Foreign Investment Initial Report and Change Report which was published as an annex to the Announcement of the Ministry of Commerce on Matters Relating to Reporting of Foreign Investment Information ([2019] No. 62 of the Ministry of Commerce), the basic information of FIEs still includes the total investment.

Pursuant to Article 13 of the Notice of the People’s Bank of China on Matters concerning the Macro-prudential Management of Full-covered Cross-border Financing (Yin Fa [2017] No. 9) (“Document No. 9”), FIEs may choose a mode between the existing cross-border financing management mode and macro-prudential mode prescribed in Document No. 9 during the transitional period (one year as of the issuance of Document No. 9). After such transitional period, the management mode of cross-border financing for FIEs shall be determined by the People’s Bank of China (PBC) and the State Administration of Foreign Exchange (“SAFE”) in accordance with the overall implementation of this Notice. Although the transitional period has expired, neither the PBC nor the SAFE has released the final regulatory mode. Article 3, Paragraph 10 of the Opinions of the State Council on Further Effectively Using Foreign Investment (Guo Fa [2019] No. 23) provides that “…We should also promote the reform of registration system for foreign debt issued by enterprises, improve the macro-prudential management policy for full-covered cross-border financing, and support foreign-invested enterprises to independently choose the mode of borrowing foreign debt to reduce the financing cost…”

Therefore, there are uncertainties as to whether the “total investment” clause should be retained in the AOA of FIEs and whether FIEs may still determine the amount of foreign debt they may borrow with reference to the difference between total investment and registered capital. Based on our consultations with relevant foreign exchange authorities on recent projects, here is our advice to FIEs:

• FIEs may retain the clause of total investmentwhen amending their AOA, and may refer to the requirements under the Three Laws governing FIEs to determine the ratio of the difference between total investment and registered capital (i.e. this may be subject to shareholders’ autonomy);
• FIEs may refer to the difference between total investmentand registered capital or choose the mode of macro-prudential in order to determine the quota of foreign debts. But before the AOA is amended, it is suggested that FIEs pay attention to the latest regulation issued, if any, and confirm with the local foreign exchange administrations on their actual practice by phone. If the quota determined under the macro-prudential mode better suits the enterprises’ demands, the FIEs shall remove relevant provisions from the existing AOA which prescribe the usage of the difference between total investment and registered capital to determine such quota;
• Where the FIEs do not consider requirements for the ratio of difference between total investmentand registered capital, they still need to pay attention to other ratio requirements related to the company’s capital, if applicable. For example, should it be an investment project of fixed assets, the relevant regulations on the capital ratios for fixed asset investment projects issued by the State Council from time to time should apply. And the FIEs should ensure compliance with such requirements when amending their AOA.

 

2.Shareholders’ Meeting

 

Pursuant to the Equity Joint Ventures Law and the Contractual Joint Ventures Law, neither Equity Joint Ventures nor Contractual Joint Ventures have shareholders’ meetings, and their highest authority is the board of directors. However, under the Company Law, the shareholders’ meeting shall replace the board of directors as the highest authority. Thus, both Equity Joint Ventures and Contractual Joint Ventures should incorporate new chapters into their AOA governing the shareholders’ meeting, and part of the powers and functions of the board of directors should also be assigned to the shareholders’ meeting. In accordance with the Company Law and based on our practical experience, we have summarized the following advice for revision of the chapter on the shareholders’ meeting:

No.	Item	Advice on added content
1	Composition of the shareholders’ meeting	The shareholders’ meeting of a limited liability company is composed of all shareholders. The shareholders’ meeting is the highest authority of the company.
2	Powers and functions of the shareholders’ meeting	The powers and functions of the shareholders’ meeting include (1) to determine the business policies and investment plans of the company; (2) to elect and replace directors and supervisors who are not employee representatives, and decide on matters relating to the remuneration of such directors and supervisors; (3) to examine and approve the reports of the board of directors; (4) to examine and approve the reports of the board of supervisors or supervisors; (5) to examine and approve the annual financial budget and final accounting plans of the company; (6) to examine and approve the profit distribution and loss recovery plans of the company; (7) to pass resolutions on the increase or reduction of registered capital of the company; (8) to pass resolutions on the issue of corporate bonds; (9) to pass resolutions on matters such as the merger, division, dissolution, liquidation of the company or change of corporate form; (10) to amend the AOA of the company; (11) other powers and functions as stipulated in the AOA. If shareholders agree unanimously in writing, a decision may be made directly without convening a shareholders’ meeting, and the decision documents shall be signed and sealed by all shareholders. In addition to the above, shareholders may also grant other powers and functions to the Shareholders Meeting in the AOA.
3	Convening of  shareholders’ meetings	Shareholders’ meetings are divided into regular and interim meetings. Shareholders shall stipulate the time for holding the regular meeting in the AOA. An interim meeting shall be convened if it is proposed by shareholders representing one-tenth or more of the voting rights, or by one-third or more of the directors or the board of supervisors or, in the case of a company without a board of supervisors, by supervisors.
4	Convening and presiding over of shareholders’ meetings	For a limited liability company with a board of directors, the shareholders’ meetings shall be convened by the board of directors and presided over by the chairman; if the chairman is unable or fails to perform his/her duties, the deputy chairman shall preside over the shareholders’ meeting; if the deputy chairman is unable or fails to perform his/her duties, a director appointed by more than half of the directors shall preside over the meeting. If a limited liability company has no board of directors, the shareholders’ meeting shall be convened and presided over by the executive director. If the board of directors or the executive director is unable to perform or fails to perform the duty of convening a shareholders’ meeting, the meeting shall be convened and presided over by the board of supervisors or the supervisors of a company without a board of supervisors; if the board of supervisors or the supervisors fails to convene and preside over the meeting, shareholders representing one-tenth or more of the voting rights may convene and preside over the meeting on their own.
5	Notice of shareholders’ meetings	The convening of a shareholders’ meeting shall be notified to all shareholders 15 days prior to the meeting, unless otherwise stipulated in the AOA or otherwise agreed by all shareholders. In practice, shareholders may refine the meeting notice clauses in the AOA, adding provisions such as whether the notice period can be waived per negotiation among shareholders, what information shall be contained in the notice, whether issues not stated in the notice can be discussed in the meeting, and whether the shareholders may propose to consider additional issues at the meeting.
6	Voting rights at shareholders’ meetings	Shareholders shall exercise their voting rights in proportion to their respective capital contributions, unless otherwise provided for by the AOA. Shareholders have the discretion to agree upon the percentage of voting rights in the AOA, i.e., they may exercise voting rights not in proportion to their equity interests.
7	Procedural rules of shareholders’ meetings	The deliberation and voting procedures of the shareholders’ meeting shall be prescribed in the AOA, unless otherwise provided for by the Company Law. Resolutions of a shareholders’ meeting on amendment to the AOA, increase or reduction of registered capital, and merger, division, dissolution, liquidation of the company or change of corporate form shall be passed by shareholders representing two-thirds or more of the voting rights. Generally speaking, the AOA may agree upon an increase (but not decrease) in the voting percentage requirements for the aforesaid major issues (but if such voting percentage is agreed as unanimously adopted by all shareholders, in the case a dispute arises in practice, a court may reject such an agreement if it believes that the agreement is easy to cause a stalemate). The voting percentage requirements for other general matters may be provided for in the AOA at the shareholders’ discretion.
8	Other items	In practice, shareholders may include articles on agent and form of shareholders’ meetings into the chapters and sections of the AOA according to their actual needs, and may also set out detailed and supplementary provisions on the aforesaid issues in this form without prejudice to the Company Law.

3. Board of Directors (Executive Directors)

 

After the Foreign Investment Law and the Implementation Regulations came into effect, pursuant to the Company Law, the board of directors shall no longer be the highest authority of the Equity Joint Ventures or Contractual Joint Ventures, but rather the business decision-making organization between the shareholders’ meeting of the company and the business management organization. (Note that a limited liability company with a small number of shareholders or of a smaller scale may appoint one executive director instead of a board of directors for this role.)  In addition to adjusting some powers and functions of the board of directors to those of the shareholders’ meeting, the Equity Joint Ventures or Contractual Joint Ventures shall amend and supplement relevant matters of the board of directors in accordance with the Company Law. Specific comparisons and advice are as follows:

No.	Item	Provisions under the Regulations for the Implementation of Equity Joint Ventures Law and the Detailed Rules for the Implementation of Contractual Joint Ventures Law	Provisions under the Company Law and advice on amendment
1	Composition of the board of directors	The board of directors shall consist of no less than three (3) members. The distribution of the number of directors shall be ascertained through consultation by the parties with reference to the proportion of investment contributed (applicable to Equity Joint Ventures)/their investment or terms of cooperation (applicable to Contractual Joint Ventures)	A limited liability company shall have a board of directors with 3 to 13 members. For a limited liability company with a relatively small number of shareholders or for a relatively small limited liability company, it may have one executive director and no board of directors. If the Chinese shareholders of the company have more than two state-owned enterprises or other state-owned investment entities, employee representative directors shall be appointed.
2	Appointment and removal of directors	Nominated by the parties to the venture. Among them, if the chairman is appointed by one party to the joint venture, the other party shall assume the office of vice-chairman.	Elected by the shareholders’ meeting. The board of directors shall have one chairman and may have one or more deputy chairmen. The appointment of the chairman and deputy chairmen (if any) shall be specified in the AOA.
3	The term of office of a director	Equity Joint Ventures: four years (In practice, many Equity Joint Ventures have agreed that the term of office of the directors shall not exceed three years according to the Company Law). Contractual Joint Ventures: shall not exceed three years.	Shall not exceed three years, and may be renewed upon re-election.
4	Powers and functions of the board of directors	To discuss and decide on all major issues of the joint venture in accordance with the provisions of the AOA.	Powers and functions of the board of directors include (1) Convening shareholders’ meetings and presenting reports thereto; (2) Implementing the resolutions made at the shareholders’ meetings; (3) Determining the company’s business and investment plans; (4) Working out the company’s annual financial budget plans and final account plans; (5) Working out the company’s profit distribution plans and loss recovery plans; (6) Working out the company’s plans on the increase or reduction of registered capital, as well as on the issuance of corporate bonds; (7) Working out the company’s plans on merger, split, change of the company form, or dissolution, etc.; (8) Making decisions on the establishment of the company’s internal management departments; (9) Making decisions on hiring or dismissing the company’s manager and his salary and compensation, and, according to the nomination of the manager, deciding on the hiring or dismissal of vice manager(s) and the persons in charge of finance as well as their salaries and compensations; (10) Working out the company’s basic management system; and (11) Other powers and functions as specified in the AOA. In addition to the above, shareholders may also grant the board of directors other powers and functions in the AOA.
5	Convening of the board meeting	The board of directors shall convene at least once every year. The chairman may convene an interim meeting based on a proposal made by more than one-third of the directors.	The number of annual meetings of the board of directors and the conditions for convening interim meetings may be agreed upon in the AOA.
6	Quorum for the board meeting	A board meeting requires a quorum of over two-thirds of the directors.	There is no statutory requirements, and it may be agreed upon in the AOA.
7	Procedural rules of board meetings	Matters subject to unanimous resolution by the directors present at the board meeting include amendment of the AOA of the joint venture; termination and dissolution of the joint venture; increase or reduction of the registered capital of the joint venture; merger or division of the joint venture (applicable to Equity Joint Ventures). In addition to the above, matters subject to unanimous resolution by the directors of a Contractual Joint Venture present at the board meeting also include mortgage of property of the Contractual Joint Ventures and an amendment to the organizational structure of the Contractual Joint Venture. Decisions on other matters of an Equity Joint Venture shall be made according to the rules of procedure stipulated in the AOA. Resolutions of the board of directors of a Contractual Joint Venture will require approval by a majority of the directors voting in order to be passed.	The methods of deliberation and voting procedures of the board meeting shall be prescribed in the AOA, unless otherwise provided for by the Company Law. Except for the agreements that conflict with the provisions of the Company Law, the clauses and matters relating to the board of directors of the original AOA may be retained or expanded according to the needs of shareholders of FIEs.
8	Legal representatives	The legal representative shall be the chairman. In practice, there are cases where general managers serve as the legal representatives of Equity Joint Ventures/Contractual Joint Ventures).	The legal representative of the company shall be the chairman, executive director or general manager in accordance with the provisions of the AOA.

 

4.Board of Supervisors

 

Matters relating to the (board of) supervisors are not addressed under the Three Laws governing FIEs. Since the issuance of the Implementation Opinions on Some Issues concerning Law Application for the Administration of Examination and Approval and Registration of Foreign-funded Companies in 2006, the existing clauses on the (board of) supervisors in the AOA of FIEs have basically been developed pursuant to the Company Law. It is important to note that, because the highest authority of Equity Joint Ventures and Contractual Joint Ventures shall be changed from the board of directors to the shareholders’ meeting, some references to the “board of directors” in the original AOA concerning the powers and functions of the (board of) supervisors shall also be changed to the “shareholders’ meeting” accordingly (for instance, the (board of) supervisors’ power to making a proposal to the “board meeting” shall be changed to making a proposal to the “shareholders’ meeting”).

 

5.Operation and Management Organization

 

No.	Item	Provisions of the Equity Joint Ventures Law, the Regulations for the Implementation of Equity Joint Ventures Law, the Contractual Joint Ventures Law and the Detailed Rules for the Implementation of Contractual Joint Ventures Law	Provisions under the Company Law and advice on amendment
1	Composition	Ÿ Equity Joint Ventures: one general manager and several deputy general managers, and an Equity Joint Venture may also have a chief engineer and deputy chief engineers, a chief accountant and a deputy chief accountants, and auditors Ÿ Contractual Joint Venture: one general manager	A limited liability company may have a general manager. The executives of a limited liability company shall include manager, deputy manager, finance chief and other personnel stipulated in the AOA of the company. Shareholders may, based on the provisions under the Company Law, agree on the appointment of other executives in the AOA.
2	Appointment and removal	Equity Joint Venture: the general manager and deputy general managers shall be appointed by the board of directors; the positions of general manager and deputy general managers (or factory directors and deputy factory directors) shall be held by the parties to the Equity Joint Venture respectively (more flexible in practice). Contractual Joint Venture: the general manager shall be appointed by the board of directors.	The manager shall be appointed or dismissed by the board of directors. The manager shall have the right to request the board of directors to appoint or dismiss deputy managers or the finance chief.
3	Powers and functions	Equity Joint Venture: the general manager shall carry out the decisions of the board meeting, and organize and lead the day-to-day operation and management of the Equity Joint Venture. Within the scope of authorization by the board of directors, the general manager shall, externally, represent the Equity Joint Venture, and internally, have the right to appoint and dismiss his subordinates and exercise other powers and functions as authorized by the board of directors. Contractual Joint Venture: responsible for the day-to-day operation and management of the Contractual Joint Venture and answerable to the board of directors or the joint management committee.	The manager’s powers and functions include (1) presiding over the company’s production, operation and management and organizing the implementation of the resolutions of the board of directors; (2) organizing the implementation of the company’s annual business plan and investment plan; (3)  drawing up a plan for the establishment of the company’s internal management organization; (4) drafting the basic management system of the company; (5) formulating specific rules and regulations of the company; (6) proposing the appointment or dismissal of the company’s deputy managers and finance chief; (7) deciding on the appointment or dismissal of responsible management personnel other than those to be appointed or dismissed by the board; (8) other powers and functions granted by the board of directors. Where the AOA provides otherwise for the powers and functions of the manager, such provisions shall prevail. The AOA may provide otherwise for the manager’s powers and functions, provided that such provisions shall not violate the Company Law (for instance, it is not allowed to delegate to the manager the statutory powers and functions of the shareholders’ meeting and the board stipulated in the Company Law).
4	Non-competes for executives	Equity Joint Venture: the general manager or deputy general managers shall not hold posts concurrently as general manager or deputy general managers of other economic organizations, or engage in any commercial competition initiated by any other economic organization against the Equity Joint Venture.	Unless otherwise provided by the AOA, the general manager or deputy general managers of the company may concurrently hold positions in other companies. Without the consent of the shareholders’ meeting, executives shall not take advantage of their positions to seek business opportunities belonging to the company for themselves or for others, or to run for themselves or for others business similar to that of the company. As there are exceptions agreed by the shareholders’ meeting, the non-compete obligation of executives under the Company Law is relatively loose.

 

6. Transfer of Equity Interest

 

Item	Provisions of the Regulations for the Implementation of Equity Joint Ventures Law and the Detailed Rules for the Implementation of Contractual Joint Ventures Law	Provisions under the Company Law and advice on amendment
Equity transfer	Equity Joint Venture: if one party to the Equity Joint Venture transfers its equity to a third party, it must obtain the consent of the other party to the Equity Joint Venture. The other party to the Equity Joint Venture has a right of first refusal. The conditions for one party to the Equity Joint Venture to transfer its equity to a third party shall not be more favorable than those for the other party to the Equity Joint Venture. Contractual Joint Venture: in case one party intends to transfer all or part of its rights with the Contractual Joint Venture to the other party or to a third party, written consent shall be obtained from the other party of the Contractual Joint Venture.	The shareholders of a limited liability company may transfer all or part of their equity in the company to each other. The transfer of the company’s equity by a shareholder to anyone other than another shareholder is subject to consent by more than 50% of the non-transferring shareholders. The transferring shareholder shall notify the other shareholders in writing for approval of the transfer. If any non-transferring shareholders fails to reply within 30 days from the date of receipt of the notice, it shall be deemed as his/her consent to the transfer. If more than 50% of the non-transferring shareholders disapprove the transfer, the dissenting shareholders shall purchase the equity interests to be transferred; if not, they shall be deemed to have consented to the transfer. For shares transferred with the consent of shareholders, the non-transferring shareholders have a right of first refusal under the same conditions. Where more than two of the shareholders seek to exercise the right of first refusal, they shall determine their respective purchase percentage through consultation; if such consultation fails, the right of first refusal shall be exercised pro rata to their respective capital contributions at the time of the transfer. Where the AOA otherwise provides for transfer of equity interests, such provisions shall prevail.

Note: in accordance with the Implementation Regulations, after the form of organization, governing structure, etc. of the existing FIEs are adjusted in accordance with the law, the equity or rights and interests may be transferred as originally agreed by the parties to the Equity Joint Venture or Contractual Joint Venture in relevant contracts. The Company Law also provides that shareholders may separately agree on matters relating to equity transfer in the AOA. Therefore, shareholders of existing FIEs may have the discretion to decide whether to revise the provisions on equity transfer in the AOA. Where there are no special provisions on matters relating to equity transfer in the original AOA, shareholders of FIEs are recommended to consider whether the provisions of the Company Law comply with their interests and include relevant mechanisms for equity transfer into the AOA when making amendments to it.

 

7.Profit Distribution

Item	Provisions under the Equity Joint Ventures Law, Regulations for the Implementation of Equity Joint Ventures Law, Contractual Joint Ventures Law and the Detailed Rules for the Implementation of Contractual Joint Ventures Law	Provisions under the Company Law and advice on amendment
Profit distribution	Equity Joint Venture: After allocations for reserve funds, employees bonuses and welfare funds and enterprise development funds (the “Three Funds”) are deducted, the profit after tax shall be distributed according to the proportion of each party’s investment. Contractual Joint Venture: The earnings or products should be distributed, and risks and losses be shared in accordance with the contractual joint venture contract. Earnings may be distributed by means of distributing profits, distributing products or by other means agreed upon by the parties to the contractual joint venture.	Dividends shall be distributed to the shareholders in accordance with the proportion of their capital contribution, unless all shareholders agreed to other dividend distribution mechanism.

Note: In accordance with the Implementation Regulations, after the form of organization, governing structure, etc. of the existing FIEs are adjusted in accordance with the law, the earnings and the assets remaining may be distributed as originally agreed by the parties to the Equity Joint Venture or Contractual Joint Venture in relevant contracts. The Company Law also provides that all shareholders may agree that  bonuses shall not be shared in accordance with the proportion of capital contribution. Therefore, shareholders of existing FIEs may have the discretion to decide whether to revise the provisions on profit distribution in the AOA or not based on their needs.

 

8.Statutory Surplus Reserve

 

Under the framework of the Three Laws governing FIEs, the profit after tax of existing FIEs shall be distributed after deducting the allocations for the Three Funds, provided however that wholly foreign owned enterprises (WFOEs) may be exempted from deducting the enterprise development funds, and the proportion of allocations is decided by the board of directors[5]. When revising the existing AOA of an FIE, the provisions on the Three Funds should be deleted in accordance with the Company Law and be amended as follows: ”[T]en percent of the profit shall be drawn as the company’s statutory surplus reserve. The company may stop drawing the profits if the aggregate balance of the statutory surplus reserve has already accounted for over 50 percent of the company’s registered capital”. In addition, as necessary for operation, shareholders may also agree in AOA that a company surplus reserve may be drawn from the after-tax profit at the resolution of the shareholders’ meeting.

 

9.Dissolution

Item	Provisions under the Regulations for the Implementation of Equity Joint Ventures Law and the Detailed Rules for the Implementation of Contractual Joint Ventures Law	Provisions under the Company Law and advice on amendment
Reasons for dissolution	Equity Joint Venture: (1) expiry of duration; (2) inability to continue operations due to heavy losses; (3) inability to continue operations due to the failure of one of the contracting parties to fulfill the obligations prescribed by the agreement, contract or AOA; (4) inability to continue operations due to heavy losses caused by force majeure such as natural calamities and wars, etc.; (5) inability to obtain the desired objectives of the operation and at the same time to see a future for development; (6) occurrence of other reasons for dissolution prescribed by the contract and AOA. Contractual Joint Venture: (1) on expiry of the term of the enterprise; (2) it is unable to continue operations due to heavy losses incurred or due to serious damage and heavy losses as a result of a force majeure event; (3) the contractual joint venture is unable to continue operations due to one or several of the Chinese and foreign partners’ failure to fulfil its/their obligations prescribed in the contractual joint venture contract and AOA; (4) occurrence of other grounds for dissolution as prescribed in the contractual joint venture contract and AOA; (5) the Contractual Joint Venture is ordered to close down in accordance with the law due to violation of laws and administrative regulations.	A company shall be dissolved for the following reasons: (1) expiry of the term of operation stipulated in the AOA of the company or occurrence of an event which triggers the dissolution as provided in the AOA of the company; (2) a resolution on dissolution has been passed by the board of shareholders’ meeting or a shareholders’ general meeting; (3) where the dissolution is required by a merger or division; (4) the business license is revoked or the company is ordered to be closed down; (5) a dissolution of the company is ordered by a people’s court in accordance with the provisions of Article 182 of the Company Law. Under the Company Law, severe violation of the investment agreement, the shareholders’ agreement, or AOA is not a statutory reason for dissolution, provided that other reasons for dissolution may be supplemented in the company’s AOA. Shareholders of FIEs may agree on other reasons for dissolution on the basis of the statutory reasons for dissolution as the case may be.

 

10.Other Issues

 

In addition to the above core issues, the following issues are also worth attention in revising the AOA of an FIE:

• If an Equity Joint Venture or contractual joint venture is a state-controlledenterprise, as required by the existing normative documents, the Chinese state-owned shareholder will in general require to incorporate the provisions in relation to China Communist Party (CCP) organization into the company’s AOA.  However, the requirements of CCP organization clauses applicable to enterprises in which the State holds an absolute controlling share are different from the requirements applicable to enterprises in which the State holds a relative controlling share. For FIEs, provisions on CCP organization in the AOA may be determined by both Chinese and foreign shareholders through consultation on the basis of the Notice of the Organization Department of the Central Committee of the Communist Party of China and the Party Committee of the State-owned Assets Supervision and Administration Commission of the State Council on Effectively Promoting the Incorporation of Requirements on Party Building into the Articles of Associations of State-owned Enterprises and the relevant internal requirements of state-owned shareholders. Based on our practical experience, for a joint venture in which the State holds a relative controlling share, the content and form of the CCP organization provisions in the AOA may be relatively more flexible.
• The AOAs of FIEs are no longer required to be approvedby government authority before taking effect. For FIEs whose business scope does not belong to the industries on the negative list of foreign investment access, the filing procedures with the Ministry of Commerce (MOFCOM) and its local branches are no longer applicable. Therefore, the provisions (commonly found in the sections of definition, preconditions and effective conditions) related to the MOFCOM approval/filing in the original AOA should be deleted and amended to “the AOA shall become effective as of the date when the authorized representatives of all shareholders sign and affix their official seals”.
• According to the Measures on Reporting of Foreign Investment Information, FIEs may decide to add provisions to their AOAs on fulfilling the obligation to submit relevant information to the competent department of commerce when the company is established and/or changed as the case may be.

 

We are here to help

 

Although FIEs may choose to amend their AOAs at any time during the five-year transition period, we suggest that FIEs consider making amendments as early as possible. Especially for Equity Joint Ventures and Contractual Joint Ventures with both Chinese and foreign shareholders, when amending the AOAs, shareholders are very likely to start new rounds of negotiations on core issues such as power division of enterprise governance structure, rules of procedure, profit distribution, etc. The amendment of the AOA should be started sooner rather than later.

 

Since the COVID-19 outbreak, Japan and many other countries provided assistance and support to China. At the same time, with the implementation of the Foreign Investment Law and China’s positive measures to further promote the building of a new landscape of foreign investment, more foreign investors will be attracted to make investments in China. If you need any assistance with drafting or amending the shareholders’ agreement and AOA of FIEs and in relation to any other foreign direct investment, we are ready to make every effort to offer professional service.

 

[1]Since most FIEs adopt the corporate structure, foreign-funded partnerships are not covered in this article.

[2]Since the introduction of the Implementation Opinions on Some Issues concerning Law Application for the Administration of Examination and Approval and Registration of Foreign-funded Companies in 2006, the basic corporate governance structure of WFOEs has been established in accordance with the Company Law. Thus, this article does not have a separate discussion on amendment to the articles of association of WFOEs. If the issues below are applicable to wholly foreign owned enterprises (also known as “WFOEs”), our advice on amendment also applies.

[3]Unlike WFOEs, in accordance with the previous Equity Joint Ventures Law and Contractual Joint Ventures Law, Sino-foreign equity joint ventures and Sino-foreign contractual joint ventures shall prepare equity joint venture contracts or contractual joint venture contracts in addition to their articles of association. After the Foreign Investment Law came into effect, the equity joint venture contract/contractual joint venture contract is no longer required for the establishment or change of FIEs. If the Chinese and foreign shareholders intend to keep it, they may convert such contract into a shareholders’ agreement, where the advice and key points on amendment are consistent with those of the articles of association mentioned herein.

[4]A Contractual Joint Venture may establish a joint management committee instead of a board of directors. The “the board of directors of a Contractual Joint Venture” referred to below may be construed as the board of directors or joint management committee.

[5]A WFOE shall draw at least 10% of the profit after tax as reserve fund, and the company may stop drawing the profits if the aggregate amount drawn has already accounted for over 50 percent of the company’s registered capital. The ratio of employees bonuses and welfare funds may be determined by the enterprise itself.

 

Thanks to intern Xie Anlin for her contribution to this article.