By Mark Schaub and Tom Shi, King Wood & Mallesons
The Regulations on the Implementation of the Law of the People’s Republic of China on the Promotion of Privately-run Schools (2021 Revision) (“Regulation”) will be effective from 1st of September 2021. The Regulations provide supporting measures to Chinese private schools including financial subsidies, tax incentives and security in respect of land but this comes with greater scrutiny and limits on their operations.
The Regulations also intend to tighten rules on compulsory education and explicitly ban VIE (Variable Interest Entity) structure. Most British schools with a presence in China do so by way of a licensing model. The Regulations will have less of a direct impact on such British schools.
Concerns for British Schools
British schools should consider the following measures:
- Review of licensing contracts and commercial terms – the Regulations direct private schools to consider public welfare and affordability in setting their fees; foreign involvement in compulsory education is also effectively banned. Therefore, the role of British schools, as licensors, will be much reduced and their Chinese partners, depending on the contractual clauses, may use the regulatory change to seek to renegotiate commercial terms.
- Risks of VIE – the situation is more complicated for British schools with Chinese partners who have a VIE structure to control/operate British branded schools and have the ultimate opportunity to list such business on capital markets. The Regulations provide explicit bans on the VIE model – the Regulations may not undo existing VIE structures but certainly companies will tread more carefully in relation to using VIEs for future projects, particularly if an IPO is considered as a possible exit. British schools involved in a VIE structure should seek to initiate discussions with their Chinese partners about disclosure and a risk assessment as to the possible impact – particularly in respect of any planned IPO.
Main purpose and regulatory focus
The Regulation clarifies that private schools must adhere to the public welfare nature of education. In order to achieve this, the Regulation sets forth rules on the establishment, organization, activities, assets and financial management of private schools. These include improving establishment standards, improving fee management mechanisms and regulating affiliated transactions.
Fee management mechanism of private schools
The Regulation provides that private schools will need to set fees based the cost of school operation and market demand. In addition, private schools should follow the principles of fairness, legality, good faith and also take into account economic and social benefits to society.
Improving supervision mechanisms including supervision of related transactions
Private schools which cover compulsory education are prohibited from conducting transactions with interested parties. Private schools which do not cover compulsory education are required to establish an information disclosure system for transactions with interested parties. Relevant departments are required to strengthen supervision over signing agreements between non-profit private schools and interested parties. These related transactions are required to be reviewed on an annual basis. The Regulation also foresees greater activity by the government and relevant administrative departments in respect of strengthening the management and supervision of private schools. This is to occur by way of annual inspections, information disclosure and direct supervision.
Standardized enrollment procedure
Private schools are able to independently determine the enrollment standards and methodology provided this fits within the scope approved by the examination and approval body. Students should be enrolled at the same time as state schools.
Standardized online operation of schools through using Internet technology
Online educational activities are required to comply with the provisions of relevant national internet management laws and administrative regulations. Private schools using the internet to implement educational activities online must obtain a corresponding school operation license and establish and implement internet security management systems and technical measures of security protection in accordance with the law.
Regulating the profit-making activities by way of capital operation
If multiple private schools are held or actually controlled by one entity then such entity shall not directly or indirectly obtain benefits from the school operation by changing the non-profit nature of the private school. Such entity is not entitled to obtain its dominant market position to abuse, exclude or restrict competition.
In addition, the Regulation comes down very hard on prohibiting private schools from providing compulsory education and also not-for-profit private schools are not entitled to provide preschool education. The Regulation also mentions that this is regardless whether this occurred by way of merger, acquisitions or contractual agreement. We believe this again suggests that any control of private schools through a VIE agreement is prohibited.
Prevent disorderly competition and illegal operations
The Regulation intends to prevent disorderly competition and also schools which illegally operate in the education sector.
The Regulation also stipulates that state schools with compulsory education shall not establish or participate in the establishment of private schools and such state schools cannot be converted into private schools.
The Regulations are further evidence that China is continuing to take steps to limit the influence of foreign education upon young minds. The younger, the stricter in that private education has no role in respect of pre-school and compulsory education.
Such schools will be subject to greater supervision by the PRC authorities and this may cause concern on the part of Chinese partners.
The private schools will be under pressure to conform more closely with public schools. Examples include conforming to having the same term dates and then closer alignment such as retaining freedom in relation to enrollment requirements but will be required to fall within the overarching scope set by the PRC authorities.
Private schools will also have their online activities curtailed in that the Regulations call for operational licenses to be obtained. This is unlikely to affect many British schools as for the most part any online activities are being operated offshore and beyond the regulatory reach of the PRC authorities.