China 20/20: Legal and Regulatory Developments - December 2012

by Orrick, Herrington & Sutcliffe LLP

The Interim Provisions of the Ministry of Commerce for the Equity Contribution of Foreign Invested Companies Released

The Ministry of Commerce released the Interim Provisions of the Ministry of Commerce for the Equity Contribution of Foreign Invested Companies (the "Provisions") on September 21, 2012. The Provisions became effective from October 22, 2012.

The purpose of the Provisions is to regulate how equity can be contributed to foreign invested companies which hitherto has not been specifically regulated although in practice has been permitted.

The Provisions apply to the establishment and change of foreign invested companies (the "Invested Enterprise") where investors contribute their equity in an enterprise in China (the "Equity Enterprise") into the Invested Enterprise, including the following circumstances: (i) setting up a new foreign invested enterprise (the "FIE"); (ii) investing in an existing non-FIE and converting it into an FIE by subscribing to its increased capital; and (iii) investing in an existing FIE and changing its equity by subscribing to its increased capital.

According to the Provisions, the establishment and change of FIEs by investors in the form of equity contribution must be approved by the competent commercial departments of the province, autonomous region, municipality directly under the Central Government or city specifically designated in the State plan where the Invested Enterprise is located, excluding those FIEs the establishment and change of which must be approved by the Ministry of Commerce according to the relevant foreign investment examination and approval administrative regulations.

The Provisions provide that the equity used for the purpose of capital contribution must be clear in ownership, the rights attaching thereto must be complete and legally capable of transfer. Where the Equity Enterprise is an FIE, it must be properly established and comply with the relevant foreign investment industrial polices.

The Provisions also set out certain circumstances where equity cannot be invested as capital contribution: (i) the registered capital of the Equity Enterprise has not been fully paid; (ii) the equity has been pledged; (iii) the equity has been frozen; (iv) the equity is non-transferable according to the Articles of Association or contract of the Equity Enterprise; (v) the Equity Enterprise (if it is an FIE) did not participate in or failed to pass the annual inspection for the previous year; (vi) the Equity Enterprise is a real estate enterprise, a foreign-invested holding company, or a foreign-invested venture capital enterprise; (vii) the necessary approvals required by laws and regulations have not been obtained for the equity transfer, or (viii) other circumstances under which the equity transfer is prohibited according to applicable law.

Pursuant to the Provisions, the "equity price amount" (i.e., the transaction price) of the contributed equity can be determined by the investor of the equity and the shareholders of the Invested Enterprise or other investors based on an evaluation conducted by a domestic evaluation institution. However, the "equity contribution amount", which is defined as the part of "equity price amount" that is calculated in the registered capital of the Invested Enterprise must not be higher than the evaluation amount. The total of the equity capital contributed by all shareholders in the form of equity and in other forms of non-monetary property as evaluated must not exceed 70% of the registered capital of the Invested Company.

The Provisions formalize and clarify the requirements for the examination, approval and registration for equity contribution into FIEs. However, as the Provisions only apply where the contributed equity is "equity in an enterprise in China", investors who wish to contribute equity in a foreign or Hong Kong company still do not have any clear guidelines to follow.

Although these Provisions are a welcome step towards increased flexibility in corporate reorganizations, as many FIEs have restrictions on transfer of equity, it may still be difficult as a practical matter for the investors of such FIEs to use their equity to contribute to another FIE.

The full Chinese text of the Provisions is available here.

Decision of the State Council on Revising the "Regulations for the Administration of Futures Trading" Released

On October 24, 2012, the State Council promulgated the revised Regulations for the Administration of Futures Trading (the "Revised Regulations"), which will come into force on December 1, 2012. The Revised Regulations provide a definition of futures trading and that trading that is not conducted in a public and centralized manner or other manner that is approved by the futures regulatory authority of the State Council shall be deemed to be illegal. The Revised Regulations therefore deleted the reference to "futures trading in a disguised form".

In addition, the requirement that changes of the premise and responsible person of a futures company's branch shall be subject to the approval of the local office of the futures regulatory authority of the State Council is also eliminated in the Revised Regulations.

The full Chinese text of the Revised Regulations is available here

China Securities Regulatory Commission Issues Rules for Subsidiaries of Securities Investment Fund Management Companies

On October 31, 2012, the China Securities Regulatory Commission ("CSRC") issued a press release to officially publish the Interim Provisions on the Administration of Subsidiaries of Securities Investment Fund Management Companies (the "Interim Provisions"), which entered into force on November 1, 2012.

The Interim Provisions address the definition of subsidiaries of securities investment fund management companies ("Subsidiaries"), the establishment of such Subsidiaries, and their governance, operation, day-to-day supervision and administration.

The Interim Provisions emphasize the corporate governance and internal control systems of Subsidiaries, address strengthening the management of personnel in Subsidiaries, and underline fund management companies' control of their Subsidiaries.

The Interim Provisions require fund management companies to reasonably determine the development and business plans of their Subsidiaries according to their own development strategy, and to enhance business coordination and resource sharing between fund management companies and their Subsidiaries.

In terms of risk control management, the Interim Provisions require fund management companies to establish risk isolation systems and related party transaction management systems between parent companies and Subsidiaries. In addition, in order to effectively prevent conflicts of interests, timely disclosure must be made where there are any related party transactions or where employees of fund management companies hold equity in Subsidiaries, or concurrently occupy positions in Subsidiaries or receive salaries from Subsidiaries. The Interim Provisions also specify corresponding administrative measures and sanctions.

The full Chinese text of the Interim Provisions is available here

CIRC issues the Interim Measures for Insurance Fund Participation in Financial Derivatives Trading 

The China Insurance Regulatory Commission ("CIRC") issued the Interim Measures for Insurance Fund Participation in Financial Derivatives Trading (the "Measures") on October 12, 2012, which came into force on the same date. The Measures apply to participation in financial derivatives trading by insurance group (holding) companies, insurance companies, and insurance asset management companies legally established in China. The so-called financial derivative in the Measures refers to a financial contract whose value is based on one or more underlying assets, indexes or particular events, including forwards, futures, options and swaps. According to the Measures, insurance group (holding) companies and insurance companies may participate in derivatives trading directly by themselves or through entrusting insurance asset management companies or other professional management institutions that comply with CIRC rules on participating in derivatives trading.

Insurance companies that participate in derivatives trading are not permitted to engage in speculative trading, but are only permitted to hedge or avoid risks, such as hedging or avoiding risks of existing assets and liabilities.

The full Chinese text of the Measures is available here.

Ministry of Finance Establishes Administration of Non-bidding Procurement Mode in Government Procurement

On October 17, 2012, the Ministry of Finance ("MOF") issued a notice to seek public opinion on the Measures on the Administration of Non-bidding Procurement Mode in Government Procurement (Draft for Comments) (the "Draft"). The deadline for submitting comments was November 18, 2012.

The Draft applies to non-bidding procurement mode adopted by the procurement person or agent to procure goods, projects and services for government agencies. The "non-bidding procurement mode" referred to in the Draft means government bidding modes other than public bidding and invited bidding stipulated in the Government Procurement Law of the People's Republic of China, including competitive negotiation, single-source procurement, inquiry purchasing and other procurement modes recognized by the supervision department of government procurement in the State Council.

The procurement person is entitled to adopt a non-bidding procurement mode, when (i) the amount of goods and services listed in the index of centralized purchasing has not reached the public bidding standard; (ii) the amount of goods and services is above the limit of government procurement amount, but is below the limit of public bidding amount; (iii) the amount of goods and services is above the limit of public bidding amount, but approval is granted for non-bidding procurement; or (iv) the non-bidding project is allowed by law.

The full Chinese text of the Draft is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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