China 20/20: Legal & Regulatory Developments - January 23, 2012

by Orrick, Herrington & Sutcliffe LLP

China Issues New Foreign Investment Catalogue

On December 24, 2011, the National Development and Reform Commission and the Ministry of Commerce jointly issued the Foreign Investment Industrial Guidance Catalogue (Amended 2011). The 2011 catalogue will take effect on January 30, 2012 and supersede the Foreign Investment Industrial Guidance Catalogue issued in 2007. Compared with the 2007 catalogue, more industries have been added into the "encouraged" category and items under the "restricted" category and "prohibited" category have been reduced. In particular, foreign investors are encouraged to make investments in high-tech and "green" industries, especially those using new technology to reform and improve China's traditional manufacturing industries such as textiles, chemicals and machinery. In addition, the service sector has been opened wider to foreign investors. We will provide a detailed analysis of the Catalogue in our sister publication, Asia in Focus. If you do not already receive Asia in Focus but wish to subscribe, please click here.

The full Chinese text of the Catalogue is available here.

NDRC Issues Notice to Standardize Equity Investment Enterprises

On November 23, 2011, the National Development and Reform Commission (the "NDRC") issued the Notice on Promoting the Standardized Development of Equity Investment Enterprises, which came into effect immediately.  The notice provides that the formation of an equity investment enterprise ("EIE") must conform to the PRC Company Law and the Partnership Enterprises Law. An EIE may raise funds only by private placement and may invest only in non-publicly-traded equity. In making investments, all EIEs are required to conform to national industrial policies, investment policies and macro-control policies, and foreign invested EIEs must carry out verification and approval procedures with the relevant department in charge of development and reform. Fund-raisers may not guarantee investors in an EIE that they will fully recoup their investment or obtain a constant rate of return. In addition, an EIE is required to carry out a filing procedure (and related filing amendment procedures), establish risk control mechanisms, submit annual reports and report significant events. An EIE that fails to abide by the requirements may be ordered to rectify within a specific time period and may be identified as a "non-compliant" enterprise if the rectification is not completed before the time period expires.

For more information, please refer to Orrick's newsletter here.

The full Chinese text of the Notice is available here.

China Improves Administration of Foreign Invested Holding Companies

On December 8, 2011, the Ministry of Commerce and the State Administration of Foreign Exchange ("SAFE") jointly issued the Notice on Further Improving the Relevant Administration of Foreign Invested Holding Companies.  The notice clarifies that a foreign invested holding company may use lawfully obtained Renminbi in China to make domestic investments. Funds may be derived from a holding company's Renminbi profits or as a result of a liquidation, equity transfer, capital reduction or early recovery of an investment. A domestic loan may not be used for re-investment in China. A foreign invested holding company is required to apply to SAFE or its local counterpart for issuance of a verification document before making a domestic investment. A foreign investor also may use lawfully obtained Renminbi to make capital contributions to or to increase the registered capital of a holding company.  

The full Chinese text of the Notice is available here.

MOFCOM Amends Measures for Commercial Franchising Filing

On December 12, 2011, the Ministry of Commerce ("MOFCOM") issued the Measures for the Administration of Commercial Franchising Filings, which will take effect on February 1, 2012 and supersede the Measures for the Administration of Commercial Franchising Filings issued in 2007. Under a Circular on Delegating Provincial Level Commerce Authorities to Carry Out Commercial Franchising Filings issued by MOFCOM in 2009, domestic franchisors (including both domestic and foreign invested enterprises) must apply to MOFCOM's provincial level subordinates, while foreign franchisors must apply directly to MOFCOM to complete a filing registration.  The new measures reiterate this requirement and also require a franchisor to update its filing with the registration authority when the following information changes: (1) registration with administration of industry and commerce; (2) business resources; or (3) distribution status of all its franchisees' stores in China. Local commerce authorities are prohibited from further delegating their responsibility to any other third parties and if a local commerce authority fails to perform its duties, a franchisor may apply directly to MOFCOM to carry out the filing registration. The new measures make it clear that before it can enter into any franchising agreement and proceed with registration, a foreign invested enterprise must have a business scope that specifically includes "engaging in commercial activities by franchising."

The full Chinese text of the Measures is available here.

CSRC Launches RQFII Trial Scheme

On December 16, 2011, the China Securities Regulatory Commission (the "CSRC"), SAFE and the People's Bank of China jointly issued the Trial Measures on Domestic Securities Investment by RMB Qualified Foreign Institutional Investors of Fund Management Companies and Securities Companies (the "RQFII Measures").  In addition, the CSRC issued the Provisions for Implementing the RQFII Measures ("Implementing Provisions"). The RQFII Measures and the Implementing Provisions became effective immediately and permit the Hong Kong subsidiaries (each a "pilot company") of domestic fund management companies and securities companies to invest in the domestic securities market by using RMB funds raised in Hong Kong. To make an investment, a pilot company must apply to the CSRC for a "license for securities investment" and to SAFE for an investment quota. Subject to the investment quota, a pilot company may invest in stocks, bonds and warrants listed and traded on securities exchanges and may participate in the offering of new shares and convertible bonds. The allocation of RMB investment in stocks and fixed income securities by a pilot company must conform to CSRC rules and requirements.

The full Chinese text of the RQFII Measures is available here.

The full Chinese text of the Implementing Provisions is available here.

Mainland and Hong Kong Sign CEPA Supplementary Provisions VIII 

On December 13, 2011, the Supplementary Provisions VIII to the Mainland and Hong Kong Closer Economic Partnership Arrangement (commonly known as "CEPA") was signed in Hong Kong. According to the supplementary provisions, effective from April 1, 2012, the Mainland will further ease market access conditions in 13 areas: legal, construction, technical testing and analysis and product testing, personnel supply and arrangement, distribution, insurance, banking, securities, hospitals, tourism, road transport, qualification examinations for professionals and individual entrepreneurs. Specific commitments include allowing Hong Kong insurance brokerage companies to establish wholly-owned insurance agencies in Guangdong province (including Shenzhen) on a pilot basis, allowing banks established on the Mainland by a Hong Kong bank to engage in the sale and distribution of mutual funds, and allowing investments in the Mainland securities market by means of the RMB Qualified Foreign Institutional Investor scheme.

The full Chinese text of the Supplementary Provisions is available here.

Provisions on Negotiation and Mediation of Enterprise Labor Disputes 

On November 30, 2011, the Ministry of Human Resources and Social Security issued the Provisions for the Negotiation and Mediation of Enterprise Labor Disputes, which came into effect on January 1, 2012. The provisions require large and medium sized companies to establish a labor dispute mediation committee comprised of the representatives of employers and employees. Small companies may establish a labor dispute mediation committee or assign a mediator to deal with labor disputes. According to the provisions, where a labor dispute arises, the employer and employee may seek to resolve it through negotiation. An employee may entrust a third party or he/she may require his/her trade union to negotiate on his/her behalf.  If an agreement is reached, the parties are required to enter into a binding settlement agreement. In case the employer and employee are not willing to negotiate, or where negotiation fails or the obligations in a settlement agreement are not performed, the parties may apply for mediation or arbitration. Mediation must be completed within 15 days from the acceptance of an application by the mediation committee. In case the parties are not willing to mediate, or where mediation fails or the obligations in a mediation agreement are not performed, the parties may apply for arbitration.

The full Chinese text of the Provisions is available here.

Supreme People's Court Issues First Batch of Guiding Cases

On November 26, 2010, the Supreme People's Court ("SPC") issued the Provisions on Case Guidance Work (Fa Fa [2010]) No. 51), which marks the preliminary establishment of a "case guidance system" in China. Under the provisions, "guiding cases" refer to cases that satisfy each of the following conditions: (1) the judgment is effective, (2) the subject matter is of broad concern to the public, (3) the relevant legislation provides only general principles, (4) the subject matter is ordinary, and (5) the case is difficult, complicated or new. The process for determining guiding cases involves three steps: recommendation, review and approval, and publication. According to the provisions, on December 20, 2011, the SPC issued the Notice on Releasing the First Batch of Guiding Cases and required the People's Courts to refer to guiding cases in adjudicating new cases that involve similar circumstances. The first batch of guiding cases included two civil cases and two criminal cases. 

The full Chinese text of the SPC Notice and related Q&A 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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