Hong Kong: FIE Contract and Articles of Association Examination and Approval Principles

Last Updated: 26 September 1995
This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

This article examines the approval process of foreign investment enterprises in the PRC introduced by the FIE contract and Articles of Association Examination and Approval Principles ("Principles").

A. Background to the Principles

The "Law of the People's Republic of China on Sino-foreign Joint Equity Enterprises", the "Law of the People's Republic of China on Sino-foreign Co-operative Enterprises" and the "Law of the People's Republic of China Concerning Enterprises with Sole Foreign Investment" lay down the basic framework for the three types of direct foreign investment vehicles ("FIEs") which are granted "legal person status" under Chinese Law. Would-be investors are required by these laws to submit their articles of association (and in the case of equity and contractual joint ventures, their joint ventures contracts) together with any supplemental documents to the "examining and approval authority" for its review. It is not until that review has been completed and an approval certificate has been granted by the examination and approval authority that the FIE may be registered with the State Administration for Industry and Commerce and accorded the right to carry on business activities in the PRC as a legal person.

Who then are the "examining and approval authorities" who perform this role? Where the total investment (ie debt plus equity) exceeds US$100 million, the approval process requires the involvement of the State Planning Commission, the State Council and the Ministry of Foreign Economic Relations and Trade of the People's Republic of China ("MOFTEC"). Smaller scale projects are normally handled by MOFTEC alone, and it in turn often delegates this examination and approval power to local bodies.

B. The Principles

The Principles themselves are divided into four sections: "Basic Principles"; a checklist for the contents of FIE contracts and articles of association ("Important Examination Essentials"); a checklist for the required contents of the examination and approval authority's certificates of approval; and various "miscellaneous" provisions.

1) Basic Principles

The three principles which are set out here are the predictable ones of "equality and mutual benefit"; compliance with the laws and regulations (including administrative regulations) of the PRC; and consistency of content between the FIE's contracts and articles of association and the FIE's feasibility study.

2) Important Examination Essentials

The requirements which are set out in this section range from simple clerical-type points to an economic and legal analysis of the FIE vehicle itself.

The following are certain examination requirements:-

- ensuring that the time and place of execution of each document is specified and that the signatories to those documents are the investors' duly authorized representatives or those representatives' attorneys;

- ensuring that the proposed "scope of business activities" clause is clear and specific (widely drafted object clauses are not acceptable in the PRC);

- ensuring that the mandatory requirements regarding the contents of joint venture contracts and FIE's articles of association which are laid down in the applicable laws have been properly covered;

- ensuring that the terms for the acquisition of any technology which is going to be used by the FIE satisfy the requirements of the technology import laws. In addition if the FIE is to be situated in either the Shenzhen Special Economic Zone or the Xiamen Special Economic Zone the local rules regarding the transfer and acquisition of technology must also be complied with;

- ensuring that special approval has already been obtained to set up FIE's in industry sectors which are only open to foreign investment on an experimental basis (for example, FIEs in the fields of finance, insurance, aviation, legal and accounting services, land development, real estate and information consulting.) Similarly, if the FIE will need to import equipment which requires special import licences or needs to export products which require special export licences, ensuring that "approvals in principle" for these special import and export licences have already been obtained;

- ensuring that the FIE's capital contribution arrangements satisfy the mimimum equity requirements (as laid down in the regulations promulgated by the State Administration for Industry and Commerce in March 1987); that the proposed timing of the contributions is also acceptable and finally, that the capital itself is contributed in a satisfactory manner (ie inter alia that the industrial property rights contributed by the foreign party must not exceed 20% of the total registered capital of the FIE);

- examining the ratio of domestic sales to export sales of the FIE's products as well as the level of pricing at which the FIE's goods may be sold in the domestic market. More crucially, officials are required to check not only that the articles of association which are submitted to them include measures dealing with the balancing of the FIE's foreign exchange income and expenditure requirements, but also that those measures will work in practice;

- ensuring that none of the documentation contravenes PRC law.

C. Miscellaneous Provisions

These provisions cover the areas of governing language: the examination of supplemental documents and the mechanics of the approval process.

As far as issue of language is concerned, the Principles emphasise that the MOFTEC officials will be reviewing the Chinese language version only of the documents which are submitted to them and will hold the PRC and foreign parties jointly responsible for ensuring consistency between the Chinese and foreign language versions of those documents.

As far as supplemental documents are concerned, the Principles expressly require all "chengbao contracts" (ie FIE management contracts) and technology transfer agreements to be submitted for examination by MOFTEC. However, the following do not need to be reviewed: loan agreements, equipment purchase contracts which do not involve a technology transfer element, factory leases, land use right certificates, and land use right transfer documents.

Finally, if the examination and approval authority discovers provisions in the FIE's contract and articles of association which need to be amended, the examination and approval authority is prohibited from issuing an approval document until it has been provided with amended versions of the documents concerned.

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

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