A BRIEF INTO THE CHINESE A BRIEF INTO THE CHINESE LEGISLATIONSLEGISLATIONS

TYPES OF COMPANIES (Gongsi) TYPES OF COMPANIES (Gongsi) UNDER THE CHINESE LAWUNDER THE CHINESE LAW

Limited Liability Companies (LLC) –

youxian zeren gongsi.

Companies Limited by Shares (CLS) –

gufeng youxian gongsi.

Wholly State-owned sole-shareholder

company (WSOC).

TYPES OF COMPANIES (GONGSI) TYPES OF COMPANIES (GONGSI) UNDER THE CHINESE LAWUNDER THE CHINESE LAW

Sino-Foreign Equity Joint Ventures (EJVs) – Zhongwai hezi qiye.

Contractual or Co-operative Joint Ventures (CJVs) – Hezuo jingying qiye.

Wholly Foreign owned Enterprises (WFoE).

Collectively “Foreign invested Enterprises” – Waishang touzi qiye

TERMINOLOGYTERMINOLOGY

Qiye & GongsiQiye means “Enterprise”Gongsi means “Company”Qiye is a broader term than Gongsi.

GOVERNING LAW FOR COMPANIES GOVERNING LAW FOR COMPANIES

The Company Law of the People’s Republic of China.– Promulgated on 29th December 1993– First amended on 25th December 1999.– Second amendment on 28th August 2004.– Third amendment (27th October 2005) and the

present law is w.e.f. 1st January 2006.

GOVERNING LAW FOR COMPANIES GOVERNING LAW FOR COMPANIES

The Law of People’s Republic of China on Chinese-foreign Equity Joint Ventures (EJV Law).– Promulgated on 1st July 1999.– First Amendment on 4th April 1990.– Second and present law w.e.f 15th March 2001.

Article 218 of the Chinese Company Law provides that EJV Law will prevail over the Chinese Company Law if there is a conflict between the EJV Law and the Company Law.

Article 4 of the EJV states that an EJV should be in the form of an LLC.

DIFFERENCE BETWEEN LLC & CLSDIFFERENCE BETWEEN LLC & CLS

LLCs Min. 2 & Max. 50

shareholders.

Investment is evidenced by way of Capital Contribution Certificate.

Cannot raise capital from Chinese Public and cannot list its shares on Stock Exchanges.

CLSs or Joint Stock Co. Min. 5 of which at least

more than 50% are Chinese residents.

Investment is evidenced by Shares.

Can raise capital from Chinese Public and list its shares.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs

Document constituting the Company– Articles of Association

Contents of the Articles– Name and the Domicile of the Company.

– Business Scope.

– Registered Capital.

– Names of Shareholders.

– Form of Capital Contribution – Under the EJV Law the Foreign Partner should hold atleast 25% of the Registered Capital. It also recognises investments in forms that is other than cash, viz: Industrial Property Rights.

– Amount of Capital Contribution – The amount of initial contribution should not be less than 20% of the Registered Capital.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs

Contents of the Articles Amount of Capital Contribution – Atleast 30% of the registered

capital should be contributed by cash. Date of Capital Contribution. Composition of the Board of Directors and their functions, the Term

of Office of each Director, the discussion methods in Board Meetings, Voting procedures. The Companies Act also provides in a small Company to have an “Acting Director” instead of a Board. The Acting Director can also be the “Manager”.

Minimum Board strength should be 3 and maximum to be 13.

Board to have a Chairman and one or two Vice-Chairman.

Representative of either of the two JV Partners can be the Chairman and the other JV Partner to be the Vice-Chairman.

Chairman and Vice-Chairman to be elected by the Board.

The max. term of each Director shall not exceed 3 years, and is eligible for re-election.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs Contents of the Articles

– Voting Rights of the Shareholders – The Polaris JV to state that voting rights shall be in the proportion of the Capital Contribution.

– Chairman of the Company – He is the Legal Representative.– Frequency of Shareholder & Director’s meetings.

Powers of Shareholders in a LLC / EJV– Determining the Company’s operation guidelines and investment plans.– Electing and changing Directors and Supervisors.– Approving the reports of the BoD.– Approving the reports of the Board of Supervisors.– Approving the annual financial budgets plans and final accounts of the

Company.– Approving profit distribution plans and loss recovery plans of the

Company.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs Powers of Shareholders in a LLC / EJV

– Approving the increase and decrease of the Company’s registered capital.– Approval of issuing Corporate Bonds– Approval for Restructuring the Company, dissolution and liquidation.– Amending the Articles of Association.– Inspect books of accounts, inspect and take copies of shareholder

meetings, board meetings and board of supervisors meetings

The Chinese Law recognises approval for all the above without a meeting, but with a written consent of the shareholders.

Investment Certificates are issued by the EJV only after verification and certification by approved Govt. Agencies.– In an EJV the Law provides that either party cannot transfer, pledge,

mortgage their investment to others. This is also subject to Government approval.

Matters that require 2/3rd majority in shareholder meetings (Art.44):

– Amendment to Articles of Association (Constitution Document)– Increasing or decreasing registered capital.– Merger, De-merger or conversion to Joint Stock Company.

In an EJV the above matters require UNANIMOUS consent of the JV Partners.

Law does not state that meetings of the shareholders should be held once a year. It only states that the frequency of the shareholder meetings should be laid down in the Articles of Association.

– Directors and Managers should attend meetings of the shareholders and do not have voting power.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs

Role of the Board of Directors– Under the Chinese Company Law

Convening shareholders’ meetings and reporting the status of the Company.

Carrying out resolutions made at the shareholders’ meetings.

Carrying out the company’s financial budget plans, profit distribution plans, establishment of company’s internal management systems.

In the meetings of the BoD, “One person one vote system is followed”. The Law is not clear as to whether the Chairman of the Board has a “CASTING VOTE”. Frequency of BoD meetings is at-least 1 in a year.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs

Certain specific features– The Chinese Communist Party should be

allowed to carry out its activities in the Company. (Art. 19)

– Employees are permitted to form Labour union, and while any restructuring exercise is undertaken, their views are required to be solicited.

LAW RELATING TO LLCs & EJVsLAW RELATING TO LLCs & EJVs

PROCEDURE FOR ESTABLISHING AN PROCEDURE FOR ESTABLISHING AN EJVEJV

The Chinese Law lay down the following procedure:– Parties to enter into a “Joint Venture

Agreement”. This is an MoU wherein main points and principles governing the establishment of a EJV is stated.

– Parties then enter into a “Joint Venture Contract” wherein rights and obligations of each party is stated.

– Parties decide on the Article of Association of the EJV.

PROCEDURE FOR ESTABLISHING AN PROCEDURE FOR ESTABLISHING AN EJVEJV

Parties may decide to have only a “Joint Venture Contract”.– In Polaris’ venture an MoU stage would be

required as Polaris proposes to make its investment by way of Sale of Intellectual Property in 2 of the Products in its Intellect Suite.

The EJV Law requires that where capital is to be contributed otherwise than in cash, the valuation should be made after consultations between parties or after making an evaluation by third parties agreed to between the JV Partners.

The Chinese Partner has a right to contribute to the venture by making available his “Right to use Site” and the value of the same is the “Site use fee” paid by the Partner for acquiring the site.

The establishment of the EJV is subject to Governmental approvals in China.

The Chinese Partner should make application to Ministry of Foreign Economic Relations and Trade in China and obtain their approval for establishing the EJV.

PROCEDURE FOR ESTABLISHING AN PROCEDURE FOR ESTABLISHING AN EJVEJV

The following are the documents to be submitted:– Feasibility Report prepared jointly by the parties;– Joint Venture Agreement, JV Contract and Articles of

Association all duly signed – the Law provides that these documents should be in Chinese with a counterpart in other languages.

– Details of Chairman, Vice-Chairman and Directors appointed by both parties;

– Details relating to the business purpose, scope and scale of business operation, registered capital, ratio of contribution and form of making the contribution.

PROCEDURE FOR ESTABLISHING AN PROCEDURE FOR ESTABLISHING AN EJVEJV

BROAD AGREEMENT BETWEEN BROAD AGREEMENT BETWEEN POLARIS & CAMELOTPOLARIS & CAMELOT

Polaris will “Sell” its IPR on TWO of its Products in Intellect Suite to the EJV in China.

The valuation of the IPR would represent Polaris’ Equity Contribution in the EJV.

The Shareholding percentage between the Partners is to be decided based on the valuation of the IPR. It is expected that the ratio of shareholding will be Polaris – 70%, Camelot – 30%.

Camelot would contribute to the venture by CASH.

SUMMARY OF CORPORATE NORMS IN SUMMARY OF CORPORATE NORMS IN CHINACHINA

LLC CLS EJV CJV WFoEMinimum Capital

Is Sector Specific* Froduction & Wholesale – RMB 500,000; Retailing – RMB 300,000; Services – RMB 100,000

RMB 10 Mio. At least 35% of the Capital to be subscribed by the Promotes.

No specific minimum requirement. Should follow LLC. Foreign Investor to hold at-least 25%.

No specific minimum requirement. Should follow LLC. Foreign Investor to hold at-least 25%.

100% Foreign owned.

No. of shareholders

2-50 5+ of which 50% must be resident Chinese.

Minimum – 2: Chinese and Foreign. Chinese party must be a legal person

At least 2 1 or more.

Board of Directors

Members 3-13. 5-19. 2 Meetings an year.

Min. 3. Board to meet Once each year.

As per the Articles. As per the Articles.

Supervisory Board

At-least 3 members. At-least 3 members.

No Supervisory Boards.

No Supervisory Boards.

No Supervisory Boards.

SUMMARY OF CORPORATE NORMS IN SUMMARY OF CORPORATE NORMS IN CHINACHINA

LLC CLS EJV CJV WFoERegistration Fees

0.1% of Capital upto RMB 10 Mio.0.05% of the excess amount upto 100 Mio. 0% for amount in excess fo 100 Mio.

0.1% of Capital upto RMB 10 Mio.0.05% of the excess amount upto 100 Mio. 0% for amount in excess fo 100 Mio.

0.1% of Capital upto RMB 10 Mio.0.05% of the excess amount upto 100 Mio. 0% for amount in excess fo 100 Mio.

0.1% of Capital upto RMB 10 Mio.0.05% of the excess amount upto 100 Mio. 0% for amount in excess fo 100 Mio.

0.1% of Capital upto RMB 10 Mio.0.05% of the excess amount upto 100 Mio. 0% for amount in excess fo 100 Mio.

Corporate Income Tax

33% 33% 33% - 30% Central Tax; 3% State Tax.

33% 33%

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