2.2.3.2.2 Types of corporate vehicles for FLES

Chinese-foreign equity joint ventures are also known as shareholding companies. They are the first corporate form used to absorb foreign direct investment in China and still play a great part in this area. They are formed in China with joint capital from foreign and Chinese investors. Both parties invest together and operate together; they share profits, and take risks and losses in proportion to their contribution to the registered capital.1 An equity joint venture takes the form of a limited liability company, but the requirements for govemance structure, registered capital, and operating terras are all different from those in the company law.2 As to the registered capital, the proportion of the investment contributed by foreign parties will in general not be less than 25 per cent.

In an equity joint venture, contributions from the Chinese partners can be valuable. They may have experience in dealing with the Chinese administrative bodies and banks, be more familiar with the Chinese culture and customs, and they may have established distribution channels. On the other hand, it takes effort for the foreign investors to keep their advanced technology secret and friction may arise on account of different preferences in management strategy. For these reasons, foreign investors are inclined to set up wholly owned companies.

Contractual joint ventures are also called cooperative joint ventures, which refer to ventures that are formed with joint capital from the Chinese and foreign investors within the territory of the People's Republic of China and in accordance with the Chinese law. Parties distribute earnings or products, share risks and losses, and operate the venture according to the terras of contract they have prescribed.3 The main difference between contractual and equity joint ventures is that in contractual joint ventures, issues like parties' rights, obligations and the policy on distribution of dividends are decided by mutual agreement rather than by the percentage of shareholdings.

Wholly foreign owned enterprises are also called foreign capital enterprises. They are enterprises incorporated in China, and all their capital is provided by foreign investors.4 Investors can choose to operate either in the foren of a limited liability company or in a partnership.5 By operating independently, foreign investors can effectively avoid management conflicts with the Chinese partners, and with the foren of a wholly foreign owned enterprise, there is no potential risk that the current cooperators will become future competitors. Most importantly, foreign investors can keep their technology, marketing skills and commercial secrets to themselves. For all the above reasons, wholly foreign owned enterprises are the predominant foren today to attract foreign direct investment in China. In 2005, the number of such enterprises accounted for more than half of the total number of FlEs in China.6 And the percentage is constantly on the rise as a result of enhanced confidence and familiarity with the legai environment in China.7

One noteworthy issue is that the form of the single member company introduced in the revised company law is also applicable to the wholly foreign owned companies. Thus, a single foreign shareholder can also adopt this foren to set up a wholly foreign owned company, provided the basic requirements of capital contributions under company law are met.8 Conceivably, with this new approach, the wholly foreign owned enterprises, an already dominant form in FlEs, will gain more momentum in China.

So far, we have a general view of Chinese company law and the corporate forms. To round up, Company Law 2006 provides two corporate forms, namely, limited liability company (a close company) and company limited by shares (a public company). FIEs, though not stipulated in the company law, are one special kind of close companies in China. The scope of close companies in China therefore includes limited liability companies in the company law and FlEs regulated by the FlEs laws.9

A company with wholly domestic investment can be registered when the requirements of company law are met. An FIE must first go through the procedures of examination by the examination and approval authority before it can be approved and registered.10

(1) Forms and percentage of contribution

With regard to the forms and percentage of contribution, there is inconsistency between the new Company Law and the laws regulating FlEs. According to the mies in the FlEs laws, the forms of contributions are more restricted compared to Article 27 of the new company law.11 In addition, the upper limit of the percentage of contribution in the form of intellectual property rights to the total capital subscribed by shareholders is 20% in the FIE laws while in the revised company law, the percentage was raised from 20% to 70%.

Article 10 of the Suggestions on Implementation of Several Issues Applicable for Law of Examination, Approval, Registration and Administration of Foreignfunded Enterprises (hereinafter "the Suggestion") clarifies the situation and brought the requirements in the new company and in the FIE laws in line. According to Article 10 of the Suggestions, Article 27 of the Company Law also applies to FlEs, which means, non-cash assets which are not explicitly listed in the FIE laws, such as, shares, bonds, mining rights and so on, can also be allowed as contributions to FIEs.12 And the upper limit of 70% of intellectual property right is also applicable to FlEs.

(2) Time of payment

As mentioned above in section 2.2.2, with the new company law, registered capital can also be paid in instalments by a wholly domestic owned company, the practice of which is in accordance with requirements in the FlEs laws, but disparity still exists. Firstly, the minimum percentage of the initial payment of the registered capital is 20% in the Company Law, but 15% in the FlEs laws for the investment subscribed by the foreign investors; secondly, if the investors choose to pay the full investment as a lump sum, it must be paid within 6 months of the establishment of the FIE; finally, as to a stock company formed with foreign investment, the rules and requirements in company law must be fully obeyed.13

In the long run, the difference in capital contributions between domestic owned companies and FlEs should be eliminated.

The organizational structure of a company in China, whether it is close or public, must consist of three parts: shareholders' meeting (a limited liability company)/ shareholders' assembly (a joint stock limited company), a board of directors, and a board of supervisors. For a listed company, there should be independent directors as well. The shareholders' meeting/ shareholders' assembly is the authority of the company, in other words, the controlling body.14 The controlling body of a joint venture (equity joint ventures and contractual joint ventures), however, is its board of directors, which decides all major issues concerning the joint venture.15 There is no shareholders' meeting in a joint venture. Nonetheless, not every FIE does not have a shareholders' meeting. Wholly foreign owned enterprises and a company limited by shares with foreign investment must set up their corporate bodies as prescribed by company law.16 So the general picture is: some types of FlEs have their own distinctive corporate structure according to FlEs laws, and others follow the rules of company law.

Share transfers in a joint venture may result in the company being converted into a wholly domestic owned company or a wholly foreign owned company. Such a conversion also concerns issues such as the restrictions on market areas and preferential treatment applicable only to FlEs. Consequently, besides the consent of other parties in the company, the transfer must also be approved by the the examination and approval authority.17

According to the Suggestions, the dissolution procedures of an FIE must conform to rules in the company law, and where the FIE fails to follow the rules in the company law, a special dissolution procedure provided in the "Procedures for the Dissection of Foreign investment Enterprises" shall be applied.18