5.5 Applicability of the exit remedies to FIEs

In Chapter 2, I stated that currently in China, companies with foreign investment are subject to FIE laws and administrative regulations especially for FlEs rather than being directly regulated under the Company Law 2006. The general rule is that company law applies only when issues in dispute are not stipulated in the FIE laws or regulations. In this sense, the appraisal remedy and the oppression remedy newly introduced into the company law are, in principle, applicable to FlEs since they are not provided in the legislation for FlEs.

This is a piece of good news to shareholders in FlEs because members of FlEs are probably more subject to disputes and disagreement in operation, given the differences in ideology of corporate strategy and cultural backgrounds. It has been pointed out that differences in management preference and marketing strategies lead to deterioration in relations and finally to deadlock or oppressive behaviour in FlEs, like exclusion from the management board.1 These two remedies and a way out when conflicts happen are therefore even more meaningful to members of FlEs.

There are, however, different views on the applicability of these remedies to FlEs. Some scholars opined that the appraisal remedy contained in the Chinese company law should not be applied to FlEs or at least should not be applicable before they were integrated into the direct regulation under company law. One of the arguments was that the exit of either party from the enterprise could possibly change the FlEs to a wholly domestic financed company or a wholly foreign owned company, and that was related to the control of market access.2 Another argument was that FlEs had a different management structure. There were no shareholders' meetings, which meant that the requirement of a veto vote in the shareholders' meetings could not be met for the appraisal remedy.3 But I think the above arguments are not sound enough to preclude members in FlEs from enjoying appraisal rights. Firstly, it is against the general principle. Issues not stipulated in the FlEs laws should be examined according to provisions in the general company law, including the exit right. Secondly, as to the problem of foreign investment control, it can be solved by notifying the original approval and examination authority of the change, so the relevant authority can make certain that after the capital composition is altered, the business activities of the FlEs will still be conducted in the area as required by the Investment Guidance. Finally, in relation to the problem of different bodies of power, since the highest body of power in an FIE is its board of directors, which is the equivalent of the shareholders' meeting in companies onder company law, decisions made by the board on appraisal triggers listed in Article 75 can also result in appraisal rights.4

The truth is, however, that the current provisions of the FIE laws affect a full application of the appraisal remedy. Take the equity joint venture for example. Article 33 of the Detailed Implementation Rules prescribes that approval of the following situations still requires unanimous agreement instead of majority rule: amendment of the articles of association, termination and dissolution, increase or reduction of the registered capital, and merger or division of the joint venture. In case of the situations listed above, dissenting shareholders can simply block the decisions by a veto vote, not necessarily relying on appraisal rights. But compared to the triggers in Article 75 in the company law, dissenting shareholders in an FIE can still avail themselves of appraisal rights in the circumstances of withholding of distribution and disposition of major assets.

As to Article 20, it should be also applicable to FlEs. It is unreasonable to suggest that shareholders of wholly domestic companies are liable when they abuse rights, but parties in FlEs are free from liability when guilty of the same misconduct. But if it is applied to FlEs, the problem of defining the scope of corporate affairs in the context of parent and subsidiary companies is an imminent issue since natural person in China are still not allowed to be a party to an FIE. That is why FlEs founded by Chinese and foreign investors together are often subsidiaries of other entities.

Nowadays, there is a call and belief among the legai scholars that the future development in China will place FlEs under direct regulation by company law of corporate operations, and issues of national safety, market control as well as authoritative examinations should be regulated by investment law. The current FIE laws should be abolished and national treatment should be afforded to FlEs.5 In that case, it will not be necessary to discuss the applicability of the appraisal remedy and the oppression remedy to FlEs. The change is a matter of time.