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Policy analysis of foreign investment companies limited by shares Lin, Hua-wei 1997

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POLICY ANALYSIS OF FOREIGN INVESTMENT COMPANIES LIMITED BY SHARES  by Hua-wei Lin L L . B., Beijing University, 1991 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF T H E REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS in T H E FACULTY OF GRADUATE STUDIES (Faculty of Law) We accept this thesis as conforming to the required standard  T H E UNIVERSITY OF BRITISH COLUMBIA July 1997 ® Hua-wei Lin, 1997  In  presenting  degree freely  at  this  the  University  available  copying  of  department publication  for  this or of  thesis  this  partial  of  British  reference  thesis by  in  for  his thesis  and  or  her  for  The University of British Vancouver, Canada  -Date  DE-6: (2/88)  ^Ostne  f) ,  study.  Columbia  tQtf  of  I further  purposes  gain  the  requirements  I agree  that  agree  may  be  It  is  representatives.  financial  <QOuJ  of  Columbia,  scholarly  permission.  Department  fulfilment  shall  not  that  the  Library  permission  granted  by  understood be  for  allowed  an  advanced  shall for  the that  without  make  it  extensive  head  of  my  copying  or  my  written  11  ABSTRACT China permits foreign investors to establish foreign investment companies limited by shares (FICLBS) together with Chinese domestic investors after 1995. FICLBS are a new form of foreign investment in addition to Sino-foreign Equity Joint Ventures, Sino-foreign Contractual Joint Ventures and Wholly Foreign Owned Enterprises.  In the meantime, FICLBS have close relations with and are strictly  governed by P R C Company Law. The double nature of FICLBS accounts for many characteristics of FICLBS. As a form of foreign investment, FICLBS are based on the foreign investment regime.  FICLBS are governed by the legal provisions relating to foreign investment  regime. At the same time, various State and Party policies give various characteristics to FICLBS and make them different from other foreign investment enterprises. As a form of modern company, FICLBS are greatly influenced by both civil law and common law as a result of the policy of joining the world economy. This thesis focuses on the common law influences. The influences of common law on FICLBS are manifest in various respects. remained.  On the other hand, various Chinese characteristics are intentionally  These Chinese characteristics can be found in many important phases and  aspects of FICLBS such as corporate capacity, corporate governance, shares and dividends. The contradicting characteristics of FICLBS are a product of the contradicting State and Party policies underlying them. On one hand, China adopts the opening-up policy and has been making constant efforts to join the world economy. On the other hand, China has always been trying to maintain the so-called Chinese characteristics despite the fact that there is no generally accepted definition of Chinese characteristics. Although China has always been committed to keeping its policies consistent, the unstable nature of the policy basis of FICLBS will inevitably affect the future of FICLBS. However, since the opening-up policy of China will not possibly be reversed in the future, FICLBS will remain available for foreign investors no matter how the specific policies are changed.  iii  TABLE OF CONTENTS Abstract  ii  Table of Contents  iii  Acknowledgement  v  Chapter I  INTRODUCTION  1  Chapter II  G E N E R A L POLICIES U N D E R L Y I N G T H E FICLBS  6  I  II III  Joining the world economy 1. Background 2. Policy of joining the world economy The policy of maintaining Chinese characteristics Summary  6 6 9 27 33  Chapter III  FICLBS AS A F O R M OF FOREIGN INVESTMENT I FICLBS are based on the General Foreign Investment Regime 1 How to apply foreign investment provisions to FICLBS 2 Scope of FICLBS II Characteristics of FICLBS - a product of State and Party policies 1 Scope of investors 2 Land use right -- three rails regime 3 Foreign investment approval 4 Dissolution III Summary  Chapter IV  FICLBS AS A F O R M OF C O M P A N Y I Common law influences on FICLBS 1 Limited liability 2 Constitution of the company 3 Registration of shareholders 4 Corporate governance 5 The presumption of equality of shares 6 The consideration for shares 7 Pre-emptive rights II Chinese characteristics of FICLBS 1 Corporate capacity 2 Corporate governance 3 Shares and dividends  34 34 34 40 43 44 48 55 61 67  68 68 69 70 71 72 74 76 77 80 80 87 108  iv III Chapter V Bibliography  Summary  Conclusions  126 128 134  Acknowledgement I would like to thank my supervisor Professor Pitman Potter for his valuable comments and helpful guidance. His guidance was always insightful and instructive for me. I would also like to thank my secondary reader Professor Bruce MacDougall for his help and support. Without their help, this thesis could not have been finished so early in its present shape.  Hua-wei Lin  Vancouver June 1997  1  CHAPTER I  INTRODUCTION  On January 10, 1995, the Ministry of Foreign Trade and Economic Co-operation of the People's Republic of China (hereinafter referred to as MOFTEC) promulgated the Provisional Regulations on the Establishment of Foreign Investment Companies Limited by Shares (Guanyu shell waishang touzi gufen youxian gongsi ruogcm wenti de zanxing guiding) (hereinafter referred to as Provisional Regulations on FICLBS). This is the first step which formally permits foreign investors to 1  take part in companies limited by shares in China. Foreign investment companies limited by shares (hereinafter referred to as FICLBS) have many characteristics which deserve detailed research. The most important characteristic of FICLBS is that they are a combination of foreign investment enterprise and modern company. According to the Provisional Regulations on FICLBS, FICLBS shall be established under the Provisional Regulations on FICLBS. The total capital of FICLBS shall be divided into shares of equal amount. The shareholders of FICLBS shall bear liabilities to the company to the extent of the capital they subscribed. FICLBS bear liability to the extent of all the assets for the debts of the company. FICLBS are enterprise legal persons. Both Chinese and foreign shareholders jointly hold the shares of the company. The shares bought and held by foreign shareholders shall account for over 25% of the capital of the company. The above definition can be divided into two sections. What is defined in the 2  Both the Chinese version and E n g l i s h translation can be found i n China Laws for Foreign Business: Business Regulation, v o l . 2 ( C C H Australia L t d . ) f 13-405 [hereinafter CCH: Business Regulation]. 1  2 Provisional  Regulations on F I C L B S , art. 2.  2  first section is a company limited by shares as defined in Company Law of the People's Republic of China (Zhonghua renmin gongheguo gongsifa)  3.  Furthermore, Provisional Regulations on FICLBS  expressly provide that FICLBS shall be governed by PRC Company Law. Therefore, FICLBS have 4  many characteristics in the context of the company law. What is defined in the second section (the last two sentences) is a Sino-foreign equity joint venture as defined in Sino-foreign Equity Joint Venture Law of the People's Republic of China (Zhonghua renmin gongheguo zhongwai hezijingying qiye fa) (hereinafter EJV Law).  5  Provisional Regulations on FICLBS expressly provide that FICLBS are a  form of foreign investment enterprises and shall be governed by the relevant provisions of foreign investment. Therefore, FICLBS have many characteristics in the context of foreign investment law. 6  As a combination of foreign investment enterprise and company limited by shares, FICLBS are a new form of foreign investment enterprises as distinguished from Sino-foreign equity joint ventures (hereinafter referred to as EJV), wholly foreign owned enterprises (hereinafter referred to as WFOE) 7  8  C o m p a n y L a w o f the People's Republic o f C h i n a (hereinafter " P R C Company L a w " ) was adopted at the Fifth Session o f the Standing Committee o f the E i g h t h National People's Congress o f P R C o n 2 9 December 1993. B o t h the Chinese version and an E n g l i s h translation can be found i n CCH: Business Regulation, v o l . 2 , supra note 1 f 13-518. A r t i c l e 3 o f P R C Company L a w provides exactly the same definition: " a company limited by shares is an enterprise legal person whose total capital is divided into equal shares, each shareholder shall assume liability to the company to the extent o f the amount o f shares held b y h i m , and the company shall be liable for its debts to the extent o f all its assets." 3  4  Provisional Regulations on F I C L B S , art. 2 5 .  E J V L a w , adopted 1 J u l y 1979 at the Second Session o f the Fifth National People's Congress, amended 4 A p r i l 1990 at the T h i r d Session o f the Seventh National People's Congress. B o t h the Chinese version and E n g l i s h translation can be found i n CCH: Business Regulation, v o l . 1, supra note 1 f 6-500. A r t i c l e 1 o f E J V L a w provides that a j o i n t venture company shall be established jointly by Chines and foreign investors. A r t i c l e 4 o f the same l a w provides that the capital contributed by the foreign investors shall not be less than 2 5 % o f the registered capital o f an equity joint venture company. 5  6  Provisional Regulation o n F I C L B S , art. 3.  7  They were first permitted to be established with the adoption o f E J V L a w i n 1979. See supra note 5.  3  and Sino-foreign contractual joint ventures (hereinafter referred to as CJV) which were the only three 9  forms of foreign investment before the permission of FICLBS (hereinafter collectively referred to as the General Foreign Investment Regime).  This is because all the previous three forms of foreign  investment are limited liability companies if they have independent legal person status.  10  Under the  PRC Company Law, companies are divided into two kinds, one is limited liability company and the other is companies limited by shares. Hence, FICLBS should be regarded as a fourth form of foreign 11  investment enterprises in addition to EJV, CJV and WFOE. This thesis intends to analyse FICLBS in two contexts ~ foreign investment law and company law. In this thesis, I will first review the policies underlying the legal regime of FICLBS. Policies of both the Communist Party of China (hereinafter the CPC) and State constitute the basis of the  They were first permitted to be established with the adoption o f W h o l l y F o r e i g n O w n e d Enterprise L a w o f P R C (Zhonghua renmin gongheguo waizi qiye fa) at the Fourth Session o f the Sixth National People's Congress on A p r i l 12, 1986 [hereinafter referred to as W F O E L a w ] . Both the Chinese version and an E n g l i s h translation can be found i n CCH: Business Regulation, v o l . 2, supra note 1 K13-506. They were first permitted to be established with the adoption o f Sino-foreign Contractual Joint Venture L a w o f P R C (Zhonghua renmin gongheguo zhongwai hezuo jingying qiye fa) at the First Session o f the Seventh National People's Congress on A p r i l 13,1988 [hereinafter C J V L a w ] . Both the Chinese version and E n g l i s h translation can be found i n CCH: Business Regulation, v o l . 1, supra note 1 H 6-100 9  See Implementation Regulations o f Sino-foreign Equity Joint Venture L a w o f P R C (Zhonghua renmin gongheguo zhongwai hezi jingying qiye fa shishi tiaoli) promulgated 20 September 1983 by the State C o u n c i l and amended 15 January 1986 by the State C o u n c i l , i n CCH: Business Regulation, v o l . 1, supra note 1 f 6-550, art. 19 [hereinafter Implementation Regulations o f E J V L a w ] ; Implementation Regulations o f W h o l l y F o r e i g n O w n e d Enterprise L a w o f P R C (Zhonghua renmin gongheguo waizi qiye fa shishi xize) approved 28 October 1990 b y the State C o u n c i l and issued 12 December 1990 by the M i n i s t r y o f F o r e i g n E c o n o m i c Relations and Trade [hereinafter M O F E R T ] , i n CCH: Business Regulation, v o l . 2, supra note 1 ^[13-507, art. 19 [hereinafter Implementation Regulations o f W F O E L a w ] ; Implementation Regulations o f Sino-foreign Contractual Joint Venture L a w o f P R C (Zhonghua renmin gongheguo zhongwai hezuo jingying qiye fa shishi xize) approved 7 August 1995 by the State C o u n c i l and promulgated 4 September 1995 by M O F T E C , i n CCH: Business Regulation, v o l . 1, supra note 1 f6-105, art. 14 [hereinafter Implementation Regulations o f C J V L a w ] . 1 0  11  P R C C o m p a n y L a w , art. 2.  4  legislation of China. The legislation authorities in China are subject to the leadership of the C P C .  12  It  is believed that laws are formulated in accordance with policies and are the finalisation and legalisation of policies of the State and CPC.  13  The leadership of the CPC is provided in the Constitution of the  People's Republic of China {Zhonghua renmin gongheguo xiccnfa) (hereinafter PRC Constitution) as 14  one of the four cardinal principles (sixiangjiben yuanze) to be followed.  15  The CPC delegates the job  of making and implementing economic policies to the government. Due to the successful leadership 16  of CPC, State policies are always consistent with the policies of the C P C .  17  Analysis of FICLBS in the  context of policies is helpful to understand and reveal the true intention and nature of FICLBS regime.  H e H u a h u i , Renmin daibiao dahui zhidu de lilun yu shijian (The Theory and Practice o f the People's Congress System) (Wuhan: W u h a n daxue chubanshe, 1992) at 265-66. 1 2  Peng Z h e n , former Chairman o f the Standing Committee o f the National People's Congress, said on September 1,1979 i n a speech made at the Central Party School:  1 3  What is law? L a w is the fixed form o f the policies o f the Party and the State, is to fix the policies o f the Party and the State i n the form o f L a w . i n Hongqi (Red F l a g ) , 1979.11, at 16; also see Peng Z h e n , Remarks M a d e at the Preparatory Meeting for the T h i r d M e e t i n g o f the Sixth Session o f the N P C on M a r c h 25, 1984, Liaowang (Outlook W e e k l y ) , A p r i l 8, 1985, at 19. Adopted 4 December 1982 at the Fifth Session o f the Fifth National People's Congress, i n CCH: Business Regulation, v o l . 1, supra note 1 f 4-500. 1 4  These four cardinal principles are adherence to socialist road, adherence to the people's democratic dictatorship, adherence to the leadership o f C P C , and adherence to M a r x - L e n i n i s m and M a o Zedong Thought. See Constitution o f P R C , Preamble. The leadership o f C P C is the core o f the four cardinal principles. See D e n g X i a o p i n g , " O n the R e f o r m o f the System o f Party and State Leadership" i n Editorial Committee for Party Literature under the Central Committee o f the Communist Party o f C h i n a (Zhonggong zhongyang wenxian bianji weiyuanhui), ed., Selected Works of Deng Xiaoping 1975-1982, trans, the Bureau for the C o m p i l a t i o n and Translation o f W o r k s o f M a r x , Engels, L e n i n and Stalin Under the Central Committee o f the Communist Party o f C h i n a (Beijing: F o r e i g n Language Press, 1984) 302 at 324 [hereinafter Selected Works of Deng Xiaoping]. 15  Susan L . Shirk, The Political Logic of Economic Reform in China (Berkeley, L o s Angeles & O x f o r d : University o f C a l i f o r n i a Press, 1993) at 10. 1 6  Ibid, at 55-69; A l b e r t H Y C h e n , An Introduction to the Legal System of the People's Republic of China (Singapore, M a l a y s i a & H o n g K o n g : Butterworths A s i a , 1993) at 75-76. 17  5  Chapter II of this thesis will analyse the CPC and State policies underlying the FICLBS regime. I will argue that on one hand, China has been trying to join the world economy. As a result, China makes constant efforts to join World Trade Organisation (hereinafter WTO) and permits foreign access to Chinese domestic stock market. China also tries to establish a modern enterprise system to comply with international practice. On the other hand, China has always been trying to maintain its own characteristics. Chapter III will analyse FICLBS in the context of foreign investment law.  I will argue  that on one hand, FICLBS are based on the General Foreign Investment Regime. On the other hand, FICLBS demonstrate their own characteristics as distinguished from the General Foreign Investment Regime. I will address the policy reasons underlying these differences. Chapter IV will analyse the FICLBS in the context of company law.  I will analyse the great influence of common law on FICLBS  and the Chinese characteristics demonstrated by the FICLBS legal regime and identify policy considerations thereunder. In the last Chapter, I will make a conclusion. In selection of the items to be compared and analysed, I try to identify those which can reveal various policies underlying FICLBS and those which are representative in the specific context of analysis. Such selection may be arbitrary and the identification may be limited by author's knowledge and intelligence. I hope that this thesis will contribute to the understanding of FICLBS legal regime which is a new but important investment form available to foreign investors.  6  CHAPTER II  GENERAL POLICIES UNDERLYING THE FICLBS  I.  Joining the World Economy  1.  Background The globalisation of economic activities emerged after the Second World War, particularly 18  during the 1960s.  As part of the globalisation process, the post-1960s was one of the emergence  of transnational corporation (TNC) activity on the one hand and the rapid growth of international trade on the other. Subsequently, with the collapse of the Bretton Woods semi-fixed exchange rate regime in the 1971-73 period, the expansion of international securities investment and bank lending began in earnest as capital markets rapidly internationalised, adding to the complexity of international economic relations and heralding the genuine globalisation of an integrated and interdependent world economy.  19  At present, foreign direct investment (FDI) by TNCs plays a  major role in linking many national economies, building an integrated international production 20  system — the productive core of the globalising world economy.  International production by  The term "globalisation" has been differently defined by analysts with diverse interests and perspectives. To some analysts, "globalisation" marks the hegemony of transnational capitalism in general, and the institutional primacy of the transnational corporation in particular. See S. Gill & David Law, The Global Political Economy (Hemel Hempstead: Harvester/Wheatsheaf, 1988), Chs. 7 and 11. To others, "globalisation" marks the general process of internationalization of finance, production and economic transactions. See David Held, "Democracy: From City States to a Cosmopolitan Order?"(1992) 40 Political Studies (Special Issue) 10 at 10-19. 19  See Paul Q. Hirst & Grahame Thompson, Globalisation in (Cambridge: Blackwell, 1996) at 18.  Question — The International Economy and the  Possibilities of Governance  See UNCTAD, World Investment Report 1995: Transnational Corporations and Competitiveness (New York & Geneva, 1995) at xix (UN Doc. UNCTAD/DTCI/26, Sales No. E.95.II.A.9) [hereinafter World Investment  2 0  Report 1995].  7 TNCs has superseded international trade in dominating international commercial transactions.  21  FDI has significant implications for the economic performance of host countries. FDI opens up prospects for additions to the capital stock, technological upgrading, skills development, and improved organisational and managerial practices simultaneously for the host countries.  Hence  FDI can contribute to enhancing the production capabilities and economic performance of the host countries.  22  As countries increasingly recognise the importance of FDI for their development, they  compete more and more to attract such investment through liberalising their FDI frameworks and creating a favourable investment climate.  23  As a result, a steady increase of interdependence and  openness across most of the developed and the developing worlds becomes apparent.  24  On the other hand, as a result of a number of factors including technological advances and the removal of restrictions of foreign participation by many of the world's securities markets, globalisation of securities markets is more than a developing trend, it is a present day reality.  25  Many newly industrialised countries and areas such as Korea, Singapore and Taiwan have been  n  Ibid, at 3 .  2 2  Ibid, at 188-189.  2 3  Ibid, at 300.  2 4  H i r s t & T h o m p s o n , supra note 19 at 26-27.  Charles C . C o x , "Statement Concerning the Internationalization o f the Securities M a r k e t s " (Before the House Subcommittee o n Telecommunication and Finance, August 5, 1987), i n Globalisation of Securities Markets: Hearing Before the Subcommittee on Telecommunications and Finance of the Committee on Energy and Commerce, House of Representative, One Hundred Congress, First Session, Serial No. 100-72 (Washington: U.S. Government P r i n t i n g Office, 1988) 6 at 6. 2 5  8  devoted to improve and open domestic securities market in order to attract foreign securities capital.  26  The globalisation of securities market reveals the following characteristics:  (i)  The globalisation of securities market network.  With the connection of SEAQ  International and NASDAQ, a global securities market has formed in which securities trading is around the clock. (ii) The globalisation of securities system of various countries. The global flow of capital has forced various countries to lessen control and open domestic securities markets to the outside world. This makes the principles, trading methods and practices of different securities markets in different countries become compatible. (iii) The globalisation of securities issuance. The procedures of securities issuance comply with international practice. The accounting principles and listing rules for companies limited by share are unified according to the requirements of international markets. Foreign companies begin to raise capital in international securities market and list their shares on international securities exchanges. The percentage of foreign companies listed in the total number of listed companies is regarded as a criterion of the extent of the internationalisation of the securities exchange.  At  present, foreign companies account for about 50% of the listed companies on New York, London and other major international securities exchanges and 15% on the Asia securities exchanges. (iv)  Internationalisation of securities trading.  Domestic securities companies extend to  international market, bring domestic investors into international investment market and international  See L i u Z h i y o n g , "Zhongguo zhengquan shichang guojihua tansuo" (China's International) (1995) 147 Guoji maoyi wenti (International Trade Journal) 36 at 36.  Stock M a r k e t  Going  9 investors into domestic securities markets in return. securities trading on the secondary market.  2.  So emerged the internationalisation of the  27  Policy of joining the world economy Although China's leaders might not have in-depth understanding of the globalisation of  international economy, they did have an in-depth understanding of aftermath of the closed-door 28  (Qing Dynasty) and self-dependence (Mao Zedong) policies.  Deng Xiaoping pointed out, "[a]  29  closed-door policy would not help construction."  He believed that the extent of the development  of the foreign economic relationship directly affected the speed of economic construction. He believed that, "[o]ne of the most important reasons for China's long years of stagnation and 30  backwardness was its policy of closing the country to the outside contact."  Deng had a systematic  See L i Z h e n g , L i u Jun & Q i u X i a o y u , " W u o g u o zhengquan shichang guojihua wenti tantao" (Discussions o n the Internationalisation o f C h i n a ' s Securities Market), Caijing wenti yanjii (Financial & E c o n o m i c Issues), February 1995, 36 at 36. Some observers argue that internationalization cannot explain why Deng X i a o p i n g and his allies decided to initiate economic reforms i n 1978. A l t h o u g h the trend i n the international economy had over time increased the probability that C h i n a w o u l d initiate policies to open its economy, this increase was unobservable because groups were prevented by communist institutions from perceiving international opportunities for gain or from organizing to gain access to them. See Susan L . Shirk, "Internationalization and C h i n a E c o n o m i c R e f o r m " , i n Robert O . Keohane & H e l e n V . M i l n e r , eds., Internationalization and Domestic Politics (Cambridge: Cambridge U n i v e r s i t y Press, 1996) 186 at 186-87. 2 8  See D e n g X i a o p i n g , " B u i l d Socialism with Chinese Characteristics", i n Deng X i a o p i n g , Build Socialism with Chinese Characteristics, trans. The Bureau for the C o m p i l a t i o n and Translation o f W o r k s o f M a r x , Engels, L e n i n and Stalin U n d e r the Central Committee o f the Communist Party o f C h i n a (Beijing: F o r e i g n Language Press, 1985) 35 at 38 [hereinafter " B u i l d Socialism w i t h Chinese Characteristics" and Build Socialism with Chinese Characteristics respectively].  2 9  See D e n g X i a o p i n g , " A c h i e v e the Magnificent G o a l o f O u r F o u r Modernisation's and O u r Basic P o l i c i e s " , i n Build Socialism with Chinese Characteristics, ibid. 49 at 5 1 . 3 0  10 understanding: in China's history, our ancestors suffered from the closed-door policy.  31  Counting  from the middle of Ming dynasty (1368-1644) to the Opium War (1840), the closed-door policy lasted more than 300 years. Counting from Kang X i (1661-1722), the door had been closed for almost 200 years. As a result China fell into poverty and ignorance.  32  After the People's Republic  of China was established in 1949, although China had been open to the former Soviet Union and East Europe during the first five year plan period, for most of the time the door was still closed and the policy of closed-door was still exercised. "[W]e were blockaded by others, and so the country remained closed to some extent, which created difficulties for us."  33  Deng Xiaoping concluded  that, "our experience shows that China cannot rebuild itself with its doors closed to the outside and that it cannot develop in isolation from the rest of the world. " present world is an open world.  35  34  Deng explicitly understood that the  In this open world, the success and failure of the economy of a  country depend, to a great extent, on the level of openness and participation in the world economic competition, and on whether the country can make use of the changes of world economy. Every country or area must conduct international economic and technology exchange and co-operation in  D e n g X i a o p i n g , "Speech at the T h i r d Plenary Session o f the Central A d v i s o r y C o m m i s s i o n o f the C o m m u n i s t Party o f C h i n a (October 2 2 , 1984)", i n Build Socialism with Chinese Characteristics, ibid. 54 at 61 [hereinafter " D e n g X i a o p i n g 1984 Speech"].  3 1  3 2  Ibid.  3 3  See supra note 2 9 .  3 4  See supra note 3 0 . See supra note 2 9 .  11 order to develop social economy faster and better. Hence no country can develop with the door closed.  36  In their theoretical justification of opening-up, Chinese scholars point out that the founders of Marxism perceived socialist society as an open society and indeed believed that openness was a prerequisite of socialism.  37  As Marx and Engels said in the Manifesto of the Communist Party,  "[t]he Bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country.  ...In place of the old local and  national seclusion and self-sufficiency, we have intercourse in every direction, universal inter38  independence of nations. And as in material, so also in intellectual production."  Besides that  Lenin's advocacy of "peaceful coexistence" after the Bolshevik Revolution, and particularly economic contacts with the capitalist world are also cited as the theoretical basis for opening-up , - 3 9  policy.  See " D e n g X i a o p i n g 1984 Speech", supra note 31 at 60-61. F o r a detailed discussion o f the open-door p o l i c y o f D e n g X i a o p i n g , please see generally Y u Fuzhang, "Jiandingbuyi d i shixing d u i w a i kaifang de changqi zhanlue fangzhen ~ D e n g X i a o p i n g d u i w a i kaifang j i n g j i sixiang gaishu" ( F i r m l y A d h e r i n g to the L o n g - t e r m , Strategic Open P o l i c y - R e v i e w o f D e n g X i a o p i n g ' s E c o n o m i c T h i n k i n g ) (1988) 72 Guoji maoyi wenti (International Trade Journal) 2. 3 7  W a n g L i n & L e n g R o n g , eds., Deng Xiaoping sixiang fazhan gaishu (Summary o f the Development o f Deng  X i a o p i n g Thought) (Beijing: Guofang daxue chubanshe, 1991) at 242. 3 8  See " C o m m u n i s t M a n i f e s t o " , i n Selected Works of Karl Marx and Frederick Engels, V o l . 1 ( M o s c o w : F o r e i g n  Languages P u b l i s h i n g House, 1962) 33 at 37-38. See W a n g Y u et a l . , Deng Xiaoping jingji sixiang de yuanyuan yu fazhan (The Sources and Development o f D e n g X i a o p i n g ' s E c o n o m i c Thought) (Shanghai: Shanghai renmin chubanshe, 1994) at 224. F o r a systematic review o f M a r x i s t perspectives on interdependence and globalization, see R . J . Barry Jones, Globalization and Interdependence in the International Political Economy: Rhetoric and Reality ( L o n d o n : Pinter Publishers, 1995) at 23-30. 3 9  12 Hence after Deng Xiaoping took power, he advocated the policy of "opening up to the outside world. "  4 0  After that, opening-up to the outside world was provided, as a policy of the State  and the CPC, in many documents of the State and the CPC and was put in an important position. In the Report on Government's Work of the Fourth Session of the Fifth People's Congress made by Zhao Ziyang in 1981, opening-up to the outside world was listed as one of the ten policies of economic construction.  41  In the Decision of the Central Committee of the C P C concerning  Economic Structure Reform (Zhonggong zhongyang guanyu jingji tizhi gaige de jueding) adopted at the Third Plenum of the Twelfth General Meeting of the CPC in 1984, opening-up to the outside world was regarded as a long term Party policy and a measure of strategy to develop socialist modern construction.  42  After three years of retreat from 1989 to 1991 due to the effect of "Tian  An Men Square", the winds shifted back in January 1992 after Deng took a tour in the South China and made a series of speeches calling for broader open-door policy and acceleration of openness. At the subsequent 14th Party Congress in October 1992, open-door policy was reiterated. Since  The interesting thing is although after the T h i r d Plenary M e e t i n g o f the Eleventh General M e e t i n g o f C P C i n 1978 C h i n a began to adopt the p o l i c y o f opening to the outside w o r l d and promulgated E J V L a w i n 1979, the concept o f "opening-up to the outside w o r l d " began to be used i n 1980. O n August 21 and 2 3 , 1980, D e n g X i a o p i n g first used the term "opening-up to the outside w o r l d " during the meetings w i t h O r i a n a F a l l a c i , an Italian reporter. See D e n g X i a o p i n g , "Answers to the Italian Journalist Oriana F a l l a c i " , i n Selected Works of Deng Xiaoping, supra note 15, 326 at 332 Zhao Z i y a n g , " D a n g q i a n de j i n g j i xingshi he j i n h o u j i n g j i jianshe de fangzhen" (The Present E c o n o m i c Situation and the Strategies o f Future E c o n o m i c Construction), i n Renmin ribao (People's D a i l y ) , D e c . 14, 1981,  4 1  1 at 3. See " D e c i s i o n o f the Central Committee o f the C P C concerning E c o n o m i c Structure R e f o r m " , i n Renmin ribao (People's D a i l y ) , October 2 1 , 1984, 1 at 3.  4 2  13  then, the process of openness was resumed and accelerated.  43  China has been the largest  developing country recipient of FDI since 1992 and the principal drive behind Asia's current investment boom.  44  China's opening-up policy has been gradually implemented according to the strategies, tactics and principles laid down by Deng Xiaoping. These consist of a multidirectional opening-up strategy, the development of economic and technical relations with foreign countries, and the establishment of economic zones and open coastal cities.  45  The process of China's opening door is  the process of China's economy joining the world economy.  46  In terms of FICLBS, China's efforts  to join the world economy can be divided into three aspects: (1)  China made constant efforts to join the General Agreement on Tariffs and Trade  (hereinafter GATT) and WTO in order to establish a justified and reasonable international economic order. Because WTO has many requirements to its member States, China has to implement these requirements in China. One of these requirements which has greatest effect on FICLBS is national treatment.  See C h u - Y u a n C h e n g , " C h i n a ' s E c o n o m i c Policies After the [ C P C ] 14th Party Congress" (1994) 10 fasc. 1 Journal of Developing Societies 7 at 7-8. See U N C T A D , World Investment Report 1996: Investment, Trade and International Policy Arrangements ( N e w Y o r k & Geneva, 1996) at x v i i ( U N D o c . U N C T A D / D T C I / 3 2 , Sales N o . E . 9 6 . I I . A . 1 4 ) [hereinafter World Investment Report 1996]. 4 4  F o r a detailed discussion o f C h i n a ' s open-door p o l i c y , see Chao Chun-shan, " P e k i n g ' s P o l i c y o f O p e n i n g U p to the Outside W o r l d " (1994) 30 n l 2 Issues & Studies 22 at 30-35.  4 5  See Z h u L i n a n , " G u o neiwai shichang j i e g u i y u d u i w a i m a o y i junheng" ( C o m b i n i n g Domestic M a r k e t with International Market and the Balance o f Foreign Trade) (1994) 149 Guoji maoyi (InterTrade) 8 at 8.  4 6  14 (2) China is trying to join the world securities market. Permission of foreign companies to promote and establish companies limited by shares is a part of the process. (3)  China tries to establish a modern enterprise system in order to comply with  international practice.  (1)  Resumption of membership of G A T T and joining W T O After a few years practice of opening-up, China formally applied to resume its membership  in GATT in 1986.  47  Since then China has been making efforts to rejoin GATT. China's request  for resumption of its GATT membership constitutes an element of its open-door policy aimed at achieving a greater degree of integration in the world economy. Chinese top leaders decided that 48  entrance into GATT was essential to realize their economic goals.  Chinese government officially  states that joining WTO will help China to establish a socialist.market economy and expand China's opening up.  49  On April 16, 1994, China signed the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations (Final Act) and the Agreement Establishing the Multilateral Trade Organisation (MTO Agreement) in Morocco, including the agreement on one of the three "new issues" placed on the negotiating agenda of the round — Trade Related Investment  4 /  G A T T D o c . N o . L / 6 0 1 7 , July 10, 1986.  4 8  See S h i r k , "Internationalizaion and C h i n a E c o n o m i c R e f o r m " , supra note 28 at 197.  See " Z h o n g g u o daibiao zai shimao zuzhi shoujie buzhangji h u i y i shang chongshen j i a r u shimao zuzhi de yuanze l i c h a n g " (China's Representative reiterated the principle standpoint to j o i n W T O at the F i r s t W T O M e e t i n g at M i n i s t e r L e v e l ) , Renmin ribao (People's D a i l y ) (overseas edition), D e c . 13, 1996, at 3 .  4 9  15 Measures (TRIMs).  50  If China joins WTO, the Agreement on Trade Related Investment Measures  (TRIMs Agreement) will apply to China.  TRIMs Agreement has nine clauses, including the  following major contents: (i) Accord national treatment to foreign investors.  Prohibit those that require particular  levels of local sourcing by an enterprise (i.e. local content requirements), those which restrict the volume or value of imports which an enterprise can buy or use to the volume or value of products it exports (i.e. trade-balancing requirements) and those which restrict the exportation by an enterprise of products, whether specified in terms of the particular type, volume or value of products or of a proportion of volume or value of local production. (ii) Developing countries shall cancel their policies against the TRIMs Agreement within five (5) years after TRIMs Agreement enters into effect.  51  In order to join WTO, China has to take various measures to reform its economic system 52  and adjust economic policies in order to comply with the requirements of WTO.  For example,  the national treatment is a guiding principle upheld by the WTO for trade relations between its signatory countries. It requires a unified policy within a country for both domestic and foreign capital to be treated as the same in taxation, law enforcement, application of regulations and  See " C h i n a Signs G A T T Uruguay A c c o r d s , W T O Agreement", Beijing Xinhua i n E n g l i s h , A p r i l 15, 1994, i n FBIS Daily Reports - China, A p r i l 18, 1994, 6 at 6. See Pierre Sauve, " A First L o o k at Investment i n the Final A c t o f the Uruguay R o u n d " (1994) 28 J . W o r l d T . 5 at 7-8.  5 1  F o r a detailed discussion o f G A T T ' s effect on C h i n a ' s policies, see Thomas C . W . C h i u , " C h i n a and G A T T : Implications o f International N o r m s for C h i n a " (1992) 26 J . W o r l d T . 5.  5 2  16 administrative control. joining W T O .  53  China is obliged to adopt national treatment policy for the purpose of  54  From the moment that China adopted open-door policy in 1979, China began to implement national treatment in some fields.  55  EJV Law provides that all the activities of Sino-foreign equity  joint ventures shall comply with PRC laws and regulations as domestic enterprises.  56  General  Principles of Civil Law (Minfa tongze) provides that all the civil activities conducted within China 51  58  shall be subject to PRC law.  It is further provided that as domestic enterprises, EJVs, CJVs and  WFOEs established within China which meet the conditions for legal persons are entitled to obtain PRC legal person status after approval by and registration with administrations of industry and  See " N a t i o n a l Treatment Comes to the D o o r " , in China Economic News, 1996. 4. 1, 1 at 1. L u J o n g x i n g , " L u n wanshan waishang touzi falii z h i d u " ( O n Perfecting Foreign Investment L e g a l System), Zhongguo faxue (Science o f L a w i n China) (Beijing), 1996. 3, at 69-77, reprinted i n Fuyin baokan ziliao: jingji faxue • laodong faxue (Photocopied Materials i n Newspapers and Magazines: E c o n o m i c L a w • Labour L a w ) , 1996. 5, 75 at 82. 5 4  See C h e n Shijiang & L i u W e n w e i , " S h i x i wuoguo waishang touzi qiye de guomin d a i y u " (Analysis o f the National Treatment o f Foreign Investment Enterprises i n China), in Gongshang xingzheng guanli (Administration of Industry and Commerce), 1996. 8, 38 at 38. 5 5  5 6  5 7  E J V L a w , art. 2. The General Principles of C i v i l L a w were adopted at the Fourth Session o f the Sixth National People's  Congress on A p r i l 12, 1986, in CCH: Business Regulation, v o l . 3, supra note 1 *b 19-150. 58  General Principles o f C i v i l L a w , art. 8.  17 commerce.  59  Civil Procedure Law (Minshi susong fa)  60  provides that foreign investment  enterprises have the same litigation rights and obligations as domestic investment enterprises.  61  However, the above stipulations are not systematic. From the overall point of view, the foreign investment enterprises are subject to different treatment compared with domestic investment enterprises.  As a developing country practising a planned economy for as long as 40 years, to  grant national treatment was out of the question when China began to introduce foreign investment. China had to resort to special administrative policies to encourage capital inflow in the absence of a sound economic and legal environment. In many respects the treatment given to foreign investment enterprises by Chinese government is more favorable than those given to domestic investment enterprises.  For instance, Enterprise Income Tax Law of Foreign Investment Enterprises and  Foreign Enterprises (Zhonghua renmin gongheguo waishang touzi qiye he waiguo qiye suodeshui fa)  62  provides that the enterprise income tax for production enterprises with foreign investment  whose terms exceed ten (10) years shall be exempted for the first two years after making profit and shall be reduced by 50% during the next three years.  63  While no domestic enterprise enjoyed  General Principles o f C i v i l L a w , art. 41(2). 6 0  C i v i l Procedure L a w was adopted at the Fourth Session o f the Seventh National People's Congress o n A p r i l 9,  1991, i n CCH: Business Regulation, v o l . 3, supra note 1 U 19-201 . 6 1  C i v i l Procedure L a w , art. 5.  Enterprise Income T a x L a w o f F o r e i g n Investment Enterprises and F o r e i g n Enterprises was adopted at the F o u r t h Session o f the Seventh National People's Congress o n A p r i l 9, 1991, i n China Laws for Foreign Business: Taxation (CCH Australia Ltd.) H 32-505 [hereinafter CCH: Taxation].  6 2  Enterprise Income T a x L a w o f F o r e i g n Investment Enterprises and F o r e i g n Enterprises, art. 8. This preferential treatment is often called "liang mian san jian" - two-year exemption and three-year reduction by foreign investors. It was initially provided as one-year exemption and two-year reduction i n the Income T a x L a w o f the P R C C o n c e r n i n g Chinese-foreign Equity Joint Ventures (Zhonghua renmin gongheguo zhongwai hezi 6 3  18 similar tax treatment at the same time.  On the other hand, China exercised strict control over  foreign investment enterprises for fear of hurting domestic industries. A l l the foreign investment enterprises are subject to special examination and approval by M O F T E C and its authorized departments,  64  subjecting them to below the standard national treatments. China is implementing a  different treatment policy to foreign and domestic investment enterprises.  65  The different treatment policy raises many unsolvable problems. One of these problems is return investment (fan touzi). Return investment refers to the phenomenon that enterprises established abroad by China's domestic enterprises return to China and establish foreign investment enterprises.  In theory these enterprises shall be regarded as foreign investment enterprises and  jingying qiye suodeshuifa) adopted at the T h i r d Session o f the Fifth National People's Congress o n September 10, 1980, i n Zhonghua renmin gongheguo fagui huibian (Compilation o f L a w s and Regulations o f the People's Republic o f China) (January - December 1980) (Beijing: F a l i i chubanshe, 1981), at 13-16 [hereinafter Compilation of Laws and Regulations]. A r t i c l e 5 provided that a joint venture scheduled to operate for a period o f ten (10) years o r more shall, upon approval by the tax authorities o f an application filed b y the venture, be exempted from income tax i n the first profit-making year and allowed a 5 0 % reduction i n income tax i n the second and third years. O n September 2 , 1983, the Second Meeting o f the Standing Committee o f the Sixth National People's Congress decided to expand the above preferential treatment to two-year exemption and threeyear reduction. See D e c i s i o n o f the Standing Committee o f the National People's Congress Regarding R e v i s i o n o f the Income T a x L a w o f the P R C for Sino-foreign E q u i t y Joint Ventures (Quanguo renmin daibiao dahui changwu weiyuanhui guanyu xiugai "zhonghua renmin gongheguo zhongwai hezi qiye suodeshui fa " de jueding) promulgated o n September 2 , 1983, i n Compilation of Laws and Regulations (January - December 1983), ibid, at 115. W i t h regard to C J V s and W F O E s , Articles 1 and 5 o f the Income T a x L a w o f P R C for F o r e i g n Enterprises (Zhonghua renmin gongheguo waiguo qiye suodeshui fa) w h i c h was adopted at the Fourth Session o f the Fifth National People's Congress o n December 13, 1981 had same provisions o f two-year exemption and three-year reduction, i n Compilation of Laws and Regulations (January - December 1981), ibid, at 21-25. A r t i c l e 3 o f E J V L a w provides that the joint venture agreements, contracts and articles o f association executed between joint venture parties shall be submitted to the State foreign economic and trade departments (hereinafter referred to as the Examination and A p p r o v a l Authorities) for examination and approval. T h e E x a m i n a t i o n and A p p r o v a l A u t h o r i t y shall decide whether to approve within three (3) months. After approval E J V s shall be registered with the State administration o f industry and commerce, obtain business license and start operation. Articles 5 and 6 o f C J V L a w and Articles 6 and 7 o f W F O E L a w have same provisions. 6 4  See C h e n Shijiang & L i u W e n w e i , supra note 55 at 38. A l s o see " N a t i o n a l Treatment Comes to the D o o r " , supra note 53 at 1-2. 6 5  19 entitled to various preferential treatments (especially in respect of tax) enjoyed by other foreign investment enterprises.  However, they are against the policy of attracting foreign investment  underlying the open-door policy adopted by the Chinese central government.  66  The main reason  for the emergence of return investment is the attraction of the preferential treatments accorded to foreign investment enterprises.  67  The same reason contributes to the emergence of false joint  venture, i.e. a domestic investment enterprise find a foreign partner to form a joint venture. After obtaining a business license of foreign investment enterprise, the investments already paid by the foreign partner are drawn back and the investments subscribed and payable are no longer paid up.  68  In order to solve these problems, China has to accord national treatment to foreign investment enterprises. The problem of national treatment has been apprehended by the policy making level of China. The Fifth Session of the Fourteenth National Congress of the CPC pointed out that China should use foreign investment actively, reasonably and efficiently and should accord national treatment to foreign investment enterprises gradually.  69  By such unusual act national treatment was  See Y u H a i y u , "Qiantan j i n g w a i touzi 'fan t o u z i ' de biduan" (Observations on Defects o f Return Investment o f C h i n a ' s Overseas Investment),  i n Zhongguo waihui guanli (Foreign Exchange A d m i n i s t r a t i o n i n C h i n a ) , 1996. 1,  27 at 27. L i W a n i n g , " W u o g u o w a i z i fagui de ruogan wenti" (Several Problems w i t h C h i n a ' s F o r e i g n Investment L a w s and Regulations), Guojijingji hezuo (International E c o n o m i c Cooperation) (Beijing), 1995. 4, at 52-55, reprinted in Fuyin baokan ziliao: jingji faxue (Photocopied Materials i n Newspapers and Magazines: E c o n o m i c L a w ) , 1995. 3, 44 at 4 5 .  6 7  See W a n g Jian, " D u waishang touzi qiye shixing guomin daiyu de biyaoxing he tiaojian" (The Necessity o f and Conditions for A c c o r d i n g National Treatment to F o r e i g n Investment Enterprises), Gongshang xingzheng guanli (Administration o f Industry and Commerce), 1996. 8, 39 at 39-40. 6 8  "Proposal of the Central Committee of the Communist Party o f China for Formulating the Ninth Five-year Plan (1996-2000) for National Economic and Social Development and the Long-term Target for the Year 2010 " adopted on  6 9  20  put in such a high position that the authority in charge of foreign investment - M O F T E C is under great pressure to implement the policy of national treatment enacted by the CPC. Within a short period of time, China announced many national treatment policies.  In October 1995, it was  announced that Shenzhen would undergo an experiment of national treatment from 1996 to 1999 70  and detailed plans were released.  On December 26, 1995, the State Council issued an urgent  notice to cancel the import-related tax exemptions over the imported equipment within the total amount of investments of foreign investment enterprises from April 1, 1996.  71  The Provisional  Regulations on FICLBS were enacted by MOFTEC in this context. M O F T E C inevitably adopted national treatment as one of the policies underlying the Tentative Regulations on FICLBS. However, the conditions for the application of national treatment are not mature in many respects. In addition to that, M O F T E C does not seem to consider the specific context to apply national treatment. As a result, the national treatment measures formulated by MOFTEC are often simple, inflexible and do not fit in with specific contexts..  September 28, 1995 at the Fifth Plenary Session o f the 14th Central Committee o f the Communist Party o f China, Beijing X i n h u a in English, October 4, 1995, i n FBIS Daily Report - China, October 4, 1995, 15 at 2 7 . The original Chinese version titled "Zhonggong zhongyang guanyu zhiding guomin jingji he shehui fazhan ' j i u w u ' jihua he 2010 nian yuanjing mubiao de jianyi" can be found in Renmin ribao (People's Daily), October 5, 1995, at 1-3. 7 0  "Shenzhen to Extend National Treatment to Foreign Business People", China Economic News, 1995. 10. 30, 3 at 3.  See A r t i c l e 2 o f the Notice o f the State C o u n c i l Concerning R e f o r m and Adjustment o f Import T a r i f f Policies (Guowuyuan guanyu gaige he tiaozheng jinkou shuishou zhengce de tongzhi) issued b y the State C o u n c i l o n December 2 6 , 1995 ( G u o F a N o . [1995] 34), i n China Laws for Foreign Business: Customs ( C C H A u s t r a l i a Ltd.)H 50 - 635 [hereinafter CCH: Customs]. The exemption from import duties is seen as having distorted markets, encouraged "round-tripping", speculative investment and "phantom" foreign ventures. See World Investment Report 1996, supra note 44 at x v i i i . 7 1  21 (2)  Permission of foreign access to Chinese domestic stock market China made a late start in the establishment of securities market.  outcome of the constant need of capital for the Chinese economy.  72  This is seen as an  China's first two securities  exchanges were established in Shanghai in 1990 and in Shenzhen in 1991 respectively. However, despite the very late start, China has been making constant efforts to join the world securities markets and achieved great progress in a short time.  73  In as early as 1982, China began its movement to make use of the world capital market. In January 1982, China International Trust and Investment Corporation became the first Chinese enterprise to enter the international debt bond market by issuing ¥10 billion international bond in Japan.  74  This symbolizes the permission of Chinese government to make use of international  securities market.  Up to the end of 1992, the total amount of capital raised through issue of  international bond had reached $6,732 billion.  75  China gained invaluable experience and  confidence in international securities market. Since then, China's efforts to join the world economy started in two directions. One is the permission of foreign access to securities market in China, the other is the foreign listing of Chinese enterprises.  In March 1990, a work conference of the State  See Pitman B . Potter, " T h e Legal Framework for Securities Markets i n C h i n a : T h e Challenge o f M a i n t a i n i n g State C o n t r o l and Inducing Investor Confidence" (1991) 12 C h i n a L a w Reporter 61 at 61-68 [hereinafter Potter, "Securities Markets i n C h i n a " ] . See L i u H o n g r u , " Z h o n g g u o zhengquan shichang de fazhan he guojihua q u s h i " (The Development o f C h i n a ' s Securities Markets and Its Internationalization Trend), Jidian ribao (Machinery and Electronics D a i l y ) , June 10, 1994, 2 at 2 . L i u H o n g r u was the former Chairman o f C S R C .  7 3  L i u H o n g r u et a l . , eds, Zhongguo gaige quanshu (1978-1991): jinrong tizhi gaige juan ( E n c y c l o p e d i a o f R e f o r m i n C h i n a 1978-1991: Financial System Reform) (Dalian: D a l i a n chubanshe, 1992) at 4 8 9 .  7 4  7 5  L i u Z h i y o n g , supra note 26 at 3 7 .  22 Commission for Reforming the Economic Structure (Guojia jingji tizhi gaige weiyuanhui) decided that, in developing shareholding system, certain enterprises should be granted the right to sell stocks to foreign investors.  76  In November 1991, People's Bank of China (PBOC) and the Shanghai  government jointly issued regulations for B shares. later.  77  Implementing Rules were promulgated  78  In November 1991, Shanghai Shenyin Securities Corporation first created the international market for China's securities by successfully issuing the first B shares for Shanghai Vacuum Electron Device Company L t d . . investors.  80  79  B shares shall only be issued to and traded between foreign  They are the major form for foreign investors to make direct securities investment in  China's securities markets. On February 21, 1992, Shanghai Vacuum Electron Device Company 81  Ltd. successfully listed its B shares on Shanghai stock exchange.  The issuance of B shares is the  See Statement o f the State C o m m i s s i o n on Restructuring the E c o n o m i c System dated M a r c h 11, 1990, i n Shenzhen zhengquan shichang nianbao 1990 (Annual Report o n the Shenzhen Securities M a r k e t 1990) at 2 2 0 . See A d m i n i s t r a t i v e Measures o f Shanghai M u n i c i p a l i t y G o v e r n i n g R e n m i n b i Special Category Shares (Shanghaishi renminbi tezhong gupiao guanli banfa) issued j o i n t l y by P B O C and the People's Government o f Shanghai M u n i c i p a l i t y o n November 2 2 , 1991, i n C h i n a L a w s for Foreign Business: Special Zones & Cities (1985-1994), v o l . 2 ( C C H Australia L t d . ) 1 91-056 [hereinafter CCH: Special Zones & Cities].  7 7  7 8  See Detailed Implementation Rules for the Measures o f Shanghai M u n i c i p a l i t y for A d m i n i s t r a t i o n o f Special  Renminbi-Denominated Shares (Shanghaishi renminbi tezhong gupiao guanli banfa shishi tiaoli) promulgated b y Shanghai Branch o f the People's Bank o f C h i n a o n November 2 5 , 1991 , i n CCH: Special Zones & Cities, ibid, f 91-057. State C o m m i s s i o n for Restructuring E c o n o m i c System, Zhongguo jingji tizhi gaige nianjian 1992 ( C h i n a E c o n o m i c System R e f o r m Y e a r b o o k 1992) (Beijing: Gaige chubanshe, 1992) at 3 5 6 . 8 0  8 1  Administrative Measures o f Shanghai M u n i c i p a l i t y G o v e r n i n g R e n m i n b i Special Category Shares, art. 14. Shanghai shehui kexueyuan (Shanghai Academy o f Social Sciences), e d . , Shanghai jingji nianjian 1993  (Shanghai E c o n o m i c Yearbook 1993) (Shanghai: Shanghai j i n g j i nianjian she under Shanghai shehui kexueyuan, 1993) at 4 2 8 .  23  beginning of the integration of China's securities markets into the international market. With the listing of B shares, secondary securities markets are open to foreign investors to a limited extent. From February 21, 1992 to June 30, 1994, shares issued by 50 enterprises were listed on Shanghai and Shenzhen Securities Exchanges.  Twenty-eight of them were listed on Shanghai Securities  exchange with a total capitalization of $2.4 billion.  Twenty-two enterprises were listed on 82  Shenzhen Securities Exchange with a total capitalization of HK$1.3 billion. Another direction is foreign listing of Chinese enterprises.  Since China Huachen Jinbei  Automobile Holding Company was listed on New York Stock Exchange on October 9, 1992, Chinese enterprises are listed on New York, London and Hong Kong exchanges in different 83  ways. A nation-wide securities regulatory framework also took shape.  A two-tire structure was  established - including both the State Council Securities Policy Committee (SCSPC) and its executive arm, the China Securities Regulatory Commission (CSRC) - and became operational in April 1993. The SCSPC consists of representatives of 14 government ministries, including the Ministry of Finance and the State Commission for Restructuring Economic System, and is primarily responsible for drafting securities laws and regulations (or authorizing the CSRC to do so) and for formulating guidelines and rules governing securities market development. The CSRC is See L i u Z h i y o n g , supra note 26 at 4 0 . Ibid, at 37-39.  These ways include direct listing and indirect listing.  Direct listing refers to the listing o f  Chinese enterprises on overseas securities exchanges. It also includes the issue o f A D R or G D R . Indirect listing refers to listing i n the name o f an overseas company bought or established by Chinese domestic enterprises. The m a i n reason for this method is that C h i n a ' s accounting, auditing legal systems do not totally c o m p l y with international practice. Indirect listing can also serve to avoid some strict listing restrictions and procedures.  24 responsible primarily for implementing regulations and for supervising security firms and markets. The exchanges are entitled to set their own listing requirements and to operate as self-regulating 84  agencies. A l l of the above paved the way for Chinese government to allow further openness of China's securities market. The promulgation of FICLBS opens China's primary securities market to foreigners to a limited extent.  Although China still prohibits foreign companies to be listed  directly on China's stock exchanges, permission of foreign investors to participate in China's primary securities market by establishing FICLBS is a great step forward in the process of internationalization of China's domestic Securities market. (3)  Establishment of a modern enterprise system As China's reform continued for 16 years, many deeply hidden problems had been  uncovered and some issues had become even more troublesome among which planned economy was becoming an obvious obstacle to China's further reform.  The old enterprise system under  which State-ownership played a leading role and no enterprise really had a real independent legal person status had been throttling the development of China's economy.  In regard of foreign  investment enterprises, although the three forms of them are called "companies" (gongsi) under respective laws,  85  they cannot be said to be modern enterprises.  A very simple and superficial  See M i c h a e l Spencer, "Securities Markets i n C h i n a " , Finance & Development, June 1995, 28 at 3 1 .  85 E J V L a w , art. 4; Implementation Regulations o f C J V L a w , art. 14 and Implementation Regulations o f W F O E L a w , art. 19.  25 example is that the investment in the three forms of foreign investment is computed in percentage and no shares are issued contrary to the prevailing practice in modern company law. China's theorists have contentions over what is modern enterprise legal system.  86  There are  three major factions: Professor Wu Jinglian believes that the modern enterprise system is 87  synonymous with the company;  Mr. Hong Hu believes that the modern enterprise system does  not only include the company, but also other forms;  88  Mr. Han Zhiguo believes that the modern  enterprise system refers to enterprises of legal person, the typical form of which is companies limited by shares.  89  However, all of the three factions believe that the modern company developed  in the West in recent two centuries is at least a part of the modern enterprise system.  See G a n Peizhong & W a n g Y i p i n g , " L u n wuoguo xiandai qiye zhidu j i qi falii m o s h i " ( O n M o d e r n Enterprise System and Its Legal M o d e l i n China), Zhongwai faxue (Chinese and F o r e i g n Legal Science) (Beijing), 1995. 5, at 10-16, reprinted i n Fuyin baokan ziliao: jingji faxue (Photocopied Materials i n Newspapers and Magazines: E c o n o m i c L a w ) , 1995. 6, 35 at 35 and 4 1 . See W u Jinglian, " D u i xiandai qiye zhidu x u zuo mingque de j i a i d i n g " ( A Clear Definition o f M o d e r n Enterprise System is Necessary), i n Shichang jingji daobao (Market E c o n o m y Report), 1994. 1, at 3 1 . H e believes that the modern enterprise system mainly refers to modern companies w h i c h gradually matured i n the first half o f this century. 8 7  See H o n g , H u , " M i n g q u e qiye gaige fangxiang j i a n l i xiandai qiye z h i d u " ( M a k e Clear the Enterprise R e f o r m D i r e c t i o n and Establish M o d e r n Enterprise System), i n Zhongguo jingji tizhi gaige (China E c o n o m i c Structure Reform), 1993. 12, at 16. H e believes that modern enterprise system refers to an enterprise system w h i c h conforms to social mass production, meets the needs o f social market regime and i n w h i c h enterprises can truly become legal person entities and market competition party i n both domestic and international markets. T h e forms o f modern enterprise system is diversified and shall not only be company. It shall include: enterprises with sole investment, partnership enterprises, contractual enterprises and company enterprises. 8 8  H a n , Z h i g u o , " L u n xiandai qiye z h i d u " (Observations on M o d e r n Enterprise System), i n Gaige (Reform), 1994. 1, at 2 7 . H e believes that modern enterprise system is one i n conformity with modern market economy. In modern market economy, there exist enterprises with sole investment, partnership enterprises and legal person enterprises. In the case o f enterprises with sole investment and partnership enterprises, the assets o f the investors are closely related to those o f the enterprises and cannot be separated. Hence these two forms belongs to natural person enterprises. T h e so-called modern enterprise system refers to legal person enterprises rather than natural person enterprises. Companies limited by shares are a typical form o f modern enterprise system. 8 9  26  At the end of 1993, the CPC formally adopted the policy of establishing modern enterprise system.  The Decision on Some Issues Concerning the Establishment of a Socialist Market  Economic Structure (Zhonggong zhongyang guanyu jianli shehui zhuyi shichang jingji tizhi ruogan wenti de jueding) made at the Third Plenary Session of the 14th Central Committee of the CPC on November 14, 1993 upholds the establishment of modern enterprise system.  90  The decision says  that modern enterprises may have various organisational patterns in which corporate form is an important one. The decision permits the establishment of companies limited by shares but restricts that they should be of a small number and must be strictly examined and approved beforehand.  91  Only one and a half month after the Decision, the Fifth Session of the Standing Committee of the Eighth National People's Congress passed the first company law of China on December 29, 1993. Establishment of a modern company system is listed as one of the purposes of the new PRC 92  Company Law.  The promulgation of the PRC Company Law was upheld as of great significance  to establishing a modern enterprise system which is a natural requirement of the development of 93  large-scale socialised production and market economy. The adoption of the PRC Company Law is an integral part of China's efforts to enter world economy although China never formally acknowledges this. 9 0  91  9 2  PRC Company Law makes the  Renmin ribao (People's D a i l y ) , N o v . 17, 1993, 1 at 1. Ibid.. P R C C o m p a n y L a w , art. 1.  See Commentator o f Renmin ribao (People's D a i l y ) , " J i a n l i xiandai qiye zhidu de zhongyao j i i c u o " ( A n Important M o v e to Establish M o d e r n Enterprise System), Renmin ribao (People's D a i l y ) , D e c . 3 1 , 1993, at 1. In C h i n a , the Commentator's opinions i n People's D a i l y are generally regarded as the opinions o f C P C . A l s o see Peter L i t t l e , " A C o m m o n L a w y e r ' s V i e w o f C h i n a ' s Company L a w " (1994) 3 A s i a Pac. L . R e v . 62 at 6 2 .  9 3  27 prevailing enterprise system in China similar to that in the West by drawing upon the international practice and experience with combination of Chinese characteristics. According to PRC Company Law, all the companies with foreign investment are governed by the PRC Company Law. However, in practice the new PRC Company Law has little effect on the General Foreign Investment Regime except for providing a potentiality of future development. The General Foreign Investment Regime has been developing for over fifteen (15) years and sees many conflicts with the new P R C Company Law. If the respective laws governing foreign investment enterprises are inconsistent with the PRC Company Law, these former laws shall apply.  94  Therefore, the General  Foreign Investment Regime is relatively independent of PRC Company Law.  95  The application of  PRC Company Law to foreign investment enterprises only lays the foundation of the future development of foreign investment enterprises to more advanced and modern forms. Nevertheless, the Provisional Regulations on FICLBS were enacted one (1) year after the promulgation of PRC Company Law and due to the simplicity of the Provisional Regulations on FICLBS, PRC Company Law fully applies to FICLBS.  II.  The Policy of Maintaining Chinese Characteristics  P R C Company L a w , art. 16. Some Chinese scholars try to analyze how to apply P R C Company L a w to foreign investment enterprises. See generally Shen Sibao, "Waishang touzi qiye shiyong gongsifa de ruogan wenti" (Several Issues Concerning A p p l y i n g C o m p a n y L a w to F o r e i g n Investment Enterprises), Zhongguo faxue (Jurisprudence i n China) (Beijing), 1995. 1, at 47 . 9 5  28 In contrast to opening-up and joining the world economy, China has always been trying to maintain its own Chinese characteristics.  During the process of opening up and reform, the  Chinese government has studied and introduced many Western ideas. However, nearly all of their reforms are labelled, "reform, with Chinese characteristics.  1,96  This is the embodiment of the  guideline of the CPC to construct "socialism with Chinese characteristics". Chinese characteristics may find their theoretical roots in Mao Zedong Thought. The basic principle of Mao Zedong Thought has been lauded as "the integration of the universal truth of Marxism with the reality of China. "  97  Mao Zedong used this theory to defeat his opponent Wang  Ming who had studied in Soviet Union and insisted on copying the revolution model of Soviet Union in the 1930's.  98  Mao insisted that all shall start from and be based on the actual  circumstances instead of emulating the model of others without analysis. Mao's thought is best summarised in his famous article "On the Ten Major Relationships" in which he said, "[o]ur policy is to learn from the strong points of all nations and all countries, learn all that is genuinely good in the political, economic, scientific and technological fields and in literature and art. But we must learn with an analytical and critical eye, not blindly, and we must not copy everything indiscriminately and translate mechanically."  99  Deng Xiaoping used similar theory to  See Steven E . Aufrecht & L i S i u B u n , " R e f o r m w i t h Chinese Characteristics: T h e Context o f Chinese C i v i l Service R e f o r m " (1995) 55 Public Administration Review 175 at 175.  9 6  9 7  Deng X i a o p i n g , " B u i l d S o c i a l i s m w i t h Chinese Characteristics", supra note 29 at 3 5 .  Tang T s o u , Ershi shiji zhongguo zhengzhi (Twentieth Century Chinese Politics) ( H o n g K o n g : O x f o r d University Press, 1994) at 73-82. 9 8  M a o Z e d o n g , " O n the T e n M a j o r Relationships", in Selected Works of Mao Zedong, V o l . 5 (Beijing: F o r e i g n Language Press, 1977), 284 at 303.  9 9  29 defeat his opponent Hua Guofeng in 1978 and established the guiding policy of starting from actual circumstances.  100  Socialism with Chinese characteristics is the development of the same principle.  The theory of Chinese characteristics first appeared in 1982. In the Opening Speech at the Twelfth National Congress of the C P C , Deng Xiaoping put forward the theory of constructing "socialism with Chinese characteristics".  101  This was soon adopted as a policy and was put in a  guiding position. The theory is elevated to a par with Mao Zedong Thought which was said to 102  have served China at an earlier time and will guide the opening-up and reform efforts.  The term  "Chinese characteristics" has been widely used ever since together with opening-up and reform. Generally, Chinese characteristics mean starting from or based on the actual circumstances of China. However, no exact definition is given and one may find it difficult to identify those Chinese characteristics.  Some models are suggested  to systematically analyse Chinese  characteristics. For example, the famous Suzanne Ogden's model of three basic competing Chinese values - traditional Chinese culture, socialism (ideological and political variables) and 103  H u a Guofeng, the hand-picked successor to M a o Zedong, advocated that what M a o said was always right and what M a o d i d was always right. T h i s is called "two whatevers" (liangge fanshi) theory. D e n g X i a o p i n g , on the contrary, contended against the b l i n d copy o f M a o ' s theory, advocated that practice was the o n l y criteria for testing a truth. See R o d e r i c k MacFarquhar, "The Succession to M a o and the E n d o f M a o i s m , 1962-82" i n R o d e r i c k M a c F a r q u h a r , ed., The Politics of China 1949-1989 (Cambridge: Cambridge U n i v e r s i t y Press, 1993) 248 at 317-18. 1 0 1  See generally D e n g X i a o p i n g , "Opening Speech at the Twelfth National Congress o f the C P C " i n Selected  Works of Deng Xiaoping, supra note 15 at 394-97. See James T . M y e r s , " E v o l u t i o n o f the socio-political Scene i n the People's R e p u b l i c o f C h i n a " (1994) 10 fasc. 1 Journal of Developing Societies 18 at 2 1 . 1 0 2  See Suzanne Ogden, China's Unresolved Issues: Politics, Development and Culture, 3d ed. ( E n g l e w o o d C l i f f s , N J : P r e n t i c e - H a l l , 1995) at 6-9. Suzanne Ogden argues that these three basic competing values underlie all the policies o f the Chinese government. Changes o f these policies reflect the changes o f priority o f these values. 1 0 3  30  development — are used by some scholars as a framework to examine Chinese characteristics.  104  However, no model is perfect and can cover all the aspects of such a complicated subject. Chinese characteristics embodied in the FICLBS regime are very complicated.  Historical, cultural,  economic and legal factors may all find their effects on these Chinese characteristics. We have to analyse them case by case. One of the most striking Chinese characteristics in the FICLBS legal regime is strict State control. China's foreign investment legal regime is based on a regulatory ethic that posits the State as the primary agent for economic and social development.  105  When China first adopted open door  policy and began to establish foreign investment legal regime by enacting EJV Law in 1979, the Chinese government made clear its intent to supervise foreign investment and business activities closely. State control constitutes one of the policies underlying the foreign investment legal regime and has never been changed.  106  The policy of State control in foreign investment legal regime has significant historical and social reasons. After the establishment of the PRC, Mao Zedong insisted on the leading role of the 107  CPC in the administration of China.  Mao believed that the leading role of the CPC should be so  absolute that the C P C should be above the NPC and the State Council in the administration of  See generally, Aufrecht & L i , supra note 96. In this article, Steven E . Aufrecht & L i S i u B u n analyze the Chinese characteristics o f C h i n a ' s c i v i l service system o n the basis o f Ogden m o d e l . See Pitman B . Potter, " F o r e i g n Investment L a w i n the People's Republic o f C h i n a : D i l e m m a s o f State C o n t r o l " (1995) 141 T h e C h i n a Quarterly 155 at 156 [hereinafter Potter, " D i l e m m a s " ] . 1 0 5  1 0 6  Ibid, at 167-68.  1 0 7  See Stuart Schram, The Thought of Mao Tse-tung (Cambridge: Cambridge University Press, 1989) at 97-109.  31 China's economy.  108  In fact, the CPC was regarded as the government at that time. After Mao,  Deng Xiaoping rose as China's top leader.  Deng and his followers began a process of  strengthening China's legal structure and creating a new "socialist legal system with Chinese characteristics".  State control of national economy was upheld as the basic ethics of the socialist  legal system. This belief is so firm that in the Constitution of PRC promulgated in 1982,  109  it was  provided that it was an obligation of the State to practise State control over the economy.  110  With  the lapse of time, although China adopted socialist market economy in 1993, the State's function as an agent for economic development is not diluted.  111  Many Chinese legal theorists believe that  economic law is the product of State intervention in the economy.  The most important  characteristics of economic law is the State intervention in the economy. The adjusting objects of the economic law are those economic relations which need the intervention and adjustment of the State. The purpose of the economic law is to ensure the realization of the greatest interest of the State intervention in the economic activities.  112  W a n g Y a n l i n , " S h i l u n M a o Zedong de j i n g j i fazhi s i x i a n g " (Observations o n M a o Zedong's E c o n o m i c Legal Thoughts), Faxue pinglun ( L a w R e v i e w ) , 1994.1. at 1-8, reprinted i n Fuyin baokan ziliao: jingji faxue (Photocopied Materials i n Newspapers and Magazines: E c o n o m i c L a w ) , 1994. 1, 6 at 8-9. 1 0 9  Supra note 14.  A r t i c l e 15 o f the P R C Constitution provides that the State shall ensure the proportionate and co-ordinated growth o f the national economy through overall balancing by economic planning and the supplementary role o f regulation b y the market. 1 1 0  1 1 1  See Potter, " D i l e m m a s " , supra note 105 at 168.  See Jiang F a n , " L u n j i n g j i fa y u guojia ganyu" (Observations on E c o n o m i c L a w and State Intervention), Xiandai faxue ( M o d e r n Legal Science) (Chongqing), 1996. 1, at 34-37, reprinted i n Fuyin baokan ziliao: jingji faxue • laodong faxue (Photocopied Materials i n Newspapers and Magazines: E c o n o m i c L a w • L a b o u r L a w ) , 1996. 4 , 12 at 12-15. 1 1 2  32 The social reasons also account for the adoption of State control over foreign investment legal regime. Foreign investment legal regime started to be established at the same time as China's overall legal regime.  In 1979, the government enacted a criminal code, a code of criminal  procedures and five other major laws one of which is the EJV L a w .  113  This is the beginning of  establishment of an overall legal regime in China. The controlling economy was still a planned economy at that time in which the State played a major role. Under the planned economy, State control naturally became one of the basic ethics of the then current legislation. This inevitably affected the legislation of foreign investment. At that time, China just adopted open door policy and knew little about the outside world. During the process of reversing the policy of strict control of foreign access to Chinese market, China has many concerns. In order to ensure that foreign investment does not constitute a menace to the leading role of planned economy, China adopts the policy of separating the foreign investment legal regime from the domestic legal regime, and exerts State control over the separate foreign investment legal regime.  A l l these laws were fundamental laws for the purpose o f establishing a new legal system. These laws are: Organic L a w o f L o c a l People's Congresses and L o c a l People's Governments o f the P R C (Zhonghua renmin gongheguo difang geji renmin daibiao dahui he difang geji renmin zhengfu zuzhi fa) adopted at the Second Session o f the Fifth National People's Congress on July 1, 1979, i n Compilation of Laws and Regulations (January-December 1979 ), supra note 63 at 4; Electoral L a w o f the National People's Congress and L o c a l People's Congresses o f the P R C (Zhonghua renmin gongheguo Quanguo renmin daibiao dahui he difang geji renmin daibiao dahui xuanjiifa) adopted at the Second Session o f the Fifth National People's Congress o n July 1, 1979, i n Compilation of Laws and Regulations (January-December 1979), supra note 63 at 18; Organic L a w o f the People's Courts o f the P R C (Zhonghua renmin gongheguo renmin fayuan zuzhi fa) adopted at the Second Session o f the Fifth National People's Congress on July 1, 1979, i n Compilation of Laws and Regulations (January-December 1979 ), supra note 63 at 29; Organic L a w o f the People's Procuratorates o f the P R C (Zhonghua renmin gongheguo renmin jianchayuan zuzhi fa) adopted at the Second Session o f the Fifth National People's Congress o n July 1, 1979, i n Compilation of Laws and Regulations (January-December 1979 ), supra note 63 at 4 0 ; C r i m i n a l L a w o f the P R C (Zhonghua renmin gongheguo xingfa) adopted at the Second Session o f the Fifth National People's Congress on July 1, 1979, i n Compilation of Laws and Regulations (JanuaryDecember 1979), supra note 63 at 4 8 ; and C r i m i n a l Procedure L a w o f the P R C (Zhonghua renmin gongheguo xingshi susongfa) adopted at the Second Session o f the Fifth National People's Congress o n J u l y 1, 1979, i n Compilation of Laws and Regulations (January-December 1979 ), supra note 63 at 87.  33  III.  Summary The policies underlying FICLBS seem to contradict each other.  On one hand, China  determines to keep on its opening up policy and makes constant efforts to join the world economy. On the other hand, as one of the last socialist countries, China has always been trying to maintain its own Chinese characteristics.  These policies account for the promulgation of Provisional  Regulations on FICLBS and constitute the basis of FICLBS.  However, the process of China's  opening up and economic reform is still unfolding and it is unclear where the process will go and with what result.  114  The possible change in Party and State policies will inevitably affect FICLBS  legal regime.  Robert F . Dernberger, " T h e Chinese E c o n o m y i n the N e w E r a : Continuity and Change" i n Bruce L . R e y n o l d s , e d . , Chinese Economic Policy: Economic Reform at Midstream ( N e w Y o r k : Paragon House, 1988) 89 at 9 0 . 1 1 4  34  CHAPTER III  I.  FICLBS AS A FORM OF FOREIGN INVESTMENT  FICLBS are based on the General Foreign Investment Regime Provisional Regulations on FICLBS expressly provide that FICLBS are a form of foreign  investment enterprises and shall be governed by the relevant legal provisions concerning foreign investment enterprises.  115  Unfortunately, no detailed rules are given to define "the relevant legal  provisions concerning foreign investment enterprises."  Nor do any rules be given to explain how  "the relevant legal provisions" are applied to FICLBS.  1.  How to apply foreign investment provisions to FICLBS Generally foreign investment enterprises refer to EJVs, CJVs and WFOEs. China's foreign  investment legal regime centres on separate laws and regulations addressing separate forms of foreign investment (i.e., EJV Law, CJV Law, WFOE Law and their Implementation Regulations), complemented  by  various  separate administrative  legislations.  116  Such  complementary  administrative legislations are also addressed to respective forms of foreign investment at the beginning of China's opening up. For example, Income Tax Law of Sino-foreign Equity Joint Ventures, Provisions Concerning Supervision, Levy and Exemption of Tariffs on Goods Imported and Exported by Sino-foreign Contractual Joint Ventures (Guanyu zhongwai hezuo jingying qiye  1 1 5  See P r o v i s i o n a l Regulations on F I C L B S , art. 3.  1 1 6  L u J o n g x i n g , supra note 54 at 76.  35 jinchukou huowu jianguan he zhengmian shui guiding) are addressed to EJVs and CJVs 117  respectively. The turning point came on October 11, 1986 when the State Council promulgated Provisions Concerning the Encouragement of Foreign Investment (Guowuyuan guanyu guli waishang touzi de guiding).  m  In these Provisions the concept of "foreign investment enterprises"  (waishang touzi qiye) was first used to refer to EJV, CJV and W F O E .  119  In order to implement  Provisions Concerning the Encouragement of Foreign Investment, the State Administration of Industry and Commerce (SAIC), General Office of Customs, PBOC, Ministry of Labour and 120  Personnel, MOFERT and Ministry of Finance enacted a series of administrative rules. Subsequently, the N P C integrated the tax system of foreign investment enterprises by promulgation of Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises which repealed the Income Tax Law of PRC for Sino-foreign Equity Joint Ventures and Income Tax Law of PRC for Foreign Enterprises.  121  The Income Tax Law for Foreign Investment Enterprises and Foreign  Promulgated b y T h e General Office o f Customs, the M i n i s t r y o f Finance and M O F E R T o n January 3 1 , 1984, i n Compilation of Laws and Regulations (January-December 1984), supra note 63 at 393. 1 , 8  In CCH: Business Regulations, v o l . 2 , supra note 1 \ 13-509.  1 1 9  Provisions Concerning the Encouragement o f Foreign Investment, art. 2 .  See L u J o n g x i n g , supra note 54 at 16-11. F o r example, Regulations o n the Right o f Autonomy o f Foreign Investment Enterprises i n the Hiring o f Personnel and o n Employees' Wages, Insurance and Welfare Expenses (Guanyu waishang touzi qiye yongren zizhuquan he zhigong gongzi, baoxian, full feiyong de guiding) promulgated b y the M i n i s t r y o f L a b o u r and Personnel o n N o v . 10, 1986, i n CCH: Business Regulation, v o l . 2 supra note 1 ^ 12-590. 1 2 0  A t the beginning o f these Regulations it is expressly provided that " [t]hese Regulations are formulated i n order to implement the State C o u n c i l Regulations concerning Encouragement o f F o r e i g n Investment." 1 2 1  See Income T a x L a w for Foreign Investment Enterprises and F o r e i g n Enterprises, art. 3 0 .  36  Enterprises confirms the general definition of foreign investment enterprises.  1 2 2  A n integrated  foreign investment legal regime was formed. When we try to determine whether a provision of foreign investment enterprises shall apply to FICLBS, the time of the enactment of such provision is of great significance.  Before the  Provisional Regulations on FICLBS were promulgated, FICLBS are not allowed to be established under the PRC law. Many provisions simply fail to consider this possibility. They deserve more consideration in detenniriing whether they shall apply to FICLBS. While those provisions made after the promulgation of Provisional Regulations on FICLBS can be reasonably assumed to have considered FICLBS.  So different rules shall be applied in detenriining which rules of foreign  investment apply to FICLBS.  1.1  Provisions promulgated after the Provisional Regulations on FICLBS. Based on the above assumption, we propose that only the provisions expressly refer to  foreign investment enterprises or foreign investment shall be applied to FICLBS. Those referring to EJV, CJV and WFOE or three forms of foreign investment enterprises (sanzi qiye) shall not apply to FICLBS. This is because FICLBS are the fourth form of foreign investment. They are different from EJVs, CJVs and W F O E s .  123  A r t i c l e 2 o f the Income T a x L a w for F o r e i g n Investment Enterprises and F o r e i g n Enterprises provides that foreign investment enterprises refer to E J V s , C J V s and W F O E s . 1 2 2  123  See supra notes 7-11 and accompanying text.  37 However, not all the provisions relating to foreign investment enterprises apply to FICLBS. There are dangerous exceptions. In the title of the Liquidation Methods for Foreign Investment Enterprises (hereinafter referred to as Liquidation Methods) promulgated by M O F T E C on July 9, 1996,  124  foreign investment enterprises refer to EJVs, CJVs and W F O E s .  125  These methods were  promulgated after Provisional Regulations on FICLBS were promulgated on January 10, 1995. Therefore, these methods shall not apply to FICLBS based on our previous conclusion that FICLBS are a fourth form of foreign investment. The liquidation of FICLBS has to be handled according to the PRC Company L a w .  1.2  126  Provisions promulgated before the Provisional Regulations on FICLBS. Provisions relating to foreign investment enterprises promulgated before the Provisional  Regulations on FICLBS can be divided into two categories. One is those provisions applying to the General Foreign Investment Regime, i.e. EJV, CJV and WFOE.  The other is those provisions  applying only to EJV and CJV. We propose the following rules: (i) Those relating to foreign investment enterprises or CJVs, EJVs and WFOEs shall apply to FICLBS.  For example, Income Tax Law for Foreign Investment Enterprises and Foreign  Enterprises applies to EJVs, CJVs and WFOEs. There is no legislative reason to prevent FICLBS  In CCH: Business Regulation, v o l . 2, supra note  1 f 13-608.  125  See L i q u i d a t i o n Methods for F o r e i g n Investment Enterprises, art. 2. A r t i c l e 25 o f the Provisional Regulations on F I C L B S provides that issues o f F I C L B S not covered i n these Tentative Regulations shall be handled according to P R C Company L a w and other relevant provisions. 1 2 6  38 from being governed by Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises and enjoying the preferential treatments.  For such purposes, one can reasonably  conclude that the reference to the three forms of foreign investment enterprises before the promulgation of Tentative Regulation on FICLBS should be automatically amplified and include FICLBS. This can be set up as a rule to define what is foreign investment enterprises. (ii) Shall the foreign investment regime applying only to EJVs and CJVs have binding force on FICLBS? Legal provisions only governing EJVs and CJVs shall not be regarded as "the relevant legal provisions concerning foreign investment enterprises" referred to in Article 3 of the Provisional Regulations on FICLBS because they do not govern WOFEs. They are not supposed to cover all the foreign investment enterprises. However, this does not mean that these provisions do not necessarily apply to FICLBS. There are exceptions. There exist similarities between EJV, CJV and FICLBS in that all of them involve Chinese partners, i.e. all of them are joint ventures. Hence where the basis of or reason for the provisions is an issue on which EJVs, CJVs and FICLBS bear similarity, these provisions shall apply to FICLBS.  For instance, China permits foreign investors to establish EJVs or CJVs to engage in 127  advertising.  We cannot certainly conclude whether FICLBS are also permitted to carry on  advertising. While in the case of Audit Methods for Sino-foreign Equity and Contractual Joint  See A r t i c l e 2 , Several Provisions concerning the Establishment o f Foreign Investment A d v e r t i s i n g Enterprises (Guanyu sheli waishang touzi guanggao qiye de ruogan guiding) j o i n t l y issued b y S A I C and M O F T E C o n N o v e m b e r 3, 1994 (Gong Shang G u a n Z i [1994] N o . 304) (copy on file w i t h the author).  39 128  Ventures (Zhongwai hezi hezuo jingying qiye shenji banfa),  the purpose of these Methods is to  ensure the maintaining and increase of State-owned assets. FICLBS involve Chinese partners as well, so the extent of need to strengthen State-owned assets administration is the same as in EJVs and CJVs.  The Audit Methods for Sino-foreign Equity and Contractual Joint Venture shall  therefore apply to FICLBS.  1.3  Provisions emphasising the characteristic of limited liability companies Those provisions governing foreign investment enterprises as limited liability companies  should not apply to FICLBS no matter when these provisions are enacted.  PRC Company Law  129  divides companies into limited companies and companies limited by shares.  All the EJVs, CJVs  and WFOEs are generally limited liability companies, different from FICLBS.  This is the basic  distinction between FICLBS and other three forms of foreign investment enterprises.  So any legal  provision concerning foreign investment that emphasises the characteristic of the foreign investment companies they govern as limited liability companies shall not apply to FICLBS. For example, can FICLBS be a holding company?  The Tentative Regulations on Foreign Investment Holding  Companies (Guanyu waishang touzi juban touzixing gongsi de zanxing guiding) specifically provide  These Methods were promulgated by the State A u d i t Office on January 12, 1993, i n Zhonghua renmin gongheguo falii fagui quanshu (Encyclopaedia o f L a w s and Regulations o f P R C ) , v o l . 5 (Beijing: Zhongguo minzhu fazhi chubanshe, 1994) 947 [hereinafter Encyclopaedia of Laws and Regulations]. 1 2 9  See P R C Company L a w , arts. 2 and 3.  40  that such companies shall be in the form of limited liability companies.  130  Such specific provision  can only be construed as prohibiting foreign investment holding companies to be FICLBS.  A l l of the above rules are not able to thoroughly solve the problems created by Article 3 of the Provisional Regulations on FICLBS. Many issues still remain unclear.  2.  Scope of FICLBS FICLBS, as a form of foreign investment companies, exclude a kind of companies which  meet almost all the requirements in the definition of FICLBS except for foreign promoters. Article 6 of the Provisional Regulations on FICLBS requires that the promoters of FICLBS shall include at least one foreign investor. Many of the domestic companies limited by shares established under PRC Company Law or its previous counterparts  131  whose foreign share capital exceeds 25% of the  total share capital through the issue of B shares in the domestic stock market and H (in Hong Kong) and N (in New York) shares in foreign capital markets are not regarded as FICLBS according to  Tentative Regulations on Foreign Investment Holding Companies issued by MOFTEC on April 4, 1995, in CCH: Business Regulation, vol. 2, supra note 1 f 13-400, art. 10. Before the promulgation of PRC Company Law, Regulating Opinions on Companies Limited by Shares (Gufen youxian gongsi guifan yijiari) and Regulating Opinions on Limited Liability Companies (Youxian zeren gongsi guifan yijian) promulgated by the State Commission for Restructuring Economic System on May 15, 1992 were regarded as provisional company laws in the shareholding experiment beginning from 1992. They can be found in Guowuyuan fazhiju (The Legal Bureau of the State Council), ed., Zhonghua renmin gongheguo xinfagui huibian 1992 di er ji (Compilation of New Law and Regulations of the PRC 1992 vol. 2), (Beijing: Zhongguo fazhi chubanshe, 1994) 199 and 234 respectively [hereinafter Compilation of New Laws and Regulations]. 131  41 Article 6 of the Provisional Regulations on FICLBS because they do not have foreign promoters.  132  Articles 21 to 23 of Provisional Regulations on FICLBS try to solve this problem by setting forth the procedures and requirements of transforming such companies into FICLBS.  The attitude  adopted by the Provisional Regulations on FICLBS (hence that of MOFTEC)  does not  acknowledge that these companies automatically become FICLBS. They.-must apply to M O F T E C and only after the grant of approval by MOFTEC and completion of a set of procedures can they 133  transform into FICLBS.  Before that, they should not be regarded as FICLBS.  Hence in  determining whether a company is a FICLBS not only the share structure is considered, historical factors are also considered. That is to say at least one foreign promoter is a part of the criteria of FICLBS, unless otherwise approved by the MOFTEC. Any company which issues foreign capital shares is subject to the strict State control by SCSPC and C S R C . shares, an approval of SCSPC shall be obtained.  135  134  Before issuing foreign capital  Why does MOFTEC require the additional  approval for these companies to become FICLBS? Is this double approval system necessary?  A r t i c l e 6 o f the P r o v i s i o n a l Regulations o n F I C L B S provides that no matter the F I C L B S are established through p r o m o t i o n or floating, they shall have at least one foreign promoter. 1 3 3  See P r o v i s i o n a l Regulations o n F I C L B S , arts. 20-23.  See Regulations o f the State C o u n c i l on Foreign Capital Shares Listed i n C h i n a by Companies L i m i t e d by Shares (Guowuyuan guanyu gufen youxian gongsi jingnei shangshi waizigu de guiding) promulgated 25 December 1995 by the State C o u n c i l , i n CCH: Business Regulation, v o l . 2, supra note 1 f 13-600, art. 7; Special Regulations o f the State C o u n c i l Concerning Floating and Listing o f Shares Overseas by Companies L i m i t e d by Shares (Guowuyuan guanyu gufen youxian gongsi jingwai muji gufen ji shangshi de tebie guiding) promulgated 4 August 1994 b y the State C o u n c i l , i n CCH: Business Regulation, v o l . 2, supra note 1 f 13-552, art. 4 . 1 3 4  Special Regulations o f the State C o u n c i l Concerning Floating and L i s t i n g o f Shares Overseas by Companies L i m i t e d by Shares, art. 10; Regulations o f the State C o u n c i l o n F o r e i g n Capital Shares Listed i n C h i n a b y Companies L i m i t e d by Shares, art. 5. 1 3 5  42 The double approval system can be justified by the need to distinguish foreign investment companies from ordinary domestic companies.  Provisional Regulations on FICLBS do not  mandate that all such companies shall apply to convert themselves into FICLBS. Theoretically, they have the discretion to choose whether to convert into FICLBS. Furthermore, the application for conversion does not guarantee that MOFTEC will grant approval.  In the case that such  companies do not apply or fail to convert into FICLBS, can they be regarded as foreign investment enterprises? This problem exists long before the promulgation of the Provisional Regulations on FICLBS.  After permitting selected domestic companies (mainly large State owned companies)  which were undergoing shareholding experiment to issue B, H and N shares, the problem of whether the above described companies are regarded as foreign investment enterprises began to emerge. Other ministries and departments also addressed this problem in their legislations before or after the promulgation of the Provisional Regulations on FICLBS by providing whether they are foreign investment enterprise. Different ministries and departments relating to the administration of foreign investment in PRC adopted similar views on this problem. CSRC and State Administration of Exchange Control (hereinafter SAEC) issued a joint notice on January 13, 1994 (before the Provisional Regulations on FICLBS were promulgated).  136  According to this notice, a domestic  enterprise which issues shares overseas if the foreign exchange capital amounts to or exceeds 25 % of the total amount of net assets of the enterprise, may according to the provisions of EJV Law apply to M O F T E C and other departments authorised by MOFTEC and go through relevant  Notice Concerning Relevant Questions on the Foreign Exchange Administration of Enterprises Listed Overseas (Guanyu jingwai shangshi qiye waihui guanli youguan wenti de tongzhi) (zheng jian fa zi [1994] No. 8) (copy onfilewith the author).  43  procedures of EJVs.  After approval, it can become an EJV and its issues relating to foreign 137  exchange shall be administered as a foreign investment enterprise.  On July 19, 1995 (after the  Provisional Regulations on FICLBS were promulgated) SAIC issued Opinions on Relevant Issues concerning the Implementation of Administrative Laws and Regulations on Company Registration Applicable to Foreign Investment Enterprises (Guanyu waishang touzi qiye dengji guanli shiyong gongsi dengji guanli fagui youguan wenti de zhixing yijian) under which a company limited by shares listed overseas after approval with foreign investment in excess of 25% of the company's shares will be regarded as a foreign investment enterprise after the approval by the Examination and 138  Approval Authority and issue of an approval certificate thereafter. In order to exclude the companies described above, the definition of FICLBS will add: at least one of its promoters shall be a foreign investor, unless otherwise be approved by M O F T E C . n.  Characteristics of FICLBS - a product of Party and State policies.  Notice Concerning Relevant Questions o n the Foreign Exchange A d m i n i s t r a t i o n o f Enterprises  Listed  Overseas, art. 4 .  v See Opinions o n Relevant Issues concerning the Implementation o f Administrative L a w s and Regulations o n Company Registration Applicable to Foreign Investment Enterprises, i n CCH: Business Regulation, v o l . 2, supra note 1 i( 13-588, art. 4(3). A p p r o v a l certificate is a document evidencing the approval o f a foreign investment enterprise. F o r a specimen o f such certificate, see Notice o f the M i n i s t r y o f F o r e i g n Trade and E c o n o m i c Cooperation Concerning Questions o n the U s e o f the N e w E d i t i o n A p p r o v a l Certificate o f the People's R e p u b l i c o f C h i n a for F o r e i g n Investment Enterprises (Duiwai jingji maoyi hezuo bu guanyu shiyong xingban zhonghua renmin gongheguo waishang touzi qiye pizhun zhengshu youguan wenti de tongzhi) promulgated 5 October 1993 by the M i n i s t r y o f F o r e i g n Trade and E c o n o m i c Cooperation, i n CCH: Business Regulation, v o l . 2 , supra note 1 \ 13-543. 1 3 8  44  Due to the policies underlying the FICLBS legal regime, FICLBS demonstrate some characteristics different from the general foreign investment enterprises.  In this section, we will  identify these differences and reveal the policies that account for these differences.  1.  Scope of Investors There is a significant development from EJV and CJV to FICLBS in terms of the scope of  the investors. Comparison between them reveals that the permitted scopes of foreign investors of the three forms of foreign investment are the same: foreign companies and/or enterprises, other economic organisations or individuals. The scopes of Chinese investors are also the same: Chinese 139  companies, enterprises and other economic organisations. PRC Constitution.  140  Such provision is a quotation from the  Apparently, individuals are prohibited from acting as Chinese partners in  EJVs, CJVs and FICLBS. Furthermore, MOFTEC and SAIC specify that the Chinese partners for EJVs and CJVs shall be enterprise legal persons or other economic organisations who are legal persons as defined in the General Principles of Civil Law. A l l non-legal persons are strictly prohibited from participation in joint ventures.  141  Although MOFTEC and SAIC make exceptions  See P r o v i s i o n a l Regulations o n F I C L B S , art. 1; E J V L a w , art. 1; and C J V L a w , art. 1. See Z h e n g Y a n z h u o et a l . , Zhongguo yanhai kaifang chengshi liyong waizi falti wenti (Legal Issues Concerning U s i n g F o r e i g n Investment i n Coastal Opening Cities i n China) (Shanghai: Shanghai Social A c a d e m y Press, 1994) at 3 7 . A r t i c l e 18(1) o f the P R C Constitution provides that the People's R e p u b l i c o f C h i n a permits foreign enterprises, other foreign economic organizaitons and individual foreigners to invest i n C h i n a and to enter into various forms o f economic cooperation w i t h Chinese enterprises and other economic organizations i n accordance w i t h the law o f the People's Republic o f C h i n a . 1 4 0  See Notice Concerning Strengthening the Examination and A p p r o v a l o f the L e g a l Person Status o f Chinese Partners i n Sino-foreign Equity Joint Ventures {Guanyu yange shenhe jtiban zhongwai hezi jingying qiye 1 4 1  45  — urban and rural individual industrial and commercial households (chengxiang geti gongshang hu), citizens engaged in industry and commerce through contracts (chengbao gongshangyie jingying de gongmin) and individual partnerships (geren hehuo), they can only be allowed to participate in joint ventures subject to special approval.  142  Some observers argue that under PRC Constitution,  these businesses are limited to "individual businesses of urban and country working people" (chengxiang laodongzhe geti jingji),,  143  foreign investment enterprises.  144  thus exclude the possibility of individuals to take part in  No provisions are found to address whether the above rules  apply to FICLBS. In China, Individual Industrial and Commercial Households, Rural Contracting Households and Individual Partnerships are legal concepts different from both legal persons and citizens although they are provided in the General Principles of Civil Law under the heading of Citizens (natural person).  145  Individual Industrial and Commercial Households refer to individual citizens or  households engaged in industrial and commercial operations within the scope permitted by law after examination and approval, with their individual assets or family assets as operation capital.  146  zhongfang faren zige de tongzhi) j o i n t l y issued by M O F T E C and S A I C o n September 2 1 , 1987, i n Encyclopaedia of Laws and Regulations, v o l . 8, supra note 128 at 105, art. 1. 1 4 2  Ibid. art. 4 .  1 4 3  P R C Constitution, art. 11.  1 4 4  See Zheng Y a n z h u o et a l . , supra note 140 at 3 7 .  1 4 5  W a n g L i m i n g , G u o M i n g r u i & Fang L i u f a n g , Minfa xinlun ( N e w Observations o n C i v i l L a w ) , v o l . 1  (Beijing: Zhongguo zhengfa daxue chubanshe, 1988) at 190-201, 321-323. T o n g R o u et a l . , Zhongguo minfaxue • minfa zongze (China's C i v i l L a w • General Principles o f C i v i l L a w ) (Beijing: Zhongguo renmin gongan daxue chubanshe, 1990) at 135. A l s o see General Principles o f C i v i l L a w , art. 2 6 . 1 4 6  46  Rural Contracting Households refer to the members of the rural collective organisations who are engaged in commodity operation through contract within the scope permitted by law.  147  Individual  partnership refers to the act or organisation of two or more persons who provide investment as agreed for the purpose of operate their common businesses.  148  Individual businesses have  developed quickly and dramatically during the past two decades with the deepening of reform and the development of China's economy. Up to the end of 1994, the number of people engaged in individual business nation-wide reached 37,759,000, and 21,866,000 in terms of households.  149  Individual businesses have become active participants in China's economy. The businesses of them have been expanded from the third line of industry to production, manufacture, real estate, high technology businesses.  The need of them to raise their production capacity and expand their  operation scale accounts for their urgent need of foreign capital and technology.  150  On the other hand, with the development of China's economy, the balance of personal savings of both urban and rural Chinese residents (chengxiang jumin chuxu cunkuan yu'e) had reached RMB3.79 trillion by the end of November 1996.  151  This is a very large amount of capital  General Principles o f C i v i l L a w , art. 27. A l s o see T o n g R o u et a l . , ibid, at 137. 1 4 8  1 4 9  General Principles o f C i v i l L a w , art. 30. A l s o see T o n g R o u et a l . , ibid, at 139. State Statistics Bureau, Zhongguo  tongji nianjian  (China Statistics Yearbook 1995) (Beijing: C h i n a Statistical  P u b l i s h i n g House (zhongguo tongji chubanshe), 1995) at 103. G a o Z i c a i , " S h i l u n zhongwai hezi j i n g y i n g qiye fa de wanshan" ( O n Perfecting the E J V L a w ) , Fujian xuekan (Fujian A c a d e m i c Journal), 1994. 2, at 61-66, reprinted i n Fuyin baokan ziliao: jingji faxue (Photocopied Materials in Newspapers and Magazines: Economic Law), 1994. 4, 51 at 52. 1 5 0  See T i a n L i , " W u o g u o chengxiang j u m i n chuxu cunkuan y u ' e chixu zengzhang" (The Balance o f Personal Savings o f Chinese U r b a n and Rural Residents Keeps Increasing,), Renmin ribao (People's D a i l y ) (overseas edition), D e c . 13, 1996, at 1. 151  47  in whatever sense. The good prospect of profitability of FICLBS will surely attract these capitals. These capitals will become a large resource for FICLBS in turn in the case that individuals are entitled to participate in FICLBS. Individuals and individual businesses can participate in FICLBS based on the following three levels of analysis: 152  (i) FICLBS may adopt the means of public issue to be established.  Where FICLBS are  established by means of public issue, the remaining shares after subscription by promoters shall be made available to the general public for subscription.  153  Hence in the process of establishment of  FICLBS, individuals, individual businesses and other economic forms of non-legal person are entitled to participate in FICLBS through the subscription of the shares of the FICLBS. (ii) In order for FICLBS to be listed on a stock market, shares issued to the general public must account for more than twenty-five percent (25%) of the total share issue. Where FICLBS have registered capital of more than RMB400 million, shares issued to the general public must account for at least fifteen percent (15%) of the total share capital.  154  Hence in the case that  FICLBS intend to become listed companies, they have to issue shares to the general public. (iii)  The PRC Company Law provides that the shares held by shareholders may be  transferred according to law.  155  However, no legal provision is found to prohibit shares to be  P r o v i s i o n a l Regulations on F I C L B S , art. 1. See P R C C o m p a n y L a w , art. 83. See P R C C o m p a n y L a w , art. 152(4). P R C C o m p a n y L a w , art. 143.  48 transferred to individuals. In the case of listed FICLBS, it is impossible to prohibit individuals to trade shares of FICLBS on the stock markets. In summary, it is impossible to exclude individuals, individual businesses and other nonlegal person economic organisations from participating in FICLBS. The scope of investors of FICLBS is a product of foreign access to the Chinese domestic stock markets. This gives foreign investors the opportunity to diversify their investments in China. In the meantime, it gives foreign investors more ways to get out of FICLBS. significance considering liquidation is difficult now in China.  This is of great  Foreign investors may through  selling their shares on the stock markets get out of FICLBS.  2.  Land Use Right - Three Rails Regime In China two major forms of obtaining land both for domestic and foreign investment  enterprises are granting and allocation. Land belongs to the State or is collectively owned by working people.  156  With regard to urban land in which most of the foreign investment enterprises  are located, the State, in accordance with the principle of separating the ownership of land from the right to use land, implements a system of the grant and allocation of the right to use State owned land.  157  Granted land use right means that the State, in its capacity as land owner, grants the right  L a w o f the P R C on L a n d Administration (Zhonghua renmin gongheguo tudi guanli fa) adopted at the Sixteenth Session o f the Standing Committee o f the Sixth N P C on June 2 5 , 1986, i n CCH: Business Regulation, v o l . 2 , supra note 1 f 14-716, art. 2. 1 5 7  Provisional Regulations o f P R C Concerning the Grant and Transfer o f the R i g h t to U s e State O w n e d L a n d i n  Urban Areas (Zhonghua renmin gongheguo chengzhen guoyou tudi shiyongquan churang he zhuanrang zanxing tiaoli) promulgated by the State C o u n c i l on 24 M a y 1990, i n CCH: Business Regulation, v o l . 2 , supra note 1 t 14-716, arts. 8 and 43 (hereinafter 1990 U r b a n L a n d Regulations).  49 to use land for a certain number of years to a land user and the land user pays to the State a fee for the grant of land use right. The consideration for such land use right and the land use conditions 158  shall be specified in a land use right granting contract signed between the State and land users. The considerations will be paid within 60 days after the execution of the land use right granting contract.  159  Upon full payment of the consideration, a land use certificate will be issued by the  State land administration departments.  160  The maximum terms for granted land use rights are fifty  (50) years in the case of land for industrial purposes.  161  Allocated land use rights refer to land use  rights lawfully acquired without consideration by land users from the State. limit for allocated land use rights.  162  There is no time  FICLBS can also obtain land use rights through these two  forms. In fact these are the only two forms through which domestic enterprises can obtain land use rights. As for foreign investment enterprises, there is an additional way to obtain land use right which is called the site use rights.  163  Well before the 1990 Urban Land Regulations, according to  the EJV Law of 1979, EJVs could obtain land use rights directly from the State in the form of site use right and could pay site use fees annually during the land use term. These fees were equivalent  1990 U r b a n L a n d Regulations, art. 8. 1 5 9  1990 U r b a n L a n d Regulations, art. 14.  1 6 0  1990 U r b a n L a n d Regulations, art. 16.  1 6 1  1990 U r b a n L a n d Regulations, art. 12.  1 6 2  1990 U r b a n L a n d Regulations, art. 4 3 .  N a n L u m i n g & X i a o Z h i y u e , Zhonghua renmin gongheguo dichan falii zhidu — tudi zhidu gaige ji tudi shiyongquan churang zhuanrang (Legal System o f L a n d Property i n P R C - R e f o r m o f L a n d System and the Granting and A l l o c a t i o n o f L a n d U s e Rights) (Beijing: zhongguo fazhi chubanshe, 1991) at 230-32. 1 6 3  50  in amount to the land use fee now applied in cases of land use right granting.  164  Although this site  use fee is stipulated in the EJV Law, it has been expanded to all other foreign investment enterprises.  165  This expansion has been confirmed by many State regulations and notices. State  authorities have been calling upon local authorities to strengthen the administration of the site use fee collected from the foreign investment enterprises according to this method. The Ministry of Finance and the State Land Administration Bureau issued a notice on collecting site use fee from foreign investment enterprises in 1995.  166  According to this notice, the government finance  departments at different levels shall establish a special account for site use fee collected from foreign investment enterprises which shall be exclusively used for saving and settlement of site use fee.  167  The site use rights constitute the third way for foreign investment enterprises to obtain land  use rights in addition to the allocation and granting as,provided in the 1990 Urban Land Regulations. They are called "two rails" land system (shuang gui zhi).  i68  As a form of foreign  investment, FICLBS shall also be entitled to the site use rights. Site use rights enable FICLBS to  E J V L a w , art. 5; Implementation Regulations o f E J V L a w , arts. 47-53. 1 6 5  N a n L u m i n g & X i a o Z h i y u e , supra note 163 at 2 3 1 .  N o t i c e C o n c e r n i n g Strengthening the Administration o f Collecting Site U s e Fee from F o r e i g n Investment Enterprises (Guanyu jiaqiang waishang touzi qiye changdi shiyongfei zhengshou guanli de tongzhi) j o i n t l y issued by the M i n i s t r y o f Finance and the State L a n d Administration Bureau o n M a r c h 15, 1995, i n Beijing fangdichan zazhi (Beijing Real Estate Journal), 1995. 10, at 17. 1 6 6  1 6 7  N o t i c e C o n c e r n i n g Strengthening the Administration o f Collecting Site U s e Fee from F o r e i g n Investment  Enterprises, art. 1. See M i n u t e s o f a M e e t i n g o n the L a n d U s e Administration o f F o r e i g n Investment Enterprises" (Waishang touzi qiye yongdi guanli gongzuo zuotanhui jiyao) issued by the State L a n d A d m i n i s t r a t i o n Bureau o n December 3 1 , 1990 (copy o n file w i t h the author). 1 6 8  51 pay the land use fees throughout their entire land use terms instead of within 60 days after obtaining land use rights in the case of granting. There is another form of obtaining land use right directly from the State unique to companies limited by shares. The Tentative Regulations on the Administration of Land Use Rights for Companies Limited by Shares (Gufen youxian gongsi tudi shiyongquan guanli zanxing guiding) issued by the State Commission for Restructuring Economic System and the State Land Administration Bureau grant companies limited by shares another way — leasing land from the State.  169  Under these Regulations, the State may lease land use rights to companies limited by 170  shares and shall collect rent periodically.  There is no reason to object to the application of these  regulations to FICLBS. Hence this provides the fourth way for FICLBS to obtain land use rights. Unfortunately, both the additional way for foreign investment enterprises and the additional way for companies limited by shares are inconsistent with the land granting and allocation regime. Thus FICLBS have a unique three-rail land use right system. Three-rail system derives from the policy of national treatment. It makes all the land use right obtaining forms available to foreign and domestic investment enterprises applicable to FICLBS. M O F T E C did not make specific analysis and simply put FICLBS in a position to enjoy all the treatments of domestic enterprises.  In fact, the conditions for national treatment are not  mature. The availability of the lease form to FICLBS creates many problems.  Promulgated i n 1994 (1994 G u o T u [Fa] Z i N o . 153) (copy on file w i t h the author). Tentative Regulations on the Administration of Land Use Rights for Companies Limited by Shares, art. 9.  52 Lease means an agreement under which owner gives up possession and use of his property for valuable consideration and for a definite term and at the end of the term owner has absolute 171  right to retake, control and use property.  However, under PRC legal regime of land use rights,  lease, as a form of disposing of land use right, has special meaning. According to the 1990 Urban Land Regulations, the land lease refers to the land user leasing the land use right to the lessee, 172  together with the building and other accessories on the land and the lessee shall pay lessor rent. The concept of land user is not expressly defined in the 1990 Urban Land Regulations. We understand that it does not include the State because the State is regarded as the land owner. Therefore, lease of land use rights is an activity by a party who has obtained the land use right 173  from the State or previous land users to dispose of the land use right.  It is not a form of  obtaining the land use rights directly from the State, it is a secondary disposition of land use rights. The lessor can only be a land user who has obtained land use rights from the State rather than the State itself. If we regard the allocation and granting of the land use rights from the State as the first level land market, lease, transfer and mortgage can be described as the second level land market.  174  The lease of land from the State is not consistent with the above land use system. Based on the above definition, it is provided that the land use right shall not be leased unless the lessor has invested in, developed and used land according to the provisions in the land use right granting 1 / 1  1 7 2  1 7 3  B l a c k ' s L a w Dictionary (6th ed., 1990) at 8 8 9 . 1990 U r b a n L a n d Regulations, art. 2 8 . N a n L u m i n g & X i a o Z h i y u e , supra note 163 at 155-57.  W a n g Jiafu et a l . , Shehui zhuyi shangpin jingji falii zhidu yanjiu (Research o n the Legal System o f Socialist C o m m o d i t y E c o n o m y ) (Beijing: Jingji kexue chubanshe, 1992) at 103-104. 1 7 4  53  contract.  175  It is impossible for such provision to apply to the lease of land from the State.  Furthermore, under PRC Law, the land use right and the ownership of the buildings on the land shall not be separated.  176  However, the land use rights obtained from the State through lease shall  not be transferred, subleased or mortgaged.  177  This means that the companies limited by shares  who obtained the land use rights from the State through lease shall not transfer, sublease, mortgage or otherwise dispose of the buildings thereupon because the land use rights cannot be freely disposed. In other words, such companies cannot have complete ownership of the buildings on the leased land. In usual cases, the land users will develop the land with their own funds. If in such cases the land users cannot enjoy complete ownership of the buildings, who will enjoy the remaining part of the ownership?  Nobody has valid legal basis to enjoy because all the  development and construction are done by the current land users. There is no need to create the additional form of lease. In fact, both land granting and land allocation are disguised forms of lease — the basic concept underlying these legal relationships is that the State retains the land ownership while the land users obtain the land use rights. On the other hand, FICLBS do not solve the problems remaining with site use rights. Site use rights are not allowed to be transferred by the site users under the Implementation Regulations of EJV Law which were promulgated in 1983.  178  At that time, China was exercising a gratuitous  1990 U r b a n L a n d Regulations, art. 2 8 . Such p r o v i s i o n is merely to prohibit trading o f land use rights without any investment o n the land (chaodipi). See W a n g Jiafu et a l . , ibid, at 109. 1 7 6  1990 U r b a n L a n d Regulations, art. 2 4 .  1 7 7  Tentative Regulations on the Administration o f Land Use Rights for Companies Limited by Shares, art. 9.  1 7 8  Implementation Regulations o f E J V L a w , art. 5 3 .  54  land use system. Land users do not have to pay consideration for the land use rights.  179  Therefore,  180  land use rights shall not be traded, leased or transferred at that time.  However, the gratuitous  land use system was proved to be problematic in entailing gross waste and misuse of land resources.  181  On April 12, 1988, the First Session of Seventh N P C passed an amendment to the  PRC Constitution which permits the transfer of land use rights according to the provisions of law and repeals the prohibition of lease of land use rights.  182  On December 29, 1988, the Fifth Session  of the Seventh N P C amended the Land Administration Law of PRC by adding such important provisions as "the use rights of State-owned and collectively owned land may be transferred according to law" and "the State adopts a system of using State-owned land with valuable consideration."  183  In 1990, the State Council promulgated 1990 Urban Land Regulations and  Provisional Administrative Measures Governing Commercial Land Development and Management 184  by Foreign Investors (Waishang touzi kaifa jingying chengpian tudi zanxing guanli banfa)  which  developed the constitutional principle of using State-owned land with valuable consideration into a Sun X i a n z h o n g , Guoyou tudi shiyongquan caichanfa lun (Property L a w o f State-owned L a n d U s e Rights) (Beijing: Zhongguo shehui kexue chubanshe, 1993) at 8. 1 8 0  P R C Constitution, art. 10.  1 8 1  Sun X i a n z h o n g , supra note 179 at 9.  1 8 2  Amendment to P R C Constitution (Zhonghua renmin gongheguo xianfa xiuzheng 'an) i n Compilation of Laws  and Regulations (January-December 1988) supra note 63 at 1, art. 2 . D e c i s i o n o f the Standing Committee o f the N P C Concerning R e v i s i n g " L a w o f P R C o n L a n d A d m i n i s t r a t i o n " (Quanguo renmin daibiao dahui changwu weiyuanhui guanyu xiugai "Zhonghua renmin gongheguo tudi guanli fa" de jueding) adopted at the Fifth Session o f the Standing Committee o f the Seventh N P C o n December 2 9 , 1988, i n Compilation of Laws and Regulations (January-December 1988), supra note 63 at 6 2 1 , art. 2 . 1 8 3  1 8 4  Promulgated b y the State C o u n c i l o n M a y 19, 1990, i n CCH: Business Regulation, v o l . 2 , supra note 1 H 14-  723.  55 detailed legal regime.  However, the Implementation Regulations of EJV Law are not revised  correspondingly. Because the Amendment to PRC Constitution provides that the land use rights may be transferred according to the provisions of law, the prohibition of transfer of site use rights may not necessarily be regarded as against the PRC Constitution. Nevertheless, land use rights which cannot be transferred are against the legal nature of the land use rights under the current legal regime. It is unfair for investors because they pay the same consideration as under the new land use system under which land use rights can be transferred freely. Furthermore, it is impossible to prohibit the land users from transferring land use rights in disguised forms.  3.  185  Foreign Investment Approval Provisional Regulations on FICLBS provide for a set of approval procedures consistent with  General Foreign Investment Regime.  This is in fact a double approval system by both the  provincial and central governments. It can be illustrated by the following chart:  Sun Xianzhong, supra note 179 at 66.  56  MOFTEC  contract articles of association.  FOREIGN T R A D E A N D E C O N O M I C D E P A R T M E N T S A T T H E P R O V I N C I A L L E V E L  application for establishment feasibility study report asset appraisal report  RESPONSIBLE G O V E R N M E N T AUTHORITIES A T T H E P R O V I N C I A L L E V E L  *  T h e vertical relationship i n this chart is double approval regime, i . e . applications for establishment,  feasibility study report and asset appraisal report shall be approved by both the second and third levels, w h i l e contracts and articles o f association shall be approved b y both the second and first levels.  For other foreign investment enterprises, relevant laws set thresholds of total amount of investment.  186  Projects above $10 million in interior areas or above $30 million in coastal areas  These do not include special foreign investment enterprises such as foreign investment h o l d i n g companies (touzixing gongsi). A c c o r d i n g to A r t i c l e 3 o f the Tentative Regulations Concerning F o r e i g n Investment H o l d i n g  57 shall be subject to the approval of the central government. approved by the provincial governments.  Those below the threshold shall be  The approval authorities at the provincial level can be 187  delegated to the local governments at the level of county, city and districts.  This approval  system was established gradually during the first decade after China adopted open-door policy in 1978. Due to various reasons, this system is very complicated and problematic. In summary, it can be illustrated by the following chart:  Companies, the approval authority and procedures FICLBS.  for foreign investment h o l d i n g companies are similar to  See E J V L a w , art. 3; C J V L a w , art. 5; W F O E L a w , art. 6; Implementation Regulations for E J V L a w , art. 8; Implementation Regulations for C J V L a w , art. 6; Implementation Regulations for W F O E L a w , art. 8; Several Complementary Provisions o f the State C o u n c i l Concerning the Development o f Foreign-oriented E c o n o m y i n Coastal Areas (Guowuyuan guanyu yanhai diqii fazhan waixiangxing jingji de ruogan buchong guiding) issued b y the State C o u n c i l o n M a r c h 2 3 , 1988, i n Yanhai yanjiang yanbian kaifang falii fagui ji guifanxing wenjian huibian ( C o m p i l a t i o n o f L a w s , Regulations and Regulating Documents Concerning Opening Areas A l o n g the Seas, R i v e r s and Boarders) (Beijing: F a l i i chubanshe, 1992) at 319; Notice o f the State C o u n c i l concerning Increase o f the A p p r o v a l A u t h o r i t y o f Interior Provinces, Autonomous Regions, M u n i c i p a l i t i e s w i t h Separate P l a n and Relevant Departments o f the State C o u n c i l i n Attracting F o r e i g n Investment {Guowuyuan guanyu kuoda neidi sheng, zizhiqu, jihua danlie shi he guowuyuan youguan bumen xishou waishang touzi shenpi quanxian de tongzhi) issued b y the State C o u n c i l o n J u l y 3, 1988, i n Encyclopaedia of Laws and Regulations, v o l . 8, supra note 128 at 39; and N o t i c e o f the State C o u n c i l concerning E m p o w e r i n g the People's Government o f Provinces, Autonomous Regions, M u n i c i p a l i t i e s Directly U n d e r the Central Government, Special E c o n o m i c Zones and M u n i c i p a l i t i e s 1 8 7  w i t h Separate P l a n to A p p r o v e W h o l l y F o r e i g n O w n e d Enterprises (Guowuyuan guanyu shouquan sheng, zizhiqu, zhixiashi, jingji tequ he jihua danlie shi renmin zhengfu shenpi waizi qiye de tongzhi) issued b y the State C o u n c i l o n June 9, 1988, i n Encyclopaedia of Laws and Regulations, v o l . 8, supra note 128 at 3 7 .  58  MOFTEC  Provinces, M u n i c i p a l i t i e s Directly  Special E c o n o m i c Zones  Municipalities w i t h Separate Plans  U n d e r the Central Government and Autonomous Regions  Coastal Cities Opening to the Outside  Counties,  Cities  and  Districts  The characteristics of simplicity and clear-cut of the approval system for FICLBS is a product of strict State control. It successfully avoids the confusions and problems created by the General Foreign Investment Regime.  The approval stage is the starting stage for a foreign  investment enterprise, so it deserves detailed analysis, (a)  Delegation of approval authority As for FICLBS, there is no provision for delegating approval authority. This spares many  problems deriving from delegation as provided in the General Foreign Investment Regime. Under the Chinese law, it is simply provided that provinces, autonomous regions, municipalities directly under the central government and municipalities with separate plans are entitled to delegate their approval authorities to the counties, cities and districts within their  59  respective jurisdictions.  188  Unfortunately, it is not clear who is the authority entitled to delegate.  Theoretically, it should be the authority which has the approval power. Other authorities have no approval power to delegate.  However, in practice, the delegation is made in some places and at  some time by local governments, government departments in charge of foreign investment or local People's Congress.  Nobody knows which form is correct.  Neither M O F T E C nor the State  Council has issued any regulation addressing this problem as yet. In this circumstance all the delegations have to be treated as legitimate because no legal basis is available to challenge any of them. Conflicts among the three forms are potential. Another problem is whether the delegation can be made after an ultra vires approval is made by an approval authority at a lower level. It is arguable that such after-approval delegation is within the power of the delegating authority. However, if permissible, after-approval delegation may create much confusion in practice. A n ultra vires approval shall be invalid and have no legal effect from the begirining.  189  The after-approval delegation may put the legal status of a foreign  investment project in a state of dangerous uncertainty because it can turn from invalid to valid at any time.  See Several Complementary Provisions o f the State C o u n c i f Concerning the Development o f Foreign-oriented E c o n o m y i n Coastal Areas, art 1; and Notice concerning the A p p r o v a l o f Contracts and Articles o f Association o f F o r e i g n Investment Enterprises b y Interior Provinces, Autonomous Regions, M u n i c i p a l i t i e s w i t h Separate Plans and Relevant Departments o f the State C o u n c i l (Guanyu neidi sheng, zizhiqu, jihua danlie shi he guowuyuan youguan bumen shenpi waishang touzi qiye hetong, zhangcheng de tongzhi) issued b y the M O F T E C o n August 20, 1988 ((88) W a i Jing M a o Z i Z o n g Z i , N o . 220) (copy o n file w i t h the author). Urgent N o t i c e Concerning the Current A p p r o v a l o f F o r e i g n Investment Enterprises {Guanyu dangqian shenpi waishang touzi qiye youguan wenti de jinji tongzhi) issued b y the General Office o f the State C o u n c i l o n N o v e m b e r 2 2 , 1995, art. 4 (copy o n file w i t h the author). 1 8 9  60 A closely related problem is the ambiguity of the legitimacy of "one delegation for one project".  Can the relevant provisions of PRC law be construed as limited to a whole-sale  delegation? It is not clear whether an upper approval authority can delegate approval power to the authorities at county, city and district level for only one specific foreign investment project. No legal provision is found expressly addressing this question, (b)  Circumvention of central government approval Multilevel approval regime makes it possible to circumvent the central government  approval. This can be achieved through two ways: the first is ultra vires approval, the second is to divide a project into various ones to lower their respective total amounts of investment under the approval threshold. Although Chinese government changes its soft attitude and becomes tough on this issue by issuing two notices expressly prohibiting these two kinds of approvals and declared them invalid in 1994 and 1995 respectively, this remains a big issue for foreign investors due to 190  A r t i c l e 4 o f Urgent Notice Concerning the Current A p p r o v a l o f F o r e i g n Investment Enterprises provides that all the approvals concerning foreign investment enterprises w h i c h do not comply, w i t h the conditions, approval power thresholds and procedures set by the State or w h i c h fail to be reported for record shall be i n v a l i d . The customs offices, tax authorities and administrations o f industry and commerce shall not handle relevant procedures with them.  Sub (3), Sub (6) o f A r t i c l e 3 o f Notice o f the State C o u n c i l F o r w a r d i n g the Report o n E x a m i n a t i o n o f F i x e d Assets Investments {Guowuyuan pizhuan guanyu guding zichan jiancha gongzuo qingkuang the State C o u n c i l o n June 11, 1994 (Guo F a [1994] N o . 36) (copy o n file with the author) provides that approvals concerning E J V , C J V and W F O E projects above the approval thresholds shall be made according to the relevant provisions o f the State. It is prohibited to divide a project into several ones for the purpose o f avoiding the approval o f the State. H o w e v e r , the notice is much softer o n the legal consequences o f such d i v i s i o n . Sub 3, A r t i c l e 3 o f the same notice provides that all the projects contravening the above provisions shall be stopped temporarily and relevant approval formalities shall be made up.  de tong  61 various reasons including the conflicts between local and central governments.  191  This greatly  affects the confidence of foreign investors in China's foreign investment legal environment. By a clear-cut double examination and approval regime, the approval regime for FICLBS eliminates delegation of approval authority and multi-level approval. All of the above problems are avoided successfully. It is in the interests of foreign investors not to face the above serious and sometimes insoluble problems entrenched in the general foreign investment approval regime.  4.  Dissolution Matters relating to the dissolution and bankruptcy of FICLBS are provided in the PRC  Company Law. Provisional Regulations on FICLBS do not have any reference to this issue. Other foreign investment enterprises are governed by EJV Law and its implementation regulations, CJV Law and its implementation regulations, WFOE Law and its implementation regulations and the 192  newly issued Liquidation Methods for Foreign Investment Enterprises.  Chapter 19 of the Civil  Procedure Law — Bankruptcy and Repayment Procedures apply to all enterprise legal persons which include FICLBS and most foreign investment enterprises. Bankruptcy Law applies only to State-owned enterprises.  193  In China, the Enterprise  A new bankruptcy law aiming at all  See N i c h o l o s H o w s o n , " W h e n the Centre doesn't H o l d " , The China Business Review, January-February 1995, 8 at 8-12. A c c o r d i n g to A r t i c l e 2 o f L i q u i d a t i o n Methods for F o r e i g n Investment Enterprises, these Methods o n l y apply to E J V s , C J V s and W F O E s . Presumably, they do not apply to F I C L B S . See supra notes 124-26 and accompanying text. 1 9 2  See L a w o f the People's R e p u b l i c o f C h i n a o n Enterprise Bankruptcy (Zhonghua renmin gongheguo qiye puochan fa) (for trial implementation) adopted on December 2 , 1986 at the Eighteenth Session o f the Standing Committee o f the Sixth N P C , i n CCH: Business Regulation, v o l . 2, supra note 1 f 13-522, art. 2 . 1 9 3  62 enterprise legal persons, enterprises without legal person status and their investors is being drafted by the N P C .  1 9 4  Besides the above laws and regulations, Accounting System of PRC for Foreign  Investment Enterprises (Zhonghua renmin gongheguo waishang touzi qiye kuaiji zhidu)  195  and other  accounting and financial provisions provide for some regulations in regard of assets evaluation. Under PRC law, FICLBS may be terminated in the case of insolvency and/or dissolution. A liquidation is mandatory in most cases. According to PRC Company Law, FICLBS may be dissolved in one of the following three circumstances: (i) expiration of the term of the company or an event leading to the dissolution of FICLBS according to articles occurs; (ii) the shareholders' meeting decides to dissolve the FICLBS; (iii) FICLBS conduct mergers or divisions which lead to the dissolution of the F I C L B S .  196  FICLBS shall also be dissolved in the case of being ordered to 197  close because of violating laws and administrative regulations.  This is the fourth case of  dissolution for FICLBS. PRC Company Law provides that where FICLBS are lawfully declared insolvent for having been unable to satisfy their debts, the People's Courts concerned shall, in compliance with relevant laws, organise the shareholders, persons from the relevant departments and relevant professionals to  See "Quanguo renda caijingwei bangongshi fuzeren jiu xin puochanfa wenti da benkan jizhe wen" (Responsible Officer o f the General Office o f the Finance and E c o n o m i c C o m m i s s i o n o f the National People's Congress A n s w e r i n g Questions Posed by Press), Gaige yuebao (Reform M o n t h l y ) , 1996. 2 , 36 at 3 6 . 1 9 5  Promulgated by the M i n i s t r y o f Finance on June 2 4 , 1992, i n CCH: Taxation, supra note 62 ^ 35-501.  1 9 6  P R C C o m p a n y L a w , art. 190.  1 9 7  P R C C o m p a n y L a w , art. 192.  63 form a liquidation committee for the liquidation of the FICLBS.  198  In this case, the Bankruptcy  and Repayment Procedures of the Civil Procedure Law shall apply. In the above two cases, except for FICLBS conducting mergers or divisions, FICLBS shall go through liquidation procedures and a liquidation committee shall be set up. This regime complies with the long-established termination regime for foreign investment enterprises by eliminating some problems in the later system. The old termination regime requires liquidation for all circumstances of termination.  199  Presumably, in a merger or division where the  business goes on, liquidation is not necessarily needed.  Hence the Provisional Regulations on  FICLBS provide for the exception. However, the legal regime of FICLBS does not address a long-argued problem — the relationship between buyout and liquidation. In the case of buyout, just the same as merger and division, liquidation may be inappropriate and inefficient if the business is to continue. Because the shares of each shareholder can be freely transferred under the PRC law,  200  it is quite possible that  the foreign shares of FICLBS are bought by domestic investors and the foreign capital is lower than 25% of the registered capital of FICLBS or there is even no foreign capital in the FICLBS. It is also possible that the Chinese shares are purchased by foreign investors and the FICLBS have no Chinese domestic shares at all. Both the above situations disqualify the companies as FICLBS,  l M  1 9 9  P R C C o m p a n y L a w , art. 189. See Implementing Regulations for E J V L a w , arts. 102 and 103; Implementation Regulations for C J V L a w ,  arts. 48 and 49; Implementation Regulations for W F O E L a w , arts. 75 and 76. 2 0 0  P R C C o m p a n y L a w , art. 143.  64 because FICLBS are defined as companies whose shares shall be jointly held by Chinese and foreign shareholders and shares purchased and held by foreign shareholders shall constitute more 201  than 25% of the registered capital.  In either of these circumstances, may the business continue  without being liquidated? This is the continuance of an old question for EJV which raised much debate. In the case of a buyout, the foreign capital of an EJV may rise to 100% or decrease to lower than 25% of the registered capital of the EJV. In either case, the business entity would have to be dissolved and reincorporated in a different form. This suggests that a mandatory liquidation 202  would follow the dissolution.  Some Chinese lawyers and accountants address this question by  challenging the meaning of liquidation. They argue that liquidation includes the form of a transfer of property rights (chanquan zhuanrang) and a continuance of operations by the PRC partner to the 203  EJV when the EJV contract expires or terminates prematurely.  This opinion was arguable at that  time because it is true that no specific definition or a clear description of liquidation was given. However, with the promulgation of Liquidation Methods for Foreign Investment Enterprises, the above opinion is becoming questionable.  The Liquidation Methods for Foreign Investment  Enterprises suggest that liquidation in China is used in its strict sense, just the same as in the common law countries. Under common law, liquidation refers to the process of reducing assets to 201 Provisional Regulations on F I C L B S , art. 2. 2 0 2  See Helena K o l e n d a , " A Happy E n d i n g : Buy-out i n Chinese-Foreign Joint Ventures" (1989) 24 Texas I n t ' l  L . J . 87 at 92-93. Presumably, it is the same i n the case that only foreign investors remain w i t h the business.  Ibid, at 9 1 .  65 cash, discharging liabilities and dividing surplus or loss, it occurs when a corporation distributes its net assets to its shareholders and ceases its legal existence. meaning suggested above.  204  This clearly precludes the other  Although the Liquidation Methods do not apply to FICLBS, they  clearly have importance in reference as the first PRC regulations which formally define liquidation and provide for specific and detailed procedures thereof. As far as we understand, FICLBS can only be terminated by bankruptcy and dissolution. The dissolution only takes place under the four conditions set forth above which do not include the change of the nature of the business of the FICLBS. Hence, unless the articles of association of FICLBS expressly provide otherwise, the change of business nature shall trigger neither dissolution nor liquidation. During the liquidation, valuation of assets is usually a major concern.  Neither the  Provisional Regulations on FICLBS nor the PRC Company Law addresses how to evaluate the assets of FICLBS.  Whether the value of assets shall be book value or market value and  whether the good-will shall be included in liquidation assets are major concerns for both Chinese and foreign investors.  Since the PRC Company Law provides that the liquidation  committee shall be responsible for undertaking a stock-take of the assets and preparing Balance 205  Sheet,  the way to evaluate the assets seems to be determined by the liquidation committee  unless expressly provided in the articles of association of the FICLBS. In practice, evaluation  See Black's Law Dictionary (6th ed., 1990) at 931. P R C C o m p a n y L a w , art. 193(1).  66 has been negotiated by parties to EJVs before the emergence of the FICLBS.  The  Liquidation Methods for Foreign Investment Enterprises confirm this practice in their provisions and further provide detailed rules with regard to the evaluation of liquidation  (i) in the case there are provisions in the Contract or Articles of Association, the evaluation shall be handled according to these provisions; (ii) in the absence of provisions in the Contract or Articles, the evaluation shall be determined through negotiation by Chinese and foreign investors and shall be reported to the examination and approval authority for approval; (iii) in the case that there is no provision in the Contract or Articles and the Chinese and foreign investors fail to reach any agreement, the evaluation shall be determined by the Liquidation Committee according to the relevant provisions of the State and in reference to the opinions of assets appraisal organisations and shall be reported to the examination and approval authority for approval; and (iv) in the case of the termination of an enterprise contract according to a decision by a court or arbitration organisation and in which the assets evaluation methods are provided, the evaluation shall be conducted according to the decision. The above provisions are clear and reasonable.  The evaluation of liquidation assets of  FICLBS shall be conducted in reference to these provisions. As for individual FICLBS, the best way is to make detailed provisions in the articles of association of the FICLBS. The professional advice of lawyers and accountants shall be consulted. Such clauses in the contract or articles of association as allowing the participation of accountants or appraisers appointed by each promoter  See John F r i s b i e & D a v i d B e n K a y , "Joint Venture D i s s o l u t i o n " , C h i n a Business R e v i e w , N o v - D e c 1990, 42 at 4 4 . 2 0 7  Measures O n L i q u i d a t i o n Procedures for F o r e i g n Investment Enterprises, art. 29.  67 shall be recommended.  This will ensure the smooth conducting of assets evaluation in a  liquidation.  DU.  Summary FICLBS are a product of a set of State policies on the basis of the General Foreign  Investment Legal Regime. FICLBS develop the General Foreign Investment Legal Regime but new problems simultaneously occur. These developments and new problems must be understood in the context of Party and State policies.  68  CHAPTER IV FICLBS AS A FORM OF COMPANY  The Provisional Regulations on FICLBS are very simple. They contain only 38 articles which mainly address the definition, approval and establishment procedures of FICLBS. The legal regime of FICLBS in terms of corporate capacity, structure, governance, share issue, dividend distribution, insolvency, dissolution and liquidation are governed by the P R C 208  Company Law.  FICLBS are different from the General Foreign Investment Regime in the  context of company law. That is the reason why FICLBS shall be reviewed separately in the contexts of foreign investment and company legal regimes. I.  Common law influences on F I C L B S In the past few years, China fastens her steps to enact laws relating to socialist market  economy and has made great progress. Much of the progress has been ascribed to the bold use and absorption of foreign legislative achievements and the introduction of international practices.  209  210  Much attention has been given to the civil law origins of the PRC company law statutes. However, they also have very significant common law counterparts.  In addition to the great  influence of civil law, FICLBS regime uses principles and conventions drawn from common law See P r o v i s i o n a l Regulations o n F I C L B S , art. 2 5 . See G e n g Y u x i n , " R e f o r m Advance Relies on Legislation - Coverage o f the N P C and C P P C C Sessions" (1994) Beijing Review, v o l . 37, N o . 11 at 4.  2 0 9  210  See generally Preston M . Torbert, "Broadening the Scope o f Investment" Review 48.  (1994) 21 T h e C h i n a Business  69 and represents an important step toward international business practices.  211  The contents of the 212  PRC Company Law are viewed as "generally consistent with common law principles".  The  common law influence on FICLBS legal regime is extensive and is impossible to be exhausted. The followings are just some illustrations of important impacts of common law on FICLBS legal regime. 1.  Limited liability The total capital of FICLBS is divided into capital shares. Each shareholder shall assume  liabilities toward the company to the extent of the amount of shares held by him. The company shall be liable for its debts to the extent of all its assets.  213  FICLBS are enterprise legal persons.  214  Although the concept of legal person is different from that of its counterparts in the common law,  215  FICLBS are separate legal entities distinct from their incorporators. Both FICLBS and their  investors are entitled to limited liabilities. Under the common law, the same principle was firmly established by Salomon v. Salomon & Co., Ltd?  16  This case established beyond doubt that in law  See Robert C . A r t & M i n k a n g G u , " C h i n a Incorporated: The First Company L a w o f the People's R e p u b l i c o f C h i n a " (1995) 20 Y a l e J . Int'l L . 273 at 275.  2 1 1  2 1 2  See L i t t l e , supra note 93 at 63.  2 1 3  Provisional Regulations on F I C L B S , art. 2; also see P R C Company L a w , art. 3.  2 1 4  See Provisional Regulations on F I C L B S , art. 2.  F o r a discussion o f the Chinese concept o f legal person, see G u i g u o W a n g & R o m a n Tomasic, China's Company Law: An Annotation (Singapore: Butterworths A s i a , 1994) at 8. Legal person is generally regarded as a European c i v i l law concept. See infra note 320 and accompanying text.  2 1 5  2 1 6  [1897] A . C . 22.  70 a registered company is an entity distinct from its members (even if one person holds almost all of the shares in the company). common law countries. creatmg companies.  2.  218  217  This principle has been codified in many corporate statutes in  Limited liability is often said to be one of the practical reasons for  219  Constitution of the company Common law, by regarding the memorandum and articles of association as agreements  between the company and the members and the members inter se, establishes the governing 220  position of the memorandum and articles of association in a company.  In China, every FICLBS  shall adopt articles of association from the beginning of setting up the company.  They are the  constitution of the company. The articles have biding force on the company, the shareholders, directors, supervisors and managers of the company.  3.  221  Registration of shareholders  See L . H . L e i g h , V . H . Joffe & D . G o l d b e r g , Northey and Leigh's Introduction to Company Law, e d . ( L o n d o n : Butterworths, 1981) at 18-19. 2 1 8  See, for example, Canada Business Companies A c t , R . S . C . 1985, c. c-44, art. 45 [hereinafter  2 1 9  Bruce W e l l i n g , Corporate Law in Canada, 2 d ed. (Toronto & Vancouver: Butterworths, 1991) at 82.  2d  CBCA].  L . C . B . G o w e r , D . D . Prentice & B . G . Pettet, Principles of Modern Company Law, 5th ed. ( L o n d o n : Sweet & M a x w e l l , 1992) at 282-88. 2 2 0  2 2 1  See P R C Company L a w , art. 11.  71 Common law splits on whether the shareholders of a company should be registered. British Columbia Company Act (hereinafter B C C A )  2 2 2  adopts the term "member" whose name  223  should be entered in the company register.  B C C A requires that every company shall keep a  register of its members and shall promptly enter in it the names of the subscribers to the memorandum and the name of every other person who agrees to become a member of the 224  company. Every company that fails to do so commits an offense.  Every share certificate  shall state on its face the name of the person to whom the certificate is issued. Hence the 225  bearer and  order forms of share certificates are excluded.  certificate may be in bearer, order or registered form.  226  While under C B C A , share A company shall maintain a  securities register in which it records the securities issued by it in registered form, showing, inter alia, the name and the latest known address of each person who is or has been a security holder.  227  PRC Company Law demonstrates similarity with the C B C A model. Under the P R C Company law, shares issued by a company to promoters, State-authorized investment institutions or legal persons shall be in the form of registered shares which shall state the  R . S . B . C . 1979, c. 5 9 . B C C A s. 1(1). B C C A ss. 67(1) and (3). B C C A s. 5 1 ( l ) ( b ) . C B C A s. 48(2). C B C A s. 50(l)(a).  72 names of the promoters, State-authorized investment institutions or legal persons. Such shares may not be registered under any other name, or under the name of a representative or a third party.  228  shares.  229  Shares issued to the general public may be either registered shares or bearer Hence the general public may purchase bearer shares which the companies do not  maintain records of ownership.  However, the statute does not provide a mechanism for  identifying the owner of bearer shares for voting or distributing dividends. The owners of bearer shares have to present their certificates to the company.  4.  230  Corporate governance Common law adopts the principle of separation of ownership and control in the case of 231  public companies.  232  Despite the fact that FICLBS may be either public or private companies,  in  FICLBS' power sharing structure, ownership and management are also separated to a limited extent although the functions of the general meetings are different from common law.  Management  functions are exercised by the board of directors subject to the supremacy of the shareholders in the general meeting.  233  T h e purpose o f this p r o v i s i o n is to prevent the transfer o f State-owned assets to private sector. 2 2 9  P R C C o m p a n y L a w , art. 133.  2 3 0  See A r t & G u , supra note 211 at 302.  2 3 1  G o w e r , Prentice & Pettet, supra note 220 at 7 1 .  2 3 2  See infra notes 297-304 and accompanying text.  P R C C o m p a n y L a w , art. 112. A l s o see W a n g Baoshu, "Gufen youxian gongsi jiguan gouzao zhong de dongshi he dongshihui" (Directors and Board o f Directors i n the Corporate Structure o f Companies L i m i t e d by 2 3 3  73 Directors' and managers' fiduciary duties to the company under the common law are also incorporated into the FICLBS. Fiduciary duties are legal norms that are imposed on directors and managers in relation to their conduct with the company and shareholders.  234  These duties ensure  that the myriad corporate actors carry out their respective duties with the utmost good faith, do not put themselves in a position where their duties may conflict with self-interests, and do not derive a secret profit from their offices.  235  At present many common law statutes codify the fiduciary duties  of directors and managers as "[to] act honestly and in good faith with a view to the best interests of the company" in exercising their powers and discharging their duties.  236  Directors and managers  are also required to comply with law, articles of association and unanimous shareholders' 237  agreement.  This is called the complying duties of the directors.  In China directors and  managers of FICLBS are also required to abide by the articles of association of the company, faithfully perform their duties and protect the interests of the company. They are not allowed to use their positions in the company to seek personal gains.  Shares), i n L i a n g H u i x i n g , ed., Minshangfa Luncong (Essays on C i v i l and C o m m e r c i a l L a w s ) , v o l . 1 (Beijing: falu chubanshe, 1994) 105 at 114-15. Some commentators argue that the inclusion o f fiduciary duties demonstrates certain community values, such as responsibility, fairness and integrity that the law wishes to foster i n individual relations. See Jacob S. Z i e g e l et a l . , Cases and Materials on Partnerships and Canadian Business Companies, 2 d ed. (Toronto: C a r s w e l l , 1989) at 491. Some commentators debate on whether fiduciary duties are merely an instrument that control agency costs. See Frank H . Easterbrook & Daniel R . F i s c e l , "Corporate Control Transactions" (1982) 91 Y a l e L . J . 698, V i c t o r Brudney, "Corporate Governance, A g e n c y Costs, and the Rhetoric o f Contract" (1985) C o l . L . R e v . 1403, Robert C . C l a r k , " A g e n c y Costs versus F i d u c i a r y D u t i e s " , i n John W . Pratt & Richard Zeckhause, eds, Principals and Agents: The Structure of Business (Boston: Harvard Business School Press, 1985) 55. 2 3 4  2 3 5  Z i e g e l et a l . , ibid, at 4 9 1 .  2 3 6  See C B C A , art. 122(l)(a).  2 3 7  See C B C A , art. 122(2).  74  5.  The presumption of equality of shares The presumption of equality of shares was well developed under common law.  It  refers to the presumption in corporate law that all shares of a company are to be treated equally in the absence of statutory provisions to the contrary or otherwise provisions in the corporate constitution.  238  Each share is presumed to be equal to every other share in terms of  the rights it embodies. These rights include: (i) dividends, (ii) return of capital on a winding up (or authorized reduction of capital), and (iii) attendance at corporate meetings and voting.  239  As a result of this presumption, risk, control and participation in profits are equally  distributed on a per-share basis unless the capital structure is subdivided into types (conventionally called "classes") of shares.  240  The presumption of equality of voting rights is codified in various company acts in Canada. Both C B C A and B C C A have statutory provisions that each share carries one vote unless the articles otherwise provide.  241  The Supreme Court of Canada and British Columbia  There are debates over whether all shareholders o f a class must be treated equally or simply the rights that are constitutive o f shares o f a given class must be the same for all shares o f that class. See F . H . B u c k l e y , M a r k G i l l e n & Robert Y a l d e n , Companies — Principles and Policies, 3d ed. (Toronto: E m o n d M o n t g o m e r y , 1995) at 194. T h e narrower proposition is more widely accepted and G o w e r ' s view that " a l l shares confer the same rights and impose the same liabilities" is often quoted to support this proposition. F o r example, i n Jacobson v . United Canso Oil & gas Ltd., [1980] 6 W . W . R . 38 ( A l t a . Q . B . ) , Justice Forsyth quoted G o w e r . T h e Supreme Court o f Canada, i n The Queen v . McClurg, [1990] 3 S . C . R . 1020, held that the presumption o f equality was among the shares rather than among the shareholders. 2 3 9  See G o w e r , Prentice & Pettet, supra note 220 at 3 6 1 .  2 4 0  W e l l i n g , supra note 219 at 605.  See C B C A s. 140(1) and B C C A s. 185(c). Their wordings are slightly different. C B C A s. 140(1) provides that, "[u]nless the articles otherwise provide, each share o f a company entitles the holder thereof to one vote at a  2 4 1  75 Court of Appeal confirmed the presumption of equality of shares in terms of dividends and participation in distribution on the winding up of the company. PRC Company Law codifies the presumption of equality of shares as well. Under P R C Company Law, equal shares shall be entitled to equal rights and equal benefits. Company Law does not specifically refer to share class.  244  243  PRC  Therefore it is ambiguous what  constitute "equal shares". With regard to the right of dividends, PRC Company Law expressly provides that equal shares shall be entitled to equal benefits.  245  After the company's debts have been paid out in  the case of winding up, FICLBS should distribute the remaining assets according to the shareholders' shareholding ratio.  246  With respect to voting rights, P R C Company Law rigidly  meeting o f shareholders." B C C A s. 185(c) provides that, "[u]nless the articles o f a company otherwise provide, every member shall have one vote i n respect o f each share held b y h i m . " It should be noted that under B C C A , "member" is defined as a subscriber o f the memorandum o f the company, and includes every other person w h o agrees to become a member o f a company and whose name is entered i n its register o f members or a branch register o f members, see B C C A s. 1(1). Hence under B C C A , beneficial shareholders are excluded w h i l e C B C A does not have such restriction. 2 4 2  See The Queen v . McClurg,  supra note 238 and Muljo v . Sunwest Projects Ltd.(\99\),  2 B . L . R . (2d) 221  (B.C.C.A.). 2 4 3  P R C C o m p a n y L a w , art. 130.  Some sources translate the words "tong g u " i n art. 130 o f P R C Company L a w as shares o f the same class, see A r t & G u , supra note 211 at 301 and C C H Translation, supra note 3 . T h e original Chinese words "tong g u " do not specifically refer to the same class. " [ T ] o n g " only generally means the same and " g u " means share(s). A correct translation can be found i n W a n g & Tomasic, supra note 215 at 113 i n w h i c h art. 130 is translated as "equal shares for equal rights and equal shares for equal benefits." 2 4 4  2 4 5  P R C C o m p a n y L a w , art. 130. P R C C o m p a n y L a w , art. 195.  76 provides that each share shall give the right to one vote at a shareholders' meeting.  247  Without  the permissive provision that the articles of a company may otherwise provide as Canadian law,  248  FICLBS cannot differentiate voting rights among shares. Such rigid adherence to the  principle of equality of shares is contrary to the well-established business practice to differentiate shares into classes and many problems arise. We will discuss this later.  6.  The consideration for shares Under common law, shares may be issued for money, or, subject to observance of  statutory formalities, for money's worth, i.e., assets, services or some other valuable consideration.  249  For example, both B C C A and C B C A provide that the consideration for 250  shares may be paid in money or m property or past services.  This provides necessary  flexibility for the company to raise capital through the issue of shares. P R C Company Law permits the promoters of the company to purchase shares with cash, tangible assets, industrial property rights, non-patented technology or land use rights.  1  P R C Company L a w , art. 106.  2 4 8  Supra note 241 and accompanying text.  251  Such provision can be  H . Sutherland, ed., Fraser's Handbook on Canadian Company Law, 8th ed. (Ontario: C a r s w e l l , 1994) at 111 [hereinafter Sutherland, Fraser's Handbook].  2 4 9  2 5 0  See B C C A s. 43(2) and C B C A s. 25(3).  P R C C o m p a n y L a w , art. 80. It is interesting to note that P R C Company L a w is totally silent o n whether other investors can purchase the shares o f a company i n the form o f property or service. 2 5 1  77 exhaustive and implies that services are not allowed to trade for shares.  252  Notwithstanding  such difference, the permission of tangible and intangible property as consideration of shares gives great flexibility to FICLBS investors under PRC Company Law.  7.  Pre-emptive rights Pre-emptive right on share issues refers to a right of shareholders whereby the company  must offer existing shareholders the opportunity to subscribe for a new share offering in the 253  proportion that their shareholdings bear to the total number of shares issued and outstanding. Pre-emptive rights may serve two functions. First, it can make it difficult for managers of the company to issue shares for the purpose of defeating a current or anticipated takeover bid, or altering the distribution of corporate control.  Secondly, pre-emptive right provisions are  designed to prevent the diluting of the interests of the existing shareholders in the company. The statutory treatment of pre-emptive rights differs considerably within Canada.  254  BCCA  255  recognizes that these concerns are especially strong m non-reporting companies  because they  are more likely to be closely held, have less well advised directors and members, and are B u c k l e y interpreted C B C A s. 25(3) i n the same way. S. 25(3) o f C B C A is similarly worded as art. 80 o f P R C C o m p a n y L a w , i . e . , " . . . may purchase shares with . . . for consideration o f shares." Buckley regarded such w o r d i n g as p r o h i b i t i o n o f other forms as consideration o f shares. See B u c k l e y , G i l l e n & Y a l d e n , supra note 238 at 2 1 8 . 2 5 3  Z i e g e l et a l . , supra note 234 at 838.  2 5 4  Ibid, at 838-39.  U n d e r B C C A , reporting company refers to a company (a) whose securities are listed for trading o n any stock exchange, (b) that is ordered b y the registrar to be a reporting company, or (c) other special circumstances unless the registrar orders that it is not a reporting company. See B C C A s. 1(1). 2 5 5  78 subject to lower disclosure standards. The provisions in B C C A acknowledge that relying on a director's duty of good faith may not satisfactorily protect a member's interest in a nonreporting company.  256  B C C A mandates pre-emptive right in the case of non-reporting  companies. In the event that there is only one class of shares, the proposed shares shall be offered pro rata to the shareholders. In the event that there are classes of shares, the proposed shares shall first be offered pro rata to the shareholders holding shares of the class proposed to be allotted, and if any shares remain, the remaining shares shall then be offered pro rata to the 257  other  shareholders  of the company.  Such cases as share exchange,  conversion,  amalgamation, compromise or arrangement, share dividend, employee share ownership plan 258  and employee venture capital plan shall be excepted.  The shareholders may not generally  waive the pre-emptive right, but may waive in writing rights to a specific allotment.  259  A  reporting company may offer the shares directly to non-shareholders unless its memorandum or articles indicate otherwise.  260  Under C B C A , the pre-emptive rights of shareholders are optional.  The default  circumstance is that the shareholders do not have such right. Only if the articles so provide,  M i n i s t r y o f Finance and Corporate Relations, Province o f British C o l u m b i a , Company Act Discussion Paper (1991) [unpublished] at 41 [hereinafter B.C. Discussion Paper].  2 5 6  2 5 7  B C C A s. 41(1).  2 5 8  B C C A s. 41(2).  2 5 9  B C C A s. 41(5). B C C A s. 41(6).  79 shall the proposed class of shares be offered to the shareholders holding shares of that class. In this case, the offeree shareholders have a pre-emptive right to acquire the offered shares in proportion to their holdings of the shares of that class, at such price and on such term as those shares are to be offered to others.  C B C A further provides some exceptions. In the case that  261  the shares are to be issued, (i) for a consideration other than money, (ii) as a share dividend, or  (iii) based on the previously granted conversion privileges, options or rights, the  shareholders have no pre-emptive rights in respect of the shares to be issued.  262  The optional  nature of C B C A provisions gives companies much flexibility. PRC Company Law seems to be based on the same reasoning. Existing shareholders have priority in contributing to a limited liability company's newly added capital.  263  The  theory behind this position appears to be that as limited liability companies are private companies in nature,  264  they are expected to co-operate closely.  Therefore, when the  registered capital is to be increased, the existing shareholders should have priority in subscription in view of their prior support for the company. This may also serve to keep the corporate culture unchanged.  2 6 1  C B C A s. 28(1).  2 6 2  C B C A s. 28(2).  2 6 3  P R C C o m p a n y L a w , art. 33.  265  PRC Company Law is silent on companies limited by  The number o f shareholders i n a limited liability company shall not exceed fifty (50). L a w , art. 2 0 .  2 6 4  2 6 5  W a n g & T o m a s i c , supra note 215 at 4 2 .  See P R C C o m p a n y  80 shares.  266  Due to the lack of express prohibition, it should be interpreted as permitting the  articles of FICLBS to grant pre-emptive rights to existing shareholders in the case of issuing new shares. Therefore, as under C B C A , the default situation under P R C Company Law shall be that shareholders in FICLBS do not have pre-emptive right unless the articles otherwise provide.  II.  Chinese Characteristics of FICLBS This thesis intends to analyse the Chinese characteristics of FICLBS by comparing FICLBS  law regime and its counterpart under the common law in three aspects: corporate capacity, corporate management, shares and dividends. In these major aspects of FICLBS law regime, distinctive Chinese characteristics can be identified.  1.  Corporate capacity Common law provides that a company has the power and capacity of a natural person of  full capacity with limited exceptions.  Hence the doctrine of ultra vires is abolished to a great  extent. A company shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor shall the company exercise any of its powers in a  A company limited by shares may either be a public company or a private company. P R C C o m p a n y L a w only provides that its promoters shall not be less than five (5) persons. It can be established either through p r o m o t i o n or p u b l i c issue. See P R C C o m p a n y L a w , arts. 74, 75. 2 6 7  See B C C A s. 21(1).  The exceptions are: no company has the capacity to operate a railway as a c o m m o n  carrier or to operate as a club unless otherwise authorized. See B C C A s. 21(2). A l s o see C B C A s. 15(1).  81 manner contrary to its articles.  However, no act of a company, including any transfer of  property to or by a company, is invalid by reason only that the act or transfer is contrary to the articles.  269  Hence violation of a statutory restriction on the corporate capacity which is reflected in  the corporate constitution does not make the transaction invalid. Furthermore, some common law statutes provide that it is not necessary for articles of association to be passed in order to confer any 270  particular power on the company or its directors.  In a further effort to protect third parties from  the influence of the doctrine of ultra vires, it is provided that no person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a company by reason only that the document has been filed with relevant authority or is available for inspection at an office of 271  the company.  Constructive notice is thus declined to be acknowledged.  While the above  provisions are intended to prevent the company and persons with whom it contracts from raising an ultra vires defence in a breach of contract action, nonetheless a shareholder, a creditor, the relevant authority and other interested parties may sue to restrain the company, its directors and officers 272  from engaging in activities beyond the scope of its articles.  The existence of this injunctive  remedy contributes to the uncertainty surrounding the entering of commercial transactions. A third party who is unaware of the ultra vires nature of the transaction may suffer a loss if the See C B C A s. 16(2), also see B C C A ss. 22(1) and (2). See C B C A s. 16(3), also see B C C A s. 22(3). See C B C A s. 16(1). C B C A , s. 17. See C B C A s. 247, also see B C C A s. 2 5 .  82 shareholders of the company can block the performance of an ultra vires contract.  273  The  injunctive remedy also illustrates the agency nature of the ultra vires doctrine. With the doctrine of limited capacity and constructive notice being eliminated, the purpose clause in the corporate constitution acts as a limitation placed by shareholders on the authority of corporate 274  representatives. Under C B C A the purpose to completely abolish ultra vires doctrine as a defence to contractual claims has not been entirely achieved. Under CBCA a company or a guarantor of an obligation of the company may not assert against a person dealing with the company or with any person who has acquired rights from the company that the articles, by-laws and any unanimous shareholder agreement have not been complied with, except where the person has or ought to have 275  by virtue of his position with or relation to the company knowledge to the contrary.  This  ambiguous provision creates a trap which cautious investors want to avoid. Hence current legal practice in major business transactions is to ignore the statutory provision that a company has the capacity, rights, powers and privileges of a natural person, and to require a clear demonstration that the company with which one deals is in fact authorised to carry out the transaction. In practice, this results in the same demand for certified copies of corporate documents and opinion letters as occurred prior to the abolishment of ultra vires doctrine. M i c h a e l A . Schaeftler, " C l e a r i n g A w a y the Debris o f the U l t r a V i r e s Doctrine — A Comparative E x a m i n a t i o n of U . S . , European, and Israeli L a w " (1984) 16 L a w & P o l ' y I n t ' l B u s . 71 at 9 1 . 2 7 4  W i l l b u r t D . H a m , "Ultra Vires Contracts Under M o d e r n Corporate L e g i s l a t i o n " (1958) 46 K Y . L . J . 215 at  232. 2 7 5  See C B C A s. 18.  83  However, contrary to the practices before the abolishment, third parties monitoring for compliance with the articles in major business transactions may be very efficient, since the monitoring cost will amount to a very small fraction of the consideration. In addition, monitoring costs may be trivial, since the objects need no longer be stated in the articles. Instead, if restrictions are desired, the company is to provide them, with the presumption of full capacity of a natural person replacing the former presumption of incapacity absent express authorisation. It is then an easy matter to verify that the ultra vires trap does not arise when the restriction clause has simply been left blank.  276  Ultra vires doctrine survives under the P R C law not as a mechanism to protect 277  shareholders' interests as is the case in the common law countries,  but as part of the State's  efforts to control the activities of enterprises so that they comply with State policies and plans. Under the PRC law, the business scopes of FICLBS shall be provided by their articles of association and registered according to law. FICLBS must conduct their business activities within the registered business scopes.  278  The company registration authorities are Administration of 279  Industry and Commerce (hereinafter referred to as AIC) at different levels.  The registration  authority for FICLBS is the State Administration of Industry and Commerce (hereinafter referred to  See B u c k l e y , G i l l e n & Y a l d e n , supra note 238 at 178. 2 7 7  Schaeftler, supra note 273 at 7 1 .  2 7 8  P R C C o m p a n y L a w , art. 11.  See A d m i n i s t r a t i v e Rules o f the People's Republic o f C h i n a G o v e r n i n g the Registration o f Companies (Zhonghua renmin gongheguo gongsi dengji guanli tiaoli) promulgated b y the State C o u n c i l o n June 2 4 , 1994, i n CCH: Business Regulation, v o l . 2 , supra note 1 % 13-568, art. 4.  2 7 9  84 as S A I C ) .  280  Items of the business scopes of FICLBS which are restricted by laws and 281  administrative laws shall be subject to approval according to law.  FICLBS may alter their  business scopes by amending their articles of association according to legal procedures and going 282  through alteration registration procedures with registration authority. In contrast to common law, ultra vires activities are regarded in China as against the mandatory legal provisions. Therefore, ultra vires activities are invalid and have no legal effect from the very beginning.  283  The company shall return the property obtained as a result of the ultra  vires act to the party which has suffered loss. The company, at fault because of ultra vires, shall compensate the other party for any resulting loss. Where both parties are at fault, each shall undertake respective liabilities. In the case that the company and other parties collaborate with ill intent to harm State or collective interests or the interests of a third party, both parties shall be  A r t i c l e 9 o f the Provisional Regulations on F I C L B S provides that all the F I C L B S shall be approved by M O F T E C . A r t i c l e 6 o f the Administrative Rules G o v e r n i n g the Registration o f Companies provides that S A I C is responsible for the registration o f companies limited by shares approved by the departments authorized by the State. M O F T E C is a ministry under the State C o u n c i l - the central government o f C h i n a , it can be regarded as one o f "the departments authorized by the State". Therefore F I C L B S should be subject to the administration o f S A I C i n respect o f its registration. 2 8 1  See P R C C o m p a n y L a w , art. 11.  P R C C o m p a n y L a w , art. 11. The specific alteration and registration procedures are as follows: (1) The company passes a resolution to alter its business scope; (2) A p p l y for registration w i t h i n thirty (30) days after such resolution is passed. In the case that the revised business scope involves items requiring approval b y State authorities, application w i t h registration authorities shall be made w i t h i n thirty (30) days after the alteration is approved by relevant State authorities. N o time limit is provided for a company to apply with state authorities for the required approval. See Administrative Rules o f the People's R e p u b l i c o f C h i n a G o v e r n i n g the Registration o f Companies, art. 2 9 . 2 8 2  G e X i n g j u n , "Jianshu wuxiao jingji hetong" (Brief Comments on Invalid E c o n o m i c Contracts), i n Sun Besheng, ed., Jingji shenpan Zhuanti yanjiu (Research on Topics o f E c o n o m i c T r i a l ) , v o l . 1 (Beijing: Zhongguo zhengfa daxue chubanshe, 1993) 62 at 7 3 . 2 8 3  85 required to hand over the properties they have acquired, ownership of which shall revert to the State or collective, or to the third party.  284  In the case that a company operates ultra vires its  business scope, the company registration authority may order correction, and may levy a fine between RMB10,000 to RMB100.000 concurrently. If the case is serious, the business license of the company may be revoked.  Besides that, the legal representative of the company may be  subject to administrative punishment and/or fine. In the case of a crime, criminal responsibilities shall be affixed according to relevant law.  286  287  China's ultra vires doctrine is rooted in the planned economy. every enterprise performs a specific role in the national economic plan.  In the planned economy, The fulfilment of the  national economic plan depends on the work of various enterprises performing different designated roles.  Any change of such roles without adjusting the overall plan will possibly result in the 288  difficult working or failure of the overall economic plan.  In a market economy, a company has  to quickly respond to the frequently changed market situation in order to keep competitive. Such responses inevitably involve the variation of business scope of a company.  289  Under the current  See Articles 58 and 61 o f the General Principles o f C i v i l L a w . 2 8 5  A d m i n i s t r a t i v e Rules o f the People's Republic o f C h i n a G o v e r n i n g the Registration o f Companies, art. 7 1 .  2 8 6  See General Principles o f C i v i l L a w , art. 49(1).  F o r a detailed discuss o f the C h i n a ' s ultra vires doctrine, see Zhang M i n ' a n , " L u n gongsi fa shang de yuequan x i n g w e i yuanze" (Observations o n Ultra Vires Doctrine i n Company L a w ) , Falii kexue (Science o f L a w ) , N o . 2 , 1995, at 68-75, reprinted i n Fuyin baokan ziliao: jingji faxue (Photocopied Materials i n Newspapers and Magazines: E c o n o m i c L a w ) , 1995. 4 , at 12-19. 2 8 7  W a n g L i m i n g , G u o M i n g r u i & F a n g Liufang, supra note 145 at 240-41. A l s o see T o n g R o u , China's Civil Law, supra note 146 at 160. 2 8 8  2 8 9  G e X i n g j u n , supra note 283 at 73-74.  86 regime, a company has to first pass a resolution, then apply for approval and registration in order to revise its business scope. This seriously obstruct the ability of FICLBS to make quick response to market changes. With the development of China's market economy, such obstacles will become more and more large to FICLBS. Besides that, according to PRC law, the ultra vires activities shall be invalid from the very beginning. This puts the established civil relationships in a position of uncertainty. Ultra vires may also be viciously used as a defence for failure or unwillingness to honour a contractual or civil obligation. Ultra vires is contrary to the State policy to get conformity with international practice. Because FICLBS are invested by both Chinese and foreign investors, the investors are in different jurisdictions and may possibly be subject to different company laws. Under the common law, a company may lend money to its invested companies. or advances.  290  This is generally called shareholder's loan  However, under the PRC law, no company is permitted to lend money to other 291  enterprises except financial institutions.  Therefore, no company other than financial institutions  has the power of lending in its business scope. Any lending by other companies is regarded as ultra vires and thus invalid. This puts FICLBS in an awkward position: it is able to obtain shareholder's  Some c o m m o n law jurisdictions have statutory provisions permitting companies to lend money. W h e r e the governing statute does not contain an express p r o v i s i o n , the power to loan is a c o m m o n power to be inserted i n the memorandum. Companies other than banks may validly lend at any stipulated rate o f interest. See H a r r y Sutherland et a l . , Fraser & Stewart Company Law of Canada, 6th ed. (Ontario: C a r s w e l l , 1993) at 80-81 [hereinafter Sutherland et a l . , Fraser & Stewart Company Law]. See D e c i s i o n o n Reforming Financial System (Guanyu jinrong tizhi gaige de jueding) issued by the State C o u n c i l on December 2 5 , 1993, i n Encyclopedia of Laws and Regulations, v o l . 5, supra note 128 at 2 5 7 . A l s o see W u Y u r u i et a l . , Xin jingji hetong fa shiyi (Explanation o f the N e w E c o n o m i c Contract L a w ) (Beijing: Zhongguo renmin gongan daxue chubanshe, 1993) at 55.  2 9 1  87 loan from foreign investors while cannot from Chinese investors. In fact this is so irrational that in recent years many Chinese enterprises (including domestic) lend money to each other in order to meet their capital needs. This phenomenon reflects the fact that ultra vires is not able to meet the needs of modern enterprises in a market economy.  2.  Corporate Governance As discussed above, FICLBS adopt the principle of separation of ownership and  management which has long been established under the common law.  However, distinctive  Chinese characteristics still exist in respect of corporate governance.  2.1  The supremacy of shareholder's meeting Under common law, the principle of the separation of ownership and management renders  management, in the exercise of its powers, independent of the general meeting in the case of publicly held companies.  The directors are not agents of the general meeting; they enjoy an  authority constitutionally independent of it, limited only by the company law, the articles of 292  association and resolutions altering the articles.  Under company statutes, management is  identified with the directors. The directors shall manage the business and affairs of the company. This presumption has significant effect in practice. In articles of association, the board may be  See L e i g h , Joffe & G o l d b e r g , supra note 217 at 131. See C B C A s. 102, B C C A s. 141(1).  88 empower to "exercise all such powers and do all such acts and things as the company may exercise and do".  294  Restrictions will be listed in the articles.  While the general meeting, among the  powers reserved to it, is entitled to change the memorandum, articles of association and the appointment and dismissal of directors. The separation principle is so firmly established that in John Shaw & Sons (Salford), Ltd. v. Shaw, Greer L.J. stated that, "[a] company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering the articles, or if the opportunity arises under the articles, by refusing to re-elect the directors of whose action they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders."  295  Considering the absolute management right of board of directors both provided for in company statutes and in generally accepted articles as described above, the shareholder's meeting is accordingly limited to alteration of articles and changing directors rather than directly participating in the management of the company. FICLBS may be either public companies or private companies. PRC Company Law does not distinguish public held and privately held companies in the case of companies limited by shares. Companies limited by shares may be established by way of promotion or public issue.  294  295  296  See B C C A Table A - Articles o f Association, art. 10.1. [1935] 2 K . B . 113 ( C A . ) at 134. P R C Company l a w , art. 74.  296  In the  89 case of promotion, all the shares are subscribed by promoters and will not be issued to the general public.  297  The method of promotion will generally create private companies although neither PRC  Company Law nor the Provisional Regulations on FICLBS have any restrictions on the maximum 298  number of the promoters.  There is no doubt that public issues will make a company limited by  shares a public company. One of the basic distinguishments between a limited liability company and a company limited by shares is that a company limited by shares has access to the general public. When a company limited by shares is established, it has the choice to select public issue.  299  After the  establishment, it has the choice to select public issue in the case of increasing its registered capital.  300  The shares of a company limited by shares can be sold through stock exchanges.  301  Although theoretically, a company limited by shares has the discretion to select whether to list its shares on a stock exchange, companies limited by shares are generally expected to be listed and this constitutes one of the fundamental differences between a company limited by shares and a limited liability company.  302  Unless converted into a company limited by shares , a limited liability  company cannot issue shares to the general public. Although it is problematic failing to distinguish  2 9 7  298  299  P R C C o m p a n y l a w , art. 74. A limited liability company shall not have more than fifty (50) promoters. See P R C Company L a w , art. 2 0 . P R C C o m p a n y L a w , art. 74.  3 0 0  P R C C o m p a n y L a w , art. 139.  3 0 1  P R C C o m p a n y L a w , art. 151.  3 0 2  See Torbert, supra note 210 at 50.  90 private and public companies in the case of companies limited by shares, due to the costs involved in the establishment of a company limited by shares, it is anticipate that the method of promotion 303  will be less commonly used than the method of public issue.  Therefore, PRC Company Law  tends to treat limited liability companies as private companies and companies limited by shares as public companies. PRC law provides shareholder's meeting as the supreme and most powerful authority within FICLBS.  304  It enjoys extensive management powers including the right to decide on the business 305  operation strategies and the investment plans of the FICLBS.  While the board of directors is  only empowered to decide on more specific business operation plans and investment schemes.  306  It 307  is expressly provided that the board of directors shall report work to the shareholders' meeting and shall perform the resolutions of the shareholders' meeting.  What is envisaged according to  the Chinese text of the above provisions is that shareholders will exercise their ultimate authority by establishing the company's broad investment and operational plans and principles. The board will implement these plans by setting and implementing specific operational and investment strategies. For example, the shareholders may decide to invest in the steel industry, indicating an upper limit  3 0 3  W a n g & T o m a s i c , supra note 215 at 74.  3 0 4  P R C C o m p a n y L a w , art. 102.  3 0 5  P R C C o m p a n y L a w , art. 103(1).  3 0 6  P R C C o m p a n y L a w , art. 112(3).  3 0 7  P R C C o m p a n y L a w , art. 112(1).  3 0 8  P R C C o m p a n y L a w , art. 112(2).  91 of such investment, whereas the board will supervise the actual investment decision, including negotiation of terms, selection of the location of the plant, hiring employees and so o n . general meeting of the shareholders is held annually.  309  A  In order to facilitate the shareholders to  fulfil their functions as described above, a provisional general meeting is provided to be held within two months of the request of shareholders holding over ten percent (10%) of the shares of the 311  company. However, all the powers of shareholders must be exercised on the basis of the information provided or disclosed by the board of directors. As the management of FICLBS, directors are responsible for the convention of the general meeting and preparing the information and data to shareholders.  312  The exercise of the supreme position of general meeting will inevitably heavily  rely on the correctness and completeness of the information provided to shareholders by directors. Fortunately, PRC law provides two means to facilitate shareholders in general meeting to exercise their supreme powers. One is the restricted business scope and the other is the supervisory board.  313  Shareholders, especially foreign investors, will generally make investment in the fields  See L i t t l e , supra note 93 at 6 5 . 3 1 0  P R C C o m p a n y L a w , art. 104.  P R C C o m p a n y L a w , art. 104(3). Other circumstances w h i c h can trigger a provisional general meeting are: (i) the number o f members o f the board o f directors falls below the number set forth i n the P R C C o m p a n y L a w , or less than two-thirds the number i n the articles o f the company; (ii) the deficit reaches one-third o f the amount o f the capital share; (iii) the board o f directors considers it necessary; and (iv) the board o f supervisors proposes a general meeting. Generally see P R C Company L a w , arts. 104(1), (2), (4) and (5). 3 1 1  3 1 2  P R C C o m p a n y L a w , arts. 103, 105 and 112. See L i t t l e , supra note 93 at 65-66.  92 they have been engaged in for a long time and in other countries.  Motorola is investing in the  telecommunication, Westinghouse is investing in power industry, while Nabisco is investing in food industry in China. They have rich experience in these investment fields. They may find it easier to review the actions of the board of directors when the company's activities are tightly defined and directors are prohibited from accepting new opportunities as they arise without consultation.  314  The  second means is the supervisory board. The supervisory board has rights to: (i) examine financial records, (ii) oversee the propriety of the manager's activities; (iii) oversee the propriety of the board of directors' activities; and (iv) attend the board meetings as nonvoting members. Current directors, the managers and the chief financial officer are ineligible to serve on the supervisory board.  315  The above functions reduce the extent to which shareholders of FICLBS rely on the  information provided by directors.  However, the effectiveness of the work of the supervisory  board or of the supervisors will also depend upon the access to corporate information which is available to them and upon their ability to assess this information.  316  Without adequate  information, such as through access to accounting records and to the auditor of the company's 317  accounts, the supervisory board is in danger of being somewhat symbolic.  2.2  Legal representative  3 1 4  F o r a discussion o f the restricted business scope o f F I C L B S , see supra notes 277-86 and accompanying text.  3 1 5  P R C Company L a w , art. 124.  3 1 6  W a n g & T o m a s i c , supra note 215 at 6 0 .  3 1 7  Ibid.  93  Legal representative (fading daibiaoren) is originally a civil law concept. Under German law, in the case of a limited liability company (GmbH), all business matters of a GmbH are managed by one or several managing directors who have full and unlimited powers to represent the GmbH in all matters, including day-to-day business matters, but also unusual business matters, such as the acquisition of real estate, of shares in other companies and the like. This broad power of a managing director cannot be limited vis-a-vis third parties, except that a managing director's powers may be limited by the requirement that he be only authorised to sign jointly with another managing director of the GmbH. If a GmbH has several managing directors, they can only act for 318  the company jointly, unless otherwise provided in the articles (which is very common). Under common law the issue relating to corporate contracts is governed by the law of agency.  There are two major ways in which an agent can bind his principal to a third parry.  The first of these arises by agreement between principal and agent, whereby the former clothes the latter with actual authority to act on his behalf. The scope of the authority depends solely on the terms of the agency agreement. The second major way by which an agent can bind his principal is by means of ostensible authority. This is sometimes referred to as apparent authority or agency by estoppel.  It arises not by agreement between principal and agent but through the relationship  between principal and third party.  The principal holds out the agent as possessing the actual  W o l f g a n g H e r i n g , " T h e C o m m e r c i a l L a w s o f Federal Republic o f G e r m a n y " , i n Lester N e l s o n ed, Digest of Commercial Laws of the World, v o l . 3 (New Y o r k : Oceana Publications, 1996) at 4 3 .  3 1 8  3 1 9  W e l l i n g , supra note 219 at 173-75.  94 authority to bind the principal, and the third party contracts with the agent in reliance on this 320  representation. Thereafter the principal is estopped from denying the agent's authority. According to agency theory, the actual authority of an officer of a company may be determined by articles of association, his contract of employment, a board resolution, statutes, even from a board notice.  321  Apart from this, merely appointing a person to serve as an officer will  clothe him with the actual authority to make the business decisions that a person in his position 322  usually makes, unless that authority is expressly restricted in some way by the company.  For  example, the secretary of the company will be presumed to have the authority to certify corporate documents as being the documents of the company, while the treasurer or chief financial officer will ordinarily have the authority to sign certificates with respect to the financial affairs of the company.  Neither these officers nor a director will ordinarily have actual authority to make  business decisions, though the president or chief executive officer will generally be deemed to be authorised to make a broad range of investment decisions in the ordinary course of the company's business.  323  On the other hand, if a company is held out or represented that the agent has the authority to act on behalf of the company, the company is estopped from denying the authority. This was  See B u c k l e y , G i l l e n & Y a l d e n , supra note 238 at 34. 3 2 1  Ibid, at 179.  3 2 2  Ibid.  Ibid.. F o r a detailed discussion o f authority o f particular officers, see Sutherland et a l . , Fraser & Stewart Company Law, supra note 290 at 129-34.  3 2 3  95 established by Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. in which not only was the above rule established, Diplock L . J . also summarised four conditions to establish an ostensible (apparent) authority: (i) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; (ii) that such representation was made by a person or persons who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates; (iii) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied on it; and (iv) that under its memorandum or articles of association, the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.  324  A further development of case law solves the problem of whether a deficiency in the internal procedure of a company has any impact on third parties dealing with the company. The case law following the Royal British Bank v. Turquand  325  decision sets the rule that "where a party  dealing with the company ascertains the existence [of power] on the part of the company to do the act, that is to make and give him the obligation, he may go on with the dealing without inquiring as to the formalities that may have been prescribed as preliminaries. He may presume without inquiry that these have been properly attended to.  1,326  This is called the indoor management rule.  327  [1964] 2 Q . B . 480 ( C A . ) at 505-506. (1856), 6 E . & B . 327 ( E x . C h . ) . See Sheppard v . Bonanza Nickel Mining Co. of Sudbury (1894), [1895] 25 O . R . 305 (Ont. C h . ) at 310. See B u c k l e y , G i l l e n & Y a l d e n , supra note 238 at 181.  96 Many common law jurisdictions have codified the case law in this regard and have statutory 328  indoor management rules. They are functioning very well. China did not develop the theory of agency - neither actual nor ostensible authorities as common law countries. On the contrary, the European legal representative system was introduced. Under PRC law, legal representative is a natural person who is the major responsible person and exercises the powers on behalf of the enterprise according to law or articles of the enterprise.  329  330  PRC law adopts a system called "fading danyi zhi" (provided by statutes and single).  "Fading"  (provided by statutes) means that the legal representative of an enterprise shall be designated in compliance with the procedures specified in law and articles of association. "Danyizhi" (single) means that there is only one legal representative in one enterprise.  331  The reason why China adopts the legal representative system can be found in the history of the State-owned factory management system. construction and the first five-year plan.  In 1953, China began its large scale economic  During that time, the Factory Director Responsible  F o r example, C B C A s. 18 provides, inter alia, that a company or a guarantor o f an obligation o f the company may not assert against a person dealing with the company or with any person w h o has acquired rights f r o m the company that (i) the articles, by-laws and any unanimous shareholder agreement have not been complied w i t h , (ii) a person held out by a company as a director, an officer or an agent o f the company has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary i n the business o f the company or usual for such director, officer or agent, or (iii) a document issued by any director, officer or agent o f a company w i t h actual or usual authority to issue the document is not valid or not genuine. In Canada, A l b e r t a and Ontario have similar provisions, Alberta Business Companies A c t , S . A . 1981, c. 44, s. 18 [hereinafter A B C A ] ; Ontario Business Companies A c t , R . S . O . 1990, c. B . 1 6 , s. 19 [hereinafter O B C A ] . 329  See General Principles o f C i v i l L a w , art. 38. 3 3 0  W a n g Baoshu, supra note 233 at 107-108  97 System was introduced from the former Soviet Union. The factory director was responsible for the overall work of the enterprise.  This was later developed into the Factory Director Responsible  System under the leadership of the Party. State-owned enterprises.  332  In 1984, China launched its movement to reform the  Factory Director Responsible System was re-established.  Under this  system, the director of the enterprise shall take charge of the production, operation and administration work of the enterprise.  333  In October 1984, the Central Committee of the CPC  pointed out in the Decision Regarding Economic Structure Reform (Zhonggong zhongyang guanyu jingji tizhi gaige de jueding) that Factory Director Responsible System was a requirement of modern enterprises and should be kept o n .  334  Hence, the General Principles of Civil Law which  were enacted in 1986 adopted the system of legal representative to ensure the Factory Director -lie  Responsible System.  After the General Principles of Civil Law, Tentative Regulations  Concerning the Conditions for Examination, Approval and Administration of Registration of Legal Representatives of Enterprises (Qiye faren de fading daibiaoren shenpi tiaojian he dengji guanli zanxing guiding) (hereinafter Legal Representative Regulations)  336  and Administrative Regulations  Jiang P i n g et a l . , Faren zhidu lun ( O n Legal Person System) (Beijing: Zhongguo zhengfa daxue chubanshe, 1994) at 314-16. 333  Notice Regarding Sincerely Handle the Experiment W o r k o f Reforming the Leadership System o f State-owned Industrial Enterprises (Guanyu renzhen gaohao guoying gongyie qiye lingdao tizhi gaige shidian gongzuo de tongzhi) j o i n t l y issued by the General Office o f the Central Committee o f C P C and the General Office o f the State C o u n c i l o n M a y 18, 1984 (copy o n file w i t h the author). 3 3 4  Renmin Ribao (People's D a i l y ) , O c t . 10, 1984, at 2 .  3 3 5  Jiang P i n g et a l . , supra note 332 at 317-18.  Promulgated b y S A I C o n N o v . 2 0 , 1990, i n Encyclopedia of Laws and Regulations, v o l . 5, supra note 128 at 824.  3 3 6  98 for the Registration of Enterprise Legal Persons (Qiye faren dengji guanli tiaolif  were  37  promulgated. These three Law and Regulations constitute a complete regime of legal representative (hereinafter General Legal Representative Regime). Under the General Legal Representative Regime, the legal representative is entitled to participate in civil activities on behalf of the enterprise, but is also obliged to be fully responsible 338  for the production, operation and management of the enterprise.  The duly registered legal  representative is the signatory who is entitled to exercise the powers of the enterprise on its behalf.  339  The documents signed by the legal representative have the same legal effect as those  affixed with the official seal of the enterprise. Both of these two kinds of documents have biding force on the enterprise legal person.  340  No other natural person is entitled to represent the  enterprise unless otherwise authorised by the legal representative or the company.  341  In the case  that the legal representative entrusts other person(s) to exercise his or her powers (including, of course, the power to represent the enterprise), a written power of attorney is required.  342  powers required by law to be exercised only by legal representatives shall not be delegated.  343  The The  Promulgated b y the State C o u n c i l on June 3, 1988, i n CCH: Business Regulation, v o l . 2, supra note 1 % 13542. 3 3 8  Legal Representative Regulations, art. 4 .  3 3 9  Administrative Regulations for the Registration o f Enterprise Legal Persons, art. 11.  3 4 0  Legal Representative Regulations, art. 5.  Y u X i a n y u , "Wuoguo ying jianli zenyang de faren zhidu"(What a Legal Representative System Should C h i n a Establish), Faxue (Jurisprudence), 1985, 9, i n Zhang X i n b a o et a l . , eds., Xin zhongguo minfaxue yanjti zongshu (Overview o f C i v i l L a w Literature i n N e w China) (Beijing: Zhongguo shehui kexue chubanshe, 1990) at 120.  3 4 1  3 4 2  L e g a l Representative Regulations, art. 6.  99 signature of the legal representative shall be filed with the enterprise registration authority for record.  344  Such provision may imply that only after registration for record with enterprise  registration authority, shall the signatures of the legal representative have binding force.  345  PRC Company Law sets forth systematic and clear provisions regarding the powers of the legal representative in forms of both mandatory provisions and discretionary provisions.  346  The  subsequent Regulations on the Administration of Company Registration set forth the formalities concerning the registration and alteration of legal representative of companies established under the PRC Company Law and penalty provisions.  These two Law and Regulations (hereinafter  Company Law Legal Representative Regime) are different from the General Legal Representative Regime. Under Company Law Legal Representative Regime, the chair of the board of directors of companies limited by shares is the legal representative of the company.  347  The legal representative  has only three statutory powers: (i) preside over the general meeting, convene and preside over board meetings; (ii) examine the implementation of the board resolution; and (iii) sign the securities and bonds of the company.  348  The board of directors may at discretion delegate some powers of  Legal Representative Regulations, art. 6. 3 4 4  Legal Representative Regulations, art. 5.  3 4 5  Jiang P i n g et a l . , supra note 332 at 361.  Shen Sibao, "Waishang touzi qiye shiyong gongsifa de ruogan wenti" (Several Issues C o n c e r n i n g A p p l y i n g Company L a w to F o r e i g n Investment Enterprises), Zhongguo faxue (Jurisprudence i n China) (Beijing), 1995. 1, at 4 7 - 5 3 .  3 4 6  3 4 7  P R C Company L a w , art. 113.  3 4 8  P R C C o m p a n y L a w , art. 114.  100 the board to the chair during the close time of the board meeting.  349  Only when the chair is unable  to perform his or her official duties, shall a vice chair designated by the chair exercise the chair's 350  functions on behalf of the chair. General Legal Person Regime subjects legal representatives to responsibilities for the misconduct of the enterprise. When an enterprise legal person commits such illegal offences as (i) carrying out illegal business activities beyond the scope of business approved by and registered with the registration authorities; (ii) concealing the true facts from the registration or tax authorities, or practising fraud; (iii) extracting funds or concealing assets for the purpose of evading debts; (iv) disposing of property without authorisation following dissolution, annulment or declaration of bankruptcy; (v) failing to apply immediately for the registration and make public announcement of a change or of termination, causing an interested party to sustain substantial loss; or (vi) engaging in other activities prohibited by law, causing damages to State or common public interests, the legal 351  representative of the enterprise may be subject to administrative sanctions (xingzheng chufen)  or a  fine. In the case that a crime is constituted, criminal liabilities shall be investigated and determined 352  according to the law.  Such harsh liabilities may be inappropriate in the Company Law Legal  3  P R C C o m p a n y L a w , art. 120.  3 5 0  P R C C o m p a n y l a w , art. 114.  The term "administrative sanctions" refers to warning, minor and severe reprimands, probation, demotion, dismissal and discharge. See The Provisions o f Administrative Supervision o f P R C {Zhonghua renmin gongheguo xingzheng jiancha tiaoli) issued by the State C o u n c i l on D e c . 9, 1990, i n Encyclopedia of Laws and Regulations, v o l . 3, supra note 128 at 706, art. 24. 3 5 1  3 5 2  General Principles o f C i v i l L a w , art. 49.  101  Representative Regime where the legal representative has considerable limited powers.  It is  unreasonable to apply such harsh liabilities to the chair of the board of a company limited by 353  shares, especially for him to be responsible for the misconduct of the company.  It should be  noted that all the penalty clauses under Chapter Ten of the PRC Company Law and Chapter Eleven of the Regulations on the Administration of Company Registration (the Chapters on legal responsibilities) never impose any liability on legal representative of a company. References are made to responsible personnel who are directly in charge, other responsible persons, directors, supervisors, managers, shareholders, promoters, company and etc., but no reference is made to the legal representative of a company.  354  The intentional avoidance of subjecting legal representative to  harsh legal liability may reveal the recognition of the conflicts between the General Legal Representative Regime and the modern company system on the part of lawmakers of China. The Factory Director Responsible System and the subsequent General Legal Representative Regime were implemented as forms of managing State-owned enterprises which did not have anything like board of directors responsible for the management of the enterprise.  FICLBS are  totally different from them. Therefore, the General Legal Representative Regime may not fit in with such companies as FICLBS. Even in Germany, in the case of a stock company, a Board of Managers holds the rights of management and representation for the stock company.  The  distribution of management tasks and of the sole or joint right of representation among members of  General Principles o f C i v i l L a w , art. 49. Such provision is reasonable under the General L e g a l Representative Regime where the legal representative is "fully responsible for the production, operation and management" o f the company. See Legal Representative Regulations, art. 4. 3 5 4  P R C C o m p a n y L a w , Chapter 10.  102 the Board of Managers is usually dealt with in the articles of the stock company. If there are no 355  such specific rules, the stock company is represented by all members jointly.  In the case of  FICLBS, general meeting is the supreme authority of the company, board of directors has extensive powers to manage the company. Although the chair of the board is the legal representative of the FICLBS, his or her management powers should be subject to articles of association, the general meeting and the board of directors. Because the legal representative shall be subject to the articles, general meeting and board of directors, it is problematic to provide that all the documents executed by the legal representative have binding force on FICLBS as under the General Legal Representative Regime. Nevertheless, it is also problematic to assume that PRC Company Law establishes a separate system excluding all the provisions of the General Legal Representative Regime. We can find no legal basis to exclude the application of the General Legal Person Regime to companies limited by shares. In any sense all the provisions of the General Principles of Civil Law are still in full effect. No legal basis can be found to limit the application of such fundamental law as General Principles of Civil Law in China. How to deal with the relationship between these two regimes remains unclear. Therefore, even under the PRC Company Law, legal representatives may have potential powers in addition to the three statutory powers and those delegated to him or her by the board.  Simultaneously, he or she may also bear potential liabilities for the misconduct of  companies.  See H e r i n g , supra note 318 at 34.  103  2.3  Director's duties As discussed above, the basic common law principles of director's duties are incorporated  into the legal system of FICLBS. However, it is not to say that the framework for director's duties in China is totally the same as common law countries. In common law, the fiduciary duties of directors are so strict that the company's interests become the only thing that the directors shall consider. A l l the others are legally irrelevant. This is called the "Collateral Purpose Doctrine". According to this doctrine, the powers conferred upon directors may only be exercised for the benefit of the company, and must not be exercised for that of any person other than the company.  Hence traditionally, social responsibility of a company is  criticised as against the corporate purpose and the efforts seeking to assume social responsibility on 357  the company is believed "not within the lawful powers of a board of directors".  Although  recently this traditional doctrine has been criticised, it has never been removed. Another issue is the employee's interests. With regard to a decision by directors of a to-be-assigned company to apply the entire proceeds of the company to cover the payment of various entitlements of those employees who were to be terminated and use the remaining to make voluntary severance compensation to them, it was ruled that, "the defendant [directors] were prompted by motives which, however laudable, and however enlightened from the point of view of industrial relations, were such as the law does not recognise as a sufficient justification. Stripped of all its side issues, the essence of the matter is this, that the directors of the defendant company are proposing 3 5 5  Leigh, Joffe & Goldberg, supra note 217 at 172.  3 5 7  Dodge v. Ford Motor Co., 170 N . W . 668 (Michigan Sup. Ct., 1919).  104  that a very large amount of its funds should be given to its former employees in order to benefit those employees rather than the company, and that is an application of the company's funds which the law, as I understand it, will not allow."  358  Notwithstanding cases such as Dodge v. Ford Motor Co. and Parke v. Daily News Ltd., courts have consistently upheld the power of companies to make charitable contribution on the basis of "enlightened self-interest".  359  However, neither case law nor statutes subject directors to an  obligation to take into account the social liability of the company and the employee's interests. Furthermore, the allowed "charity" should be for the "enlightened self-interest" of the company. It is believed, "charity has no business to sit at board of directors qua charity. There is, however, a kind of charitable dealing which is for the interest of those who practise it, and to that extent and in that gard (I admit not a very philanthropic garb) charity may sit at the board, but for no other ,,360  purpose. Under the PRC Company Law, director's duties to the company are seriously diverged by the social liability and the interests of employees. PRC Company Law puts (i) the lawful rights and interests of the companies, shareholders and creditors, (ii) maintaining social economic order, and (iii) the development of socialist market economy parallel in its purpose clause.  361  Social  responsibility and public interests are evident not only in the above general principles but also in more specific provisions. For example, when engaging in business activities, a company shall  J M  Parke v . Daily News Ltd., [1962] 1 C h . 927 ( C h . D . ) at 9 6 3 .  SeeHutton v . West Cork. Ry. Co. (1883), 23 C h . D . 654 ( C . A . ) , sad A.P. Mfg. Co. v . Barlow, 98 A . 2 d 581 ( N . J . , 1953).  3 5 9  3 6 0  See Hutton v . West Cork. Ry. Co., ibid, at 6 7 3 .  3 6 1  P R C C o m p a n y L a w , art. 1.  105 abide by the law and observe professional ethics, enhance the building of socialist spiritual civilisation and accept supervision of the government and the general public.  362  No detailed rules  are set out to interpret these additional liabilities of FICLBS. The directors of FICLBS, who are the management of FICLBS, will surely face an awkward position when they try to balance the interests of FICLBS and the social liability. With regard to the employees of FICLBS, not only their interests shall be considered by FICLBS, they are also entitled to participate in the management of F I C L B S .  363  FICLBS shall  consult the trade union and employees prior to making decisions concerning the salaries and welfare of the employees, production safety, labour protection, labour insurance and other matters involving the interests of the employees and shall invite representatives from the trade union or from their bodies of employees to attend relevant meetings but they shall not have the right to vote.  364  FICLBS shall take into account the opinions and suggestions of the trade union and its  employees when discussing and deciding upon major and important issues in respect of the production, operation or the formulation of important rules and regulations of the companies.  i b l  P R C C o m p a n y L a w , art. 14.  Such participation does not seem to be significant to companies limited by shares under A r t . 16 o f the P R C Company L a w provides that a State wholly owned company and a established by two or more State-owned enterprises or by two or more State investment bodies implement democratic management through the employee's representative assembly and other limited by shares are not required to implement democratic management. 3 6 3  3 6 4  365  P R C C o m p a n y L a w , art. 121. P R C C o m p a n y L a w , art. 122.  the P R C Company L a w . limited liability company as the main investors shall means. W h i l e companies  106 Undoubtedly, the codification of the social liability and taking account of employee's interests seriously affect the directors to perform their duties to the company in the course of managing FICLBS at the purpose level. The participation of employees and trade unions in the decision making process obstruct the director's duties at the technical level. The doctrine of social liability and public interests can be traced back to earlier legislation for State-owned enterprises.  It is an official belief that State-owned enterprises are units of  commodity production and operation in the society. A l l the assets of the State-owned enterprises are owned by the whole people.  366  It is therefore natural for an enterprise to bear social liabilities  and take into account public interests. The provisions relating to employees and trade unions in the FICLBS law regime find their roots in the old prevailing belief that workers are the master {zhurenweng) of the State and so of the State-owned enterprises.  367  The State-owned enterprises  exercise a combination system of collective leadership and individual responsibility. The director of a factory (changzhcmg) or manager of an enterprise (jingti) is responsible in the enterprise while the enterprise is subject to democratic management through workers' representative meetings and other forms.  368  The trade union is responsible for organising workers and employees to take part in  the democratic management and supervision.  369  State-owned Enterprise Law even accords workers  and employees the right to remove the director of the enterprise subject to the government  State-owned Enterprise L a w , art. 2 . State-owned Enterprise L a w , art. 9. State-owned Enterprise L a w , arts. 7 and 10. State-owned Enterprise L a w , art. 11.  107 approval, and the right to veto or decide on issues relating to welfare, remuneration and labour protection.  370  PRC Company Law reflects the same policy orientation.  The legal regime of FICLBS represents a much step forward. In respect of management, they are not required to implement democratic management as is the case of State wholly owned companies and limited liability companies established by two or more State-owned enterprises or by 371  tow or more State investment bodies as the main investors.  In respect of social liability and  public interests, in addition to all those provided in the FICLBS legal regime, State-owned enterprises shall develop commodity production, create wealth, increase savings and satisfy the 37?  ever-growing material and cultural needs of society.  While upholding the development of  socialism's material civilisation, State-owned enterprises shall at the same time support the strengtheriing of socialism's spiritual civilisation and the building of teams of idealistic, moral, educated and disciplined workers.  373  shall also stick to the socialist road  In addition to the above obligations, State-owned enterprises 374  and shall protect the State property.  375  A State-owned  enterprise shall increase the quality of its staff and workers through the promotion of ideological  State-owned Enterprise L a w , art. 52 P R C C o m p a n y L a w , art. 16. State-owned Enterprise L a w , art. 3. State-owned Enterprise L a w , art. 4 . State-owned Enterprise L a w , art. 5. State-owned Enterprise L a w , art. 40,  108 and political education, education in areas such as the legal system, national defence, science and culture and technical training.  376  FICLBS bear no such obligations.  Despite the above broad provisions, no measures are taken to ensure a State-owned enterprises to fulfil their social responsibilities.  The democratic management of State-owned  enterprises never functioned well. It is pretty rare for workers and employees to elect a director or 377  manager of a State-owned enterprise.  The functions of trade unions are summarised by the  workers and employees of the State-owned enterprises as two: birth control and granting free film 378  passes to workers. The historical limited functions of the provisions may not be strengthened in a short time. The less strength in the wording of the FICLBS legal regime also reveals the government's attitude not to strengthen these provisions. Hence the directors in FICLBS may still serve exclusively for the best interests of FICLBS with limited restrictions.  3.  Shares and dividends  3.1.  Classes of shares  State-owned Enterprise L a w , art. 4 2 . 3 7 7  T h e right o f the workers and employees to elect the director or manager o f a State-owned enterprise is subject  to the permission o f the government.  A wide practice o f this p r o v i s i o n w i l l deprive the power o f the government  w h i c h is against the long-term p o l i c y o f State control over economies i n C h i n a . T h i s is a saying widely spread unofficially. Birth control is the strict State p o l i c y . H o w e v e r , it is generally considered insignificant i n the current C h i n a where production and business operation are regarded as the most important issues i n an enterprise. F i l m tickets are regarded as one o f the few welfare trade unions can p r o v i d e to workers and employees. 3 7 8  109 FICLBS law regime and P R C Company Law are entirely silent on one of the most important aspects of shares - the division of classes. In Canada, although the statutes have no definition of what constitute a class of shares, the term "class" is not only frequently referred to in the statutes but also forms the basis of some important legal concepts and principles. 379  Members who hold shares of a particular class are entitled to convene a class meeting. Special rights and restrictions attached to a class are protected from being prejudiced or interfered with by requiring a separate resolution of the class to approve any alteration thereof.  380  The concept of share classes is not technical in nature, but rather is simply the  accepted means by which differential treatment of shares is recognized in the articles of incorporation of a company.  381  Under common law, shares are traditionally divided into 382  "common" shares and "preferred" or "preference" shares.  Preferred or preference shares  usually refer to shares which carry a long-term, special liquidation preference, have fixed dividend rights which are payable in priority to dividends to other shareholders, and often have either contingent voting rights or no voting rights at all. A given company might have more than one class of such shares, differing from one another in varying degrees. Common shares are traditionally used to describe shares that have no restrictions and that are fully participating  B C C A s. 1(1) defines a "class meeting" as a meeting o f members who h o l d shares o f a particular class. B C C A s. 2 5 0 . Unfortunately, B C C A is silent on what constitute class rights. There are disputes over the contents o f class rights. A r g u a b l y , class rights should include at least the three fundamental rights o f shares, i . e . , the right to dividends, the right o f voting and the right to participate i n the distribution o f surplus o n w i n d i n g up o f the company. 3 8 0  3 8 1  ne  Queen v . McClurg  ,[1990] 3 S . C . R . 1020.  3 8 2  W e l l i n g , supra note 219 at 612.  110 as to voting, dividends, and dissolution. These terms are jargon words with no fixed legal 383  meanings. Both C B C A and B C C A permit the articles of the company to provide for more than one class of shares with special rights and restrictions attached. However, such provisions are permissive rather than mandatory.  They do not mandate that different classes should have  different rights or restrictions attached.  It is commonly done in practice that two classes of  common shares are identical in every respect.  However, recent cases seem to indicate that 384  there should be differences between classes regardless of the long-standing practice.  On the  other hand, under C B C A , in the case that a company only has one class of shares, all shares shall be equal.  385  Hence, it is necessary to create separate classes to draw distinction between  shares. However, some memorandum jurisdictions do not have the same statutory provision as CBCA.  B C C A only permits a company to set up different classes with special rights and  restrictions attached and does not mandate that the only way to attach different rights or  Champ v . The Queen (1982), [1983] 21 B . L . R . 1 (Sask. F . C . C . ) . In this case, M r . Champ set up a company w i t h class A (divided into voting shares and non-voting shares) and class B (divided into voting shares and nonvoting shares) shares held by himself and his wife respectively. The rights o f Class A voting shares and Class B voting shares are identical. A s a director o f the company, M r . Champ declared and paid dividends on class B voting shares without at the same time declaring and paying dividends on Class A voting shares. T h e Federal Court o f Canada ruled that from the company law principle, there is only one class because Class A and Class B voting shares are identical. It is necessary when creating classes o f shares, to create some difference between different classes. i W  C B C A s. 24(3).  Ill 386  restrictions to shares is to create separate classes.  Furthermore, B C C A talks about attaching 387  different rights or restrictions to shares without specific reference to classes.  Some common 388  law cases support attachment of different rights or restrictions to shares within one class. Hence in these jurisdictions, it may not be necessary to create different classes in order to attach different rights or restrictions to shares. PRC Company Law is silent on share classes.  As discussed above, P R C Company  Law rigidly insists on the equality of share rights without permitting the articles of the company to differentiate share rights in terms of voting, dividends and distribution of surplus on winding up.  However, in practice, shares are commonly divided into common and  preference shares. Before the promulgation of PRC Company Law, the corporate regulations at both the State and local levels expressly permitted creation of common and preference shares. The Regulating Opinions on Companies Limited by Shares which was the de facto company law before PRC Company Law, provide that a company should create common 389  shares and may create preference  shares.  The Provisional Regulations of Shenzhen  Municipality on Companies Limited by Shares (Shenzhenshi gufen youxian gongsi zanxing 3 8 0  B C C A s. 20.  3 8 7  B C C A ss. 248, 249.  388  In Pender v . Lushington (1877), 6 C h . D . 70 ( C . A . ) , a p r o v i s i o n i n the articles o f a company p r o v i d i n g that shareholders may not have more than one hundred votes regardless o f h o w many shares they h o l d is ruled to be v a l i d . In Bushell v . Faith, [1970] A . C . 1099 ( H . L . ) , the p r o v i s i o n i n the articles that gave a director's shares three votes i n respect o f any resolution to remove h i m was upheld even though it was obviously designed to frustrate s. 184(1) o f the Companies A c t o f U K then i n force, w h i c h provided for the removal o f a director by ordinary resolution regardless o f any contrary provision i n the articles. 3 8 9  Regulating O p i n i o n s on Companies L i m i t e d by Shares, art. 2 3 .  112 guiding)  have similar provisions.  390  391  Furthermore, detailed provisions regarding the 392  preference shares can be found in both regulations. clear-cut  393  These provisions are so detailed and  that, in the context that China was in her experimental stage of share-formulated  In CCH: Special Zones & Cities, v o l . 1, supra note 77 f 73-571. These regulations were promulgated by the Shenzhen M u n i c i p a l People's Government on M a r c h 18, 1992. C h i n a had adopted an incremental approach with respect to company law before the promulgation o f P R C Company L a w i n 1993, a l l o w i n g local areas to issue company legislation that could be implemented on a trial basis or on a small scale i n a given location. These Shenzhen Regulations are one example o f such legislation. See Torbert, supra note 210 at 4 8 . 3 9 0  391  392  3 9 3  T h e Provisional Regulations o f Shenzhen M u n i c i p a l i t y on Companies L i m i t e d by Shares, art. 5 1 .  Ibid.. F o r example, art. 51 o f the Provisional Regulations o f Shenzhen M u n i c i p a l i t y on Companies L i m i t e d by  Shares provides that: " A company may issue ordinary shares and preference shares. " H o l d e r s o f ordinary shares may participate i n company administration through the use o f their voting rights i n shareholders' meetings, w i t h each share having the equivalent amount o f voting rights. After a company has allocated money to its accumulation fund and public welfare fund and paid dividends on preference shares, ordinary shareholders shall have the right to participate i n the distribution o f the company's surplus [profits - author]. Bonuses shall be issued i n line with the company's profit variance. If a company is declared bankrupt or undergoes termination related liquidation procedures, the rights o f ordinary shareholders i n relation to distribution o f the company's remaining assets shall come after those o f company creditors and preference shareholders. " H o l d e r s o f preference shares normally shall not be entitled to h o l d voting rights, but i f a company fails to pay dividends for three consecutive years, preference shareholders may also be entitled to voting rights pursuant to the "one share one [vote] "system. Dividends on preference shares shall be paid according to the interest rate or amount stipulated i n the articles o f association. If a company is declared bankruptcy o r undergoes termination-related liquidation procedures, the rights o f preference shareholders i n relation to distribution o f the company's remaining assets shall come after those o f company creditors and before those o f ordinary shareholders. A company issuing preference shares shall stipulate i n its articles o f association provisions on the following items: "(1) order o f assignment o f preference share dividends, fixed amount or rate; "(2) whether the dividends are accumulative or non-accumulative; "(3) the company's order o f assignment o f remaining property to preference shareholders; "(4) whether or not preference shares may be exchanged for ordinary shares and exchange criteria; "(5) other matters concerning preference share rights and obligations.  113 enterprises and had little experience, provided clear directions to the company experiment. Hence many companies established before the promulgation of P R C Company Law created common and preference shares with special rights or restrictions attached.  After the  promulgation of P R C Company Law, it is difficult for these companies to cancel the issued preference shares. Revising the provisions in the articles regarding the preference shares has proved to be difficult as well due to the reluctance of the existing companies. The extent of the influence of such practice on FICLBS is not clear. Preference shares, as a flexible financing form, are of wide use in business. Although the common share offerings, particularly initial public offerings, are very popular, preferred share financing remains a fundamental source of corporate finance.  394  Over the past several  years, many Canadian businesses in financial difficulties have refinanced portions of their debt by substituting that indebtedness with what are commonly referred to as "distress preferred shares" because the debtor will enjoy an improved cash flow position by virtue of the after-tax financing nature of distressed preferred shares.  395  Not able to differentiate rights or  "Preference shareholders shall not enjoy any rights and interests i n relation to a company's accumulation fund. " A company shall have the right to buy back preference shares at the price stipulated i n its articles o f association." Geoffey J . R . D y e r , "Preferred Share F i n a n c i n g " i n Income Tax Considerations in Corporate Corporate Management Tax Conference, 1986 (Toronto: Canadian T a x Foundation, 1986) 20 at 2 0 .  3 9 4  Financing:  395  E l l e n L . Hayes, "Distress Preferred Share Financing: Structural Issues and Pioneer Distributors of Montreal" (1996) 11 B . F . L . R . 291 at 291-92.  Ltd. v . Bank  114  restrictions in respect of shares, companies are greatly limited in terms of the flexibility of corporate financing under PRC Company Law. It seems that P R C Company Law is a total failure in respect of share classes.  In  practice, Provisional Regulations of Shenzhen Municipality on Companies Limited by Shares are not revised to comply with the PRC Company Law provisions. These regulations at least enable companies limited by shares in Shenzhen not to cancel their preference shares and revise their articles of incorporation correspondingly. Furthermore, subsequent legislation at the State level also seems to challenge the PRC Company Law.  Regulations of the State  Council on Foreign Capital Shares Listed in China by Companies Limited by Shares (Guowuyuan guanyu jingnei shangshi waizigu de guiding) refer to "the same type of shares" (tongyi zhonglei gufen) held by holders of A shares and B shares.  396  This reference seems to  indicate that separate share classes are still permitted despite the provisions of PRC Company Law.  The same regulations further provide that a company may specify in its articles of  incorporation any special matters concerning the rights and obligations of its shareholders and 397  make detailed stipulations to that effect.  However, Regulations of the State Council on  Foreign Capital Shares Listed in China by Companies Limited by Shares were promulgated by the State Council while P R C Company Law was adopted by the Standing Committee of the NPC.  The Standing Committee of the N P C is entitled to rescind the regulations enacted by  Regulations o f the State C o u n c i l on F o r e i g n Capital Shares Listed i n C h i n a by Companies L i m i t e d by Shares promulgated by the State C o u n c i l on December 2 5 , 1995, i n CCH: Business Regulation, v o l . 2 , supra note 1 f 13-600, art. 5(1). 397  Ibid. art. 5(2).  115 the State Council in the case that conflict exists between the legislation separately enacted by them.  398  Hence, even if Regulations of the State Council on Foreign Capital Shares Listed in  China by Companies Limited by Shares do imply that companies may create classes among shares, the validity of such implication is in doubt. The reason for the strict adherence to equality of shares under P R C Company Law is unclear.  Perhaps the lawmakers overstate the principle of fairness out of the fear that State  owned shares may be prejudiced if different classes of shares are allowed.  399  Another reason  for the inconsistency between P R C Company Law and Regulating Opinions on Companies Limited by Shares may be that they were enacted by different legislators. P R C Company Law was enacted by N P C , while the latter Opinions were drafted by the State Commission for Restructuring Economic System. It is interesting that in China shares are divided into various kinds not by the characteristics of shares but by the status and nationality of shareholders.  Shares are divided  into State shares, legal person shares, individual shares and foreign capital shares depending upon the principal investment body. State shares refer to those shares purchased with State  P R C Constitution, art. 67(7). A r t i c l e 130 o f P R C Company L a w provides that one o f the principles that should be followed i n the issue o f shares is fairness. The protection o f State-owned assets is a consistent policy underlying various P R C laws. See art. 2(1), T r i a l Measures on Share-formulated Enterprises (Gufenzhi qiye shidian banfa) promulgated by the State C o m m i s s i o n for Reconstructing E c o n o m i c System, the State Planning C o m m i s s i o n , the M i n i s t r y o f Finance, the People's Bank o f C h i n a and the State Production Office on M a y 15, 1992, i n CCH: Business Regulation, v o l . 2 , supra note 1 f 13-570; also see art. 4 o f the Provisional Regulations on the A d m i n i s t r a t i o n o f the Issuing and T r a d i n g o f Stocks {Gupiao faxing yu jiaoyi guanli zanxing tiaoli) promulgated 22 A p r i l 1993 b y the Securities Committee o f the State C o u n c i l , i n CCH: Business Regulation, v o l . 2, supra note 1 \ 13-574. 3 9 9  116 assets by departments or organs which are authorized to make investments on behalf of the State. Legal person shares refer to those shares purchased with legally allocated funds by legal persons, or shares purchased with the assets of public institutions and social groups which have legal person status and which are authorized by the State to conduct business.  Individual  shares refer to those shares purchased by individuals with their own legal assets.  Shares  purchased by foreign investors and investors from Hong Kong, Macao and Taiwan shall be regarded as foreign capital shares.  400  Shares can also be divided into A shares, B shares, H  shares and N shares. A shares are available for Chinese domestic investors only. B shares are for foreigners and investors from Hong Kong, Macao and Taiwan.  H shares refer to the  shares listed on Hong Kong Stock Exchange. N shares refer to the shares listed on New York Stock Exchange.  401  It should be noted that these divisions are only types of shares rather than  "classes" in the common law sense because there are no statutory provision requiring that the rights or restrictions attached to these different types of shares shall be different in any respect, let alone the fundamental share rights: dividends, voting and participation of surplus on winding up. In the case of foreign capital shares listed overseas, additional rights are attached. Shareholders holding such shares representing more than 5% of the voting rights are entitled to raise written proposals to the company for resolution. The items in such proposals which  T r i a l Measures o n Share-formulated Enterprises, art. 4. See A r t & G u , supra note 211 at 301; W a n g & T o m a s i c , supra note 215 at 113; Regulations C o u n c i l o n F o r e i g n Capital Shares i n C h i n a by Companies L i m i t e d by Shares; Special Regulations C o u n c i l C o n c e r n i n g Floating and L i s t i n g o f Shares Overseas by Companies L i m i t e d by Shares guanyu gufen youxian gongsi jingwai muji gufen ji shangshi de tebie guiding) promulgated 4 A u g u s t State C o u n c i l , i n CCH: Business Regulation, v o l . 2, supra note 1 f 13-552. 4 0 1  o f the State o f the State (Guowuyuan 1994 by the  117 fall into the jurisdiction of the general meeting shall be included in the agenda of the annual general meeting.  However, such provision does not necessarily create different share  402  classes because these companies may give the same rights to shares held by Chinese domestic investors (including those held by the State). On the contrary, the equality of B shareholders and A shareholders is expressly upheld in the case of companies listed in China.  403  Therefore,  it is erroneous to believe that A , B , H , and N shares are different classes of shares in the common law sense.  Such ambiguity has caused great confusion among the Chinese law  observers and foreign investors, especially when A shares, B shares, H shares and N shares are commonly translated as "Class A (B, H or N) shares."  404  Even some Chinese scholars also  seem to believe that A , B, H and N shares are different classes of shares.  3.2.  405  Par Value and No Par Value Shares Most common law jurisdictions have abandoned par value shares and only allow the  issue of no par value shares. Others permit the co-existence of par and no par value shares. The par value shares were originally introduced to provide some protections to creditors, but proved ineffective. The intent of the par value shares could be circumvented by issuing shares  Special Regulations of the State Council Concerning Floating and Listing of Shares Overseas by Companies Limited by Shares, art. 21. Regulations of the State Council on Foreign Capital Shares Listed in China by Companies Limited by Shares, art. 5.  403  4 0 4  See Art & Gu,  405  See Wang & Tomasic,  supra  note 211 at 301. supra  note 215 at 113.  118 in exchange for property of unproved value.  406  The concept of par value shares is arbitrary  because share is simply a portion of the interests of the company. Par value shares could be misleading to the purchaser, who might be led to believe that the par value is an indication of the value of his or her investment.  Besides that, par value shares generate accounting and  disclosure confusion arising from such accounting concepts as "contributed surplus" and "distributable surplus".  407  In those jurisdictions which still allow the issue of par value shares, there is a trend of creating low-par value shares in order to lessen the potential for abuse and has reduced the significance attached to the expression of par value.  408  PRC Company Law permits companies to issue shares at par or at a premium but not at a discount, and no par value shares are not allowed.  409  The par value shares serves a host of  purposes under P R C Company Law. First, such provision is in conformity with the principle of adequate capitalization of companies under PRC Company L a w . registered capital is adopted.  410  In China, a system of  Registered capital shall be fully paid. Therefore, there is no  distinction between registered capital and paid up capital.  411  A capital verification certificate  B.C. Discussion Paper, supra note 256 at 4 4 . Robert W . V . D i c k e r s o n , John L . H o w a r d & L e o n Getz, Proposals for a New Business Companies Law for Canada, V o l . 1 (Ottawa: Information Canada, 1971) § 97-101, at 36-37.  4 0 7  4 0 8  B.C. Discussion Paper, supra note 256 at 4 4 .  4 0 9  P R C C o m p a n y L a w , art. 131.  4 1 0  W a n g & T o m a s i c , supra note 215 at 113.  4 1 1  Ibid, at 7 9 .  119 shall be submitted to the company registration authority in applying for the registration of the company.  412  Failure of submission may result in refusal to register the company.  413  Variation  of the registered capital shall also be registered with company registration authority.  414  The  minimum amount of the registered capital of a company limited by shares shall be RMB10,000,000.  415  In the case of FICLBS, the minimum requirement is RMB30,000,000.  416  This reflects the Chinese Government's concern over inadequate capitalization of companies. The policy theory behind these requirements is that when a company has adequate capital, its operations are likely to be smoother and the interests of the public (including the public shareholders and creditors) will not be easily adversely affected.  417  This policy is enhanced by  the harsh penalty provisions of both the PRC Company Law and criminal l a w .  4  "  418  P R C C o m p a n y L a w . art. 94(5).  4 1 3  P R C Company L a w , art. 9 5 .  4 1 4  A d m i n i s t r a t i v e Rules o f the People's Republic o f C h i n a G o v e r n i n g the Registration o f Companies, art. 2 8 .  4 1 5  P R C C o m p a n y L a w , art. 7 8 .  4 1 6  Provisional Regulations o n F I C L B S , art. 7.  4 1 7  W a n g & T o m a s i c , supra note 215 at 7 9 .  A r t i c l e 206 o f P R C Company L a w provides that: where a company i n its application for registration has made a false declaration w i t h regard to its registered capital and has obtained the approval for its registration, it shall be ordered to rectify the w r o n g doing and subject to a fine equal to five to ten percent (5-10%) o f the registered capital falsely declared; where the circumstances are serious, the registration o f the company shall be revoked. Where c o m m i s s i o n o f a crime is proved, the person responsible shall be subject to criminal liabilities i n accordance w i t h the l a w . 4 1 8  A r t i c l e 1 o f the D e c i s i o n o f the Standing Committee o f the National People's Congress Concerning Punishment o f the C r i m e Constituting V i o l a t i o n o f the Company L a w (Quanguo renda changweihui guanyu chengzhi weifan gongsifa fanzui de jueding) adopted 28 February 1995 by the Twelfth Session o f the Standing Committee o f the E i g h t h National People's Congress (in CCH: Business Regulation, v o l . 2 , supra note 1 f 13-520) provides: when applying for company registration, a person who provides false documentation or adopts other deceptive measures to falsely declare registered capital so as to defraud the Company Registration A u t h o r i t y i n order to obtain the  120  Secondly, Chinese companies may not issue stock for less than par value and shares issued at a premium shall require the approval of the securities authorities of the State Council.  419  These provisions may ensure that all investors pay the same amount per share and  hence effect an element of equity.  420  The principle of equity is one of the fundamental  principles of share issue under PRC Company L a w .  421  Furthermore, the conditions and price  of shares issued as part of the same share issue shall be the same.  Any entity or individual  422  subscribing to these shares shall pay the same price for each share. Low par value shares will not have the same effect under P R C Company Law as in Canada. FICLBS have to fulfill the minimum registered share requirement. Besides that, the capital surplus shall be allocated to the capital accumulation fund of the company which shall be used to recover the company's losses, to expand the production and operation of the 423  company or to increase the registered capital of the company.  Unlike common law, the  capital surplus is not available of dividends. company registration shall, i n cases i n v o l v i n g a large amount o f falsely declared registered capital entailing serious consequences, be sentenced to up to three (3) years imprisonment or criminal detention, and may concurrently have a fine o f an amount o f up to ten percent (10%) o f the falsely declared registered capital imposed. W h e n applying for company registration, a unit w h i c h has committed the aforesaid crimes shall be fined an amount o f up to ten percent (10%) o f the falsely declared registered capital and the principal person directly responsible and other persons directly responsible shall be sentenced up to three (3) years imprisonment or crime detention. 4 1 9  P R C C o m p a n y L a w , art. 131.  4 2 0  See A r t & G u , supra note 211 at 304.  4 2 1  P R C C o m p a n y L a w , art. 130, para. 1.  4 2 2  P R C C o m p a n y L a w , art. 130, para. 2.  4 2 3  P R C C o m p a n y L a w , arts. 178, 179.  121  3.3  Going public and flotation In Canada, as in the U K , the subject concerning going public and flotation is now  rightly regarded as a branch of securities regulation rather than company l a w .  424  This belief  may account for the failure of coverage of this subject in both federal and provincial company acts in Canada.  P R C Company Law refuses to accept the same belief by specifically  addressing the subject of going public and flotation. FICLBS may be established either through the method of promotion or the method of public issue.  425  P R C Company Law provides strict restrictions on the public issue.  The  promoters are not entitled to offer shares to the general public without the approval of the securities authorities of the State Council.  For the purpose of approval, the promoters must  submit the required documents including the particulars of the promoters, the underwriters and the bank in charge of accepting the subscriptions, the business forecast of the company and the prospectus.  426  Hence only upon the approval by the securities authorities of the State Council,  shall the prospectus enter into effect and serve as a contract between the issuer and the purchaser.  The issuer in question and the purchaser must conduct the transactions in  accordance with the terms and conditions of the prospectus.  A person distributing a false  prospectus shall be ordered to stop issuing such shares and to refund both the money so raised  424  425  426  See G o w e r , Prentice & Pettet, supra note 220 at 3 1 1 . Provisional Regulations on F I C L B S , art. 5. P R C C o m p a n y L a w , art. 84.  122 and interest on this amount to the subscribers, and shall be subject to a fine of one to five percent (1-5%) of the funds thus raised. Where commission of a crime is proved, criminal responsibilities shall be affixed.  427  The business forecast letter which is required to be  submitted to the securities authorities of the State Council should be carefully drafted in view 428  of the prohibition of submission of false document or the use of other means of deception. A widely over-optimistic business forecast could well come within this category.  429  PRC Company Law has a separate chapter addressing listed companies. policy of strict State control is evident in this chapter as well.  The same  Both domestic and overseas  listings of the shares of FICLBS shall be subject to the approval of the State Council or securities authorities under the State Council.  430  FICLBS must satisfy five (5) specific  conditions in order to be approved for share listing including a history of profitable business of more than three (3) years.  431  Listed FICLBS are required to regularly and publicly disclose  their financial and business situations. A financial accounting report shall be publicized every  P R C C o m p a n y L a w , art. 9 0 . The criminal responsibilities referred to i n this article are detailed i n art. 3 o f the D e c i s i o n o f the Standing Committee o f the National People's Congress Concerning Punishment o f the C r i m e Constituting V i o l a t i o n o f the Company L a w . A person who issues shares with a false prospectus shall, i n cases i n v o l v i n g a large amount and entailing serious consequences, or i n other serious circumstances, be sentenced to up to five (5) years imprisonment or criminal detention, and may concurrently have a fine imposed o f up to five percent (5%) o f the funds thus subscribed. A unit ( i . e . , institutional promoter — author) w h i c h has committed the aforesaid crimes shall be fined up to five percent (5%) o f the funds illegally subscribed and the principal personnel directly responsible and other personnel directly responsible shall be sentenced to up to five (5) years imprisonment or criminal detention. 4 2 8  P R C C o m p a n y L a w , art. 206.  4 2 9  W a n g & T o m a s i c , supra note 215 at 83.  4 3 0  P R C C o m p a n y L a w , arts. 153, 155.  4 3 1  P R C C o m p a n y L a w , art. 152.  123 half year of each fiscal year.  432  The securities authorities of the State Council has the right to  suspend or terminate the listing of FICLBS in certain circumstances including three consecutive years of losses.  3.4.  433  Dividends The profits of a company may be accumulated by the company or paid out, in whole or  in part, in the form of dividends.  Distributions of the profits of the company among the  shareholders in respect of their shares are described as dividends. Under Canadian law, such distribution is usually made by resolution of the directors declaring a dividend of a certain sum per share or at a rate per cent upon the shares (if they have par value) to be payable on a certain date to shareholders of record as of a specified date subsequent to the date when the resolution is passed.  The articles generally empower the  directors to declare dividends. Articles of companies incorporated by registration sometimes authorize the declaration of dividends by the company in general meeting, or by the directors with the sanction of a general meeting.  Any special regulations as to dividends in the  governing act, letters patent, supplementary letters patent, by-laws, memorandum or articles must be observed.  434  P R C C o m p a n y L a w , art. 156. P R C C o m p a n y L a w , arts. 157, 158. Sutherland, Fraser's Handbook, supra note 249 at 437.  124 Two rules have been developed under the common law.  First, a company cannot  declare dividends if the payment would constitute a return of capital to the shareholders. Paying dividends out of the share capital of a company is prohibited.  435  Some of the older  Canadian acts expressly prohibit the payment of dividends which will impair the capital of the company.  436  Secondly, as a general rule dividends may not be paid if there are reasonable  grounds for believing that the company is, or would be, after the payment, unable to pay its liabilities as they become due or that the realizable value of the company's assets would be, as a result, less than the aggregate of its liabilities and stated capital of all losses.  437  This rule has  438  been widely codified in various jurisdictions in Canada. Under P R C Company Law, the plans for the distribution of profits and loss recovery of FICLBS are formulated by the board of directors.  439  Such plans shall be subject to the review  and approval of the general meeting by ordinary resolution.  440  P R C Company Law is silent  on the two common law principles, although arguably the approval system of the reduction of  Verner v. General & Commercial Investment Trust, [1894] 2 C h . 239 ( C . A . ) . 4 3 6  4 3 7  Sutherland, Fraser's Handbook, supra note 249 at 4 3 7 . Ibid.  These jurisdictions include federal (see s. 42 o f C B C A ) , Alberta (see s. 40 o f A B C A ) , B r i t i s h C o l u m b i a (see s. 151(l)(c) o f B C C A ) , M a n i t o b a (s. 40 o f M a n i t o b a Companies A c t , R . S . M . 1987, c. C 225), N e w B r u n s w i c k (s. 41 o f N e w B r u n s w i c k Companies A c t , R . S . N . B . 1973, c. C - 1 3 ) , Newfoundland (s. 76 o f Newfoundland Companies A c t , R . S . N . 1990, c. C - 3 6 ) , Ontario (s. 38(3) o f O B C A ) , Prince E d w a r d Island (ss. 65 and 66 o f Prince E d w a r d Island Companies A c t , R . S . P . E . I . 1988, c. C - 1 4 ) , Quebec (s. 94 o f Quebec Companies A c t , R . S . Q . 1977, c. C-38) and Saskatchewan (s. 40 o f Saskatchewan Business Companies A c t , R . S . S . 1978, c. B - 1 0 ) . 4 3 8  4 3 9  P R C C o m p a n y L a w , art. 112(5).  4 4 0  P R C C o m p a n y L a w , arts. 103(7), 106.  125 the registered capital ensures that share capital of FICLBS will not be impaired by dividends. In contrast to the Canadian company law, PRC Company Law reflects distinctive Chinese characteristics.  P R C Company Law controls the allocation of FICLBS' profits and protects  specified interests of corporate continuances other than shareholders.  441  Under P R C Company Law, FICLBS are required to allocate ten percent (10%) of their annual after-tax profits to the statutory accumulation fund, and five percent (5%) to the statutory welfare fund.  442  The statutory accumulation fund is the ongoing balance of a portion  of the company's profits, minus all of its losses, dividends, and other transfers.  The premium  income derived from issuing shares at a premium by FICLBS shall be set aside to a special account - the capital accumulation account.  443  Both the capital and statutory accumulation  fund shall be used to recover FICLBS' losses, to expand the production and operation of the FICLBS or to increase the registered capital.  444  Hence the capital surplus is not available for  dividends. The statutory accumulation account starts at zero when FICLBS are first organized. When FICLBS suffer business losses, as calculated on its Income Statement (also known as Profit and Loss Statement), the amount will be subtracted from the statutory accumulation fund. The number this calculation produces may be negative. As long as the number remains negative, all future profits must be allocated exclusively to the account. FICLBS are relieved  A r t & Gu, supra note 211 at 305. P R C C o m p a n y L a w , art.  177.  P R C C o m p a n y L a w , art. 178. P R C Company L a w , art. 179.  126 from the obligation of allocation if the accumulated amount of the statutory accumulation fund has exceeded fifty percent (50%) of the registered capital.  445  However, no corresponding  provision is set out in respect of statutory public welfare funds.  This in fact entitles the  workers and other personnel who have access to the statutory public welfare funds to 5%-10% profits without any shareholding basis.  Shareholders may find such provisions unfair and  onerous, especially when considering that all FICLBS are usually very large in terms of the amount of capital and the number of shareholders.  The regulation of profit allocation is  viewed as a reflection of the traditional role Chinese enterprises played in providing life time employment, housing, medical care, retirement, and other social services to their workers. Requirements for welfare funds and the regulation of the use of accumulation funds appear oriented  toward maintaining, in some measure, the traditional social  functions  and  responsibilities of enterprises for their workers. After the mandatory allocations, FICLBS have discretion in distributing their profits. The shareholders may decide to allocate profits to a discretionary accumulation fund -essentially retaining the profits in the business.  Alternatively, remaining profits may be  distributed as dividends to shareholders.  IIL  Summary  A r t & G u , supra note 211 at 305-306. A l s o see P R C Company L a w , art. 177.  127 In addition to civil law, common law also has great influences on FICLBS in the context of company law. However, FICLBS demonstrate distinctive Chinese characteristics as well. Specific analysis of these characteristics reveals that they are different form each other and rich in kind. Due to the lack of a clear definition, Chinese characteristics may be randomly explained. This contributes to the uncertainty of the future of FICLBS.  128  CHAPTER V  CONCLUSION  Since Deng Xiaoping took power in 1978, China has been exercising the policy of opening up to the outside world, the purpose of which is to join the world economy. It culminated in China's application for rejoining the GATT in 1986. For this purpose, various measures are taken to make China meet the requirements of G A T T and W T O and comply with international practice. As a result, China permits foreign access to its domestic prime securities market which accounts for the permission of establishment of FICLBS.  Among other results, China has been exercising national treatment to foreign  investment enterprises in order to create a better investment environment.  China is also  reforming its domestic enterprise system with the purpose of compliance with international practice. A l l of the above policies have significant influences on FICLBS. On the other hand, China has always been trying to maintain the so-called Chinese characteristics despite the fact that there is no generally accepted definition of Chinese characteristics. FICLBS are a product of the above policies.  The different effects of different  policies make FICLBS a contradiction in various senses. In the context of foreign investment law, FICLBS are based on the Old Foreign Investment Regime.  FICLBS are governed by the legal provisions relating to foreign  investment regime.  Therefore, FICLBS shall be subject to the differential treatments  enjoyed by foreign investment enterprises. Although China is in the process of exercising national treatment and has been cancelling some preferential treatments of foreign  129 investment enterprises, there exists a substantial amount of tax and other preferential treatments available to foreign investment enterprises. FICLBS avails FICLBS to such treatments.  The foreign investment nature of  In the meantime, foreign investment  enterprises are subject to special State administration and control. In order for FICLBS to comply with those legal provisions applicable to them, it is also necessary to make clear what are legal provisions governing foreign investment regime and how they apply to FICLBS.  Unfortunately, the provisions of foreign investment enterprises are very  complicated and inconsistent in some aspects. Furthermore, it is difficult to define what are foreign investment enterprises. Hence this thesis proposes a few rules about how to apply foreign investment legal provisions to FICLBS. At the same time, various State and Party policies give various characteristics to FICLBS and make them different from other foreign investment enterprises. As a result of foreign access to China's prime securities market, the scope of investors of FICLBS is much broader than the three other forms of foreign investment which exclude Chinese individual investors. Permission of Chinese individuals and individual businesses to participate in FICLBS is significant to FICLBS because of the increasing financial strength of Chinese individuals and individual businesses.  Such funds  constitute an integral and important financing source for FICLBS. As a result of national treatment, FICLBS enjoy all the four forms available to foreign investment enterprises and domestic enterprises respectively. Land use rights have always been a big issue to foreign investment enterprises because in China all the land is owned by the State or collectively owned.  The availability of all the four forms of land use rights gives FICLBS much  130 flexibility in selecting the land use form. However, the inherent problems with the land use system in China are not resolved. As a result of maintaining Chinese characteristics, the approval system of FICLBS is quite different from that of the other foreign investment forms.  FICLBS do not adopt the multi-level approval system governing other foreign  investment enterprises. FICLBS are subject to the final approval of MOFTEC as a result of strict State control. This solves many problems with the multi-level approval system such as ultra vires approval and delegation of approval authority.  Approval process is the  beginning of FICLBS. A clear-cut and succinct approval system will surely benefit foreign investors of FICLBS. With regard to dissolution, the dissolution regime of FICLBS does not mandate liquidation in the cases of merger, dissolution and buyout.  This is a  development from the Old Foreign Investment Regime which unnecessarily requires liquidation in the above cases. The evaluation of assets is an integral part of the dissolution. FICLBS regime is silent on this issue. Investors have to make detailed provisions in the articles of association of FICLBS. In sum, on one hand FICLBS are based on and develop the Old Foreign Investment Legal Regime. On the other hand FICLBS demonstrate their own characteristics and present their own problems. In the context of company law, FICLBS are greatly influenced by both common law and civil law as a result of the policy of joining the world economy.  There are much  literature on the civil law influence on China's company legislation. But little attention is paid to the common law. In fact, common law also has substantial influence on FICLBS. The influence of common law on FICLBS is manifest in various respects including  131 incorporation, corporate liability, corporate governance, shares, etc.. On the other hand, various Chinese characteristics are intentionally remained. These Chinese characteristics can be found in many phases and aspects of FICLBS.  This thesis tries to reveal these  characteristics through review of the corporate capacity, corporate governance, shares and dividends of FICLBS.  With regard to corporate capacity, the ultra vires doctrine is  remained in China as a part of the State's efforts to control the activities of FICLBS so that they comply with State policies and plans.  With regard to corporate governance, the  shareholders' meeting is the supreme authority within FICLBS although the exercising of powers on the part of the shareholders has to rely heavily on the directors. FICLBS are represented by their respective legal representatives.  As the management of FICLBS, the  directors bear fiduciary duties to the company but are restricted by the public and employees' interests to a limited extent. With regard to shares and dividends, China does not expressly permit differentiating shares into different classes.  Besides that, only par  value shares are permitted to be issued and no par value shares are prohibited.  These  Chinese characters make FICLBS different from the companies limited by shares in the Western legal regimes.  They find their roots in social, historical, political and cultural  factors of China. Both foreign investors and foreign scholars may be unfamiliar with these characteristics because they are unique to China. Many of such characteristics are reflected in important aspects of FICLBS including corporate capacity, corporate management, shares and dividends. Therefore, this thesis devotes efforts to reveal and analyse these Chinese characteristics.  132 The policy basis of FICLBS determines that FICLBS will be inevitably affected by the change of the Party and State policies in the process of China's further reform and opening up although China has always been trying to assure foreign investors that China will keep its policies consistent.  446  However, within the policies underlying  FICLBS such as the Chinese characteristics to be maintained, some of them (e.g., legal representative) are so deeply rooted in the history and other factors of China that they are unlikely to be changed easily and within a short time.  While issues such as the  problem of land use rights deriving from the rigid implementation of national treatment should be able to be solved without much difficulty because both the land use legal regime and the national treatment policy are of a much short history and do not have deep social and economic roots. However, FICLBS, as a new form of investment available to foreign investors, are significant in terms of permitting foreign access to China's primary securities market through issuing shares to the public and listing in domestic stock exchanges. Before the permission of FICLBS, foreign investors are only allowed to trade B shares issued by Chinese domestic enterprises. FICLBS are an important step forward in the process of China's opening up.  It seems that no matter how specific policies are  changed, the basic policy of openness and joining the world economy will not be  F o r example, Deng X i a o p i n g reiterated for several times that "there is no need to w o r r y that our policies might change" i n a 73-page thin book. 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