Provisions of the Supreme People's Court on Several Issues Concerning the Hearing of Cases about Disputes Involving Foreign-funded Enterprises (I)

Fa Shi [2010] No. 9

August 5, 2010

The Provisions of the Supreme People's Court on Several Issues Concerning the Hearing of Cases about Disputes Involving Foreign-funded Enterprises (I) ("the Provisions"), which was
adopted at the 1487th session of the Judicial Committee of the Supreme People's Court on May 17, 2010, are hereby promulgated and shall come into effect on August 16, 2010.

These Provisions were enacted for the purpose of hearing cases about disputes arising out of the processes involved in establishing foreign-funded enterprises, or making changes to such enterprises, etc. correctly, and protecting the legal rights and interests of the parties concerned. The Provisions have been formulated in accordance with the General Principles of Civil Law of the People's Republic of China, the Contract Law of the People's Republic of China, the Real Rights Law of the People's Republic of China, the Company Law of the People's Republic of China, the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, and other laws and regulations, in conjunction with trial practices.

Article 1 In instances where any law or administrative regulation prescribes that a contract shall not come into effect until being approved by the approval authority for foreign-funded enterprises if concluded during the process of establishment of or alteration made by a foreign-funded enterprise, or pending matters related to a Foreign-funded enterprise, the People's Court shall uphold that such contract has not come into effect where no such approval has been granted. Where the concerned parties apply for recognition of the invalidity of the contract, the People's Courts shall deny such application.
In instances where the aforesaid contracts are deemed invalid due to their failure of being approved, it shall not affect the validity of the relevant clauses which the parties to the contract conclude concerning their obligations of submission for approval and other clauses created due to the obligation to submit for approval.

Article 2 Where the parties concerned reach any supplementary agreements on relevant issues with the foreign-funded enterprises, which do not constitute a material or substantive change to the contract's terms that have been approved by the approval authority for foreign-funded enterprises, the People's Court shall not rule that such supplementary agreement has not come into effect due to its failure of being approved.
The term "material or substantive change" as used in the preceding paragraph includes a change in registered capital, corporate type, business scope, operating term, capital contributed by shareholders, means of capital contribution, corporate merger or division, equity transfer, etc.

Article 3 Where any contract falls within any of the circumstances of invalidity as stipulated by laws and regulations, the People's Court shall rule it invalid or void even if it has been approved by the relevant approval authority for foreign-funded enterprises. Where any party requests the discharge of any contract which is certified as voidable in accordance with laws and administrative regulations, the People's Court shall uphold such request.

Article 4 In contract for foreign-funded enterprises, where it has been agreed that any of the parties shall contribute capital by way of subject matter which requires registration of a change in ownership, or provide conditions for cooperation, and the subject matter has been delivered to the foreign-funded enterprise for actual use, and the party obligated for processing the registration for the change in ownership has processed such registration within a reasonable period of time as stipulated by the People's Court, the People's Court shall determine that the party has fulfilled the obligations for the capital contribution, or provision of conditions for cooperation. Where the foreign-funded enterprise or its shareholders claim that the party is not entitled to rights and interests of shareholders due to the party's failure in fulfilling obligations for the capital contribution, the People's Court shall reject such claim.
Where a foreign-invested enterprise or any of its shareholders proves that the party was late in proceeding with the registration formalities for the changes in ownership, thus resulting in losses to the foreign-invested enterprise and claims for damages, the People's Court shall uphold all such claims.

Article 5 After a foreign-invested enterprise equity transfer contract is concluded, if the transferor and the foreign-invested enterprise fail to perform their obligation to report for approval, and continue to fail to perform such obligation within a reasonable period after being urged by the transferee, and the transferee requests rescission of the contract, return of the payment for the equity transfer and compensation for their actual losses caused by their failure to report for approval, the People's Court shall uphold all such claims.

Article 6 If after a foreign-invested enterprise equity transfer contract is concluded, the transferor and the foreign-invested enterprise fail to perform their obligation to report for approval, and the transferee brings a lawsuit with the transferor being the defendant and the foreign-invested enterprise as the third-party, requiring the transferor and the foreign-invested enterprise to jointly perform their obligation to report for approval within a specified time limit, the People's Court shall uphold such claim.
Where, at the same time, the transferee takes it upon itself to request reporting for approval, in the event the transferor and the foreign-invested enterprise fail to perform their obligations to report for approval within the time limit determined by the effective judgment, the People's Court shall uphold such request.
Where the transferor and the foreign-invested enterprise refuses to perform their obligations to report for approval within the time limit determined by the effective judgment, and the transferee brings a lawsuit and claims for rescission of the contract and compensation for losses, the People's Court shall uphold such claims. The scope of compensation shall include losses of difference between equity prices, proceeds from equity and other reasonable losses.

Article 7 Where the transferor, foreign-invested enterprise or the transferee reports the foreign-invested enterprise equity transfer contract for approval in accordance with Paragraph 1 Article 6 hereof, and fails to obtain the approval of the foreign-invested enterprise examination and approval authority, and the transferee brings a lawsuit otherwise, making a claim against the transferor to return the payment for equity transfer, the People's Court shall uphold such claim.
Where the transferee makes a claim against the transferor to compensate the losses thus incurred, the People's Court shall determine whether the transferor's liability to compensate, and the specific amount of compensation owed based on whether it was at fault, and the degree of such fault.

Article 8 Where the foreign-invested enterprise equity transfer contract specifies that the transferor will report for approval only after the transferee makes payment for equity transfer, and the transferee fails to make payment for equity transfer and still fails to make such payment within a reasonable period after being urged by the transferor, in the event the transferor claims for rescission of the contract and compensation for the actual losses caused by delay of performance, the People's Court shall uphold such claims.

Article 9 If the transferee fails to make payment for equity transfer, and the transferor and the foreign-invested enterprise fail to perform their obligations to report for approval after a foreign-invested enterprise equity transfer contract is concluded, if the transferor makes a claim against the transferee for payment of equity transfer price, the People's Court shall suspend the hearing, and order the transferor to report for approval within a specified time limit. In the event the equity transfer contract is approved by the foreign-invested enterprise examination and approval authority, claims by the transferor for payment of the transfer price shall be upheld by the People's Court.

Article 10 If after a foreign-invested enterprise equity transfer contract is concluded, the transferee actually engages in the business operation and management of the foreign-invested enterprise and has obtained proceeds therefrom, but the contract has not been approved by the examination and approval authority, the transferor's claims against the transferee to withdraw from the business operation and management of the foreign-invested enterprise, and to pay to it the proceeds obtained by the transferee from engaging in the actual business operation and management less relevant costs and expenses, then the People's Court shall uphold such claim.

Article 11 Transfer of all or part of the equity by a shareholder of a foreign-invested enterprise to a third party other than to the other shareholders shall be unanimously agreed upon by the other shareholders. Where any of the other shareholders' bring claims for the revocation of the equity transfer contract by reason of failure to obtain its consent, the People's Court shall uphold such claim except under any of the following circumstances, namely:
1. There is evidence supporting that the other shareholders have agreed to such transfer;
2. The transferor gave written notice of the equity transfer, but the other shareholders failed to reply thirty (30) days after the receipt of such written notice; or,
3. Other shareholders disagree with the transfer, and did not purchase the equity being transferred.

Article 12 Where a shareholder of the foreign-invested enterprise transfers all or part of its equity to a third party besides the other shareholders, the People's Court shall uphold a claim made by the other shareholders for the revocation of the equity transfer contract because that transfer violated their pre-emptive right, except if other shareholders fail to exercise their pre-emptive right within one year from the date they know, or should have known about the conclusion of the equity transfer contract.
Where the aforesaid transferor and transferee claim for the confirmation of the invalidity of the equity transfer contract because it violated other shareholders' pre-emptive right, the People's Court shall not uphold such claim.

Article 13 An equity pledge contract entered into by the shareholders of a foreign-invested enterprise and the creditor shall come into effect when it is concluded, unless otherwise provided for by law and administrative regulations, or otherwise agreed upon by the contract. Failure to go through the process of registering the pledge shall not prejudice the effect of the equity pledge contract.
In the event the party concerned claims that the equity pledge contract is null and void, or has not come into effect by the reason that it has not been approved by the foreign-invested enterprise examination and approval authority, the People's Court shall not uphold such claim.
Where the equity pledge contract has been registered in accordance with the relevant provisions of the Property Law, the pledge on equity is established upon such registration.

Article 14 Where the parties concerned agree that one party is an actual investor and the other party serves as the nominal shareholder of the foreign-invested enterprise, and the actual investor makes a claim for the confirmation of its shareholder status in the foreign-invested enterprise, or for an alteration to the shareholder(s) of the foreign-invested enterprise, the People's Court shall not uphold such claim, unless all of the following conditions are satisfied simultaneously:
1. The actual investor has actually made an investment;
2. Shareholders other than the nominal shareholder recognize the shareholder status of the actual investor; and,
3. The People's Court or the parties concerned have obtained the approval of the examination and approval authority for foreign-invested enterprises to change the actual investor into a shareholder during the course of the litigation.

Article 15 Where the contract agrees that one party is an actual investor and the other party serves as the nominal shareholder of the foreign-invested enterprise, which do not qualify as being invalid as specified by the laws and administrative regulations, the People's Court shall confirm such contract to be valid.
Where one party claims that the contract is null and void, or has not come into effect because it has not been approved by the examination and approval authority, the People's Court shall not uphold such claim.
Where the actual investor requests that the nominal shareholder of the foreign-invested enterprise perform corresponding obligations as per the agreement, the People's Court shall uphold such request.
In the event both parties fail to agree to the distribution of profits, and the actual investor makes a claim against the nominal shareholder of the foreign-invested enterprise to hand over the proceeds obtained from the foreign-invested enterprise, the People's Court shall uphold such claim.
Where the nominal shareholder of the foreign-invested enterprise makes a claim against the actual investor for the payment of necessary remuneration, in light of the circumstances, the People's Court shall uphold such a claim.

Article 16 The People's Court shall uphold such claims, in the event the nominal shareholder of the foreign-invested enterprise fails to perform its contract between the actual investor, which renders the actual investor unable to realize the contractual objectives, and the actual investor claims for the rescission of the contract and the assumption of liability for breach of contract by the nominal shareholder of the foreign-invested enterprise.

Article 17 The People's Court shall not uphold such claims where the actual investor makes a direct claim against the foreign-invested enterprise for the distribution of profits or to exercise the rights of other shareholders as per its agreement with the nominal shareholder of the foreign-invested enterprise.

Article 18 Where the contract between the actual investor and the nominal shareholder of the foreign-invested enterprise is determined to be null and void, and the value of the equity held by the nominal shareholder is higher than the actual amount of the investment, if the actual investor asks the nominal shareholder to return the investment sum and distribute a reasonable amount of the return on equity between both parties, according to the circumstance of the actual investment made by the actual investor, and the circumstance of nominal shareholder participating in the operation and management of the foreign-invested enterprise, the People's Court shall uphold it.
Where the nominal shareholder of the foreign-invested enterprise specifically represents to abandon the equity, or refuse to hold the equity continually, the People's Court shall order the return of the amount of the investment to the actual investors by auction, or by selling the equity of the foreign-invested enterprise, and order to make a reasonable distribution of the other items according to the circumstances of the actual investment made by the actual investor, and the circumstance of the nominal shareholder participating in the operation and the management of the foreign-invested enterprise.

Article 19 Where the contract between the actual investor and the nominal shareholder of the foreign-invested shareholder is determined as null and void, and the value of the equity is lower than the actual amount of investment, if the actual investor asks the nominal shareholder to return the equivalent value of the existing equity, the People's Court shall uphold it.
Where the nominal shareholder of the foreign-invested enterprise specifically represents to abandon the equity or refuses to hold the equity continually, the People's Court shall order the return of the amount of investment to the actual investors by auction, or selling the equity of the foreign-invested enterprise.
Where the actual investor asks for the payment of losses by nominal shareholder, the People's Court shall determine whether the nominal shareholder should undertake the compensation responsibilities or the detailed compensation amount according to the facts if the nominal shareholder make a mistake on the voiding of the contract and the extent of the error, if there is any.

Article 20 Where the contract between the actual investor and the nominal shareholder of the foreign-invested enterprise is determined null and void for causing damage to state interests, the collective and the third party due to malicious conspiracy, the People's Court shall return the property obtained to the State, the collective and the third party.

Article 21 Where one shareholder of the foreign-invested enterprise or the foreign-invested enterprise applies for a change of the shareholders recorded in the Approval Certificate of Foreign-invested Enterprise by providing false material, or using other illegal or inappropriate means, causing the other-party shareholder to lose their status as shareholders of the foreign-invested enterprise or their original shares, if the other-party shareholder asks for confirming the status of the shareholders or the original shares, the People's Court shall uphold it, except that the third party has obtained the equity in bona fid.
Where the other-party shareholder asks for compensation of losses caused by the infringement shareholder, or the foreign-invested enterprise, the People's Court(s) shall uphold it.

Article 22 The People's Court shall apply these Provisions by reference when trying relevant cases pertaining to disputes arising out of enterprises invested and established by investors from the Taiwan region, Hong Kong Special Administrative Region, Macau Special Administrative Region, as well as Chinese citizens residing overseas.

Article 23 These Provisions shall be applicable to cases that are still in the first or second trial after these Provisions have come into effect. With regards to the cases for which the final instance has been completed prior to the implementation of these Provisions, these Provisions shall not be applicable when the People's Court re-tries the case.

Article 24 Where the relevant judicial interpretation made by the Supreme People's Court prior to the implementation of these Provisions Contravene these Provisions, these Provisions shall prevail.