An alternative investment option to WFOEs and JVs is a foreign-invested company limited by shares (FICLS). Therefore, today the present entry is about the Foreign Company Limited by Share. This instrument is rarely considered because it is a little bit more complicated to structure, and because even though big companies are considering China the next emerging market they are usually implementing other forms of (classic) investment.
Introduction to the
Foreign Company Limited by Shares
A
foreign company limited by shares
refers to a legal person enterprise, whose total capital is composed of shares of equal value and whose foreign shareholder (or shareholders) contributes 25% or more of its
registered capital.
On 10 January 1995 the
Ministry of Foreign Trade and Economic Cooperation
promulgated the
Provisional Rules on Several Issues Concerning the Establishment of Foreign Companies Limited by Shares
(available at:
http://www.jus.uio.no/lm/china.establishment.of.foreign.funded.joint.stock.companies.provisional.regulations.1995/doc.html
) allowing foreign companies, enterprises, other economic entities, or individuals (i.e. the foreign shareholder) to form foreign companies limited by shares with Chinese companies, enterprises or other economic organizations (the Chinese shareholder). The ‘
company limited by shares
’ bears liabilities with its total assets, while the shareholders bear liabilities in proportion to the number of their respective shares.
A
foreign company limited by shares
can be established by means of sponsorship or subscription (reference must be done to
Chapter V
of the
Company Law
(available at the following web-site:
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/company/the-company-law-of-the-peoples-republic-of-china.html
). If the company is to be established by means of sponsorship, the promoters must meet the requirements stipulated in the mentioned Company Law, and there must be at least one foreign promoter. On the other hand, if the company is to be established by means of subscription, not only the promoters must meet the requirements contained in the Company Law, but it is worth to underline that there must be at least one promoter who has successively made profits in the last three years.
The minimum amount of registered capital for this type of company is RMB 30 million. If a shareholder wants to transfer its shares, the consequential share holding of foreign shareholder must be at least 25% of the registered capital. The promoters can transfer their shares only if three years have passed since the registration of the company and the original examination and approval organ has given approval. Having reached an agreement on the establishment of
limited by shares
the promoters will entitle one of the parties to go through the formalities concerning the application. All the documents will be submitted to the MofCOM for review and final approval. In case of transfer of shares, the MofCOM must give its approval, in fact these transaction can change the structure of the company’s shareholding.
Within 90 days of the issue of the certificate of approval, the promoters must pay, in a lump sum, their respective subscribed shares. It the company cannot be established, the promoters will be jointly and severally liable for the expenses and debts incurred as a result of their promoting activities.
In case of establishment by means of sponsorship, the promoters must set up a board of directors and a board of supervisors after they have paid in full their subscribed shares. The board of directors must then submit the certificate of approval, the article of association, and the certificate of capital verification to the SAIC to register the establishment of the company.
In case of establishment by means of subscription, the promoters must first pay in full their subscribed shares and then have a legally designated capital verification organ (i.e. a Chinese accountant company) verify their payments and produce a certificate of capital verification.
Within 30 days of the issue of the certificate of capital verification, the promoters shall convene the founding meeting and elect a board of directors and a board of supervisors. The board of director shall, within 30 days of the closing of the founding meeting, submit the certificate of approval, the articles of association, the certificate of capital verification to the SAIC to apply for registration and obtain the business license.
In 2001 the MofTEC issued a Circular (i.e.
The Circular on Relevant Issues Concerning Foreign Companies Limited by Shares,
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/foreign-investment/circular-on-the-issues-concerning-the-foreign-invested-companies-limited-by-shares-2000.html
)
standardizing the listing of Foreign companies limited by shares. The Circular specifies the requirements for the listing, however reference must be also done to the Securities Law and to all the other relevant laws and regulations (by the CSRC –China Securities Regulatory Commission, and the Stock Exchanges) concerning the listing of companies limited by shares.
Finally, a foreign company limited by shares may rise capital by offering its shares to the public, thus this type of enterprise may rely more on equity than on debt to finance its operations. Moreover, since a foreign company limited by shares has more financial strength, it may operate on a larger scale and engage in a wider range of business activities. However, the establishment of a foreign company limited by share and the public offering require compliance not only with the rules concerning its establishment but also with the laws and regulations concerning the issuance of securities and the listing of companies in the Stock Exchanges (if to be listed).
It is possible to affirm that in the absence of regulatory restrictions, the FICLS structure would likely eclipse JVs and even narrow the gap with WFOEs in terms of popularity. But PRC law subjects FICLS to higher capital requirements and restricts FICLS founders to a three-year lock-up period during which they cannot dispose of their shares. A FICLS may be newly established or converted from an existing FIE. In the case of a conversion, the company must satisfy several requirements, including demonstrating that the existing Chinese company has been profitable for at least three consecutive years. In practice, a FICLS is better suited as a vehicle to acquire less than 100 percent interest in a profitable existing business rather than as a greenfield investment.
With this entry the panorama about the instruments which can be used to establish a presence in China is complete. In the next contribution I will examine the pro and cons of each investment instrument, in order to help the foreign investor in choosing the most appropriate vehicle to invest in China.
– Cristiano Rizzi