Setting Up A Share Capital Company In China

Foreign Invested Companies Limited by Shares (FICLS)

The establishment of a Foreign Invested Company Limited by Shares (also known as a ?joint stock company?) was designed to accommodate investors seeking to issue shares to the public or to list on the Shanghai, Shenzhen or foreign stock exchanges (under Chinese foreign investment law nomenclature, the Hong Kong Stock Exchange qualifies as a ?foreign? stock exchange. Consequently, the establishment of FICLS is subject to stricter conditions than the establishment of Equity Joint Ventures, Cooperative Joint Ventures, and Wholly Foreign Owned Enterprises ? so far, applications for the establishment of FICLS have been denied more often than not. Although an FICLS may be set up directly, a Joint Venture is eligible to convert to an FICLS after three profitable years if it meets the conditions set forth below.

The Registered Capital of an FICLS must be no less than 5 million RMB (about US$ 625,000). There be at least 5 shareholders, and 25% foreign shareholding is required. Like the Equity Joint Venture, profits and liquidated net assets must be distributed in proportion to shareholding.

Promoters At least two promoters are required to form an FICLS, and more than half of them must reside in China. Further, a promoter?s shares in an FICLS are subject to a 3 year lock-up (they cannot be transferred within 3 years of the date of establishment of the company). Share buy-backs are not permitted except under limited circumstances. The promoters? share capital must be at least 35% of total share capital if shares are offered to the public.

Shares All shares may be paid for in cash or property, in lump sum or installment payments. The initial installment payment must be at least 20% of the total share capital, and promoters must pay in full within 2 years after the date that the Business License is issued. Stricter requirements may be set out in the Articles of Association if so desired.

Corporate Governance

Management must be in proportion to shareholding. An FICLS must appoint at least 3 members to a supervisory board, which is responsible for supervising the performance and regulatory compliance of directors and senior executives, and monitoring the company?s financial affairs. This requirement is more strictly enforced than is the case with Joint Ventures and Wholly Foreign Owned Enterprises.

An FICLS must appoint between 5 and 19 directors. Board meetings are required biannually with at least 10 days notice. 50% of the directors constitutes a quorum. A special meeting may be forced by one-third of the directors or supervisors, or shareholders holding 10% or more of the share capital. Significantly for minority shareholders, all board decisions must be passed by majority vote or (in the case of important decisions such as termination, increase or decrease of Registered Capital, etc.) by a two-thirds majority vote ? unanimous approval cannot be required. Thus a 25% foreign shareholder would have no veto power over any board decisions.

David Carnes is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. Check out his website, China Legal Bulletin, at http://www.lunaticwisdom.com/blog1.