Companies Limited by Shares

It is required under the Company Law that no company limited by shares may have less than five promoters. However, neither the Company Law nor the Tentative Provisions have specified the minimum shareholding held by, or minimum amount of capital contributed by, each promoter. It is interesting but not surprising to see some promoters in practice holding only a 0.1% stake or even one share in some CLSFIs that have been approved.

Term of Existence

An Equity Joint Venture (EJV) engaging in certain lines of business will have a prescribed specific term of existence. For example businesses such as engaging in service trades, land development or real estate business, the exploration or development of natural resources or projects subject to investment restriction as stipulated by the State. In principle, the term of existence for an EJV is between 10 years to 30 years. This term may be extended up to 50 years for those joint ventures engaged in projects encouraged or permitted by the PRC government. If an EJV has no specific term of existence, the joint venture contract shall stipulate the conditions and procedures of termination, as well as principles for dissolution and distribution upon termination of the EJV. There is no restriction under current law on the term of existence of a company limited by shares, including a CLSFI. In practice, there have been precedents in which CLSFIs of permanent duration have been officially approved.

Veto Right of Minority Shareholders

According to the PRC Sino-foreign Equity Joint Venture Law (中华人民共和国中外合资经营企业法)(EJV Law), the board of directors rather than the general shareholders' meeting is an EJV's highest governing organ. Unanimous approval of directors present at the board of directors meeting is required to pass a resolution amending the articles of association, suspending or dissolving, increasing or transferring the registered capital, and merging. Such a requirement has granted minority shareholders a right of veto with respect to the above issues.

Where the Chinese party to an EJV is a minority shareholder and waives such right of veto in the articles of association of the EJV, it is unlikely that the waiver will be recognized as effective by the relevant approval authority or court. The majority shareholder of a CLSFI is better off than that of an EJV in this regard.

It is stated in the Company Law that a company limited by shares shall have a general shareholders' meeting and a board of directors as its governing organs. However, for a company limited by shares, there is no mandatory requirement that the resolution of the general shareholders' meeting / board of directors on certain issues be subject to the unanimous approval of the shareholders/directors. Even for material matters, such as the merger division or dissolution of the company or amendment to articles of association, two thirds of the voting rights held by the shareholders present at the general shareholders' meeting is sufficient for making the resolution effective under the Company Law. It is not uncommon that the major foreign shareholder of an EJV gets into trouble when it fails to obtain the unanimous approval of the board of directors for its motion to increase the registered capital of the EJV. Such trouble does not exist for the major shareholder of a company limited by shares, except as otherwise provided in its articles of association.

Share Transfer

Under the EJV Law, the transfer of shares by a shareholder of an EJV to a non-shareholder shall be subject to the agreement of the other shareholders, who hold the preemptive right to purchase. It is provided in the Company Law that the shareholder(s) of a limited liability company disagreeing with the transfer shall purchase the shares to be transferred, and shall be deemed in agreement with the transfer if they fail to purchase.

The above provision is not considered by the approval authorities or courts as applicable to EJVs. The success of share transfer by a shareholder of an EJV is at the discretion of the other shareholder(s). The Company Law does not require that the transfer of shares of a company limited by shares by a shareholder shall be conditioned on the agreement by other shareholders. Unless otherwise required by the articles of association, the transfer of shares of a company limited by shares is at the sole discretion of the transferor, provided that such transfer is in compliance with Articles 147 and 149 of the Company Law and the mandatory provisions of other laws and regulations. For the transfer of negotiable shares of a listed company, the relevant regulations of the PRC, Securities Law and the listing rules of the relevant stock exchanges shall also be complied with.

In contrast with EJVs, CLSFIs enjoy the privileges of raising capital via the public issue of new shares and listing on stock exchanges.

By Charles Qin,
Llinks Law Office, Shanghai