Sino-foreign Cooperative Educational Institutions

Establishment of Cooperative Educational Institutions

The Regulations provide that investors may contribute their investment in cash, tangible assets, and intangible assets such as land use rights and intellectual property. Unlike other foreign-invested enterprises, the maximum ratio of the contribution in the form of intellectual property of either party of a SFCEI may reach 1/3 of their respective total contribution. Furthermore, a foreign educational institution may exceed this limitation, upon invitation from the relevant government authorities.

The Regulations provide two procedures for the establishment of a Sino-foreign Educational Institution: Establishment Preparation and Formal Establishment. Unless the SFCEI is proven to meet all the required criteria, permitting it to apply for Formal Establishment directly, the investors of an SFCEI shall apply for Establishment Preparation first. Within three years after obtaining approval for Establishment Preparation, the investors may apply for Formal Establishment. Only after obtaining Sino-foreign Cooperative Education Permits can the SFCEI begin operation.

Administration of SFCEIs

In an attempt to supervise and administer the operation of SFCEIs, the Regulations set out several monitoring provisions, which are mainly reflected in four aspects.

Firstly, an SFCEI with independent legal person status must establish a board of directors or a council, while SFCEIs without independent legal person status must establish a cooperative administration committee. Like a foreign-invested enterprise, the board of directors, council or cooperative administration committee will be the highest decision-making body of the SFCEI.

Secondly, the Regulations require an SFCEI to formulate its financial, accounting and asset management system. They further provide that all fees collected shall mainly be utilized in educational activities and in improving educational facilities.

Thirdly, the Regulations set out some provisions concerning division, merger and liquidation of the SFCEIs. Liquidation is classified as either voluntary liquidation or mandatory liquidation. In both circumstances, the assets of an SFCEI shall be used to refund the tuition and related fees to the educatee, to meet the payroll and social welfare obligations of its employees, and to settle any other debts. The Regulations do not specify disposal of the remaining assets by referring to other laws and administrative regulations. It remains unclear whether investors are allowed to distribute the remaining assets.

Fourthly, the Regulations provide a variety of legal liabilities for violation of the obligations under the Regulations, which is believed to enhance the administration of the SFCEIs.

Protection of Educatees

The Regulations also introduce provisions for the protection of educatees, which mainly focus on some obligations of the SFCEIs, such as timely and accurate disclosure of recruitment information, supervision and approval of pricing systems, and assurance of the effectiveness and acknowledgement of the certificates and degrees of foreign educational institutions bestowed upon the educatees by the SFCEIs. It is expected that these measures will create more business opportunities for SFCEIs while emphasizing their obligations.

Core Issue _ Profit Distribution

Unsurprisingly, the Regulations do not touch on the sensitive point of whether SFCEIs are for-profit institutions. Although the Regulations grant SFCEIs ownership rights to assets and allow an SFCEI to open and maintain foreign exchange accounts, they provide an ambiguous and equivocal provision on profit distribution by stating that the remaining assets after liquidation shall be distributed according to relevant laws and administrative regulations. Obviously, it is anticipated that this provision will be challenged by related-party transactions, a profit transfer arrangement between the investors and the SFCEIs.