What's in a Name? China's New Foreign-invested Advertising Enterprises Regulations
May 02, 2004 | BY
clpstaff &clp articles &New regulations from the State Administration of Industry and Commerce and the Ministry of Commerce have opened the advertising market in China to greater foreign participation.
So much depends upon a brand name. And as a result of the growth of China's fiercely competitive consumer markets, where even a white goods manufacturer tries its hand at selling mobile phones, there are an estimated 47,000 advertising agencies in China. Can they benefit from the changing times?
As with many other industries in China, there are numbers and names to herald the auspicious times: China is the world's third largest advertising market, which, at US$14.5 billion, grew by 30% from last year. Most international advertising firms, including Ogilvy & Mather, Leo Burnett and Grey Global Group, are represented in the country, and their clients include both multinational companies and high profile Chinese ones such as China Mobile and Huawei Technologies. And the momentum is picking up. The recently issued Administration of Foreign-invested Advertising Enterprises Provisions (外商投资广告企业管理规定)(the New Provisions)1 spell out what foreign investors have been waiting for regarding China's advertising-related WTO commitments. Especially, this means a legal guide for gaining more substantial control over their operations in China. Also, in certain important respects the New Provisions update key provisions of the now-repealed 1995 Establishment of Foreign-invested Advertising Enterprises Several Provisions (the Original Provisions).2
Worlds Apart
As an enunciation of its advertising-related WTO commitments and a broader commentary on the development of China's economy in 2004 in a specific regulation, the New Provisions reflect in a substantial and practical manner many of the changes that China has undergone in the nine years since the issuance of the Original Provisions.
China's advertising-related WTO commitments on market access are: as of the date of accession (December 11 2001), Sino-foreign joint venture advertising enterprises allowed with maximum foreign ownership restricted to 49%; within two years from the date of accession (prior to December 11 2003) majority foreign stakes are allowed; and within four years from accession (prior to December 11 2005) foreign investors may establish wholly foreign-owned advertising enterprises. While the 2002 edition of the Foreign Investment Industrial Guidance Catalogue (the Catalogue) provided a schedule to open China's advertising industry based on these commitments, approval procedures, especially for wholly foreign-owned enterprises (WFOEs), were not specifically addressed. Also, still effective at that time were the Original Provisions and the Questions Concerning the Implementation of the «Establishment of Foreign-invested Advertising Enterprises Several Provisions»Circular, (also issued in 1995 and hereafter the 1995 Circular),3 which prohibited advertising WFOEs and, in principle, did not permit majority foreign stakes in advertising joint ventures.4
Clarification of Requirements
The New Provisions resolve such conflicts by clearly providing for majority foreign stakes in Sino-foreign joint venture enterprises, to a maximum of 70%.5 China's relevant WTO advertising commitments do not actually specify what percentage constitutes a "majority equity stake". Some may find the 70% limit on majority foreign stakes a bit low, but this should not be a real issue with advertising WFOEs to be permitted from December 10 2005.
Aside from definitively setting out the commitment schedule for advertising, the New Regulations also work to fill in the requirements and procedural blanks for establishing advertising WFOEs, and reduce and simplify the requirements and procedures for advertising joint ventures and branch companies.
The New Provisions eliminate those establishment requirements for advertising joint venture enterprises from the Original Provisions that were aimed to draw foreign technology and management experience to China, such as the ability to introduce "advanced international advertisement production technology and equipment" into China, to "engage in market investigation, advertising planning, and assessment of advertising effects", and to "train Chinese workers in the areas of advertisement design, production, and management".6 These are replaced with simple demands, including that the parties to the proposed advertising joint venture should be enterprises operating in the business of advertising (advertising need not be the major business of the enterprise, as was required in the Original Provisions),7 and that they have been established and operating for two or more years.8
The minimum registered capital requirement for advertising joint ventures follows this same trend toward inviting investment. While formerly set at US$300,000,9 the New Provisions now stipulate that in regard to establishment requirements the parties must adhere to the provisions of the "relevant laws and regulations".10 This mainly refers to the PRC Company Law(中华人民共和国公司法), theSino-foreign Equity Joint Venture Law(中华人民共和国中外合资经营企业法), the Sino-foreign Cooperative Joint Venture Law(中华人民共和国中外合作经营企业法), the Qualification Criteria for Advertising Operators and Issuers and the Norms for Verification of the Wording of Advertisement Scope, and the Sino-foreign Equity Joint Ventures Ratio of Registered Capital to Total Investment Several Provisions. Consequently, the new minimum registered capital amount could be Rmb500,000 (about US$60,750), or even less.11 The registered capital of advertising WFOEs will also be determined in accordance with "relevant laws and regulations", with the other requirements for advertising WFOEs being that investors be operating enterprises whose main business is advertising and the investors have been established and operating for three or more years.12
To establish a branch company, the New Provisions state that foreign-invested advertising enterprises must have fully paid in their registered capital and that their annual advertising turnover must be at least Rmb20 million.13 While making the requirement the "annual advertising turnover" as opposed to the "annual turnover" (as was in the Original Provisions) creates a more stringent standard, in general conditions have been relaxed. The former requirement that a foreign-invested advertising company must have three or more regular clients in the area where it intends to set up the branch14 has been removed.
Approval Authorities and Procedures
Many recently issued laws have sought to mitigate the administrative burden and increase transparency in approval processes, and the New Provisions act in kind. While the SAIC and MOFCOM (in place of the former MOFTEC) remain the primary approval authorities, with their responsibilities largely unchanged, approval by the responsible department of the Chinese party to the proposed advertising joint venture (if such party is an enterprise directly subordinate to a state department, commission, or authority)15 is no longer required. Also, in a move that should save investors valuable time, under prescribed conditions the provincial level counterparts of SAIC and/or MOFCOM may conduct examinations and issue approvals.16
The specific changes in the approval procedures for each form of foreign-invested advertising enterprise are as follows.
Sino-foreign Advertising Joint Ventures
The New Provisions state that the SAIC (or its authorized provincial counterparts) and the provincial counterparts of MOFCOM will be the approval authorities (the competent authorities under the Original Provisions were the SAIC and MOFCOM). In addition, the New Provisions remove the requirement to obtain the approval of the responsible department of the Chinese party to the joint venture. Aside from a change in the approval authority, the approval process is basically as it was before.17
Other notable changes include a shortened approval procedure; the SAIC (or its counterpart at lower levels) must conduct its examination and issue an approval within 20 days from receiving a complete application, as compared with 30 days previously. The New Provisions also increase transparency by requiring the provincial counterpart of MOFCOM to state in writing the reasons for disapproval of the application if such is the.
Advertising WFOEs
The New Provisions require that the SAIC and MOFCOM be the competent authorities, and approval procedures are similar in pattern to the process for joint ventures, which are: (i) the foreign investor should submit the application documents to the SAIC, which must decide whether to approve the application within 20 days as of receipt of all of the documents so submitted; (ii) the foreign investor shall then submit the relevant documents to MOFCOM (via its provincial counterpart, which shall finish its examination within 20 days); and finally (iii) the foreign investor shall go through registration formalities with the SAIC.18
Branch Companies of Foreign-invested Advertising Enterprises
The New Provisions change the locus of approval authorities from the central level of MOFCOM and the SAIC to their provincial counterparts, and remove the approval by the responsible department of the Chinese party to the joint venture.19 In addition, the New Provisions increase the transparency of the approval procedure by requiring the statement of reasons in case of disapproval.
Other Circumstances Requiring Examination and Approval
It was required in the Original Provisions that a foreign-invested enterprise should go through a separate application and examination procedure for a change of investor or business scope.20 Other than maintaining the foregoing rule, the New Provisions clarify that separate application and examination are necessary for changes in registered capital or share transfers.21
M&A and CEPA
Two of the more prominent advancements for conducting business in China since WTO entry have come in the form of new mergers and acquisitions laws and the Closer Economic Partnership Arrangement between mainland China and the Hong Kong/Macao Special Administrative Regions (CEPA), both of which the New Regulations touch upon.
Being less capital intensive, advertising businesses can be acquired with a reasonable capital investment, and the trend among advertising firms in Europe and the United States has been an increase in utilizing such avenues. M&A in China has in recent years become a far more manageable option also, and with the date clearly set for establishing WFOEs, entering or expanding operations in China by such means will surely become more attractive. In this regard, the New Provisions state that M&A activity with domestic advertising enterprises will be performed in accordance with the New Provisions and the "relevant rules regarding foreign investment merger and acquisition of domestic companies,"22 which refers to the 2003 Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions.
The reference to CEPA in the New Provisions confirms that Hong Kong and/or Macao enterprise legal persons with an advertising business, as qualified in CEPA, will be able to establish advertising WFOEs in China as of January 1 2004 (even though the Hong Kong/Macao legal persons' advertising business need not be the major business of the enterprise).23
The Future
Needless to say, this new law will benefit foreign players in regard to access to China's advertising market. Once in, however, market participants will soon discover that many vexing issues await them, with the primary dilemma being the uncertainties that exist in the area of advertisement legal compliance. In general, the current PRC Advertisement Law, which was promulgated in 1994, is inadequate as a clear and workable legal framework for the industry, as its coverage and rules are in many cases either vague or uncertain. A telling example is the Chinese law's treatment of comparative advertisements: the law does not generally prohibit "indirect" comparative advertisements, but neither does it explicitly stipulate what types of comparative advertisements are allowed. As a result of such uncertainty, it is sometimes quite difficult to determine what type of advertisement content is legitimate. It appears very much the case, then, that in the post-WTO era proper operation in China's advertising industry still needs improvements in legal risks assessment and control.
Endnotes
1 Jointly issued by the State Administration of Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM) on March 3 2004, and effective from the same date.
2 Jointly issued by the SAIC and the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC) in November 1994, and was effective from January 1 1995.
3 Jointly issued and promulgated by the SAIC and MOFTEC in 1995.
4 Article 2 of the Original Provisions and Articles 3 and 4 of the 1995 Circular.
5 Article 23 of the New Provisions.
6 Article 6 of the Original Provisions.
7 Idem.
8 Article 9 of the New Provisions.
9 See note 7 above.
10 See note 8 above.
11 Article 3 of the Qualification Criteria for Advertising Operators and Issuers and the Norms for Verification of the Wording of Advertisement Scope.
12 Article 10 of the New Provisions.
13 Article 11 of the New Provisions.
14 Article 7 of the Original Provisions.
15 Article 5 of the Original Provisions.
16 Articles 6 and 8 of the New Provisions, Article 5 of the Original Provisions and the Establishment of Branch Companies by Foreign-invested Advertising Enterprises Circular.
17 Article 6 of the New Provisions. Specifically, the approval involves: (i) the main Chinese investor shall obtain approval first from the SAIC (via its provincial counterparts) or the authorized provincial counterpart of the SAIC; (ii) then the Chinese investor shall obtain approval from the provincial counterpart of MOFCOM; and finally (iii) the Chinese investor shall go through registration formalities with the SAIC or its competent local counterparts.
18 Article 7 of the New Provisions.
19 Article 8 of the New Provisions and the Establishment of Branch Companies by Foreign-invested Advertising Enterprises Circular.
20 Article 10 of the Original Provisions.
21 Article 17 of the New Provisions.
22 Article 20 of the New Provisions.
23 Appendix of the New Provisions.
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