Provisions on Several Issues Concerning the Trial of Disputes Involving Foreign-invested Enterprises (1)

(Promulgated by the Supreme People's Court on August 5 2010 and effective as of August 16 2010.)

SPC Interpretation [2010] No.9

These Provisions have been formulated pursuant to laws and regulations such as the PRC General Principles for the Civil Law, the PRC Contract Law, the PRC Property Law, the PRC Company Law, the PRC Sino-foreign Equity Joint Venture Law, the PRC Sino-foreign Cooperative Joint Venture Law and the PRC Wholly Foreign-owned Enterprise Law and by taking into account trial practice, in order to correctly try disputes arising in the course of the establishment, the modification, etc. of foreign-invested enterprises and protect the lawful rights and interests of concerned parties.

Article 1: If, pursuant to laws or administrative regulations, a contract entered into *by the concerned parties in the course of the establishment, modification, etc. of a foreign-invested enterprise enters into effect only upon approval by the foreign-invested enterprise's examination and approval authority, such contract shall enter into effect on the date of approval. If such a contract has not been approved, the people's court shall render a determination that such contract has not entered into effect. If a concerned party requests that such contract be confirmed as invalid, the people's court shall reject such request.

The fact that a contract as mentioned in the preceding paragraph has been determined not to have entered into effect due to its not having been approved shall not affect the performance by the concerned parties of the provisions of the contract on their approval application obligations or the validity of the provisions specified therein relating to their approval application obligations.

Article 2: If a supplementary agreement reached between the concerned parties regarding relevant particulars of the foreign-invested enterprise does not constitute a material or substantive change to the approved contract, the people's court shall not, on the grounds that such agreement has not been approved by the foreign-invested enterprise's examination and approval authority, render a determination that it has not entered into effect.

A material or substantive change as specified in the preceding paragraph includes changes to registered capital, company type, scope of business, term of operation, the capital contributions subscribed for by the shareholders and method of capital contribution as well as company mergers and divisions, equity transfers, etc.

Article 3: If, in the trial of a case, the people's court discovers a circumstance specified in a law or administrative regulations that makes the contract for a foreign-invested enterprise approved by the foreign-invested enterprise's examination and approval authority invalid, the people's court shall render a determination that the contract is invalid. If a circumstance specified in a law or administrative regulations that makes the contract rescindable exists and a concerned party requests rescission of the contract, the people's court shall uphold such request.

Article 4: If the contract for a foreign-invested enterprise specifies that a concerned party is to make its capital contribution or provide cooperation conditions in the form of a subject matter for which procedures for registration of change in title need to be carried out, such subject matter has been delivered to, and is actually being used by, the foreign-invested enterprise and the concerned party with the obligation to carry out the procedures for registration of the change in title has completed the registration within the reasonable period of time specified by the people's court, the people's court shall render a determination that such party has performed its capital contribution obligation or obligation to provide the cooperation conditions. If the foreign-invested enterprise or a shareholder thereof claims that the concerned party does not have shareholder rights and interests on the grounds that it did not perform its capital contribution obligation, the people's court shall reject such claim.

If the foreign-invested enterprise or a shareholder thereof submits evidence showing that the concerned party caused the foreign-invested enterprise to incur a loss due to its delay in carrying out the procedures for registration of the change in title and requests damages, the people's court shall uphold such request.

Article 5: If, after the formation of an equity transfer contract of a foreign-invested enterprise, the transferor and foreign-invested enterprise fail to perform their approval application obligations, and still fail to do so within a reasonable period of time after being reminded by the transferee, and the transferee requests termination of the contract, refund by the transferor of the transfer price it has paid and compensation for the actual losses incurred by it as a result of the failure to perform the approval application obligations, the people's court shall uphold such request.

Article 6: If, after the formation of an equity transfer contract of a foreign-invested enterprise, the transferor and foreign-invested enterprise fail to perform their approval application obligations and the transferee institutes a legal action naming the transferor as the defendant and the foreign-invested enterprise as a third party and requesting that the transferor and the foreign-invested enterprise jointly perform their approval application obligations within a fixed period of time, the people's court shall uphold such request. If the transferee additionally requests that it itself be permitted to carry out the approval procedures should the transferor and the foreign-invested enterprise fail to carry out their approval application obligations by the deadline set in the effective judgment, the people's court shall uphold such request.

If the transferor and the foreign-invested enterprise refuse to perform their approval application obligations by the deadline set in the people's court's effective judgment and the transferee institutes a separate legal action requesting termination of the contract and compensation for its losses, the people's court shall uphold such request. The scope of the compensation for losses may include the loss due to the price disparity of the equity, returns on the equity and other reasonable losses.

Article 7: If the transferor and foreign-invested enterprise or the transferee make(s) a submission for approval in respect of the equity transfer contract of the foreign-invested enterprise pursuant to the first paragraph of Article 6 hereof but fail(s) to secure the approval of the foreign-invested enterprise's examination and approval authority and the transferee institutes a separate legal action requesting the refund by the transferor of the transfer price paid by it, the people's court shall uphold such request. If the transferee requests that the transferor compensate it for the losses incurred as a result thereof, the people's court shall render a determination on the transferor's liability for damages and the specific measure of damages based on whether the transferor was at fault and the extent of such fault.

Article 8: If an equity transfer contract of a foreign-invested enterprise specifies that the transferor is to carry out the approval procedures only after the transferee has paid the transfer price, the transferee fails to pay the equity transfer price and still fails to do so within a reasonable period of time after a reminder by the transferor and the transferor requests termination of the contract and compensation for the actual losses it incurred as a result of the delay in performance, the people's court shall uphold such request.

Article 9: If, after the formation of an equity transfer contract of a foreign-invested enterprise, the transferee fails to pay the equity transfer price and the transferor and foreign-invested enterprise also fail to perform their approval application obligations, and the transferor requests that the transferee pay the equity transfer price, the people's court shall adjourn the trial and order the transferor to carry out the approval procedures by a set deadline. If the equity transfer contract is approved by the foreign-invested enterprise's examination and approval authority, the people's court shall uphold the transferor's claim for payment of the transfer price.

Article 10: If, after the formation of an equity transfer contract of a foreign-invested enterprise, the transferee has actually participated in the operations and management of the foreign-invested enterprise and obtained benefits therefrom, but the contract does not receive the approval of the foreign-invested enterprise's examination and approval authority, and the transferor requests that the transferee withdraw from the operations and management of the foreign-invested enterprise and pay to the transferor the benefits derived from having actually participated in its operations and management, minus relevant costs and expenses, the people's court shall uphold such request.

Article 11: If a shareholder of a foreign-invested enterprise transfers all or part of its equity to a third party other than another shareholder and such transfer was subject to the unanimous consent of the other shareholders, and the other shareholders request rescission of the equity transfer contract on the grounds that their consent was not secured, the people's court shall uphold such request, unless any of the following circumstances applies:

(1) there is evidence showing that the other shareholders had given their consent;

(2) the transferor gave written notice of the equity transfer and the other shareholders failed to give a reply within 30 days of receipt of such notice; or

(3) the other shareholders did not consent to the transfer but did not purchase the equity being transferred.

Article 12: If a shareholder of a foreign-invested enterprise transfers all or part of its equity to a third party other than another shareholder and the other shareholders request rescission of the equity transfer contract on the grounds that such equity transfer infringes upon their right of first refusal, the people's court shall uphold such request, unless the other shareholders fail to assert their right of first refusal within one year from the date on which they learnt or ought to have learnt of the execution of the equity transfer contract.

If the transferor or transferee specified in the preceding paragraph requests the rendering of a determination that the equity transfer contract is invalid on the grounds of infringement of the other shareholders' right of first refusal, the people's court shall reject such request.

Article 13: An equity pledge contract entered into by a shareholder of a foreign-invested enterprise and a creditor shall enter into effect upon its formation unless otherwise provided in a law, administrative regulations or the contract. A failure to carry out pledge registration procedures shall not affect the validity of the equity pledge contract.

If a concerned party claims that the equity pledge contract is invalid or not effective solely on the grounds that it was not approved by the foreign-invested enterprise's examination and approval authority, the people's court shall reject such claim.

If pledge registration is carried out for an equity pledge contract in accordance with relevant provisions of the Property Law, the equity pledge shall be established upon registration.

Article 14: If it is agreed between the concerned parties that one party shall make the actual investment and the other party shall serve as its nominee shareholder in a foreign-invested enterprise and the actual investor requests confirmation of its status as a shareholder of the foreign-invested enterprise or requests a change in shareholders of the foreign-invested enterprise, the people's court shall reject such request, unless all of the following conditions apply:

(1) the actual shareholder has actually made the investment;

(2) the shareholders other than the nominee shareholder recognise the actual investor's status as a shareholder; and

(3) the people's court or a concerned party secures the consent of the foreign-invested enterprise's examination and approval authority for the change of the actual investor into a shareholder while the legal action is pending.

Article 15: If a contract specifies that one party shall make the actual investment and the other party shall serve as its nominee shareholder in the foreign-invested enterprise and no circumstances specified in laws or administrative regulations that would make the contract invalid apply, the people's court shall render a determination that such contract is valid. If a concerned party claims that the contract is invalid or not effective solely on the grounds that it was not approved by the foreign-invested enterprise's examination and approval authority, the people's court shall reject such claim.

If the actual investor requests that its nominee shareholder in the foreign-invested enterprise perform its relevant obligations as agreed by the parties, the people's court shall uphold such request.

If the parties have not agreed upon the distribution of benefits and the actual investor requests that its nominee shareholder in the foreign-invested enterprise pay to it the benefits derived by the nominee shareholder from the foreign-invested enterprise, the people's court shall uphold such request. If the nominee shareholder in the foreign-invested enterprise requests that the actual investor pay it the necessary remuneration, the people's court shall uphold such request while taking into consideration the actual circumstances.

Article 16: If the nominee shareholder in the foreign-invested enterprise fails to perform its contract with the actual investor, making it impossible for the actual investor to realise the objectives of the contract, and the actual investor requests the termination of the contract and that its nominee shareholder in the foreign-invested enterprise bear liability for breach of contract, the people's court shall uphold such request.

Article 17: If, pursuant to the agreement with its nominee shareholder in the foreign-invested enterprise, the actual investor makes a direct request to the foreign-invested enterprise for a distribution of the profits or the exercise of other shareholder rights, the people's court shall reject such request.

Article 18: If a determination is rendered that the contract between the actual investor and its nominee shareholder in the foreign-invested enterprise is invalid and the value of the equity held by the nominee shareholder is greater than the actual invested amount and the actual investor requests that the nominee shareholder reimburse it the invested amount and that the returns on the equity be reasonably distributed between the parties based on its actual investment and the nominee shareholder's participation in the operations and management of the foreign-invested enterprise, the people's court shall uphold such request.

If the nominee shareholder in the foreign-invested enterprise expressly indicates that it is relinquishing the equity or that it refuses to continue to hold the equity, the people's court may issue an order to take the proceeds derived from auctioning or selling the equity in the foreign-invested enterprise held by the nominee shareholder to reimburse the invested amount to the actual investor and reasonably distribute the balance between the parties based on the actual investor's actual investment and the nominee shareholder's participation in the operations and management of the foreign-invested enterprise.

Article 19: If a determination is rendered that the contract between the actual investor and its nominee shareholder in the foreign-invested enterprise is invalid and the value of the equity held by the nominee shareholder is less than the actual invested amount and the actual investor requests that the nominee shareholder reimburse it an amount equivalent to the existing equity, the people's court shall uphold such request. If the nominee shareholder in the foreign-invested enterprise expressly indicates that it is relinquishing the equity or that it refuses to continue to hold the equity, the people's court may issue an order to take the proceeds derived from auctioning or selling the equity in the foreign-invested enterprise held by the nominee shareholder to reimburse the invested amount.

If the actual investor requests that its nominee shareholder compensate for its losses, the people's court shall render a determination on the nominee shareholder's liability for damages and the specific measure of damages based on whether the nominee shareholder was at fault with respect to the invalidity of the contract and the extent of such fault.

Article 20: If a determination that the contract between the actual investor and its nominee shareholder in the foreign-invested enterprise is invalid is rendered due to malicious collusion and harm caused to the state's, a collective's or a third party's interests, the people's court shall recover for the state the property so obtained or return it to the collective or the third party.

Article 21: If a shareholder of a foreign-invested enterprise or the foreign-invested enterprise applies to the foreign-invested enterprise's examination and approval authority for a change in the shareholders as recorded on the foreign-invested enterprise's approval certificate using such fraudulent or other improper means as submitting false materials, etc., resulting in another shareholder of the foreign-invested enterprise losing its status as a shareholder or its existing share of the equity and the other shareholder requests confirmation of its status as shareholder or existing share of the equity, the people's court shall uphold such request, unless a third party has acquired such equity in good faith.

If the other shareholder requests that the shareholder that infringed upon its rights or the foreign-invested enterprise compensate for its losses, the people's court shall uphold such request.

Article 22: When people's courts try disputes arising in connection with enterprises invested in and established in mainland China by investors from the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan as well as by PRC citizens permanently resident abroad, these Provisions shall apply mutatis mutandis.

Article 23: Once these Provisions are implemented, they shall apply to cases already pending in the first or second instance. These Provisions shall not apply to cases that were final before the implementation hereof and which people's courts open for re-trial.

Article 24: In the event of a conflict between these Provisions and relevant judicial interpretations issued by this court prior to the implementation hereof, these Provisions shall prevail.