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China promulgated judicial interpretations on trial of disputes involving
foreign investment enterprises

31 Auguest 2010 

After hearing public comments for more than half a year, the PRC Supreme People's Court recently published the final and effective version of "Provisions on Several Issues relating to Trial of Disputes Involving Foreign Investment Enterprises (No. 1)" which has been implemented as from 16 August 2010.
The said provisions focus on several interesting issues in relation to foreign investment, such as effectiveness of unapproved joint venture contract and its supplemental agreement, effectiveness of unapproved share pledge contract, remedy (including specific performance) for breach of share acquisition agreement, pre-emptive right and veto power of a shareholder in terms of a share transfer by another shareholder to a third party, relationship between a nominee and a beneficiary in terms of entrusted investment, etc.
For example, if a joint venture contract has been approved by the examination and approval authority while its supplemental agreement has not, according to the said provisions, such supplemental agreement shall not be held as ineffective so long as it has not made a substantial amendment to the approved joint venture contact. As defined by the said provisions, the "substantial amendment" means a change in registered capital, company form, business scope, operation period, amount of subscribed capital, or method of capital contribution, or a change which may result in a company merger, division or share transfer.
As to share acquisition, according to the said provisions, if a share acquisition agreement is signed and the vendor or the target company fails to perform its obligations to apply for obtaining approval for the share transfer, then upon application of the purchaser (transferee), the people's court may grant a specific performance judgment to require the vendor and target company to perform such obligations within a given period, and such judgment may also include an order allowing the purchaser (transferee) to apply unilaterally for obtaining such approval when the vendor and target company fail to honor the judgment.
Regarding an investment made in trust for a beneficiary, the said provisions confirm that even if the contract between the trustee (nominee) and the beneficiary is unapproved, so long as there is no ground to hold it as invalid pursuant to relevant laws and regulations, such contract should be held valid and binding upon parties thereto. Namely the beneficiary may based on such a contract demand the trustee (nominee) to surrender the profit generated from such investment to the beneficiary. Nevertheless, such a contract between the beneficiary and the trustee will not entitle the beneficiary to request the relevant invested company to distribute profit or dividend directly to it, or entitle it to exercise any other rights as a shareholder.


Any legal information contained in this newsletter is general in nature and laws and regulations are changing from time to time and compliance will always depend upon the particular circumstances. We have not attempted to give exhaustive descriptions of law or to give a legal opinion on specific legal issues. You should not rely on this newsletter as a legal advice for any particular purpose.



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