On August 5, 2010, China’s Supreme Court published the Provisions Regarding Hearing Cases of Disputes involving Foreign-invested Enterprises (Part I) (the “FIE Dispute Guidance”). The FIE Dispute Guidance clarify many important issues related to disputes involving foreign-invested enterprises (FIEs). Two key provisions of the FIE Dispute Guidance are summarized below.
Validity of Side Agreements
The FIE Dispute Guidance confirms that side agreements entered into by shareholders of an FIE but not approved by Chinese authorities are valid as long as such agreements do not make any “significant or material change” to the FIE contracts approved by Chinese authorities. “Significant or material change” is defined to include changes to the registered capital, corporate form, business scope, term of operation, subscribed capital contribution, for of contribution, merger, division and share transfer. The FIE Dispute Guidance marks the first time Chinese courts will recognize the validity of side agreements among FIE shareholders, which are usually entered into by shareholders to supplement joint venture contracts / articles of association, the latter but not the former are submitted Chinese authorities for approval. It is good news for private equity/venture capital firms that typically need to obtain special rights with respect to liquidation, share transfer, dividend and management, which may be challenged by the authorities if submitted for approval.
The FIE Dispute Guidance also confirms that an entrustment agreement entered into by an actual shareholder and a nominee shareholder is valid so long as such entrustment agreement does not involve any circumstance that gives rise to ground for invalidation pursuant to any law or administrative rule. Chinese courts will support an actual shareholder’s claim to obtain the benefits received by the nominal shareholder from the FIEs even if the entrustment agreement does not include a benefits allocation clause. On the other hand, Chinese courts will also support the nominee shareholder’s claim to receive compensation from the actual shareholder for serving as the nominee. Furthermore, according to the FIE Dispute Guidance, Chinese courts will not support the actual shareholder’s claim for dividend allocation directly from the FIE or appeal to the court to directly exercise shareholder rights.
Although the FIE Dispute Guidance is judicial interpretation and not legislation, they provide critical guidance and clarification for planning FIE arrangements and litigating FIE-related issues.
- Provisions Regarding Hearing Cases of Disputes involving Foreign-invested Enterprises (Part I)
- Issuing Authority: the People’s Supreme Court
- Date of Issuance: August 5, 2010 / Effective Date: August 16, 2010