Finding a balance between speedy approval and customised contracts

On 18 October 2011, the Shanghai Municipal Commission of Commerce (the approval authority in charge of foreign investment in Shanghai) issued the Notice on Launching the Pilot Project for the Examination and Approval of Standardised Contracts for, and Articles of Association of, Foreign-Invested Enterprises in Shanghai Municipality. Following the notice, from 1 November 2011 to 31 October 2012, the Shanghai commission has, in respect of newly established foreign-invested enterprises, promoted standardised foreign-invested enterprise articles of association and equity/co-operative joint venture contracts, so as to standardise the examination and approval procedure and radically shorten the time required for foreign investment approvals.

The Shanghai Commerce Commission issued the Model Foreign-Invested Enterprise Contracts/Articles of Association to serve as the standardised contracts and articles of association from which investors can choose. Between 1 April and 31 October, the commission extended the pilot project for the examination and approval of the standardised contracts and articles of association down to district and county level foreign investment approval authorities.

It has been strongly rumored in the industry recently that the commission intends to further strengthen the uniform use of the standardised contracts and articles of association in foreign-invested enterprises to be established in future. Whether provisions that diverge quite substantially from the standardised contracts and articles of association will be approved by approval authorities has become an issue that is being closely monitored. In this regard, the authors sought the opinions of the Shanghai and various district and county commerce commissions, and will explore the issue by examining the status of the implementation in Shanghai of the standardized contracts and articles of association.

Pilot standardisation project

Shanghai’s pilot standardised contract and articles of association project is being carried out against the background of reform of the system for the administration of foreign investment. Pursuant to the Several Opinions of the State Council on Further Improving the Use of Foreign Investment in 2010, commerce authorities are required to improve the foreign investment approval method and, through pilot projects, progressively promote the examination and approval of standardised contracts and articles of association nationwide. Subsequently, the General Office of the State Council issued the Notice on the Plan for the Division of Responsibilities Among Departments for the Thorough Implementation of the Several Opinions of the State Council on Further Improving the Use of Foreign Investment, reiterating the intention of revising foreign investment approval particulars, easing up on approval procedures and improving approval methods, and requiring the Ministry of Commerce to take the lead in implementation.

Main provisions

The standard articles of association principally include such sections as general provisions, scope of business, total investment and registered capital, shareholders, board of directors/executive director, supervisory board/supervisor, management organisation, labour management, financial affairs, and dissolution and liquidation. The standard contracts also include provisions found in regular contracts, such as those on amendment and termination of the contract, liability for breach of contract, force majeure, governing law, dispute resolution, etc.

The language of the standard articles of association is also more compliant and the structure more complete. For example, in the section on dissolution and liquidation, the standard articles of association, pursuant to the provisions of the current Company Law, set forth the steps in a liquidation and the functions, powers and responsibilities of the liquidation committee during the liquidation. However, it is also clearly apparent that the framework of the standard contracts is terse and the provisions simple, avoiding key provisions that are regularly included by foreign-invested enterprises. For example, the standard contracts are silent on technology transfer, product sales, equipment purchase, taxation, financial affairs, audits, insurance, etc. Accordingly, adoption of the standard contracts is unlikely to satisfy the specific requirements of foreign-invested enterprises in different industries and of different sizes, or the agreed upon division of the rights and interests of the joint venture parties, thereby greatly limiting their applicability.

With respect to the handling of specific commercial terms on which the standard contracts are silent, the Ministry of Commerce proposed at a symposium on the examination and approval of standardised contracts and articles of association that separate agreements on the commercial provisions could be executed between the investors, or between the enterprise and other third parties, without requiring them to be submitted to the approval authority for approval. The author is confident that the Shanghai commission will comply with this requirement of the Ministry of Commerce. However, if a foreign-invested enterprise concludes commercial terms or a supplementary agreement separate from its contract and articles of association, whether such provisions can be freely agreed upon by the investors as commercial terms remains a point that requires further clarification.

Current and future trends

Shanghai has not made implementation of the standard contracts and articles of association mandatory. Foreign-invested enterprises can still submit articles of association and contracts that they have themselves drafted or prepared. However, the time required for the approval of standardised contracts and articles of association is shorter.

Undoubtedly, the pilot project for such standard contracts and articles of association will be conducive to accelerating the process for the approval of foreign-invested enterprises, but the uniformity of the standard contracts and articles of association may not be conducive to the design by enterprises of custom contract terms that are based on their specific circumstances. Although Shanghai has not yet made the standard contracts and articles of association mandatory, certain “customised provisions” in contracts and articles of association may be subject to close scrutiny by the commerce authorities, which may result in longer approval times. Accordingly, investors will face the choice between “approval efficiency” and “individuality” in the provisions of their contracts and articles of association. How to opt for the standardised contracts and articles of association to the greatest extent possible without affecting the approval process and satisfying the commercial interests of the investors as much as possible, will become the challenge in lawyers’ work in future.

Kenneth Kong is a partner and Shelly Sui is an associate at Martin Hu & Partners (MHP Law Firm)