1. Corporate Governance:
Under the existing FIE Laws, an EJV/CJV currently does not have a shareholders’ meeting. The board of directors of an EJV (or the board of directors or joint management committee of a CJV) is the highest authority of the company. The powers of the board of directors include the review and approval of all major matters of the company, such as amendment of the articles of association, termination and dissolution of the company, increase or reduction of the company’s registered capital, and merger or division of the company (collectively, the “Major Matters”), which are subject to unanimous approval by all directors present at a duly convened board meeting.
Under the Foreign Investment Law, subject to the Five-year Grace Period, an FIE is required to have a shareholders’ meeting as the highest authority of the company in accordance with the Company Law. The powers of the shareholders’ meeting include the review and approval of all major matters of the company such as the Major Matters, which are subject to the approval by shareholders representing more than two-thirds of the company’s voting rights. As a result, those Major Matters which previously require unanimous approval of all directors present at a duly convened board meeting under the FIE Laws will now only require super-majority approval by shareholders (representing more than two-thirds of the company's voting rights) under the Company Law. Accordingly, if a Foreign Investor has less than one third of the equity interests in an EJV/CJV, such Foreign Investor would no longer enjoy the veto right with respect to the Major Matters which it used to enjoy under the FIE Laws.
2. Transfer of Equity Interests:
Under the existing FIE Laws, if one party to an EJV/CJV intends to assign its equity interest to a third party, the transferring party is required to obtain the consent from the other party. In the case of an EJV, the non-transferring party also has the right of first refusal to purchase such equity interest to be transferred.
Under the Foreign Investment Law, an FIE is required to comply with the relevant provisions regarding the equity transfer under the Company Law. A shareholder proposing to transfer its equity interests to a non-shareholder is required to obtain the consent of more than half of the other shareholders. If more than half of the other shareholders do not consent to the proposed transfer, the non-consenting shareholders are required to purchase such equity interests, failing which they will be deemed to have consented to the proposed transfer.
3. Distribution of Profits:
Under the existing FIE Laws, an EJV is required to pay the profits to its shareholders in proportion to their respective contributions to the registered capital of the company.
Under the Foreign Investment Law, the shareholders of an FIE may, in accordance with the relevant provisions of the Company Law, reach an agreement on a percentage and method for the payment of profits which may vary from their respective contributions to the registered capital of the company.
4. Allocation of After-tax Fund:
Under the existing FIE Laws, an EJV/CJV may contribute to the reserve fund, the employee bonus and welfare fund and the enterprise development fund in accordance with the percentage decided and approved by the board of directors.
Under the Foreign Investment Law, an FIE will be required to contribute 10% of the after-tax profit to its statutory surplus reserve in accordance with the Company Law until the aggregate sum of the statutory surplus reserve reaches more than 50% of its registered capital.