China's Company Law: One Step Forward, Two Steps Back--A Modest Complaint


CHINA'S COMPANY LAW: ONE STEP
FORWARD, TWO STEPS BACK?

A MODEST COMPLAINT

NICHOLAS C. HOWSON"

I. INTRODUCrION

The 15th National Party Congress of the Communist Party of the
People's Republic of China ("PRC" or "China) opened on September 12,
1997 with a much heralded call by Secretary General Jiang Zemin to
intensify reformation of the state-owned sector. Jiang provided critical
ideological authorization of the selling down of the State's interest in
China's state-owned enterprises by equating "state ownership" with "public
ownership" and then "ownership by the public," declaring:

Public ownership can and should take diversified
forms... even if the state-owned sector accounts for
a smaller proportion of the economy, this Will not
affect the Socialist nature of the economy.!

The key vehicle for this newly invigorated reform, and in fact the
process of restructuring that has been underway for several years, is
China's basic corporate statute, only three years old. The promulgation of
the Company Law of the People's Republic of China2 (the "Company
Law") in late 1993 was met with a chorus of praise in the official Chinese

Partner, Paul, Weiss, Rifklnd, Wharton & Garrison, New York and Beijing. JD. (1988)
Columbia University;, B.A. (1983) Williams College; Graduate E.xchange Fellow (1983-85), Fudan
University, Shanghai; Lecturer, Columbia Law School, 1996, 1997. The author Ashes to thank
Donald C. Clarke, Professor of Law at the University of Washington and attorney, Paul, Weiss,
Riflknd, Wharton & Garrison, New York, for his sturdy friendship and helpful comments on earlier
drafts of this article, and all of the students of the Chinese Investment Law seminars at the Columbia
Law School in 1996 and 1997 for their queries and suggestions. This article is based upon remarks
made by the author at the 'China Capital & Securities Market Developmente conference on May 29-
30, 1995 in Hong Kong.

1. See Jiang Pushes for Quick Reform: Chinese President Backs State Sell-off$ in Move to
Mixed Economy, FIANC1ALTIIMES, Sept. 13, 1997, at 1.

2. Company Law of the People's Republic of China (adopted by the 5th Session of the
Standing Committee of the 8th National People's Congress on Dec. 29. 1993, and effective July 1,
1994) [hereinafter Company Law].



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press and abroad.3 However, the immediate reaction among the more
reform-oriented members of China's securities regulatory authorities, the
nascent Chinese securities bar, and foreign bankers, lawyers and
accountants intimately involved with the PRC's first securities offerings in
Hong Kong and New York, was less sanguine.4 In many cases, the
Company Law was privately termed a "disaster," a keen expression of
conservative compromises or the wholesale avoidance of difficult issues
implicit in China's transition from state ownership and the mandated
allocation of capital to a "socialist market economy." Some PRC
professionals and regulators even expressed the opinion that China's
developing body of corporate law and securities markets would have been
better off without the new legislation, and with continued reliance on the
then-existing patchwork of laws, regulations, notices, opinions and
standards which provided the legal basis for China's earliest corporate
reorganizations 5 and public issuances of stock in Shenzhen, Shanghai,
Hong Kong and New York.

The most pessimistic view of the Company Law is probably not
justified, especially in light of subsequent rule-makings which remedied
the damage done by the Company Law, at least with respect to PRC
companies listing shares abroad. However, it is true that the Company
Law, understood in the context of the legal reform implemented with
respect to corporate organization in the PRC, was a distinct step backwards

3. See, e.g., Stuart Valentine, Company Law, 1994; A Welcome Move, of Limited
Application, SOUTH CHINA MORNING POST, Feb. 9, 1994; Owen Nee, China's Company Law Sets
Out the Next Stage of Reform, INT'L FINANCIAL LAW REV. 13-15 (Apr. 1994); Marilyn Selby
Okoshi, China's New Company Law: An Overview, 5 ASIAN BUSINESS LAW REV. 14-20 (1994);
David Ho, China's Company Law: Something Concrete to Go By, EAST ASIAN EXECUTIVE REPORTS,
Feb. 15, 1994, at 9; Sunny Huo, The Company Law of the People's Republic of China 13 UCLA
PAC. BASIN L. J. 373 (1995).

4. Of course, much of this discontent was not made public; but see New Laws Pose Big
Challenges for Next Listings, SOUTH CHINA MORNING POST, Jan. 31, 1994, Business at 6; and
Jerome A. Cohen and Charles F. Goldsmith, Company Law - Unfinished Business, INTERNATIONAL
CORPORATELAW, May 1994.

5. This article does not use the popular but very misleading term "privatization," as the great
majority of transactions seen to date in China have involved merely the corporate reorganization of
productive entities (or groups of assets), with only a minority portion of the new issuer's stock being
sold to truly "private" actors. In most cases, the state has maintained majority shareholdings
through stockholders representing the administrative organs previously governing the issuer in
question - so-called "state-owned" or "state-owned legal person" shareholders. For a superb
discussion of this phenomenon, see Lan Cao, The Cat That Catches Mice: China's Challenge to the
Dominant Privatization Model, 21 BROOKLYN J. OF INT'L LAW 97 (1995).



19971 CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 129

from local or provisional national legislation and "practice" as it had
developed in the immediate run-up to the promulgation of the Law.

Part II of this article summarizes the policy and organizational
background to China's corporatization drive and the relevance of this
initiative for foreign capital - which will be one important "purchaser" in
the disposition of share interests in newly-corporatized Chinese
enterprises. In Part ii, a precis of concrete legislative developments in
China's corporate law is provided. Part IV of this article present a critique
of the Company Law, both generally (Section A) and with reference to the
specific problem of "companies limited by shares" and the creation of
viable Chinese issuers in China and abroad (Section B). The article also
addresses how competing departments of the PRC government have since
taken express steps to remedy some of these problems. This article seeks
to provide a view of what the enumerated defects, and the process of
remedial rule-making, mean - for the corporatization experiment, China's
legislative process and the ongoing struggle to define the balance between
state and central control and independent economic power. It is also hoped
that this article will provide insight into how corporate law in China will,
or at least should, develop in both the immediate and the long-term future.

II. FOREIGN CAPrrAL IN CHINA - WHY PRC COMPANmS MATrER

A. Restructuring of the State Sector and the Creation of Corporate
Entities

Like other socialist countries, the PRC has since 1949 been burdened
with the concrete manifestation of the ideological construct "ownership of
the means of production by the people": state-owned enterprises ("SOEs")

and a centrally-controlled planned economy. As economic reform has
progressed, much of the Chinese leadership has realized that this system
of ownership and control does not contribute to sustained economic growth
or rational production decisions. By the end of 1994, more than 50% of the
approximately 110,000 SOEs in China ran at a loss.6 In the same year,
direct subsidies to such SOEs amounted to the equivalent of US$ 4.7

6. See Lincoln Kaye, Fire When Ready, FAR EAsTERN EcoNoMiC REvIEv Feb. 23, 1995,
at 50. A more recent report indicates that over 118,000 enterprises comprise the state sector, of
which about 70% lost money in 1996. See Tony Walker, Unbinding China: Chinese Leaders Are
Slowly Facing up to the Huge Task of Reforming Bankrupt State-owned Enterprises, FINANCIAL
TimS, Sept. 10, 1997, at 31.



COLUMBIA JOURNAL OF ASIAN LA W

billion, or 60% of China's budget deficit.7 This crisis is all the more
compelling as such SOEs continue to hold absolute dominance in the
capital-intensive and infrastructure sectors, monopolizing key industries
where goods and services could be delivered by more efficient enterprises
which would not require ongoing subsidies. It is no wonder that Li
Tieying, chief of the Commission for the Restructuring of the Economic
System ("CRES"), said in early 1995: "China will [now] shift its focus of
reform to state-owned enterprises... with the aim to establish a modem
enterprise system."8

Reform of the state-owned sector actually began in the late 1970s and
has continued to find expression in the creation or alteration of legal
norms. 9 SOEs were originally conceived of as the mere vehicles of a
centrally-controlled state plan; thus, SOEs were only accumulations of
assets, entirely "owned by the State on behalf of all the people," with no
independent legal personality and lacking the key attributes of "property"
or the ability to confer on any party that bundle of rights that constitutes
"ownership" in industrial market economies: the rights of "utilization";
"return" (the right to possess the fruits-and bear the burdens-of the
utilization right); and "alienation" (the right to transfer such rights to
another party, for value or by gift).,0 In addition to lacking any attributes
of property, such SOEs effected their production tasks pursuant to
mandatory goals set by the government, submitted all of their revenues or
profits to the state, and possessed little management independence.

Cognizant of the need to somehow incentivize SOEs as actors in a
real market economy, initial reforms sought to adjust the relationship of
SOEs to the government by causing SOEs to be responsible for their own
profits and losses (as independent accounting units) and allowing such
enterprises to discontinue the submission of profits to the center, in favor

7. These SOEs have proven unable to remunerate the 100 million people directly employed
by them, or provide sustained support for the 200 million others who depend upon them for their
livelihood. See Kaye, supra note 6, at 50.

8. See Kaye, supra 6, at 50. For a comprehensive PRC treatment of the problem, see Yu
Dong, Thoughts on State Enterprise Reform and Development for the Ninth Five-Year Plan,
FOREIGN BROADCAST INFORMATION SERVICE, FBIS-CHI-96-01, Mar. 28, 1996, at 46.

9. The best summary of this process is Fang Liufang, China's Corporatization Experiment,
5 DUKE J. COMP. & INT'L L. 149 (Spring 1995).

10. See Louis Putterman, The Role of Ownership and Property Rights in China's
Economic Transition, 144 THE CHINA QUARTERLY 1047-1064 (1995).

[11:1



1997] CHINA 'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 131

of a rudimentary system of taxation." These policy initiatives were
followed by the promulgation of a civil code which stipulated that certain
SOEs could acquire "legal person" status and assume civil obligations
independently1 2 and a 1986 draft SOE bankruptcy law which made clear
that SOEs would assume civil liability to the extent of the assets given to
such SOE to manage ("on behalf of the people"). 3 These notions were
explicitly codified in a State-owned Enterprise Law, adopted in
April 1988. Further policy and legal reforms followed that conferred upon
the management of such SOEs some independent decision-making
powers, subject always to the condition that they passed some of their
earnings to the state, as taxes, repayments of "debt," or a return of
government-allocated funds.

Even more profound and visible legal changes occurred at the
national level beginning in 1992 with the promulgation by CRES of the
"Standard Opinions" discussed in this article, which for the first time in the
history of the PRC provided the legal basis for corporate forms which
could own and operate productive assets, and, most important in the
present context, allow shareholders to benefit from and alienate interests
in such corporate forms. After two years of experimentation with the so-
called "Standard Opinions," the People's Republic's first "Company Law"
became effective on 1 July 1994, and the corporate twins - "companies
limited by shares" and "limited liability companies" - were at last granted
existence in a national law. ("Companies limited by shares" are what
Western lawyers and businessmen recognize as equity or joint stock
companies, with liquid interests, and separation of management and
ownership. "Limited liability companies" are akin to "closely-held
companies" with fewer shareholders, holding more illiquid interests, and
a board that is made up of the direct representatives of the shareholders.)
Though flawed, it confirmed that the corporate form would henceforth be
a key instrument in China's industrial development. Policy followed the
creation of a legal basis, as 1995 was designated the year to focus on
reform of the SOE sector, with a pilot program to create 1,000 large state

11. Caizhengbu Guanyu Guoyingqiye Ligaishui Shixing Banfa [Implementing Rules on
Converting State-owned Enterprise Profits Submission into Taxation] (approved and distributed by
the State Council on Apr. 24, 1983); and Caizhengbu Guanyu Dui Guoyingqiye 2hengshou
Suodeshui de Zhanxing Guiding [Temporary Regulations on Levying Ownership Tax on State-
owned Enterprises] (promulgated by the Ministry of Finance on Apr. 29, 1983).

12. Minfa 7hongze [General Principles of The Civil Law of People's Republic of China]
(passed by the Fourth Session of the Sixth National People's Congress on Apr. 12, 1986).

13. See Ud art. 48.



COLUMBIA JOURNAL OF ASIAN LAW

enterprises, 100 experimental transregional and multisectoral companies
in 18 cities, with 57 "enterprise groups" of national scope. t"

Notwithstanding these formal legal changes, reform and
reorganization of the state sector in China has taken two distinct paths.
SOEs continue to exist in abundance, and many will not be converted into
"companies limited by shares" or "limited liability companies" at any time
in the near future. If they are, then they will be recast as "wholly state-
owned limited liability companies" under the Company Law. 15 Many other
SOEs have been re-formed into "companies limited by shares," with a state
or "legal person" shareholder owning a controlling position (usually 60 to
80%) in the resulting corporate entity. While various strategies are
available for saving the state-owned sector, the most encouraged is the
reordering of such industrial units by merger pursuant to the 1989
"Provisional Measures for the Merger of Enterprises" 16 (including the
creation of large scale industry groups that the Chinese authorities hope
will compete with major multinationals), 7 the splitting up of large SOEs
into more efficient units, sales (by privately negotiated sale or auction) of
assets to stronger economic actors, the distribution of "ownership" in
enterprises to employees18 and, depending upon the will of China's
leadership, bankruptcies.

B. The Accepted Uses of Foreign Capital

The process described above has not occurred in isolation from the
huge influx of foreign capital in China. In the period 1979-84, the PRC
was able to report promised (or "contracted") foreign investment of US$6.9

14. See Progress in Reform of State-Owned Enterprises, BEJING REVIEW (English
Edition), June 17-23, 1996. As this report makes clear, the worthy pilot initiatives have run into
serious difficulties due to a lack of understanding on the part of the government and enterprise
managers as to the true implications of corporatization and related management and ownership
structures.

15. See Company Law, supra note 2, arts. 64-72.
16. See Provisional Measures for the Merger of Enterprises (adopted by the PRC Commission

on the Restructuring of the Economic Systems ("CRES"), the State Planning Commission, the
Ministry of Finance and the State-owned Assets bureau on Feb. 19, 1989).

17. See Li Rongxia, Second High Tide of the Merger of Enterprises, 40 BEIJING REVIEW, No.
38, Sept. 22-28, 1997, at 11-16, which reports that, to 1993, official statistics show that more than
2,900 enterprises in Shanghai, Wuhan, Chengdu and 13 other cities were formally merged or sold,
implicating the transfer of over Renminbi 6 billion yuan in assets.

18. Sometimes called the "cooperative shareholding system," although it is doubtful the extent
to which many of the new employee shareholders are in fact willing buyers. See Enterprise
Ownership with Chinese Characteristics, 40 BEIJING ZHOUBAO, No. 37, Sept. 15-21, 1997, at 9-12.

[II:I



1997] CHINA 'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 133

billion. In 1994 alone, this number had ballooned to US$81 billion, with
actual investment for the year reaching US$33.7 billion.' 9 (These statistics
are exclusive of foreign borrowing, and the proceeds of international debt
and equity offerings, which, together with foreign direct investment,
accounted for a gross capital inflow in 1994 of US$53 billion."

The introduction of foreign capital into China during the
implementation of the "open door policy" has also resulted from policy and
legal initiatives, as well as the needs and expectations of the foreign capital
itself. The Chinese leadership believed that the absorption of direct foreign
investment would give China access to new sources of capital, advanced
(foreign) technology and management practices, and allow participation
in an advanced international marketplace able to absorb China's exports
and provide foreign exchange to finance her import needs. However, the
notion of introducing foreign capital was (and remains) controversial, as
it went against long-held ideas of "self-reliance" and represented a
potential threat to state control of China's development strategy, not to
mention Chinese/"Socialist" values. Thus, the PRC struck a compromise
which continues to animate China's policy and laws respecting foreign
investment and corporate law: China would strive to absorb enough foreign
capital to bring about desired developmental benefits, while at the same
time maintaining state control over the terms of such investment through
a system of approval controls, taxation policy, access to foreign exchange
and production and distribution requirements.

Most important, China sought to attract "interested" foreign capital,
i.e., large, product-tied foreign multinationals desiring to set up
manufacturing enterprises in China, create a bridgehead in the "largest
market in the world" and see a return (through distributed profits not
dispositions of stock or assets) only over the "long term." This strategy
found perfect expression in the development of the joint venture form, and
the great amount of associated law-making completed through the 1980s21

19. THEBULE'oFrIE I -'Y OFFOREGN TRADFAND EcoNO.M/CCOOPATioNoFTHE

PRC, No. 2, Apr. 25, 1994, at 10; and BANKING TIMs, Jan. 26, 1995, at 1.
20. It is important to note that some of this 'foreign investment" is actually capital recycled

into the PRC by PRC-owned entities offshore.
21. For example, The Law of the PRC on Chinese-foreign Equity Joint Ventures of

(July 1, 1979) (amended on Apr. 4, 1990); Implementing Regulations for the Law of the PRC on
Chinese-foreign Equity Joint Ventures (Sept. 20, 1983); Law of the PRC on Chinese-foreign
Cooperative Joint Ventures (Apr. 13, 1988); Implementing Regulations for the Law of the PRC on
Chinese-foreign Cooperative Joint Ventures (Sept. 4), 1995; Law of the PRC on Wholly Foreip-
owned Enterprises (Apr. 12, 1986); Implementing Regulations for the Law of the PRC on V/holly
Foreign-owned Enterprises (Dec. 12, 1990). These are only a few of the many statutes, rules and



COLUMBIA JOURNAL OF ASIAN LAW

allowing for the establishment of joint venture manufacturing entities,
wherein the foreign investor obtains an illiquid "registered capital" interest
in the joint venture entity operating in a non-strategic sector (most often
consumer goods), which entity in turn is bound to export (pursuant either
to approval commands or the need to earn foreign exchange) much of its
products. Thus, through the 1980s, the largest number of "foreign
investors" were multinationals establishing long-term productive ventures,
often in conjunction with SOEs, or Asian interests establishing small-scale
processing or "bonded" operations designed to take advantage of China's
low-cost labor inputs.

This landscape changed radically in the early 1990s, as a result of
both a new interest in China by foreign finance professionals, and the
needs of China's industrial actors ("private" and state-owned alike). The
1990s saw the arrival in Hong Kong of great teams of investment bankers
(and associated professionals) expecting a rich stream of IPO and debt
offering business. In the same period, the real ineffectiveness of the SOE
form had become apparent to all but the most conservative Chinese
leaders, brought about in part (ironically) by the strong challenge presented
to such SOEs by foreign-invested operations. For various reasons, China
did not prove able to complete a substantial number of capital markets
transactions, and the somewhat under-employed investment bankers (and
the funds they had assembled) began to agitate for pure financial
investments in Chinese industry: investments which could earn a
respectable (and enforceable) return, while offering the appropriate
realization of value (or "exit") in a relatively short time frame. This
pressure dovetailed perfectly with the urgent need of much of Chinese
industry for finance capital, on almost any terms, particularly when faced
with stringent controls on lending mandated by Beijing in the wake of
runaway inflation and unchecked industrial construction.

And, it is precisely this pressure which has made the corporate form
of such interest and concern to foreign capital. Far from being an arcane
sidelight of emerging markets legal reform discussion, the PRC Company
Law, and the interests which foreign capital may obtain in Chinese
corporate entities, is of compelling concern to foreign industrialists,
investment professionals and regulators. By way of introduction for the
discussion following, it may be useful to discuss the interests now
available, which include the following:

notices concerning the establishment, funding, registration, and taxation of foreign-invested
enterprises in the PRC.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 135

Foreign investors may of course acquire registered capital interests
in Sino-foreign joint ventures. They may also, in theory, acquire interests
in PRC "limited liability companies," which are tantamount to registered
capital interests in joint ventures. 2

Companies limited by shares offer a plethora of interests, identified
according to the holder of such interests or their listing site. For PRC
investors in unlisted companies limited by shares, there are: (i) state shares
(owned by a representative of the state, often the relevant state-owned
assets bureau); (ii) legal person shares (owned by large institutions, often
affiliated with the state); (iii) "internal" shares (employee-owned shares);
and (iv) individual shares. Foreign investors in non-listed companies
limited by shares own "foreign-invested shares." State shares are not
transferrable, and legal person shares are generally only transferable
among legal persons-in some cases through STAQ, the Shanghai
automated over-the-counter trading mechanism.

For PRC companies limited by shares that are listed, there are: "A"
shares (purchased by and traded among domestic investors and listed on
the Shanghai or Shenzhen Stock Exchanges); "B" shares (purchased by and
traded among foreign investors and listed on the same Exchanges); and "H"
or "N" shares (share capital of PRC companies listed on the Hong Kong or
New York Stock Exchanges).

Thus, a foreign investor may be faced with the following options in
attempting to buy into Chinese industry: (i) a registered capital interest in
a joint venture; (ii) an interest in an unlisted privately held company
limited by shares; (ii) "B" shares traded on the Shanghai or Shenzhen
Stock Exchanges; or (iv) "H" or "N" shares traded on the Hong Kong or
New York Stock Exchanges. All but the interest described in item (i)
above is an interest in a "company limited by shares" established pursuant
to (or in conformity with) the Company Law. Having clarified the
alphabet soup which confront foreign capital, it is also necessary to
critically examine the law which purports to govern the rights, obligations
and value obtained through ownership of such interests - the Company
Law and its associated laws and regulations.

22. As is noted below, there is as of yet no formal legal basis allowing for foreign investment
in PRC "limited liability companies" as opposed to 'companies limited by shares. See section
IV.A.xv of this article. Presumably, foreign invested limited liability companies are merely Sino-
foreign equity joint ventures, authorized and governed by the law and implementing regulation
governing that foreign direct investment form.



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III. LEGISLATIVE BACKGROUND

It is beyond the scope of this article to examine in detail the long
history of China's attempts at corporate law-making, which commenced
in 1904, with the promulgation by the Qing court (or more precisely the
Commerce Board (Shangbu)) of a "Company Law." Suffice to say, as
William Kirby has shown,2s that the motivation behind even the earliest
law making efforts were similar to that behind the PRC's Company Law:
to create a tool to promote China's industrial development, and as part of
a more generalized legal reform intent on somehow conforming Chinese
industrial organization and relationships with perceived Western
(developed, industrial capitalist) norms and structures. Add to this the
present-day desire to use corporate entities not only to compete with the
West (and Japan), as was the case in the Qing, but also to provide a
suitable (and recognizable) receiving entity for foreign capital investment
and Chinese capital rapidly accumulating as a result of reforms, and the
aims and means of the 1904 and 1994 projects are not too distinct.

The very recent history of Chinese law making and local
experimentation with the corporate form, and its relationship to foreign
investment, can also best be summarized very briefly: 24

A. Local Legislation (1992-93)

The promulgation of the Company Law was only the culmination of
a process which, like a great deal of law-making in China, began both
locally and experimentally.25

Legislation concerning the establishment and form of Chinese
corporations commenced in earnest in 1992 with the issuance of the
"Tentative Provisions of Shenzhen Municipality on Companies Limited by
Shares"26 which were replaced - at least with relation to companies formed
in the Shenzhen Special Economic Zone - on 1 October 1993 by the

23. See William C. Kirby, China Unincorporated: Company Law and Business Enterprise
in Twentieth-Century China, 1 THE JOURNAL OF ASIAN STUDIEs 43 (1995).

24. This is well described and analyzed in an excellent article by Professor Fang
Liugang, perhaps China's best academic writing on corporate law matters. See Fang, supra note 9.

25. See id.
26. On March 17, 1992, by the Shenzhen Municipal Government. This article uses the term

"company limited by shares" perhaps more familiar to readers versed in English law for the Chinese
term Gufen Youxian Gongsi. Many North American writers and translators have rendered the term
as "joint-stock companies." The underlying Chinese animal is the same.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 137

"Regulations on Companies Limited by Shares of the Shenzhen Special
Economic Zone."27 Meanwhile, in 1993, Guangdong Province also
promulgated its own "Regulations on Companies Limited by Shares."23

Not to be left too far behind, Shanghai had also issued its own regulations
providing a basis for companies limited by shares: "Tentative Provisions
on Companies Limited by Shares of Shanghai Municipality" of 18 May
1992. Importantly, this collection of provisions and regulations allowed
for the formation of companies limited by shares only in the jurisdiction
promulgating the legislation in question: thus a company limited by shares
could not for instance be established in Chengdu, Sichuan Province based
upon the conditions set forth in any of the Shenzhen, Shanghai or
Guangdong rules.

In the midst of this explosion of local corporate law-making, and the
continuing lack of a national corporate law, certain central government
authorities took it upon themselves to promulgate two documents which
collectively asserted basic minimum national standards: the "Share System
Experimental Procedures of the PRC"29 and the "Opinion Regarding
Standards for Companies Limited by Shares," the second knowm simply as
the "Standard Opinion. 30 The first document mandated that all companies
limited by shares established in the PRC comply with the Standard
Opinion. Although the status of the Standard Opinion as "law" or
"regulation" (as opposed to a mere "guiding document" or "principles") was
originally open to some doubt, the State Council later obligingly confirmed
in a Notice31 that the Standard Opinion had been duly promulgated and had
the effect of ministry-level law and regulation (zhengfu bumen guizhang).
Because of the peculiar timing of the promulgation of the Standard
Opinion - two months after the Shenzhen rules and three days before the

27. On Apr. 26, 1993.
28. On May 14, 1993 (effective on Aug. 1, 1993).
29. Issued on May 15, 1992, by CRES, the State Planning Commission, the Ministry of

Finance, the People's Bank of China and the State Council Production Office. Note that these
Procedures were promulgated two months after the initial Shenzhen regulations, and only three days
before the Shanghai provisions.

30. Also promulgated on May 15, 1992 [hereinafter Standard Opinion]. A separate opinion
on standards applicable to 'limited liability companies" was also promulgated on the same day
[hereinafter Limited Liability Company Standard Opinion].

31. Notice of the State Council Office Concerning Implementation of the Standard Opinion
(May 15, 1993, in GUOBANFA, No. 27, 1993). This was deemed necessary as many of the original
"A" and "B" share issuers were concurrently being organized in accordance with a pronouncement
that did not have the status of law, merely that of an 'opinion.'



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Shanghai provisions - the relationship amongst the three was not clear.32

In the event, companies limited by shares listed on the Shanghai and
Shenzhen stock exchanges were formed under the Shanghai provisions and
the Shenzhen regulations respectively, while issuers which listed almost
simultaneously on the Shanghai and Hong Kong exchanges ("A" and "H"
share issuers), and the first direct issuer on the New York Stock Exchange
( an "N" share issuer, with no underlying tranche inside the PRC or in
Hong Kong), were established pursuant to the Standard Opinion.

B. Trans-National (Territorial) Initiative (1992)

To facilitate the listing of the shares of PRC issuers on the Hong
Kong Stock Exchange, relevant Chinese authorities and the Hong Kong
Securities and Exchange Commission held discussions in late 1992 to
clarify certain perceived gaps in the Standard Opinion. These discussions
led to the signature of a "Cooperative Supervision Memorandum" and the
promulgation (in mid-1993) of the "Addendum" to the Standard Opinion
and "Mandatory Provisions of the Articles of Incorporation for Mainland
Companies Listing in Hong Kong."33 The Addendum and the Hong Kong
Mandatory Provisions proved extremely effective in enhancing the
viability (and acceptance) of PRC issuers looking to Hong Kong.34

32. The Standard Opinion, supra note 30, did say, at art. 118, that the Shenzhen regulations
would continue to apply to companies limited by shares established in Shenzhen or listing on the
Shenzhen stock exchange. However, no national authority was able, before the promulgation of the
Company Law, to state clearly whether or not the Shenzhen regulations, or the subsequent Shanghai
provisions, had priority over the terms of the Standard Opinion.

33. Addendum Regarding the Implementation of the Standard Opinion by Companies Listing
in Hong Kong (May 24, 1993 by CRES) [hereinafter Addendum] and Mandatory Provisions for
Articles of Association of Companies Listing in Hong Kong (June 10, 1993 by CRES) [hereinafter
Hong Kong Mandatory Provisions].

34. The Addendum and the Hong Kong Mandatory Provisions, supra note 33, effected
improvements in several areas, including: (i) the introduction of 'H" shares; (ii) enhanced protection
of minority shareholders; (iii) waivers of some provisions in the Standard Opinion, including: (a)
the requirement of at least three promoters; (b) the external investment ceiling (on the issuer) of 50%
of the value of its total assets; (c) the required twelve month interval between any two issuances of
stock; (iv) allowance for an "authorized (but unissued) capital" concept; (v) recognition of foreign
jurisdiction judgments as to share ownership; (vi) the keeping of the shareholder register at the
(foreign) listing venue; and (vii) allowance for perpetual terms of such companies.

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1997] CHINA'S COMPANY LA W: ONE STEP FORWARD, TWO STEPS BACK? 139

C. The National Company Law and Its "Overseas" Progeny (1994)

As stated above, the Company Law finally became effective on 1 July
1994Y.3 However, various shortcomings, particularly with respect to the
establishment of issuers intent on accessing foreign capital markets, were
perceived immediately. Thus, the China Securities Regulatory
Commission ("CSRC") formulated and saw to the promulgation by the
Standing Committee of the State Council of the "Special Regulations of the
State Council on Foreign Offerings and Listings of Companies Limited by
Shares"36 - which sought to codify many of the waivers set forth in the
Addendum and the NYSE Shandong Huaneng listing - and the "Articles
of Association for Overseas Listed Companies"38 - which also seek to
incorporate previous arrangements made with Hong Kong authorities
(chiefly the Addendum and the Hong Kong Mandatory Provisions) and in
connection with the Shandong Huaneng offering.

D. What is Being Compared and Why

Amid this abundance of law-making it may be difficult to decipher
what exactly, in a remarkably fluid situation, can be usefully compared.
It is the purpose of this article to compare the Standard Opinion, as
supplemented by the Addendum and amplified by market practice on the
one hand 9 and the subsequent Company Law on the other, to illustrate (i)

35. First attempts to draft a Company Law began in 1983, but stalled after multiple drafts.
In 1986, the effort commenced to at least draft standards for companies limited by shares and limited
liability companies, which resulted in the two 'standard opinions.' After the adoption and before
the coming into effect of the Company Law, the State Council issued *Regulations on the
Administration of Company Registration" (effective on July 1, 1994).

36. Promulgated on Aug. 4, 1994 by the State Council of the PRC, but published only on
August 19, 1994 in the People's Daily [hereinafter Overseas Listing Rules].

37. The listing of Shandong Huaneng Power Development Co., Ltd. on the NYSE represented
the first direct listing by a PRC company on a stock exchange outside of Hong Kong. Thus, while
Shandong Huaneng was technically formed under the Standard Opinion and prior to the
effectiveness of the Company Law, it was not subject to the special arrangements agreed between
the PRC and Hong Kong for the initial 'H" share issuers. The author and a team of his colleagues
at Paul, Weiss, Rifkind, Wharton & Garrison represented the lead underwriter and global co-
ordinator in the transaction: CS First Boston.

38. Promulgated by CRES and the State Council Securities Commission on Aug. 27, 1995
[hereinafter Overseas Mandatory Articles].

39. This paper will also make reference to the Provisional Regulations on the Administration
of Share Issuances and Trading, promulgated by the State Council of the PRC on Apr. 22, 1993
[hereinafter Issuance and Trading Regulations].



COLUMBIA JOURNAL OFASIANLAW

important ways in which the Company Law was in fact a step backwards
from the Standard Opinion and accepted practice, and (ii) how the
Company Law represents a missed opportunity to improve upon the
Standard Opinion. This comparison of two important milestones will not
however ignore subsequent ameliorations of the Company Law, especially
the relief provided by the Overseas Listing Rules - at least insofar as
overseas issuers are concerned.

Such a comparison is intended to illuminate the corporate law issues
under discussion in China presently, and thus provide a basis for
understanding the direction of corporate legislative reform of wider
application. To some extent, this discussion will reveal issues inherent in
the drive to remove certain portions of the industrial economy away from
central state control. In addition, the following discussion will highlight
difficulties and deficiencies in the Company Law which could have been
obviated by a more open (or "transparent") legislative process, or at least
one which took account of a wider circle of informed opinion.

IV. CRITIQUE OF THE COMPANY LAW

This section IV is divided into two sub-parts, the first, which offers
more generalized comments on flaws inherent in the Company Law, and
the second, which details how the Company Law in its present form makes
the establishment of viable participants in the capital markets difficult.
The first set of issues address more fundamental contradictions in the
statute, while the latter set may pertain to the concerns of a more focused
taste.

A. General Critique

i. Shareholders Rights and Liabilities. The Company Law
declares that a company's shareholders "have the right to
enjoy the benefits of the assets of the company, make
major decisions and choose the managers in accordance
with the amount of capital they have invested in the
company."'4 This rather extraordinary provision seems to
contravene the basic theory behind stock companies: to
wit, that shareholders exercise powers, and enjoy rights,

40. See Company Law, supra note 2, art. 4, para. 1.



1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 141

in accordance with the amount (and terms and conditions)
of the stock they hold, not "the amount of capital they
have invested in the company." What are the respective
rights of shareholders who have invested different
amounts of capital, but received the same amount of
stock? The concept is clearly better suited to the
determination of a shareholder's rights with respect to
limited liability companies, as the Company Law
recognizes.' (Note also that, in other sections of the
Company Law, the drafters seem to recognize and affirm
the correct concept: for instance, companies limited by
shares are commanded to distribute profits (after making
up losses and making allocations to statutory funds) to
shareholders "in proportion to the number of shares held
by the shareholders."42) The provision is matched only by
the equally inappropriate stipulation of the Standard
Opinion declaring that "shareholders shall assume
liability for company debts, up to the quantity of shares
held."43 Of course, shareholders are not directly liable for
the debts of corporations which they invest in. And even
if they are, indirectly, then they should be liable only for
such debts up to the value of the stock they have
subscribed for, not their pro rata portion (determined by
shareholding) of such corporate debts. The Company
Law improves upon this provision only in part, with its
declaration that "shareholders shall be liable to a company
limited by shares to the extent of the shares held by
them,"44 a formulation that clarifies who exactly such
holders are liable to but keeps open the door to liability
for such shareholders in excess of the amounts they have
paid into the company.45

41. See id provisions regarding limited liability companies: arts. 33 (dividends assigned in
accordance with the proportion of capital contributions) and 41 (voting in accordance with the
proportion of capital contributions).

42. Id art. 177, para. 4 (emphasis added).
43. Standard Opinion, supra note 30, art. 42.
44. Company Law, supra note 2, art. 3, para. 3 (emphasis added).
45. For a good history of the concept of limited liability in China (and explicit comparison

with U.S. concepts) but a non-critical view of the drafting style of the Company Law, see Chuan
Roger Peng, Note, Limited Liability in China: A Partial Reading of China's Company La,,, of 1994,



COLUMBIA JOURNAL OF ASIAN LA W

ii. Piercing the Corporate Veil "With Chinese
Characteristics": The State Reaches Through to "its"
Assets. No doubt to provide comfort to conservative
figures who did not welcome the lessening of state control
and the advent of corporations in China, the Company
Law states: "the state-owned assets of a company belong
to the state."'46 This stipulation is nonsense, as a
corporation's assets should belong to the corporation,
which corporation in turn belongs to all of the
shareholders, it being impossible to identify a portion of
the company's assets that belong exclusively to certain
shareholders participating in the corporation. There was
no similar concept in the Standard Opinion. Thus,
pursuant to the terms of the Company Law, if a company
limited by shares is owned 60% by a state entity or state
proxy, yet all of the factory, capital equipment and fixed
assets of the company were contributed to the corporation
by such state entity or proxy (the other shareholders
contributing cash), conceivably the 60% shareholder
would own 100% of the assets of the corporation, or the
corporation would not be able to dispose of such assets
without the approval of the state-owned assets bureau.

iii. Fiduciary Duty. Before the earliest "H" share offerings,
the Hong Kong securities authorities demanded that PRC
directors and officers of Chinese companies be subject to
some strong and credible notion of fiduciary duty. So it
was that the Standard Opinion,47 in conjunction with an
explanation rendered to the Hong Kong Securities and
Exchange Commission by CRES on the meaning of
Article 62 thereof, established the notion of "fiduciary
duty" (chengxin zeren) for directors and senior managers

10 COLUM. J. ASIAN L. 263 (1996).
46. See Company Law, supra note 2, art. 4, para. 3.
47. See Standard Opinion, supra note 30, art. 62.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, 7IVO STEPS BACK? 143

in Chinese law for the first time.s Sadly, the Company
Law eliminated this key concept (and phraseology), and
thus any commonly accepted notion of how, or in whose
interest, such key personnel should act.49 (Instead,
directors, supervisors and managers are to "protect the
company's interests.")50  The exact concept (and
phraseology) was recovered, and only with respect to
companies issuing stock overseas, in the Overseas Listing
Rules of August 1994.51 The damage in this regard is
significant. First, it may have retarded the wide and
undisputed application of a key concept of corporate
responsibility which ensures that the board and
management of a corporate entity will act in the interests

48. See CRES's letter to the Hong Kong Stock Exchange of June 10, 1993 (TIFAIHANSHENG,
No. 74, 1993) [hereinafter CRES Hong Kong Stock Exchange Letter]. In item 6 of the letter, CRES
stated that: 'the duty.. described in Article 62 of the Standard Opinion has the same meaning as the
'Chengxin Zeren [fiduciary duty]' of Hong Kong law.' (Note the English words 'fiduciary duty"
are set out in the original Chinese form of the letter.) The equivalent concept exists in Taiwan's
corporate law as 'Shanliang Guanli."

49. The Company Law does stipulate that a company's articles of association are binding upon
the company's shareholders, directors, members of the supervisory committee and senior managers
(See Company Law, supra note 2, arts. 11, 59). The Overseas Listing Rules, supra note 36,
expanded the application of this concept to other senior officers, which includes the CFO. the
secretary of the company and other officers specified in the articles of association. The Company
Law does contain specific prohibitions against directors, supervisors and management personnel
acting in an interest contrary to the company's: See Company Law, supra note 2, arts. 59 (exploit
position, accept bribes or take over company property), 60 (misappropriate company funds), 61
(enter into competition with, or sign contracts with, the company), 62 (disclose confidential
company information), 118 (vote for resolutions which violate laws, the articles of association or
result in serious losses), 128 (supervisors), 198 (members of liquidation group) and 214
(misappropriation, etc.)

50. Company Law, supra note 2, art. 59. Some analysts have understood this Article and all
the other indications of responsibility in the Company Law as the concept of fiduciary duty. Even
if this view is credible, it raises the question as to why the Overseas Listing Rules had to restate the
Standard Opinion formulation (See Overseas Listing Rules, supra note 36. art. 31) and why the
former CRES-explicated language was dropped. In addition, there is continuing dispute among
various analysts and regulators as to whom or what precisely such duty is owed: the company, the
shareholders or - in the most conservative view - the state.

51. See Overseas Listing Rules, supra note 36, art. 23, para. 1. This provision refers to such
persons' (including supervisory committee members') 'fiduciary duty' and 'duty of due care.'
There may be a problem of legislating logic in this case. The above-cited provision of the Overseas
Listing Rules makes implicit reference to an interpretation of a statutory provision (See Standard
Opinion, supra note 30, art. 62) contained in a superseded law (the Standard Opinion) by a now
seemingly dis-empowered authority (CRES - which is granted no power to explain the Company
Law).



COLUMBIA JOURNAL OFASIANLAW

of the entity, not the particular shareholder who has
appointed such director or executive (or the state).
Second, the omission leaves a mystery as to the exact
standard which directors and senior executives of PRC
companies must measure up to. Contrary to the U.S. and
English systems, there is no common law system in China
which will in time produce jurisprudence explaining and
amplifying such a key concept; like the continental
system, an authoritative explanation will have to be
rendered - difficult, even if the substantive omission is
remedied, because the Company Law designates no
authoritative interpreter of the Law.52 Of course, even if
an authoritative body was annointed to explain the Law,
and develop a coherent jurisprudence, there would remain
the nettlesome problem of how, and who would enforce
the duty so identified.53

iv. State Officials. As China makes the transition from a
Party-led, state-mandated economy to a "socialist market
economy," various state officials have been placed in
positions of "leadership" (i.e., managerial control) of
newly transformed enterprises. In many cases, such
newly-minted managers are simply the senior cadres of
the enterprise's previous "leading department." As the
underlying assets have become corporatized, so the
leading department's relationship with the assets has
changed from one of administrative control to share
ownership. Thus, the laudable prohibition in the
Company Law against "state officials" (guojia
gongwuyuan) acting as directors, supervisors or managers
of Chinese companies seems strange and certain to be
widely dishonored,5 and contributes to the sense that the
Company Law is not to be understood as a statute that has

52. Most Chinese legal theorists would think that, by default, it is the Standing Committee
of the National People's Congress. See below, Section IV.A.xiv of this article.

53. See the definitive work on this most important question, Donald C. Clarke,
Power and Politics in the Chinese Court System: The Enforcement of Civil Judgments, 10 CoLUM.
J.AsiANL. 1 (1996).

54. See Company Law, supra note 2, arts. 58 (with respect to the directors of limited liability
companies), 123 (directors of companies limited by shares), 128, para. 2 (supervisors).

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1997] CHINA'S COMPANY L4W: ONE STEP FORWARD, TWO STEPS BACK? 145

close connection with "actual circumstances" in China.
(The Standard Opinion had no such provision.)55

Unfortunately, the term "state officials" remains
undefined, and worse, the underlying concept is presently
honored mostly in the breach, where all of the directors,
supervisors and managers of countless companies in the
PRC also serve in government positions, or as the local or
enterprise Communist party officials.5 6

v. Prohibition on Establishing Wholly-owned Subsidiaries.
Although the Company Law states that companies may
set up independent legal person subsidiaries,' it also
mandates that "a limited liability company is established
by capital contributions made together by at least two and
no more than 50 shareholders. "s5 Thus, any corporate
entity intent on forming its own wholly-owned subsidiary
(as a limited liability company) is effectively blocked,
unless it finds at least one co-investor and thus takes only
a partial interest in the subsidiary entity. This limitation
is at odds with practice as it has developed throughout
China since the mid-1980's and throws into serious doubt
the true limited liability nature of such entities already
established under pre-existing PRC companies. In a clear
concession to the powerful remnants of the state-run
economy, it is only state-authorized investment
institutions or departments which may act as the sole
investor in "wholly state-owned companies" (a special
class of limited liability company).5 9

55. See Standard Opinion, supra note 30, art. 61, which restricts certain individuals -
incompetents, bankrupts, criminals, etc. - from serving as directors. The Company Law retains this
concept, both with respect to limited liability companies (See Company Law, supra note 2, art. 57)
and companies limited by shares (i& art. 123).

56. Of course, an argument can be made that 'party' officials are not "states officials, in a
society and political system that confers separate status on party and state. The easy rejoinder to this
argument is that China is a one-party state, where the party acts as a kind of executive, which
ensures that its policies are implemented by the state.

57. See Company Law, supra note 2, art. 13.
58. Id art. 20. This provision is identical to that contained in the Limited Liability Company

Standard Opinion. See Standard Opinion, supra note 30, art. 9.
59. See Company Law, supra note 2, arts. 64-72.



COLUMBIA JOURNAL OF ASIAN LAW

vi. Sloppy Drafting: Confusion Between "Issuer" and
"Promoter," Etc. Some aspects of the Company Law
reflect a rather pronounced ignorance of basic corporate
or securities law or, at best, very sloppy drafting. For
instance, many provisions of the Company Law speak of
situations whereby "promoters offer shares to the
public."60 This use of the word "promoter" (faqiren)
reveals some very basic confusion with the term for
"issuer" (faxingren), or at least contemplates a situation
whereby a promoter may engage in the direct public offer
of stock of a company that is not yet even formed. It is
true that many of the initial public offerings of stock in
China were effected in connection with the formation of
the issuer by promoters, but in all cases it is the "issuer"
- not any "promoter" - which has engaged in the initial
public offering. The Standard Opinion studiously avoids
such a misconception, clearly identifying "the company"
as the issuer. The Company Law has another equally
confusing drafting mistake in that it refers in many places
to "stock/share certificates" (gupiao) where in fact it
means to address concepts of stock or share capital
(gufen).6' In many other places, the drafters have made
the correct choice, using "gufen." The inconsistency is
inexplicable.

vii. Quorum Requirements and Special Shareholders'
Resolutions. The Standard Opinion contained basic
quorum requirements for meetings at which both general
and special resolutions would be addressed.62 It was
commonly thought that the high quorum requirement for
action on special resolutions (i.e., resolutions seeking to
amend the articles of association or increase share capital)
inhibited such actions unduly, or forced the company to

60. See, e.g., id. arts. 84, 85, 88, 89, 90.
61. See, e.g., id. art. 155 which refers to the listing of "share certificates" abroad.
62. See Standard Opinion, supra note 30, art. 46. This Article provides for a quorum of over

50% of the shareholders (by shareholding) for a general meeting at which an ordinary resolution
(simple majority vote) is to be addressed, and a quorum of two-thirds of the shareholders (by
shareholding) for a special resolution.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 147

fall back on remedial provisions of the Standard Opinion
allowing for the holding of a general meeting following
the absence of a quorum (and after repeated notice to
potential minority shareholders). 63 The lack of any
mention of a quorum requirement (with respect to
shareholders' meetings)54 in the Company Law, or
differentiation between general and special resolutions,
is an odd, if potentially benign (at least for controlling
holders) omission. Certainly it does not evidence any
consciousness on the part of the Company Law drafters of
the rights of minority shareholders. The Overseas Listing
Rules did subsequently re-introduce the Standard
Opinion's 50% quorum requirement for general meetings
for companies listing abroad. The Overseas Mandatory
Provisions go a step further, providing for general and
specific meetings and resolutions, and following UK law,
even "class" (called "type") meetings (leibie gudong
huiyi) and voting.67 (It has long been a feature of UK
corporate law that shareholders of a certain class may

63. Standard Opinion Article 48 sets forth a procedure in the event that Article 46 quorum
requirements are not met. See Standard Opinion, supra note 30, art. 48. First, further notice is
given, and the meeting is postponed for 20 days. In the event a quorum is still not attained, then a
quorum shall be deemed to exist, and the various majority and supermajority voting requirements
shall be calculated based upon the total number of shares held by the shareholders who do attend.

64. The Company Law does recognize a quorum requirement for meetings of the board: 50%
or more. See Company Law, supra note 2, art. 117.

65. Compare the Company Law's provisions with respect to action by shareholders of limited
liability companies on increase of reduction of registered capital, division, merger, dissolution or
change in corporate form (See id. art. 39, para. 2) and amendment of the articles of association ( id.
art. 40). With respect to companies limited by shares, the Company Law makes a distinction
between general meetings (id. arts. 102, 103) and special meetings (id. art. 104), and voting
requirements for certain kinds of resolutions at general meetings only (id. arts. 106, 107).
Moreover, the Company Law does not address the respective quorum requirements at either type
of meeting or for either type of resolution.

66. See Overseas Listing Rules, supra note 36, art. 22. But note the curious formulation of
this Article and the corresponding article of the Overseas Mandatory Articles (supra note 38, art.
53), which asks for only 50% of the 'shareholders who are planning to attend" (Nichuxi Hujyide
Gudong) (which plans to attend must be confirmed in writing to the company at least twenty days
before the meeting is convened per Article 20 of the Overseas Listing Rules). Thus, even if
shareholders holding 90% of the stock of a company attend a meeting without having confirmed
their desire to attend beforehand, while two of the remaining three shareholders holding in the
aggregate 10% of the company stock and having confirmed their desire to attend miss their bus, a
quorum is not established.

67. See Overseas Mandatory Articles, supra note 38, arts. 49-55. 64, 70, 71, 78-85.



COLUMBIA JOURNAL OF ASIAN LA W

vote, as a class, with respect to any proposal before the
shareholders which may affect such class' rights.)

viii. Ceiling on Individual Shareholdings. The Standard
Opinion provided very explicit caps on the amount of
shares to be owned by natural persons and/or
employees.68 The Company Law provides for no such
restrictions. While the Standard Opinion formulation
may appear, to Western eyes, overly restrictive, it sought
to ensure wider dissemination of shareholdings among a
diverse base of shareholders, not simply persons
connected (presently, or in the very recent past) with huge
entities representing the state, powerful individuals who
exist in the twilight between government (or Party)
administrative jurisdiction and enterprise management, or
the employees of an enterprise, forced to take stock in
lieu of cash compensation and/or benefits. 69 The Standard
Opinion's method may have been overly blunt. However,
it stood as the expression of an idea which seems to have
been rebutted in the Company Law, with its many
allowances for direct or indirect state control of
corporations.

ix. Shareholders' Resolutions. Those keen to promote
shareholder democracy and/or protect the voice and
leverage of minority stockholders will be disappointed by

68. See Standard Opinion, supra note 30, art. 24(3), which holds: (i) a natural person (other
than "B" share or other foreign investors) may not own more than 0.05% of the stock of a company;
(ii) employees may not own more than 20%, in the aggregate, of the total share capital of a company
formed by directed share offer; (iii) employees, in the aggregate, may not own more than 10% of
the publicly offered share capital, of a company formed by a public offer. Any natural person
seeking to hold in excess of 10% had to gain approval therefor from CRES and the People's Bank
of China (a power likely delegated to the CSRC). Id. art. 31. The Addendum altered this provision
for "H' share holders, requiring only disclosure of such interests (pursuant to the Issuance and
Trading Regulations, supra note 39) to the relevant stock exchange and notification to the issuer.
See Addendum, supra note 33, art. 12.

69. There may of course be a contrary view, to the effect that a wide dissemination of
shareholding dilutes the power of any independant owner of capital to govern the affairs of the
industrial enterprise subject to the corporate form - especially in a "corporatization" system which
deposits substantial shareholdings into the hands of state actors: whether holders of "state-owned
shares" or "legal person" shares.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 149

the Company Law, which - in addition to its failure to
allow for different classes of stock and independent class
rights70- allows shareholders no right to propose
resolutions for consideration at general or extraordinary
meetings.7 This represents a retreat from the Standard
Opinion, which allowed for shareholders representing at
least 5% of a company's share capital to propose
resolutions for consideration at a general meeting.n

Moreover, although pursuant to the Company Law
shareholders holding 10% or more of a company's shares
may call a special shareholders' meeting, there seems to
be no provision allowing such shareholders to propose
resolutions at general or extraordinary meetings, only a
notice to be given by the board to shareholders (thirty
days before), and a prohibition against the adoption of
any resolution at a special meeting not stated in the
notice7 4 Thus, while a significant minority may cause the
convening of a special meeting, it is not at all clear that
such minority can propose resolutions to be validly
considered at such meeting. And if such minority does
not succeed in getting the board to notify all the
shareholders of the matter giving rise to the special
meeting, then resolutions with respect thereto may not be
adopted. These anomalies were remedied somewhat in
the Overseas Listing Rules, which allow shareholders
holding 5% or more of a company's voting shares to
submit draft resolutions at general meetings !5 However,
this remedial provision may have gone too far, in that
there is no minimum period (before such meeting) when
such shareholder resolutions must be submitted: opening

70. See Section IV.B.ii of this article.
71. See Company Law, supra note 2, arts. 102-111.
72. See Standard Opinion, supra note 30, art. 43(9).
73. The same provision is in the Standard Opinion, supra note 30. art. 44(2)(iii). and is

confirmed in the Overseas Mandatory Articles, supra note 38, art. 72(1).
74. See Company Law, supra note 2, art. 105. See also Overseas Mandatory Articles, supra

note 38, art. 55.
75. See Overseas Listing Rules, supra note 36, art. 21. Note however that the Overseas

Mandatory Articles, supra note 38, echo Article 105 of the Company Law, prohibiting the adoption
of any resolutions at a special meeting not contained in the notice for such meeting. Id. art. 55.



COLUMBIA JOURNAL OFASIANLAW

up shareholder meetings to the potential of ad hoc and
disruptive resolutions being brought by vocal shareholder
groups.

x. Statutory Funds. The Company Law requires, seemingly
without exception, that a portion (five to ten percent) of
a company's after-tax profits be first allocated to a
"statutory common welfare fund."76  The Standard
Opinion merely provided for the establishment of such a
fund, but required no minimum allocation to it.77 While
it is true that in the past the PRC Ministry of Finance had
promulgated notices requiring such allocations for
Chinese corporate entities, the Ministry was reportedly in
the process of amending such regulations to do away with
such requirements. However, with the promulgation of
the Company Law, such allocations are locked into a
statute of national application, binding on all companies
in China.

xi. Ultra Vires and Third Parties. Chinese legal and
organizational culture is fixated on the precise limitations
described in a given entity's "business scope," such that no
enterprise is authorized to undertake an activity not
specifically delineated and authorized in an approved
scope. Thus, it is somewhat surprising that the Company
Law does not provide any protection for third parties
acting in good faith, where a company or its directors or
officers are acting ultra vires or beyond their scope of
authority.78 Conversely, the Standard Opinion provided
for liability for those parties responsible for companies
acting outside of their registered scope of business or
engaging in illegal business. 79

76. See Company Law, supra note 2, art. 177.
77. See Standard Opinion, supra note 30, art. 74.
78. The Company Law only contains the affirmative statement to the effect that a company's

business scope must be specified in its articles of association, and that a company must conduct it
activities in accordance with its registered scope of business. See Company Law, supra note 2, art.
11, para. 2.

79. See Standard Opinion, supra note 30, art. 104(4).

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19971 CHINA'S COMPANY LAW: ONE STEP FORWARD, TVO STEPS BACK? 151

xii. Company Borrowing. The Standard Opinion made fairly
clear the power of a company to borrow, give guaranties,
and issue securities, and the ways in which such acts are
to be authorizedso The Company Law provides a very
exhaustive list of the powers of the board' and the
shareholders (acting in general meeting),82 all of which
fail to state clearly whether a company actually has the
power to borrow money, give guarantees, issue securities,
etc., 83 or if such power may be deemed to be implied,
how such powers are to be exercised, and by whom.

xiii. Established Entities: Conforming with the Company Law.
The Company Law attempted to deal with the problem of
how corporate entities established prior to the July 1,
1994 effective date of the Company Law (including those
established pursuant to the Standard Opinion and the
Limited Liability Company Standard Opinion) will be
brought into conformity with it: "those companies not
completely satisfying the requirements of this Law shall
meet the requirements of this Law within the specified
time limit."84 It was subsequently rumored that the time
period for such conforming was to be one year i.e., to 1
July 1995. However, the State Council has, as of yet, not
promulgated any relevant rules. While the initiative is a
good one, given the need to conform the great universe of
corporate forms in existence throughout the PRC, it puts
the Chinese regulatory authorities under tremendous
pressure with respect to such compliance, especially with
regard to corporate entities which have effectively been
formed through "private placements" but which have been
granted no legal basis in the new law.8 To date the
majority of PRC companies formed since corporate

80. Id. arts. 43(5), 55(6), 55(12).
81. See Company Law, supra note 2, arL 112.
82. Id. art. 103.
83. Article 103(9) does state that the shareholders, acting in a general meeting, may exercise

the power to decide upon the company's issuance of 'bonds" (Zhaiquan), which are specifically
addressed in Chapter V of the Company Law, supra note 2.

84. Id. art. 229.
85. See Section I.B.xiii below.



COLUMBIA JOURNAL OF ASIAN L4W

experiments began have not conformed, and there is of
course a difficult issue as to how exactly they can be
made to conform in a society where the attention and
resources dedicated to enforcement are scanty.

xiv. Failure to Promulgate Detailed Implementing Rules and
Designate An Authoritative Interpreter of the Law. As of
this writing, other than fairly insignificant provisions on
registered capital, 6 China has not yet promulgated
"detailed implementing rules" or regulations which could
help explain and clarify many of the more vague or
contradictory provisions of the Company Law (many
highlighted in this article).87  In theory, at least, it is the
Standing Committee of the National People's Congress
which is empowered to promulgate such urgently required
rules - as they did for the Overseas Listing Rules (at the
behest of the CSRC and other reformist elements). This
situation (not unprecedented in Chinese legislative
practice)8 8 would not be so disturbing, if the drafters of
the Company Law had at least seen fit to appoint a body
as the governing authority or authoritative interpreter of
the Law, or even a body which is in charge of
promulgating detailed implementing rules. Conversely,
the Standard Opinion and the Addendum made very clear
designations of the party responsible for interpreting them
(CRES), 89 as did the Issuance and Trading Regulations
(the State Council Securities Commission, acting through

86. Tentative Provisions on the Administration of Registration of Company Registered
Capital (Dec. 18, 1995 by the State Administration of Industry and Commerce, effective March, 1,
1996).

87. It is understood that there remains a vigorous dispute over which bureau will be permitted
to draft such implementing rules among the Standing Committee of the National People's Congress,
CRES, the Ministry of Finance, and the CSRC.

88. For instance, although the Law on Sino-foreign Co-operative Joint Ventures was
promulgated on Apr. 13, 1988, implementing rules were only forthcoming in 1996. Similarly, there
was a gap of almost twelve years between the promulgation of measures for the registration of
foreign representative offices in China and their detailed implementing measures. And,
notwithstanding the creation of two functioning stock exchanges in China, and markets in all sorts
of securities, there is still no Securities Law in China.

89. See Standard Opinion, supra note 30, art. 119; see Addendum, supra note 33, art. 23.



1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 153

the CSRC.)90 The difficult result may be competing
interpretations of the Law and its provisions, and
patchwork implementation. Worse, at present, parties
looking for authoritative rulings on the Company Law are
uncertain which organ they must approach: CRES, the
State Council, the CSRC, the Ministry of Finance, the
State-Ovned Assets Bureau, etc.

xv. Status of "Foreign-Invested" Unlisted Companies Limited
by Shares. The Company Law, by its terms, seems to
provide a legal basis for foreign-invested "limited liability
companies" but not for unlisted foreign-invested
"companies limited by shares."91 In the earliest days of
"B" share issuances, such foreign-invested (B-issuing and
unlisted) companies were governed "by analogy" by the
Sino-foreign equity joint venture law. The Standard
Opinion explicitly recognized such vehicles (both "B"
share issuers, and unlisted companies that sold share
capital to foreign investors in private transactions), and
clearly ceded approval power over them to the Ministry
of Foreign Trade and Economic Cooperation
("MOFTEC")? 2 Thus, as with foreign share offerings and
"B" shares, the noticeable silence in the Company Law
regarding foreign-invested companies limited by shares
(and the rights of any other government authority to
administer the same) seemingly eliminated a legal basis
for them, and detracted from the completeness and
seriousness of the Company Law itself, requiring a "small
company law" to fill in an important gap. Subsequently,
MOFTEC has promulgated such an additional special-use
"little company law" specifically applicable to foreign-
invested companies limited by shares: "Provisional

90. See Issuance and Trading Regulations, supra note 39, art. 83.
91. See Company Law, supra note 2, art. 18. The Article uses the term in Chinese for'limited

liability companies" (Youxian Zeren Gongsi), rather than that for 'companies limited by shares*
(Gufen Youxian Gongsz) or the defined term for both (from art. 2 of the Company Law), merely
.company" (GongsO. See supra Sections II. A and B for a general description of these corporate
forms and the various interests that a foreign investor may obtain in them.

92. See Standard Opinion, supra note 30, arts. 12 (para. 3), 13(5), 24(4). See also Issuance
and Trading Regulations, supra note 39, art. 6.



COLUMBIA JOURNAL OF ASIAN LAW

Regulations on Several Issues Concerning the
Establishment of Foreign-Invested Companies Limited by
Shares" (the "Provisional Regulations"). 93  These
Provisional Regulations make clear that the Company
Law governs such companies only with respect to matters
not covered in the Provisional Regulations and the
Overseas Listing Rules,94 and does not address which will
have precedence in the event of conflict. ("B" share
issuing companies were long regulated by "B" share
regulations promulgated by the Shanghai and Shenzhen
Exchanges and, after the promulgation of the Company
Law, by a national law, "Provisions of the State Council
on Domestically Listed Foreign Capital Shares of
Companies Limited by Shares.") 95

xvi. Foreign Share Offerings. Although the Company Law
allows (vaguely) for foreign issuances and listings of PRC
share capital,96 in general the Law applies only to
domestically-issued share capital. The failure to address
foreign issuances, and set forth some basic regulatory
framework therefore, immediately subjected the "great"
Company Law approved by the "national" legislature to
the suspicion that it is in fact empty, thereby attacking the
legitimacy and seriousness of the Law. The omission
also caused the PRC securities regulatory authorities
immediately to formulate and publish a "small company
law," which in fact contravened a great deal of the content

93. Promulgated by MOFTEC on Jan. 10, 1995.
94. See Provisional Regulations, id. art. 25.
95. Provisions of the State Council on Domestically Listed Foreign Capital Shares of

Companies Limited by Shares (adopted on Nov. 2, 1995 by the Thirty-Seventh Session of the
Standing Committee of the State Council and issued for implementation on Dec. 25, 1995 by
Premier Li Peng pursuant to Order No. 189 of the State Council of the PRC) [hereinafter B Share
Provisions).

96. See Company Law, supra note 2, arts. 85, 155 (which specifically contemplate additional
rule-making by the State Council). The Issuance and Trading Regulations, promulgated almost eight
months before the Company Law, also contemplate "direct and indirect" issuances abroad of the
share capital of PRC enterprises. See Issuance and Trading Regulations, supra note 39, art. 6. The
Addendum of course specifically authorized "H" shares: shares with a renminbi par value, purchased
and traded in foreign currency and listed on the Hong Kong Stock Exchange. See Addendum, supra
note 33, art. 4.



1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 155

of the Company Law, further devaluing the Company
Law before it had been in effect for even a month. This
"small company law" was in fact produced for the specific
purpose of establishing PRC issuers suitable to issue stock
abroad, and is the "Overseas Listing Rules."97

xvii. No Allowance for "B" Shares. The Standard Opinion
(and the Issuance and Trading Regulations) originally
contemplated - and thus specifically authorized - the
creation and issuance of share capital to be listed on PRC
stock exchanges but traded in foreign currencies among
foreign holders: i.e., "B" shares.93 The Company Law
does not address such share capital. Thus, "B" share
issuances, prior to the promulgation of the B Share
Provisions," had to either be conducted pursuant to
existing Shenzhen and Shanghai regulations of local
application, or await the issuance of national regulations
promulgated under the authority of the Company Law
with respect to such shares. This requirement of further,
special-application legislation contributes to the sense
alluded to above that the Company Law is empty or fails
to address key issues involved in China's corporatization
process.

xviii. Conflict with China's New Securities Regime. There are
multiple ways in which the Company Law, as
promulgated, conflicts with, preempts or skews
jurisdictions associated with the substantive laws and
institutions arising from China's new securities law
regime (including the Issuance and Trading Regulations
and the yet-to-be promulgated "Securities Law"). It will
suffice to point out just a few of these areas:

First, the Company Law purports to identify the
documentation required to be submitted to the "securities

97. See Overseas Listing Rules, supra note 36, art. 3, which provides a statutory basis for
foreign-listed shares, or 'foreign-listed foreign funded shares.'

98. See Standard Opinion, supra note 30, arts. 24(4), 29; See Issuance and Trading
Regulations, supra note 39, art. 6, para. 1.

99. See B Share Provisions, supra note 95.



COLUMBIA JOURNAL OF ASIAN LA W

administration authorities of the State Council" in
connection with the public offer of shares to the public by
promoters [sic]'I ° The documents listed in the Company
Law are far fewer than those currently requested by the
CSRCt0t in connection with such offers for salet 2, and the
Company Law does not even allow the normal Chinese
catch-all: "and such other documents, etc. as such
authorities shall request." The Company Law goes on to
confer approval powers regarding "offering applications"
to the securities administrative authorities't 3 , while
simultaneously setting forth the very minimal - in
comparison with the CSRC's announced requirements -
content of an offering prospectus. Finally, the Company
Law allows for administrative rehearing or administrative
litigation (presumably against the CSRC) for the failure
to grant an approval with respect to an offering
application that "meets the requirements of this [the
Company] Law t' 4, and - more ominously -
"administrative sanctions" and (in serious cases) criminal
liability for personnel who have direct responsibility for
the approval of share and bond offerings, listings, etc.
which do not meet such requirements.'0 5 This structure
borders on the absurd, given the fact that "this Law" - the
Company Law as promulgated - contains so narrow a list
of required documentary and informational submissions,
and that China's securities regulators have no competence,
and should have no responsibility, for weighing the
merits, or truth, of an offering or listing application) °6

100. See Company Law, supra note 2, art. 84.
101. See Issuance and Trading Regulations, supra note 39, art. 15, items 1-16.
102. One of the documents listed however, an "operating budget" (Jingying.Gusuanshu), is

seemingly an additional document, of uncertain identity.
103. See Company Law, supra note 2, art. 86, para. 1.
104. Id. art. 227.
105. Id. art. 221.
106. The provision also runs directly counter to the spirit of the legend which must, pursuant

to Article 16 of the Issuance and Trading Regulations, supra note 39, be on the front of any

prospectus, reading (in part):
NO DECISION MADE BY THE GOVERNMENT OR ANY STATE SECURITIES
REGULATORY DEPARTMENT CONCERNING THIS ISSUANCE INDICATES THAT
SUCH BODIES HAVE SUBSTANTIVELY PASSED UPON OR WARRANTED THE

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19971 CHINA'S COMPANY LAW. ONE STEP FORWARD, TWO STEPS BACK? 157

Second, the Company Law also asserts its authority
in the matter of new share issuances, prescribing certain
qualifications for companies that wish to increase their
capital and issue new shares, including: (i) full
subscription of a previous issuance (which must have
been at least one year beforehand); (ii) continuous profits
and payments of dividends for the three previous years;
(iii) no false statement in a company's financial
statements over the three previous years; and (iv) that the
"projected profit" of the issuer exceeds the bank deposit
interest rate °7 The list is apparently exclusive, and thus
in conflict with the Issuing and Trading Regulations, 103

and preempting any future Securities Law. The final
requirement, the implicit promise that investors will do
better investing in the issuer's stock than in depositing
funds in a bank, is inappropriate and forces initial public
offering issuers to tout immediate income over long-term
capital appreciation.

Third, the Company Law rather clearly over-reaches
its competence in purporting to set forth requirements for
companies that seek to list on stock exchanges.1t 9 Such
provisions would have been far better left to the CSRC,
the forthcoming national Securities Law or the
regulations promulgated by China's stock exchanges.
Perhaps most extraordinary, and unprecedented in any
local listing regulations or the Issuing and Trading
Regulations, is the provision allowing for temporary de-
listing of an issuer upon such entity experiencing losses
for three straight years. 10

VALUE OF THE SHARES BEING OFFERED BY THE ISSUER OR ANY POTENTIAL
GAIN TO THE INVESTORS.

107. See Company Law, supra note 2, art. 138. Item (ii) does not apply to companies issuing
stock in connection with a stock dividend.

108. See Issuance and Trading Regulations, supra note 39, arts. 10 (capital increase), 11
(increase of private placement).

109. See Company Law, supra note 2, arts. 151-158.
110. Id art. 157(4). The Issuance and Trading Regulations, echoing art. 138 of the Company

Law, address the problem from the opposite side: such that a company may list only after it has
demonstrated three years of profits. See Issuance and Trading Regulations, supra note 39, art. 30(4).
In Article 70, the Issuance and Trading Regulations allow for companies only to be prohibited from
issuing shares in the event of serious misbehavior, but not de-listing. Id. art. 70.



COLUMBIA JOURNAL OF ASIAN LAW

B. The Establishment of Viable Securities Issuers

i. Failure to Define Accepted Share Classifications. The
Standard Opinion... distinguished between four kinds of
share capital: (i) state shares, (ii) legal person shares, (iii)
individual shares, and (iv) foreign shares, according to the
identity of the holder of such shares. The Company Law
does not address such distinctions. These distinctions are
important, especially with respect to "state shares" and
"legal person shares" and the oft-encountered hybrid,
"state-owned legal person shares," the common name or
concept for share capital of newly-transformed state
enterprises held by representatives of the state." 2 The
Standard Opinion, other items of legislation and various
pronouncements by relevant departments have made clear
that "state shares" and "legal person shares" may not be
freely transferred." 3 Thus, the failure of the Company
Law even to address such different categories (coupled
with the silence in the Overseas Listing Rules" 4 on the
same subject) throws into doubt the very legal basis for
such distinctions, and increases widespread confusion as
to the limitations and uses of such share capital.

ii. Failure to Provide a Legal Basis for Preferred Shares or
Different "Classes" of Shares. The Company Law does
not provide an explicit basis for preferred shares, different
classes of shares (with different values or different voting
rights, terms and conditions) or convertible shares; it
merely allows for further State Council regulations on

111. See Standard Opinion, supra note 30, art. 24.
112. Which share classification was recognized in the Provisional Regulations on the

Administration of State Equity in Companies Limited by Shares (promulgated by CRES and the PRC
State-owned Assets Bureau on Nov. 3, 1994, almost a year, and a full five months, after the
promulgation and coming into effect, respectively, of the Company Law).

113. See, e.g., the Provisional Regulations on the Administration of State Equity in Companies
Limited by Shares, id. It is rumored that one of the major obstacles involved in the final formulation
of a national "Securities Law" for China is the thorny issue of transferability of "state shares" and
"legal person shares" and related implications for continuing "state ownership on behalf of the
people."

114. The Overseas Listing Rules, supra note 36, make only a distinction between "foreign
listed shares" and "domestic shares."

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1997] CHINA 'S COMPANY LAW: ONE STEP FORWARD TVO STEPS BACK? 159

"the issue of different types of share certificates [sic] not
covered by this law.""5 The Standard Opinion addressed
preferred shares in some detail," t6 and seemed to imply
the existence of different classes of the same shares of
ordinary share capital.1 7

With respect to the creation of capital stock with
different valuations, the Company Law seems to indicate
the opposite, with the simple statement that: "the capital
of a company limited by shares is divided into shares;
each share shall be of equal value."118  This not only
represents a step back from the Standard Opinion, which
specifically authorized preferred shares, but makes
exceedingly difficult the issuance of stock of PRC issuers
on different markets - for instance, "A" shares in
Shanghai and "N" shares in New York - where mid-range
per share valuations differ. In the U.S. context this
problem has been solved by effectively "bundling'
together PRC share capital into appropriately priced
"American Depositary Shares" (i.e., 50 ordinary shares of
a PRC issuer being represented by one American
Depositary Share), even in anticipation of subsequent "A'
share issuances which will effectively unbundle such
shares to achieve a more rational initial public offering
price in China.

With respect to different classes of the same share
capital enjoying different voting rights, the Company Law
does not present an advance on the Standard Opinion,

115. "...Faxing Benfa Guidingde Gupiao Yivaide Qita Zhongleide Gupiao'. See Company
Law, supra note 2, art. 135. Article 138 of the Company Law also alludes to the idea of different
types of shares, mandating that when shareholders vote upon the issuance of new shares they must
specifically address the "type" (Zhonglet) of such shares. Id. art. 138.

116. See Standard Opinion, supra note 30, arts. 23 (which allows for cumulative preferred and
a liquidation preference), 39, para. 3 (which prohibits any voting rights for preferred shares), 102(1)
(liquidation preference). Note also that the relevant accounting provisions for companies limited
by shares - still in effect - make provision for preferred share capital.

117. See id. art. 27, which mandates that 'the issue price of the same £ype (Tongz~honS Leibie)
of shares during the same issue by a company must be uniform," which seems to imply the existence
of different "types" - and arguably different classes - of share capital; and art. 83(5), which uses
the same Chinese word (Leibie) in requiring amendment of the company's articles of association to
.add new types of shares' (Zengshi Xinde Gufen Leibie).

118. See Company Law, supra note 2, art. 129.



COLUMBIA JOURNAL OF ASIAN LAW

both of which seem to enshrine the principle of "one
share, one vote."119 The Chinese phraseology in the
Company Law is more limiting than that evident in the
Standard Opinion: Article 130 of the Company Law
declares that "the same stock (tonggu) enjoys the same
rights (tongquan) 120 and the same benefits (tongli),"
whereas the Standard Opinion refers in several places to
the same (tongzhong)12 1 or new (xinde) 22 "types" (leibie)
of share capital (gufen).

The failure to acknowledge different classes of
shares, and different rights attaching to such classes, will
both stymie efforts to provide sophisticated financing
strategies for investors in PRC issuers and cause certain
difficulties in attempting to protect minority rights. If the
Company Law does not address different classes of stock,
then investors will have to settle for the same rights as all
other shareholders and it will be difficult to establish a
basis upon which minority holders or investors giving
different value can be recognized and protected. The
CSRC has recognized at least the latter problem with
respect to PRC issuers accessing foreign capital markets
by providing in the Overseas Mandatory Articles for
"class shareholders" (leibie gudong), "class shareholder
meetings" and a full listing of issues affecting a specific
class, upon which such class must pass upon by a
supermajority (two-thirds). 23 These concepts will be used

119. See Standard Opinion, supra note 30, art. 39, para. 2, and art. 49 (but see also paragraph
3 of the same article, which prohibits any voting rights being attached to preferred shares). CRES
confirmed, in its letter to the Hong Kong Stock Exchange of 10 June 1993 (CRES Hong Kong Stock
Exchange Letter, supra note 48) that the division in law among state, legal person, individual and
foreign shares did not affect the principle of "one share, one vote", or "same rights for the same
shares." See id. item 1. For the Company Law iteration, see Company Law, supra note 2, art. 106,
para. 1, and art. 130, para. 1: "the same shares enjoy the same rights and benefits" (Tonggu
Tongquan, Tonggu Tongi).

120. This concept has already resulted in one disastrous decision by a local PRC court, which
has allowed that employee-owned shares - previously subject to restrictions on transfer pursuant to
Article 24(3) etc. of the Standard Opinion, supra note 30 - must be freely transferrable as "the same
stock enjoys the same rights," i.e., the same liquidity.

121. See Standard Opinion, id. art. 27.
122. Id. art. 83(5).
123. See Overseas Mandatory Articles, supra note 38, arts. 72,78,80, 82.

[11:1



1997] CHINA'S COMPANY LAW. ONE STEP FORWARD, TWO STEPS BACK? 161

to protect "H" and "N" (or other foreign shareholders) as
an identified minority. A better solution would have been
to provide for different classes of stock in general, and the
protection of class rights in accordance with the practice
of UK (and Hong Kong) law.

iii. Pre-emptive Rights and Anti-dilution Protection. The
Company Law provides for statutory pre-emptive rights
with respect to "limited liability companies"12 4 but only
allows for a shareholder's vote at companies limited by
shares in the event of a proposed increase in capital'S or
issue of new shares t2 - and only at general meetings, not
apparently at special meetings.2'z If an increase in the
registered capital of a company limited by shares will
cause an amendment of the company's articles of
association, then implicitly shareholders must approve by
a supermajority (two-thirds) any increase in capital that
would preview an issuance of capital by the company.12

However, the Company Law falls short of offering
existing shareholders pre-emptive rights to purchase
shares in any offering of new shares, thereby protecting
themselves against dilution. Statutory pre-emptive rights
(with provisions for waivers of such rights subject to time
and volume limitations) are a feature of corporate law
regimes which are closest to the UK model. Whatever the
merits of such rights for certain kinds of minority
shareholders, it seems clear that they could not be offered
in the PRC, as existing state legal person shareholders
simply do not now have the cash to participate in such
purchases, and thus would necessarily suffer dilution to
existing non-state shareholders.

124. See Company Law, supra note 2, art. 33.
125. Which the board may only propose, but which must be approved by the shareholders. Id.

art. 112(6).
126. Id. art. 138.
127. Id. arts. 103(8, 11), 104.
128. Id. art. 107, requiring a tw o-thirds majority of the voting rights present at the meeting -

again with no quorum requirement apparent.



COL UMBIA JOURNAL OF ASIAN [ W

iv. Derivative Forms and Convertible Stock. The Company
Law does not acknowledge the existence of derivative
instruments tz and convertible stock. (The Company Law
does, however, specifically envision the issuance of bonds
that are convertible into stock.)130 The Overseas Listing
Rules correct this, for PRC issuers listing stock abroad, by
allowing for depositary receipts "and other forms of
derivative instruments." Some authoritative sources in the
CSRC have previously indicated that the Overseas Listing
Rules thus also authorize convertible stock, although the
legal basis for this assertion is far from clear.

v. Authorized but Unissued Capital and Over-allotment
Option or "Greenshoe." Like the Standard Opinion, the
Company Law does not provide a legal basis for any
difference between a company's authorized and issued
share capital.' 3' Instead, the Company Law anticipates
that the value of all shares authorized for issuance (the
"registered capital") will be fully paid. 3 2 This limits the
flexibility of issuers in the distribution of newly
authorized capital, and negates the possibility of a
common U.S. underwriting practice (associated with
"book building") which allows for an "over-allotment
option," i.e., an extra portion of stock that may be dipped
into to cover extra demand in an JPO, and demonstrate the
keen demand for an IPO stock. The Overseas Listing
Rules allow for such over-allotment options, but only in
an amount up to 15% of the total number of foreign-listed

129. Id. arts. 129-135. Note however that Article 135 allows that the State Council may issue
further regulations governing the issuance of "other forms of share certificates [sic]."

130. Id. arts. 172, 173.
131. For "H" share issuers, the Addendum allowed for an "authorized" but unissued share

capital concept, such that all of a company's authorized shares could be issued over a fifteen month
period after the issuer's establishment. It also allowed for over-allotment options, and subsequent
issuances of already authorized capital without further shareholder approval. See Addendum, supra
note 33, art. 5.

132. See Company Law, supra note 2, arts. 25, 26, 78 ("the registered capital of a company
limited by shares is the total share capital which has been registered with the company registration
authority and which has been actually received"), 91.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 163

foreign funded shares, and with the approval of the
CSRC.

133

vi. Investment Company Restrictions. Perhaps one of the
most troublesome, and unclear, provisions of the
Company Law is the ceiling on external investment
permitted by companies:

Except for investment companies and
holding companies specified by the
State Council, where a company invests
in other limited liability companies or
companies limited by shares, the
aggregate amount of investment may
not exceed fifty percent of the net assets
of the company..."

(This ceiling echoes a similar ceiling in the Standard
Opinion, 135 which differed from the Company Law only
in requiring approval from "authorized departments." The
Addendum eliminated the restriction altogether with
respect to "H" share issuers" 6.) First, the provision clearly
restricts the establishment of holding company structures,
so crucial to the creation of viable and attractive capital
markets issuers. Second, the concept articulated in this
provision is exceptionally unclear, as it seems to neglect
investment by PRC companies into forms other than
"limited liability companies or companies limited by
shares" (i.e., partnerships, sole proprieterships, Sino-
foreign equity and co-operative joint ventures) and gives
no guidance how the value of "net assets" or investments
in other companies is to be calculated, and when. There
were high hopes that - after the Addendum - this
provision would be altered in the Overseas Listing Rules.
This hope, sadly, was not fulfilled.

vii. Formation of Companies Limited by Shares and Initial
Public Offers. The Company Law provides for two

133. See Overseas Listing Rules, supra note 36, art. 11.
134. See Company Law, supra note 2, art. 12, para. 2.
135. See Standard Opinion, supra note 30, art. 4.
136. See Addendum, supra note 33, art. 7.



COLUMBIA JOURNAL OF ASIAN LAW

methods of forming a company limited by shares: "offer"
and "promotion."

Establishment by the "offer" method means
"subscription by the promoters of part of the shares to be
issued by a company (not less than 35%) and a public
offer of the remaining part of the shares" prior to formal
establishment," 137 i.e., the raising of funds from the public
even before the company has been established. 31 (The
provisions of the Standard Opinion resulted in the same
anomaly. 39) Few overseas jurisdictions allow the public
offer of shares of a company that is not yet formed; it is
highly unlikely that investors in China will, as the
domestic capital market matures, engage in such risky
purchases (even though the Company Law provides for a
full refund of the public subscribers' payments - with
bank interest - in the event a founding meeting is not
held, the public shares have not been fully subscribed, or
a resolution not to establish the company is adopted at the
founding meeting)."4

Establishment by the "promoter" method
contemplates the subscription by the promoters of all
initial shares issued by the company' 4' (while subsequent

137. See Company Law, supra note 2, art. 74. This provision represents a narrowing of
options, as compared with the Standard Opinion, which described two kinds of "offers": (a) a public
offer much like that described in Article 74 of the Company Law, and (b) a "directed share offer,"
allowing for subscription by the promoters, and non-public issuances to other legal persons and,
subject to approval, employees (a kind of pre-establishment private placement). See Standard
Opinion, supra note 30, art. 7, para. 3.

138. See Company Law, supra note 2, arts. 91- 95 which mndate a founding meeting within
40 days of payment in full by the public subscribers, adoption of the issuer's articles of association
at that meeting, submission of a company registration within 30 days of the founders' meeting, and
a decision by the registration authority regarding formation of the company thirty days after that.
See also id. art. 136, which indicates that share certificates may not be issued prior to the registration
and establishment of a company, and art. 142, which requires that, in connection with an issuance
of new shares, all money be paid in before shares are issued, and re-registration is effected.

139. See Standard Opinion, supra note 30, arts. 19, 20, which contemplate a founding meeting
forty days after payment for company shares is received in full, and formal registration and
establishment of the company thirty days after that.

140. See Company Law, supra note 2, arts. 91 (para. 2), 93.
141. Id. arts. 74, 82.

[11:1



1997] CHINAS COMPANY L4iv: ONE STEP FORiARD, TWO STEPS BACK? 165

issuances are restricted within any twelve-month period
following).,42

Thus, an initial public offering using the first
technique seems unpalatable, while the second seems
impossible.

The Company Law further requires that companies
limited by shares must have at least five promoters (more
than half of which must be domiciled in China),t43 but that
state-owned enterprises being re-organized into
companies limited by shares may have fewer than five
promoters, but only if they are established through the
"offer" method.144 Thus, the Company Law provision also
represents a step back from the Standard Opinion, which
allowed that "large scale" state enterprises being
transformed into companies could, subject to approval,
have only one promoter if the "offer" method was used. 145

The combined implications of each of these
provisions makes for very difficult promotion,
establishment and initial public offering procedures.
While the problem remains for wholly domestic
companies, the CSRC provided a remedy in the Overseas
Listing Rules. Pursuant to those Rules, a state-ovMed
enterprise (i) may be converted into a company limited by
shares by the promotion method with fewer than five
promoters, and (ii) may issue new shares immediately
after its formal establishment.' 46  (The Standard
Opinion 47, the Issuance and Trading Regulations 14S and
the Company Law all provide for certain restrictions on
increases in capital and public flotations within a year of

142. As with the offer method of establishment, companies formed by promoters are
established only after all promoters shares have been fully paid. Id. art. 82, para. 2.

143. The Standard Opinion, supra note 30, required a minimum of three promoters.
144. See Company Law, supra note 2, art. 75.
145. See Standard Opinion, supra note 30, art. 9, para. 1. The Addendum was even more

favorable in such situations, allowing for one promoter, formal establishment and an immediate
increase in capital followed by a public offer. See Addendum, supra note 33, art. 6.

146. See Overseas Listing Rules, supra note 36, art. 6.
147. See Standard Opinion, supra note 30, art. 7 (para. 3), 36.
148. See Issuance and Trading Regulations, supra note 39, art. 11(2) (concerning private

placements).



COLUMBIA JOURNAL OF ASIAN LAW

formation or any previous increase. 49) The Overseas
Listing Rules provide even greater flexibility for
companies engaging in transformation and initial public
offering by stating that "a company may increase its
capital through an issuance of foreign-listed foreign-
funded shares even when the issuance is within a period
of less than twelve (12) months of a previous share
issuance."1 50  This offers the best of both worlds:
formation by promoters and formal legal establishment of
an issuer, followed by an increase in capital, and an initial
public offering - i.e., the "offer" method, but with the
legal establishment of the company sensibly coming after
the promotion and before the offer.

viii. No Pricing Differential for Simultaneous Issuances. The
Company Law states very clearly: "For share certificates
[sic] issued at the same time (tongci faxing de gupiao),
each share shall have the same issue terms and price; the
share price for each share purchased by any organization
or individual must be the same."' 5 ' This makes very
difficult the previously accepted practice of simultaneous
issuances of either (i) "A" and "H" (or "N"'152) shares or (ii)
"A" and "B" shares, at different issue prices, and explicitly
overrules the very finely-drawn Article 27 (paragraph 3)
of the Standard Opinion, which states only that: "the issue
price of the same type of shares during the same issue by
a company must be uniform (emphasis added)." This
form of language allowed "A," "B" and "H" shares to be
offered at different issue prices, based upon their
characterization as different "types" of shares.

149. In the Standard Opinion, supra note 30, the twelve month blackout restriction is
applicable to: companies formed by the promoters method, and by the "directed share offer" method
(described herein as the analogue to private placements), and any company that wishes to issue new
share capital after establishment. The Addendum eliminated this restriction for "H" share issuers;
see Addendum supra note 33, art. 8.

150. See Overseas Listing Rules, supra note 36, art. 10, para. 2, which follows the lead of the
Addendum, supra note 33, art. 8.

151. See Company Law, supra note 2, art. 130, para. 2.
152. The CSRC does not recognize a distinction between "H" and "N" shares; the different

designations are merely a market idiom.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 167

ix. Share Subscription Applications. The Company Law
mandates that, in making a public offer of shares,
promoters must publish a prospectus and prepare a share
subscription application (rengushu), the latter of which
must conform to detailed requirements.' However, this
provision seemingly conflicts with accepted practice
under the Standard Opinion, which required companies to
issue "share subscription certificates" (gupiao
rengouzheng). Apparently, these share subscription
applications are not the same as share subscription
certificates, as subscribers submitting the former are
obligated to make payment for shares according to the
number of shares they have subscribed for pursuant to the
share subscription applications," presumably eliminating
any allocation among potential subscribers in the event of
over-subscription.

x. Share Certificates. Article 132 of the Company Law
while allowing for "other forms"lSs - seemingly
contradicts another command of the Law requiring that
company shares take the form of "share certificates"
(gupiao xingshi) 56 and further stipulates the items that
must be included on share certificates, that such
certificates must be signed by the chairman of the board
of directors and affixed with the company seal, and that
promoters' shares must be so labeled. Such stipulations
seem to run counter to the desired move towards book-
entry shares (specifically authorized in the Issuance and
Trading Regulations15), and leaves a mystery as to how

153. See Company Law, supra note 2, art. 88. The requirements are set forth at the Company
Law, art. 89.

154. Id. art. 88.
155. This represents an improvement from the Standard Opinion, which contemplated the use

of only paper share certificates. See Standard Opinion, supra note 30, arts. 25,28.
156. See Company Law, supra note 2, art. 129, para. 2.
157. See Issuance and Trading Regulations, supra note 39, arts. 53 and 8 1(2). Note also that

the CRES Hong Kong Stock Exchange Letter, supra note 48, makes clear that the 'printed signature
of the chairman of the board of an issuer on the issuers share certificate would comply with Article
28 of the Standard Opinion, supra note 30, art. 28.



COLUMBIA JOURNAL OF ASIAN LAW

the required notation for promoters will be removed once
such shares are properly transferred to non-promoters.

xi. Intrusive Escrow Arrangements. The Company Law
contains the following, apparently exclusive, provision
with respect to the handling of money flows in connection
with public offerings:

In making a public offer of shares, the
promoters [sic] shall enter into an
escrow agreement with a bank. The
escrow bank shall receive and hold as
agent the payments for shares, issue
receipts to subscribers making
payments, and shall be obliged to issue
evidence of receipt of payments to
relevant departments.'5 8

This provision is awkward, as it forces the employment of
a bank intermediary, and does not give the issuer (or its
promoters), or their appointed underwriter, any other
choice as to how to manage the underwriting.

xii. No Legal Basis for Private Placements. Except with
respect to the original subscription of share capital by
"promoters,"'159 the Company Law does not contemplate
private placements to domestic or foreign investors,
sophisticated or not. The Standard Opinion apparently
did, in the form of "directed share offers,"'O which
entailed subscription by promoters, coupled with (pre-
establishment) non-public distributions to other legal
persons and, subject to approval, employees. The
Issuance and Trading Regulations went a step further,
allowing for private placements (dingxiang muji) even
after the completion of the establishment process, with a

158. See Company Law, supra note 2, art. 90.
159. Note however that even in the event of establishment by the offer method, a company

limited by shares must "make public" its financial statements, which seems to eliminate one of the
key benefits - for an issuer - of a private placement. See Company Law, supra note 2, art. 176,
para. 3.

160. See Standard Opinion, supra note 30, art. 7, para. 4.

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1997] CHINA'S COMPANY L4W: ONE STEP FORWARD, TWO STEPS BACK? 169

space of twelve months between each placement. 161 This
omission from the Company Law is both at variance with
the way in which a great deal of "B" share issuances have
been effected, along with a smaller portion of A" share
distributions, and it also seems to close off a viable capital
raising method for competent PRC issuers that cannot
face the approvals (or expense and disclosure) associated
with a public offer.

xiii. Restrictions on Transfers by Sitting Directors. The
Company Law contains a blanket prohibition upon
"directors, members of the supervisory committee, and
managers (jingli)" from transferring their shares while
they are in office, t62 a prohibition not apparent from the
Standard Opinion or the Shares Issuance and Trading
Provisions. In fact, the Standard Opinion contained a
much more nuanced and thus workable provision,
applicable only to directors and managers, which allows
for time and volume limitations and a reporting
requirement.' 6 The Company Law provision is drawn too
broadly, and may seek to hamper the development of an
independent, economically-interested managerial class.
A better strategy would have been a narrower prohibition
(i.e., prohibiting such transactions within many months or
years of purchase, sale or public announcements) and the
establishment of a system whereby such persons are
obligated to disclose their shareholdings in the companies
they control'6 and notify the public or some central
authority upon their desire to dispose of or acquire
shareholdings. 65

161. See Issuance and Trading Regulations, supra note 39, art. 11.
162. See Company Law, supra note 2, art. 147, par. 2.
163. See Standard Opinion, supra note 30, art. 30(6).
164. Which disclosure requirement already exists: see Company Law, supra note 2, art. 147.
165. Note that the Issuance and Trading Regulations adopt another strategy, such that any

director, supervisor, senior management or legal person shareholder who owns more than 5% of the
voting shares of a company, and who realizes a profit on any stock purchases or sales of the same
company, must vest such profits in the company. See Issuance and Trading Regulations, supra note
39, art. 38.



COLUMBIA JOURNAL OFASIANLAW

xiv. Interim Dividends. Neither the Standard Opinion nor the
Company Law provides an explicit legal basis for interim
dividend distributions, or empowers the board of a
company to declare such an interim dividend, absent the
approval of the shareholders acting in general meeting.1
The requirement that certain allocations be made annually
to the statutory common reserve and welfare funds before
the profits of the company may be distributed (and the
"clawback" of dividends in the case of an under-
allocation) 67 ensure that interim dividends will be
difficult to effect, if they are not contrary to law. Thus,
interim dividends, an important aspect of capital markets
transactions in mature markets, and certain to become
increasingly desirable to real PRC investors, are
seemingly impossible or illegal to effect.

xv. Return of Mis-allocated Profits. The Company Law
mandates that any company must, before distributing its
annual after-tax profits, make allocations to the company's
"statutory common reserve fund" (10% of after-tax
profits) and "statutory common welfare fund" (5-10% of
after-tax profits).'6 The provision is subject to a cap once
the common reserve fund is funded to a certain level (50%
of registered capital), and a carry-over funding obligation
in the event of losses. However, the Company Law also
contains the following extraordinary provision:

If a shareholders meeting or the
board of directors violates the
above provisions and profits are
distributed to the shareholders
before the company makes up
losses or makes allocations to the
statutory common reserve fund and

166. See Company Law, supra note 2, arts. 103(7), which empowers the shareholders in a
general meeting to approve (Pizhun) the company's profit distribution plan, and 112(5), which
allows the board merely to formulate (Zhiding) such distribution plan. See also the similar
provisions in Standard Opinion, supra note 30, arts. 42(2), 55(4).

167. See Company Law, supra note 2, art. 177. See below, Section llI.B.xv.
168. See Company Law, supra note 2, art. 177. See also Section lII.A.x above.



1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 171

the statutory common welfare fund,
the profits distributed in violation
of the provisions must be returned
to the company. 169

Not only is this "clawback" mechanism profoundly
worrying to shareholders (as it raises the specter of having
to disgorge already received and employed dividends), but
it is almost impossible to implement in a true market
context, where shareholders acquire and dispose of
interests continuously. How likely is it that a company
could reconstruct its year-end shareholders' list from
several years previous, and then contact certain former
shareholders (and recipients of wrongfully calculated
dividend monies) to cause them to disgorge such monies
to the company? The provision is plainly unworkable,
and a holdover from a corporate regime that contemplates
large, static shareholders: i.e., the state, or long-term
foreign investors in joint ventures. It also represents a
misconceived departure from the Standard Opinion,
which required allocations to make up previous losses,
and to the two statutory funds (with no minimum for the
welfare fund),'170 before any dividend (or bonus)
distributions - and in the event of a breach of such
obligations by the company, then the conferring of a right
on the company's creditors to request compensation (from
the company, not the shareholders) for any losses
incurred.'7 '

V. CONCLUSION

The foregoing discussion, which represents a detailed description of
some of the flaws in China's Company Law, should not be taken as an
outright condemnation of an important item of legislation which took years
to produce. Instead, the discussion seeks to highlight certain aspects of the

169. See Company Law, supra note 2, art. 177, par. 3. See also art. 216 which also commands
that in such event the Company must make up (how and to whom?) 'the exact amount which should
have been allocated."

170. See Standard Opinion, supra note 30, art. 73, para. 1.
171. Id. art. 73, para. 2.



COLUMBIA JOURNAL OFASIAN LAW

Law which need to be amended or rethought as the government of China,
powerful departments and newly-independent economic actors use the
legislation (and underlying concepts) in the transition to a mixed economy,
albeit with "Chinese characteristics." This task has become only more
urgent with the drive to corporatization and diminution of the state's
interest in the aftermath of the 15th Congress of the CCP.

The criticisms above should also alert China's government and foreign
professionals to the great price paid for the lack of real transparency in
China's legislative process. Many of the problems and contradictions noted
above could have been addressed had more insightful (or experienced)
hands been allowed to participate in the generation of the Company Law.
Of course, many of these problems have since been remedied in subsequent
rule-makings, waivers, or the promulgation of legislation applicable to
certain kinds of entities or situations - for instance, with respect to issuers
accessing foreign capital markets. Such post facto remedial action,
however, actually serves to detract from the prestige and identity of China's
first modern national corporate statute, even while it makes crucial
corporate concepts more useful or viable in the immediate term. Only in
this sense would the promulgation of the Company Law have been better
delayed until greater agreement or coherence could be achieved.

The foregoing critique also reveals the temporary result of contending
forces in the struggle to transform China from a centralized, state planned
economy to some kind of market economy ruled by law. William Kirby
has described the history of China's first corporate law (the 1904 law
promulgated by the Qing court) as "to some degree, a barometer of the
state's assumptions toward the economy over the course of the 20th
century." 7 2 So the retreat implicit in the changes between the Company
Law and the Standard Opinions may be seen as the barometer of the state's
defense against the onslaught of independent economic action, acting under
an increasingly weak central government, and predicated on interactions
between economic "strangers" governed by law, all as conjured up by the
opening up to the outside world and heady program of economic and
industrial reform of the last 15 years. While the Company Law has
nettlesome technical problems, it is also replete with inconsistencies and
odd concepts which are a direct expression of the state's resistance to what
has been advertised as the new system: a market economy employing
increasingly private capital. Thus, while on its face the Company Law

172. See Kirby, supra note 23, at 44.

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1997] CHINA'S COMPANY LAW: ONE STEP FORWARD, TWO STEPS BACK? 173

promises the creation and organization of a semi-independent group of
economic actors, in fact it both expresses and enables continuing state
control over the economic and industrial system in China. Certainly this
appears to be the reality of corporatization in China to date, where the state
is merely changing the form, but not the substance of economic
relationships. In this way, law, and specifically the Company Law, has
acted not as a bulwark against the state and central control, or as an agent
to further competitiveness and independent economic action, but as a
vehicle in promoting the state's ascendancy over "private enterprise.'173

The fascinating question in China is whether or not the true function of the
corporation will triumph over the badly compromised form presently
described in China's Company Law.

173. This is akin to the development Kirby perceives with respect to the Guomindang
.nationalization of the corporation" in the period 1929-45. Id. at 51.