• SPC Judicial Interpretation (No. 1) on Several Issues regarding Hearing of Foreign Invested Enterprise Disputes (SPC Interpretation No. 9)
  • September 21, 2010
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • On Aug 5, 2010, the Supreme People's Court (“SPC”) promulgated Judicial Interpretation No. 1 on Several Issues regarding Hearing of Foreign Invested Enterprise Disputes (the “Judicial Interpretation”). This Judicial Interpretation took effect on Aug 16, 2010.

    • Effectiveness of an Agreement - According to the relevant laws and regulations regarding foreign investment, some agreements, such as equity transfer agreements and joint venture contracts, do not take effect until they are approved by and registered with the competent authorities. However, this Judicial Interpretation provides that without due approval or registration, these agreements shall be regarded as not having taken effect (¿¿¿), rather than being void. This means that the agreements in question are concluded, but their effectiveness is pending for approval. This Judicial Interpretation further provides that if the party having the obligation to apply for approval or registration fails to submit the application, the people's court may render a judgment permitting the other party to carry out the relevant application.
    • Capital Contribution - This Judicial Interpretation confirms that a shareholder must register the transfer title of property that is used for capital contribution, such as land use rights and intellectual properties. Without due registration, the shareholder will be liable for any loss caused to the FIE.
    • Equity Transfer Agreement - If the responsible party fails to file the relevant equity transfer agreement with the authorities, this Judicial Interpretation clarifies that the People's Court may order the transferor and the FIE to jointly complete the approval process within a set period of time. Where the transferor fails to conduct the transfer approval, the transferee has the right to refund of consideration and damages or it may carry out the approval process itself, with the transferor to bear the costs.

    • Right of First Refusal - This Judicial Interpretation provides that even though an equity transfer agreement has been approved by the competent authority, it may still be voidable on the grounds that the agreement fails to respect the right of first refusal of the other shareholders.
    • Shadow shareholders - where a person invests an FIE (“the actual shareholder”) but uses another person’s name (“the nominee shareholder”), if the actual shareholder claims to the court that his position in the FIE should be recognized, the court will reject it unless (1) the actual shareholder has de facto made investments; (2) the other shareholders (excluding the nominee shareholder) recognize the actual shareholder’s position; and (3) the approval from the competent authority regarding the shareholder change is obtained during the litigation period.