Unexpected “Surprises” When Forming Foreign-invested Enterprises

Preface

The official promulgation of the Foreign Investment Law of the PRC (“Foreign Investment Law”) on March 15, 2019 indicates the PRC government’s determination to further promote open-up and attract foreign direct investment (“FDI”). It has been 40 years since China’s reform and opening-up, and China has joined the World Trade Organization for 17 years. Nowadays, foreign-invested enterprises (“FIEs”) spread all over China, and the Foreign Investment Law stipulates the general principle that FIEs shall be administrated in the same way as PRC domestic enterprises. This is definitely good news for foreign investors, and at this transition period, we consider it worthwhile to point out some unexpected “surprises” commonly encountered by foreign investors during the establishment registration of FIEs.

Based on our experience in assisting foreign investors to establish FIEs in various regions in China, this article aims to identify some common “surprises” that could have been avoided by foreign investors and therefore help foreign investors to better understand the requirements for establishing FIEs and thus avoid such “surprises” to the extent possible so as to promptly establish an FIE in China.

I.  Company Name of FIE

In order to maintain a uniform brand image, foreign investors always wish to have its FIE in China having the same company name (especially the trade names) as the group company. According to the Administrative Provisions on Enterprise Name Registration and the provisions of its related regulations (“Name Regulations”), the Chinese company name of a PRC enterprises can only use Chinese characters, yet it is not prohibited for a PRC enterprise to have an English company name, provided that the English company name shall be consistent with its Chinese name and shall be registered with corporate registration authority. Therefore, apart from an official Chinese name, most FIEs will have a company name in English for group’s internal management and daily operations.

1

   Chinese Name

Common Practice

In terms of the Chinese name, foreign investors usually adopt a Chinese name according to the translation or transliteration of the name of the parent company. According to the Name Regulations, the Chinese name of a PRC enterprise shall be composed of: administrative region + trade name/brand name + industry + organization form. Among the foregoing four factors, the administrative region and the organization form are quite definitive, while the trade name and the industry are more discretional. Therefore, we have commonly seen that the corporate registration authority rejects a company name reservation application due to the reasons that the use of trade name or industry does not comply with the naming standard. As the company name reservation is the first step for FIE establishment and the foreign investors, as the applicants, may submit several alternative names in the same application, the mere rejection of one of the proposed company names may not significantly impact the entire application process.

Special Notes and Suggestions

However, it is worth noting that corporate registration authorities in most regions have adopted the online name reservation system. Although this method has greatly improved efficiency, we have experienced issues in some regions that the reserved name through the online system was rejected during the onsite application due to the unconformity of the “naming standard” and we were required to reapply for name reservation and go through the entire application process all over again. In such case, if the relevant application documents have already stated the rejected company name, then all these application documents need to be resigned and thus will significantly delay the registration process. 

Regardless of the reasonability of such practice, in order to avoid unnecessary disputes, we suggest that where the foreign investors have seen any precedents of the above-mentioned situation, the foreign investors are encouraged to conduct onsite consultation with the local corporate registration authority after the online name reservation is approved. Additionally, when executing the application documents, we suggest to leave the company name blank until the time of onsite submission to maintain certain flexibility.

2

   English Name

Common Practice

With respect to the English name of FIE, FIE may stipulate its English name in the Articles of Association (“AOA”) and submit the AOA to corporate registration authority for filing. In practice, the English name of an FIE is not a separate registration or filing item at corporate registration authority, yet it is optional to have the English name filed with the local Ministry of Commerce (“MOC”) as an optional filing item. If filed with corporate registration authority, the MOC Filing Receipt will stipulate the filed English name accordingly. Generally speaking, neither corporate registration authority nor MOC adopts a review standard of the English name as strict as the Chinese name.

Special Notes and Suggestions

It is worth noting that for trading FIEs, it is mandatory to have their English names filed for the filing registration of foreign trade operator. Although the filing registration of foreign trade operator is conducted at the local MOC, the governmental officials handling such filing registration are not the same MOC officials in charge of the FIE establishment filing. We once came across a situation where the English name accepted by MOC during the establishment filing was later rejected during the filing of foreign trade operator and the reason for such rejection was that the English name shall not contain Arabic numerals. Although we managed to solve this issue after communication with the authority by providing precedents where the English names of enterprises contain Arabic numerals, yet we do not recommend foreign investors to use Arabic numerals in the FIE’s English name (unless really need so), given the different practice in different regions.

II. Certificate of Incorporation and Authorization Documents of Foreign Investors 

When reviewing the application materials for the establishment of a FIE, one of the most concerned matters of corporate registration authority is the legal capacity of the foreign investor.

If the foreign investor is a natural person, corporate registration authority generally requires such natural person to provide the original copy of his/her identity certificate (passport, China mainland Travel Permit for Hong Kong and Macau Residents and etc.) and sign on relevant application documents as the shareholder, which is similar to the requirements for domestic enterprises. However, if the foreign investor is a legal entity as opposed to a natural person, considering the different legal systems among different jurisdictions, the corporate registration authority requires a non-natural person foreign investor to submit the following certificates to prove its legal capacity as a foreign investor: 

(1) information evidencing the establishment and valid existence of the foreign investor;

(2) information of the legal representative or similar position (if not applicable, the list of all directors or similar positions) of the foreign investor. Where the above-mentioned documents cannot identify the authorized representative of the foreign investor, the foreign investor shall also provide the authorization instrument issued by its highest authority for proper authorization of the named authorized representative.

The following will analyze the common requirements and some special cases on certificate of incorporation, authorized signatory and notarization and legalization where the foreign investor is a non-natural person:

1

  Certificate of Incorporation

Common Practice

As mentioned above, the certificate of incorporation serves a proof of a foreign investor’s legal establishment and valid existence. We list below the certificates of incorporation and the issuing authorities thereof in some countries/regions for reference:

Special Notes and Suggestions

It is worth noting that registration certificates such as Certificate of Good Standing are directly issued by the foreign corporate registration authority based on the registration information of the foreign investor, which generally include the establishment history and the existence status of a foreign investor as of the issuance date thereof. In practice, the corporate registration authorities in most regions accept and recognizeCertificate of Good Standing to be used as the required certificate of incorporation. However, there are still some corporate registration authorities in certain countries and regions that require the foreign investor to provide a separate certificate of incorporation and the directors’ list in addition to the Certificate of Good Standing. Therefore, to avoid unnecessary back-and-forth, prior to preparing the relevant certificate of incorporation, we suggest the foreign investors to seek the local corporate registration authority’s opinion and their requirement first. 

2

  Authorized Signatory 

Common Practice

After proving the foreign investor’s legal establishment and valid existence, it is also of vital importance to prove the personnel who has the authority to sign on behalf of the foreign investor (since the concept of “company chop” is not available in many countries, corporate registration authority does not mandatorily require the company chop information of a foreign investor). The certificates of incorporation of many countries assembling the PRC business license, such as the license of a Japanese company (謄本), will list the representative (代表取缔役) who can independently represent the company and sign documents externally like the legal representative of a PRC company, which are acceptable by the corporate registration authority as the authorized signatory. And the certificates of incorporation of some companies only list the executive director of such company, which are also acceptable by most corporate registration authority as the authorized signatory.

Special Notes and Suggestions

Nevertheless, the certificates of incorporation of many foreign investors do not indicate the information of its legal representative equivalent or the personnel who has the authority to sign on behalf of the foreign investors. In practice, there are two commonly adopted solutions: 

(1) the foreign investor can further provide the documents, such as the Articles of Association thereof, specifying information of the personnel that is authorized to sign on behalf of the company;or

(2) the foreign investor can provide a resolution or appointment letter designating a person as the authorized signatory, which shall be signed by all directors. 

Please note that when taking the latter option, the corporate registration authority in practice will by default deem the foreign investor’s board of director to have the authority to pass such resolution/appointment letter without actually looking into the constitutional documents of the foreign investor. Therefore, we suggest the foreign investors provide the resolution/appointment letter signed by all the directors of the board to avoid unnecessary challenge by corporate registration authority. In case the constitutional documents of the foreign investor specify otherwise regarding the authorized signatory, the foreign investor may first issue a proper resolution pursuant to its constitutional documents to authorize the board of director to appoint an authorized signatory.

3

   Notarization and Legalization 

Common Practice

As the foreign investor’s certificate of incorporation and authorization documents are generated in foreign jurisdictions, corporate registration authority cannot verify the authenticity and validity of such documents. As a result, the foreign investor is required to have such documents notarized by a qualified notary organization or a lawyer in the relevant countries and regions, and certified by the Chinese Embassy/Consulate(if in Hong Kong, the notarized documents shall be handed over via China Legal Services Co., Ltd.). 

Special Notes and Suggestions

Please be aware not to confuse the Embassy/Consulate legalization with the Hague appostile. As China is not a member of the Hague Convention, the corporate registration authority only accepts documents legalized by the Chinese Embassy/Consulate rather than apostilled through the Hague Convention.

Additionally, it is worth noting that although the notarized and legalized certificate of incorporation itself does not generally state a validity period, yet corporate registration authority in most regions only accepts such certificate of incorporation issued within 6-month period so as to ensure that the information stated therein is up to date. In practice, considering that the notarization and legalization process is quite time consuming, the foreign investors are usually suggested to prepare the notarization and legalization in advance. Yet we would like to point out that in case the FIE establishment procedure is halted for whatever reasons, the foreign investor may face the risk of needing to re-prepare the notarization and legalization due to the expiration of the 6-month validity period, which will further delay the process. Considering the fact that the notarization and legalization procedures tend to take less time than before, we suggest that foreign investor may initiate the notarization and legalization once the major FIE establishment items are settled.

Summary

Foreign investors may face some unexpected issues when establishing an FIE. Sometimes even small issues like using the wrong paper or wrong signature pen color may result in the rejection of the application. And the issues listed above are only part of the picture. To avoid registration delay, we suggest that when making investment in China, foreign investors shall engage experienced PRC legal counsels as early as possible, and such PRC counsels shall pay special attention to the details and keep effective communication with the authorities in order to ensure that the entire filing and registration process goes smoothly.

特别声明：

以上所刊登的文章仅代表作者本人观点，不代表北京市中伦律师事务所或其律师出具的任何形式之法律意见或建议。

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About the Author

David Wang

Partner Shanghai Office

Practice Area:

Corporate/Foreign Direct Investment, Mergers & Acquisitions, Litigation & Arbitration

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Jackie Chen

Non-equity Partner Shanghai Office

Practice Area: Corporate/Foreign Direct Investment, Banking & Finance, Private Equity & Investment Fund

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Chaoqun Yin

Shanghai Office

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