Category: VC/PE

Legal Position of Anti-Smuggling Risks in Processing Trade

To most foreign invested enterprises (“FIE”) that carry out a reasonable compliance standard, smuggling should be a rather remote concept. However, this may not be the case for those FIE that treat Chinese operation as the sourcing site and relies heavily upon the business model of processing trade (in a nutshell, processing trade refers to importation of materials free from Chinese duties and VAT (“Bonded Materials”) to manufacture finish goods and in turn export such finished goods back overseas pursuant to Chinse laws and regulations.

Are Buyers’ Sourcing Agreements Free From Anti-Trust Concern?

The strength of anti-trust enforcement of Chinese government (Chinese Development and Reform Committee (“NDRC”) in particular) against price fixing arrangement with distributors has become unprecedented. The amount of penalties has reached hundreds of millions of RMB, not to mention the scary process of investigation such as dawn raid and the corresponding interruption to business.

Exploration of Various Options to Walk Out of PRC

As the firm expectation of RMB appreciation is compromised and PRC is undergoing the painful economic restructuring, how to exit PRC has becoming an increasingly relevant matter for investors which had incorporated various foreign invested enterprises such as wholly foreign owned enterprises or joint ventures with local partners (collectively as “FIE”) within PRC.

In response to the foregoing change of capital flows, we summarized commonly seen options to exit PRC as starting point to consider and deal with the ever changing economy of PRC.

Liabilities of Shareholder and Piercing Corporate Veil in China

One of our most frequently questions asked by foreign investors doing business in China is the scope of liabilities of a shareholder under PRC laws. It totally makes sense as this is the fundamental bottom line for taking any investment acts in China. Interestingly, it is not uncommon that a panic foreign shareholder of an insolvent foreign direct enterprise (“FIE”) was told he / she may be put in jail if his / her company is unable to pay off the debts owed in China. We therefore set forth below some basic understanding of PRC laws in this regard.

Dangerous To Be the Head of Your PRC Company? (Part I)

When the U.S. headquarter is enthusiastic about penetrating to the PRC’s seemingly lucrative market, you as a senior manager may in one day be asked to take a role in charge of the proposed PRC company. Not everybody is excited about being a regional boss as he or she may be told that such role means substantial personal risks and liabilities.


In the Beginning


On May 6, 1964, Berkshire Hathaway, then run by a man named Seabury Stanton, sent a letter to its shareholders offering to buy 225,000 shares of its stock for $11.375 per share. I had expected the letter; I was surprised by the price.

1964年5月6日,当时由 Seabury Stanton经营的伯克希尔哈撒韦向股东发出了一封信,提出以11.375美元/股的价格购买225,000股伯克希尔的股票。我猜到了这个信件,但却为价格感到惊讶。

Venture investors Liability for Company Liquidation in China

Venture investors often hold a diversified portfolio to reap maximum profits. As such, they usually appear as minority shareholders and hold the belief that their worst investment return is limited to their capital contribution. Therefore in practice, once the target company fails, venture investors frequently do not bother to conduct liquidation.

Shanghai Free-Trade Zone: so what does it mean for foreign investors?

The ambitious Shanghai Free-Trade Zone or SFTZ is the first free trade zone in mainland China. Xi Jinping’s careful and deliberate plans for economic reform has been hailed by some analysts as the Chinese government’s most liberalized plan for economic reform in more than a decade. By selecting a nearly 29 square-kilometer (11 square-miles) area of docks, hangars and warehouses for the commercial zone, Chinese authorities now have a controlled space in which to experiment with loosened trade regulations on everything from interest rates to foreign investment initiatives.

Anti dilution

Traditionally, the anti-dilution provision is used to protect investors in the event a company issues equity at a lower valuation then in previous financing rounds.

VIE Structure Overview

Based on the cases we have done, I summarize here a short overview of VIE structure. Offshore Company It is the entity listed in US, HK or other places. WFOE It is 100% owned by the Offshore Company. Chinese Entity The entity has the ICP license or related licenses, which couldn’t be obtained by WFOE. But it is not owned by the WFOE through ownership. Agreements A VIE structure is that control is obtained through legal agreements rather than through share ownership. Taken together, the agreements are intended to provide WFOE with substantially all of the economic benefits from Chinese Entity and the obligation to absorb all of its losses. There are normally six agreements for the VIE structure: Loan agreement The shareholders of Chinese entity borrowed funds from WFOE in order to capitalize Chinese entity. In China, the shareholder is very difficult to get a loan from Offshore Company. Equity pledge agreement The shareholders executed an equity pledge agreement with WFOE which pledges their shares in Chinese Entity as collateral under the loan agreement and the other agreements. Call option agreement The shareholders agree to sell Chinese Entity to WFOE at any time for the original capital contribution. The […]

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