Responsibilities of “Old” Company Founders for Capital Contributions

(By Tian Shanshan) The Chinese Company Law and legal interpretations thereof provide that founders are responsible for paying in full their capital contributions. However, should founders of a company be responsible for paying in full their capital contributions if the company was established before the Company Law 2005 took effect, the first law setting forth responsibilities of a company’s founders for paying in full their capital contributions? Another issue in this case is how to define the founder’s responsibilities and protect the creditors’ interests. Legal authorities didn’t deal with this issue in the same way.


How to Determine Joint Liabilities of shareholder for IPR Infringement in China?

(By Wang Ting and You Yunting)The limited liability of the shareholders means that the liability of the shareholder to the company are limited to its capital contribution, and the independent personality of corporation means that the Company shall fulfill its external liabilities by all of its properties. Therefore, the shareholders usually do not take personal responsibility in IPR infringement cases even when the long-term business of the company is infringement of the intellectual property rights (“IPR”) in most cases. However, today we will introduce a recent case, in which the shareholders were determined to take such joint liabilities for the IPR infringements.


What Should Startup Entrepreneurs Know to Negotiate with Outside Investors and Handle Equity issues?

(By You Yunting) The other day I had a conversation with a lawyer of a foreign law firm. That lawyer, who specializes in handling legal affairs of VIE financing on behalf of the investment side, told me that many startups would sign investment agreements proposed by investors directly without any argument. To be honest, I can hardly understand nor agree with this kind of practice. I think investors may actually feel ambivalence in face of such situation, too. On one hand, they can get more control over the invested business as well as other extra benefits. With probably unfair terms being included in an investment agreement, investors may be happy to have a favorable position in the relationships with startups. On the other hand, the investors are expecting to gain lucrative profits, so they may doubt whether the startups will be able to win fierce competitions of the market as they behaved so obediently when making investment agreements. This article talks about common points of financing negotiation between startups and investors as well as startups’ internal equity allocation issues.


Directors’ Liability in China

(By Yu ZhiyuanDirectors’ liability in China is an attractive matter to foreigners who act or intend to act as directors in China. Today, we would like to introduce directors’ liability in China to the below questions.

1. What are the key areas of liability that directors in China need to be aware of?

Directors shall abide by laws, administrative regulations and articles of association of the company and shall have the fiduciary and diligent duties to the company.

Directors may not abuse their authorities by accepting bribes or generating other illegal income, and may not convert company property.


Litigation in China–A Long and Rocky Road

(By Dr. Wenbao Qiao) For foreign companies doing business in China, dispute and litigation may sometimes be inevitable. Once a dispute cannot be resolved out of court, there is a long and rocky road to the final success, with several important points to be considered for planning and handling of litigation in China:

Documents and Evidence

The first step of each procedure is to collect and prepare all necessary documents and evidence. According to Chinese law, documents and evidence from another country (such as excerpts from the commercial register or powers of attorney) have to be first notarized in their country of origin and then certified by the Chinese Embassy or Consulate in the respective country. Only notarized and certified documents and evidence will be accepted by Chinese courts. While preparing the documents and evidence, attention should be paid to the timeline required for the notarization and certification. There are several important statutory deadlines shown below. Failure to meet these deadlines can lead to the loss of a case. Notarization and certification in Germany usually takes two to three weeks, which in turn may play a critical role for the time schedule of trial preparation.


Why Uber China Takes Legal Risks to Mega Millionaire Marketing Promotion?


(By You Yunting) Recently, Uber Shanghai carries out a marketing activity called Call for one hundred million by one button of Uber cooperated with 1qiaobao, an App owned by PINGAN INSURANCE GRP. According to the Uber’s official Weibo, users can use the Uber App to call the securicar provided by both Uber and 1qianbao, and anyone who is the winner of the caller can obtain all the financing earnings of one hundred million yuan, which is about ten thousand yuan. I think this activity has huge legal risks, therefore hereunder are the risks and its reason.


DeBund Succeeds in Pushing Copycat Game App from AppStore

Recently, DeBund takes a big step forward in providing mobile internet legal services that You Yunting Team, on behalf of clients, succeeds in pulling a popular game from the AppStore by more than 10 lawyer’s letters.

The Developer of the complained game copied large amounts of background elements of a well-known game, including graphic design, plots, role names and geographic names, and also used the brand of the original game. The Developer also made a cartoon modeling on the game characters, and did a slight change to the game name, not exactly the same as the original game. The infringed benefits greatly from the complained game to millions of yuan every month.


Qvod Vs China Government: RMB 260 million Punitive Fine for Copyright Infringement?


(By You Yunting) Introduction to the Case:

Plaintiff: Shenzhen Qvod Technology Co., Ltd (the “Qvod”)

Defendant: Market Supervision Administration of Shenzhen Municipality (the “MSA”)

Court of first instance: Shenzhen Intermediate People’s Court

The MSA filed a case with the Shenzhen Intermediate People’s Court, and claimed to cancel the punitive fine of RMB 260 million from the MSA. On 30th of December 2014, the Shenzhen Intermediate People’s Court held the trial as the case is still on that trial.


Will China New Foreign Investment Law Wipe Out VIE Structure?

(By You Yunting) Abstract: The Foreign Investment Law (Draft for Comments) has shifted the standard of a company based upon the actual controller, instead of the shareholder of the company, and regulated that the domestic company must not engage in any industries where operation by foreign investors is prohibited. In case the Draft becomes law, it will cut off the survival basis of VIE structure, so that the VIE company controlled by foreign investors cannot be operated, that the overseas listed company controlled through the VIE structure by Chinese will lose its survival basis of oversea listing, and that the startup companies of VIE structure controlled by Chinese will be forced to abandon the VIE structure.


An Analysis on Chinese and Foreign Entrepreneurs’ Equity Disposal Options

(By Wang Qiurui) Selfishness is nature of human beings and difficult to get rid of, out of which a problem arises that employees and even high-level managerial staff of a company care much more about their own interest than the company’s rise and fall when dealing with managerial issues. Adam Smith raised a question related to such problem in his masterpiece the Wealth of Nations, known as ‘Smith’s Difficult Question’.

Many past and living Chinese and foreign entrepreneurs have turned to equity to find a way of thinking a solution to overcome such weakness of human beings. However, being governed by the current Company Law of P.R.China, settlement of a case in such a way would give rise to many legal issues. It should be more advisable for Chinese entrepreneurs to create and apply to their businesses a phantom equity system.


How to Protect Trade Secrets When a Shareholder want to Inquiry Company’s Account Book?

(By You Yunting and Wang Ting) Pursuant to China’s Company Law, any shareholder shall be entitled to inspect and copy the Articles of association, minutes of shareholders’ meetings, resolutions of meetings of the board of directors, resolutions of meetings of the board of supervisors and financial reports of a company in which he or she owns shares. However, if a shareholder operates a business in competition with a company in which he or she owns stocks, then when exercising the shareholder’s right to information, such inspection may result in leaks of confidential business and trade secrets. In today’s post, we will introduce this conflict, and discuss ways in accordance with relevant Chinese laws to balance this conflict of interests while maintaining a shareholder’s right to information and a business’ right to protect its trade secrets.


Logic and Practical Analysis of Foreign Investment Facilitation in the Shanghai FTZ


(By Gong Lier) The China (Shanghai) pilot free trade zone (hereafter called ‘the free trade zone’) was officially launched in Waigaoqiao, Shanghai on 29th Sept. 2013. Attention should be paid to the news that the, i.e., the ‘Negative List’, of the free trade zone was issued at midnight on the same day, on which the five Shanghai municipal governmental rules were also implemented one after another, including the China (Shanghai) Pilot Free Trade Zone Administrative Rules (No.7 municipal government’s order) (hereafter called ‘the Free Trade Zone Administrative Rules’), the China (Shanghai) Pilot Free Trade Zone Foreign Investors’ Funded Projects Filing Rules (H.F.F.(2013) No.71) (hereafter called ‘the Foreign Investors’ Funded Projects Filing Rules’), the China (Shanghai) Pilot Free Trade Zone Overseas Investment Projects Filing Rules (H.F.F.(2013) No.72) (hereafter called ‘the Overseas Projects Filing Rules’), the China (Shanghai) Pilot Free Trade Zone Foreign Investors’ Funded Enterprises Filing Rules (H.F.F.(2013) No.73) (hereafter called ‘the Foreign Investors’ Funded Enterprises Filing Rules’), and the China (Shanghai) Pilot Free Trade Zone Overseas Invested and Incorporated Enterprises Filing Rules (H.F.F.(2013) No.74) (hereafter called ‘the Overseas Invested and Incorporated Enterprises Filing Rules’).


The Establishment Procedure of Foreign-Capital Enterprises in Shanghai FTZ

(By Bai Lituan) On August 30, 2013, the Standing Committee of the National People’s Congress enacted the Decision of the Standing Committee of the National People’s Congress on Authorizing the State Council to Temporarily.

Adjust the Administrative Examination and Approval of Relevant Laws in China (Shanghai) Free Trade Zone (the “DESIVISION”). The DESIVISION authorizes the State Council to temporarily adjust about 11 administration examinations and approval of the establishment and merger of foreign-capital enterprises including the wholly foreign-owned enterprises, Sino-foreign cooperative joint venture and Sino-foreign equity joint ventures in the Shanghai Pilot Free Trade Zone (the “FTZ”). Earlier reports once said that it would temporarily suspend the implementation of the Law on Wholly Foreign-Owned Enterprises, the Law on Sino-Foreign Cooperative Joint Ventures and the Law on Sino-Foreign Equity Joint Ventures in the FTZ. In effect, those three laws involve the establishment, business structure, foreign exchange management, labor and personnel, finance and accounting, dissolution and liquidation, etc. The DESIVION of the National People’s Congress just temporarily suspends 11 administration approvals and changes them into filling administration. The Law on Wholly Foreign-Owned Enterprises, the Law on Sino-Foreign Cooperative Joint Ventures and the Law on Sino-Foreign Equity Joint Ventures will still be enforced in the FTZ and be temporarily adjusted.


Why did the “Gatekeeper” of the Capital Market Fail to Fulfill its Duties?

(By Yu Zhiyuan and Bai Lituan) In the capital market, agency institutions’ participation greatly reduces the degree of information asymmetry of market subjects, and plays a significant role in the capital market; thus, the agency institutions and their professionals are named by the industry as the “gatekeepers” of the capital market. Ever since the Enron Corporation scandal became public and the Sarbanes-Oxley Act (SOA) was published, in order to better protect the interests of public investors, all countries are attempting to apply new approaches to security supervision. Thus far, enhancing the gatekeepers’ obligations is one of the ways to realize investor protection. Recently, fraudulent securities issuances and severe distortions of information disclosure are occurring frequently in China’s capital market, and this has a direct causal relationship with the gatekeepers’ mechanism failure.