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Legal features of acquiring public status when establishing corporations in China

Обновлено 09.01.2024 05:15

 

The article discusses and analyzes the features of the creation of public and non-public corporations under Chinese law. The author distinguishes between public and non-public corporations in general, and also addresses the key characteristics of the differentiation of these institutions in China. The author identifies two ways of establishing corporations, namely "on initiative" and "on offer", subsequently wondering how these methods are applied to public and non-public corporations. The author pays special attention to the issue of corporations acquiring public status in China.

 

Keywords: establishment of a corporation, public and non-public corporations, public status, ways of establishing corporations.

 

Introduction

 

The concept of a public corporation appeared relatively late in Chinese law. However, in practice, due to the rapid development of the Chinese economy, the number and size of public corporations are growing rapidly.

Currently, there are four platforms in China for the public circulation of shares of public corporations: the Shenzhen Stock Exchange, the Shanghai Stock Exchange, the Beijing Stock Exchange and the National Stock Exchange Platform for Small and Medium-sized Enterprises (corporations). As of July 8, 2022, there were 4,737 listed companies on the Shenzhen Stock Exchange and the Shanghai Stock Exchange with a total market capitalization of 84.31 trillion yuan <1>. On the Beijing Stock Exchange, established on September 3, 2021, as of July 15, 2022, the total number of listed companies was 104, and the total market capitalization was 198.176 billion yuan <2>. At the same time, on the National Stock Exchange Platform for Small and Medium-sized Enterprises (Corporations) in July 2022, the total number of listed companies was 6,728 with a total market capitalization of about 2.1 trillion yuan <3>.

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<1> China Securities Regulatory Commission. Express information on 07/08/2022.

<2> Beijing Stock Exchange. Regular statistics as of 07/15/2022.

<3> National stock exchange platform for small and medium-sized enterprises (corporations). Regular statistics.

 

Of course, compared to non-public corporations, the number of public corporations in China is generally small. According to the head of the Main State Administration of the People's Republic of China for Market Control and Regulation, until July 2021, the total number of enterprises (mostly corporations) was about 46 million <4>.

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<4> Speech by the head of the Main State Administration of the People's Republic of China for Market Control and Regulation at a press conference on 09/06/2021.

 

Despite the relatively small number of public corporations, they, with large capital, play an important role in the Chinese economy. In this regard, it is important to study in more detail the features of public corporations, the ways they are established and their acquisition of public status.

 

1. Features of the status of public corporations in China

 

It is interesting to note that Chinese legislation currently lacks a formal division of corporations into public and non-public. The concept of a public corporation is mentioned only in the departmental act, namely in the Methods of Management and Control of unquoted public corporations <5>. According to these Methods, in China, a joint-stock company is recognized as a public corporation if it meets any of the following conditions: 1) the number of shareholders exceeds 200; 2) the shares of the corporation may be publicly traded.

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<5> Order of the Securities Regulatory Commission of China dated 09/28/2012 No. 85 "Methods of management and control of unquoted public corporations".

 

At the same time, Chinese corporate law uses the following concepts: "limited liability company" and "joint-stock limited liability company" (this classification is similar to such types of business entities in Russia as a limited liability company and a joint-stock company). These types of companies are classic types of legal entities under continental law. Chinese joint-stock companies are divided into listed companies (The Listed company) and unquoted companies. The shares of the listed companies are traded on these three stock exchanges. Unquoted public companies and unquoted non-public companies are also distinguished from unquoted companies (see Fig.).

 

Classification of companies in China

 

Corporations in China

┌──────────────────┴───────────────────┐

V V

Public corporations Non-public corporations

│ │

┌──────────┴─────────┐ ┌──────────┴──────────┐

V V V V

1 2 3 4

 

1 - listed companies (joint-stock companies with limited liability); 2 - unquoted public companies (joint-stock companies with limited liability); 3 - other joint-stock companies with limited liability; 4 - limited liability companies.

 

Source: author's development.

 

The difference between public and non-public corporations mainly lies in the liquidity of shares (shares), the scale of the corporation and the number of shareholders (participants).

Many Chinese scientists have proposed to combine non-public joint-stock companies and limited liability companies and classify organizations according to the criterion of publicity <6>. As a result, the legislators decided not to follow a similar Anglo-American legal model, but to preserve two organizational and legal forms: joint-stock companies and limited liability companies and use the classification of public and non-public companies as an addition.

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<6> [Wang Baoshu]: [The trend of Corporate Legal Structure Reform], [Chinese Law], 2012, 106 - 116 ; [Liu Junhai]: [Proposed joint amendment to the Law on Companies, the Law on Securities and three sets of laws on Enterprises with Foreign Investments], [Legal Application], 2013 12, 2-13.

 

2. Features of the establishment of corporations in China

 

In China, the process of establishing a corporation must fully comply with the requirements of legislation, namely the Civil Code of the People's Republic of China dated May 28, 2020 (effective January 1, 2021) (hereinafter referred to as the Civil Code of the People's Republic of China), the Law on Corporations of the People's Republic of China dated December 29, 1993 (as amended on October 26, 2018) (hereinafter referred to as the Law on Corporations) and the Rules of the Department of Registration of Market Entities dated April 14, 2021 (effective from March 1, 2022) (hereinafter - the Rules on Registration).

According to Article 58 of the Civil Code of the People's Republic of China, a legal entity must have its own name, organizational structure, address and property. The specific conditions and procedures for the establishment of a legal entity must comply with the provisions of laws and administrative rules.

With regard to the corporation, we are talking about the Law on Corporations and the Rules on Registration.

The registration rules basically have the following content:

1) regulated entities (market entities): individuals, legal entities (including corporations) and organizations without the formation of a legal entity;

2) types of registration of a legal entity: on creation, on modification and on liquidation;

3) the registration authority is the Department for Market Control and Regulation;

4) information requiring registration: name of the legal entity, type of registration entity, field of activity, location, amount of authorized capital, legal representative.

The Law on Corporations provides for two ways to establish a corporation: "on the initiative" and "on the proposal".

The essence of the establishment of a corporation "on the initiative" is that the founder (founders) contributes in full, as defined in the articles of association of the corporation, or subscribes to all shares specified in the articles of association of the corporation. The institution "on initiative" applies to all categories of corporations, including limited liability companies and joint-stock limited liability companies.

The establishment of a corporation "on offer" is applicable only to joint-stock companies with limited liability. It means that the founders subscribe to parts of the shares specified in the articles of association of the corporation (Article 84 of the Law on Corporations provides that if a limited liability company is established "on offer", the shares signed by the founders must be at least 35% of the total number of shares of the corporation). The founders publicly offer the remaining parts of the shares for open capital raising in the company (public offer) or among specific persons (directed offer).

In accordance with Article 11 of the Law of the People's Republic of China dated July 1, 1999 (as amended on December 28, 2019) "On Securities", a public offer of shares in the establishment of a limited liability company must meet the conditions provided for by the Law on Corporations, as well as the conditions established by the securities regulatory authority under the State Council. Thus, according to the conditions approved by the State Council, the following documents must be submitted along with the application for a share offer:

1) the articles of association of the company;

2) the founding agreement;

3) the surname, first name or name of the founders, the number of shares signed by the founders, the type of contribution to the capital and the certificate of capital verification;

4) Share prospectus;

5) name and address of the bank (which will receive deposits by subscription of shares);

6) the name of the consignment organization (the organizer of trading on the listing of shares) and the relevant agreements.

Thus, it is important to note that, firstly, in China, corporations are established in accordance with the law and are subject to registration by the competent government authorities. Secondly, for corporations whose activities concern the interests of many participants in economic activity (public interests), in addition to the standard requirements for their establishment established by law, additional verification (authorization) procedures are often carried out.

 

3. Features of acquiring public status when establishing corporations in China

 

As already mentioned, in China, the criteria for a public corporation are explicitly specified in the departmental act, namely in the Management and Control Methods of unquoted Public Corporations.

These criteria also apply to listed public corporations (public circulation of shares). However, Chinese corporate law does not regulate the general procedure for the acquisition of public status by a corporation.

In this regard, it can be assumed that the corporation automatically receives public status if one of the following conditions is met:

1) the number of shareholders exceeds 200;

2) the shares of the corporation may be publicly traded.

Let's analyze which corporations in China can get public status. Let's start with the first (formal) criterion, namely the required number of shareholders.

As you know, the Law on Corporations limits the number of founders when creating a limited liability company and a joint-stock limited liability company. Thus, in relation to a limited liability company, the number of founders should not exceed 50 (Article 24), and in relation to a limited liability company - 200 (Article 78).

Thus, corporations established on the initiative cannot obtain public status.

However, the Law on Corporations limits only the number of founders, while there is no detailed restriction on potential subscribers (future shareholders). Thus, a corporation established under the proposal will be able to obtain public status if the total number of its shareholders exceeds 200.

Let's move on to the second essential basis, namely, the public circulation of shares. In China, public share float means that shares of limited liability companies are freely traded on the stock exchange or the national share float platform for small and medium-sized enterprises.

In accordance with the Law of the People's Republic of China "On Securities" and the Methods of Managing Initial Public Offerings of Shares and Listing issued by the Chinese Securities Regulatory Commission in 2006, one of the main conditions for listing a joint-stock company on the stock exchange is that the company must exist for more than three years, with the exception of companies established under public the offer. In accordance with the Rules of the national stock exchange platform for small and medium-sized enterprises, one of the main conditions for listing a joint-stock company on the national platform is that the company must exist for more than two years. Thus, in the process of creation, only those companies that are established by public offering can freely issue their shares into circulation.

In accordance with Article 9 of the Management Methods for Initial Public Offerings of Shares and Listing, with the approval of the State Council, when converting a limited liability company into a limited liability joint stock company, a public offering of shares can be carried out by establishing an offer.

Thus, corporations established under the proposal and having over 200 shareholders, and corporations established under the public proposal, will be able to obtain public status.

However, in practice, the establishment of a limited liability company "by public offering" existed only at an early stage after the adoption of the Law on Corporations and only in relation to some State-owned enterprises. Due to increased state control, such a method currently exists only in theory.

Of course, it must be borne in mind that Chinese corporate and securities laws are in the process of continuous improvement. The Chinese Securities Regulatory Commission has a department for supervision of unlisted (unquoted) public companies, whose functions include approving an application for the establishment of a joint-stock company with limited liability under an offer (public offer). I would like to believe that this function will soon be fully implemented.

 

Conclusions

 

In conclusion, I would like to note the following.

1. In China, the classification of public and non-public corporations is temporarily regulated in a departmental act and is considered as an addition to the basic division of corporations into limited liability companies and joint-stock limited liability companies.

2. In China, when a corporation is established, it receives public status provided that there are more than 200 shareholders or when shares of the corporation are publicly traded.

3. As for the criteria for allocating public corporations in China, of course, the number of shareholders of a corporation is important: after all, the more shareholders a corporation includes, the more public interests it represents. But the formal criterion, in fact, does not reflect the key characteristics of public corporations. So, it would be wrong to assume that there is a big difference in publicity between a company with 199 shareholders and a company with 201 shareholders. In this regard, the author suggests eliminating the formal criterion (200 shareholders) in the process of improving corporate legislation and retaining only the essential criterion (public circulation of shares), which fully reflects the essence of the legal institution under consideration.