Briefcase on Corporation Law Yihe Co Ltd v Warren Inc

Case Summary A (wholly Chinese funded company) B (wholly foreign- funded company) JV Company (Limited liability company) Contract

Case Summary Shanghai Yihe Co Ltd (hereinafter referred to as PARTY A ) and Warren Inc (hereinafter referred to as “PARTY B”) agreed to jointly establish an Chinese-foreign equity joint venture company (hereinafter referred to as the “JV Company”) in Shanghai and entered into an Equity Joint Venture Contract (“Contract”) on 1st May, PARTY A and PARTY B are the shareholders of the JV Company.

A (wholly Chinese funded company) Shareholder B (wholly foreign- funded company) Shareholder JV Company (Limited liability company) 30% (RMB) 70% (USD machinery and equipment) Contract Failed to contribute the capital Fully contributed cancelled Annual Inspection

Case Summary Article7 of the Contract provides that (i) the registered capital of the JV Company shall be ten million (10,000,000) US Dollars; (ii) PARTY A shall contribute the Renminbi (“RMB”) equivalent of three million (3,000,000) US Dollars in cash to the JV Company, accounting for 30% of the registered capital of the JV Company and (iii) PARTY B shall contribute four million (4,000,000) US Dollars in cash and contribute machinery and equipment equivalent of three million (3,000,000) US Dollar to the JV Company, totally accounting for 70% of the registered capital of the JV Company.

Case Summary Article 8 of the Contract provides that either PARTY shall contribute 100% of its share of the registered capital within ninety (90) days after the JV Company obtains its business license.

Case Summary PARTY B made its contribution to the registered capital as required by Article 7 and 8. However, PARTY A failed to contribute its share. Consequently, the JV Company failed to pass the annual inspection carried out by Shanghai Administration for Industry and Commerce. The JV Company was cancelled by Shanghai Administration for Industry and Commerce.

PARTY B decided to take a legal action in a Chinese court. PARTY B’s Claim: PARTY A failed to perform its obligations under the Contract, which was the direct and root cause of the cancellation of the JV Company. PARTY B claimed that PARTY A shall compensate for all its losses, including (i) Remedy for breach of the Contract (ii) Expense for the Company’s operation paid by PARTY B (iii) Expected future income (which may not be obtained owing to the cancellation of the Company) Case Summary

Questions Which law shall be adopted in this case? How shall PARTY B obtain legal remedy? How many ways can a JV Company contribute its investment?

Legal Issues Concerned I. Application of Law When a matter is stipulated by laws, both general law and special law, the special law shall be adopted prior to resolve that matter. General law: the Company Law of People’s Republic of China Special law: the Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures In this case, the application of the Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures shall be adopted prior to the Company Law of People’s Republic of China.

Legal Issues Concerned II. Legal remedy for the shareholder who make full contribution to the capital In accordance with the Company Law of People’s Republic of China if a party fails to perform its obligation of contributing capital, the other party may have the right to elect legal remedy. Two elections of legal remedy (i) If a shareholder does not pay its subscribed capital contribution in accordance with the provisions of the Contract, such shareholder shall make full payment of its contribution and be liable for default to the other shareholders who have fully paid their capital contributions. (ii) If the shareholder who fails to fully pay capital contribution, which lead the cancelation and dissolution of the Company, he shall be liable for damages.

Legal Issues Concerned III. Investment contribution methods of a Chinese-Foreign Joint Ventures A Joint Company may contribute its investment in the following ways: a. investment in cash: Chinese currency or freely convertible foreign currency; b. investment with physical objects: buildings, plants, machinery and equipment or other materials. The machinery or equipment shall be essential for the use in production by the joint venture. c. industrial property rights, proprietary technology and the rights to the use of land which are assigned a fixed value.

Legal Issues Concerned If the materials, industrial property rights and proprietary technology are contributed as investment, their fixed value will be determined by the parties to the enterprise on the basis of negotiation in accordance with the principles of fairness and reasonableness or determined by a third party agreed to by the parties. When a Chinese party does not use the right to the use of land as its investment, the joint venture must pay the land use fee to the Chinese government.

Legal Resource Company Law of the People’s Republic of China The Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures Regulations for the Implementation of the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment