Supreme Court Issued Interpretation IV on Company Law, ICOs Banned – China Regulatory Brief

Interpretation IV on Company Law enhances shareholder protection

China’s Supreme Court issued the fourth judicial interpretation of the PRC Company Law (“the Interpretation”) at a press conference on August 28 to further standardize company governance, and enhance protection to the minority shareholders and creditors, with effect from September 1, 2017.

The Interpretation offers great practical and instructive guidance to the law application issues in disputes over the validity of company resolutions, shareholders’ right to know, profit distribution, preemptive right, and shareholder representative action.

In particular, the Interpretation introduces suits for affirming “the non-existence of a resolution”, and expands the valid plaintiff scope to directors and supervisors. Further, it stipulates that shareholders’ right to know cannot be deprived by articles of association of the company, or agreements between the shareholders.

Shareholders now have the right to file a lawsuit requesting profit distribution. Moreover, the Interpretation offers remedies for infringement of the pre-emptive rights, and provides more details to the implementation of shareholder representative actions.

The Interpretation makes several breakthroughs to the existing laws and regulations. However, the bridges between the breakthroughs and the current system are yet to be resolved in practice.

 RELATED: China Bans Weird, Long, and Sensitive Company Names

Four draft standards for Cybersecurity Law released

The National Information Security Standardization Technical Committee recently released four draft national standards (“Draft Standards”) in relation to the Cybersecurity Law of China, including the second draft Guidelines for Cross-Border Transfer Security Assessment, the General Security Requirements for Network Products and Services, and two other guidelines on critical information.

Among other issues, the Draft Standards add new definitions of certain terms, such as “domestic operations”, “cross-border data transfer”, and “assessment by competent authorities”. The Draft Standards provide general and enhanced security requirements applicable to network products and services sold or provided within China. Moreover, the Draft Standards proposes security evaluation procedures and approaches on critical information.

Accordingly, a network operator that is not registered in China would still be deemed to be conducting “domestic operations” if it conducts business or provides products or services within China. There could still be a cross-border transfer even if the data collected is not retained outside of China, if overseas entities, institutions or individuals are able to access the data remotely.

The Draft Standards are open for comments from the general public until October 13, 2017.

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Chinese Authorities Officially Ban ICOs

Seven state authorities led by the People’s Bank of China issued a joint announcement on September 4, 2017 to curb risks stemming from the initial coin offerings (ICOs) – an increasingly popular way to raise cash or other virtual currencies, such as Bitcoin and Ethereum.

According to the announcement, the initial offerings of virtual currencies will be deemed as illegal fundraising, all ICOs fundraising activities must stop immediately, and individuals and organizations that have completed ICOs should arrange to return funds.

Over 100,000 investors in China are reported to have snapped up RMB 2.6 billion (US$385 million) in new virtual currencies through ICOs during the first six months this year. This imposes great risks in default and fraud, or even money laundering and terrorist financing, due to the anonymous nature of the transactions.

Other governments – such as the US, Canada, and Singapore – have also taken measures to regulate ICO risks.

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