The Secretary of State to the Minister in China ( Johnson )
Sir: Referring to paragraph four of the Department’s telegram No. 265 of August 7, 4 p.m., stating that, upon the receipt from the Consulate General at Shanghai of translations of the Chinese text of the “Provisional Regulations for the Registration of Companies” and the “Supplemental Rules”, further consideration would be given to the general question of the registration of American business concerns with the Chinese authorities, you are informed that the Department has now received and has examined the translations in question.
Without going into the subject of the merit or soundness of the “Provisional Regulations” as such, the Department is of the opinion, after careful consideration, that application of the regulations to American business concerns in China would result in the violation of rights granted to American citizens by existing treaties between the United States and China. The Department gives below some particulars in which the regulations and related enactments seem, from this point of view, objectionable.
It would appear that business concerns registered under the regulations or applying for registration are subject to the possibility of having [Page 557] certain of their business affairs examined and reported upon by “inspectors” appointed by the “competent” Chinese “authorities”. The regulations appear designed to place the Chinese authorities in possession of practically all facts connected with the formation and conduct of any registered business.
Article 41 of the “Provisional Regulations” states that:
“The registration of any company is cancelled immediately after the completion of its liquidation is recorded”.
Articles 218 to 229 of the “Regulations Governing Commercial Associations”, which are referred to in the “Provisional Regulations” and presumably are the same as the “Commercial Associations Ordinance of the Chinese Republic”, prescribe the procedure decided upon by the Chinese Government for effecting the liquidation of a business concern.
Article 47 of the “Provisional Regulations” provides in part that:
“The old Regulations Governing Commercial Associations shall remain applicable prior to the enactment of the Commercial Law”.
An examination of the “Regulations Governing Commercial Associations” reveals that an association may not make preparation to commence business unless it has been registered with the competent authorities at the place of its principal office (Article 5); that if an association does not commence business within six months after its registration or if an association acts contrary to law, ordinance, public peace or good customs, the competent authorities may dissolve the association on the application of a procurator (Articles 7 and 8); that an association shall be dissolved upon bankruptcy or upon an order for dissolution from the competent authorities (Article 49); that any member of the association may make an application to the competent authorities for the dissolution of the association (Article 58); that liquidators may be dismissed by the competent authorities on the application of any person interested or of a procurator (Article 64); that liquidators apparently may be appointed by a Chinese court (Article 70); that the duties and powers of directors shall be as set forth and that the issuance of shares and bonds shall be under definite regulations; that any member of an association charged with the administration of its business, a promoter, a director, a supervisor, or a liquidator, shall be liable to fines ranging from five to one thousand yuan if he fails to make registration as prescribed, to deliver up without reasonable excuse any document for inspection or examination, and the like.
The Department refers once more to Article 47 of the “Provisional Regulations”, which provides that the “Regulations Governing Commercial Associations” shall remain applicable prior to the enactment of the “Commercial Law”. By clear implication, firms registering under the regulations now under discussion will find themselves subject, [Page 558] also, to the “General Principles of the Chinese Civil Code”, of which the following excerpts are of especial interest in this connection:
“If a director of a juristic person authorized by grant disobeys any supervising order of, or obstructs an inspection by the competent authorities, he may be punished with a fine not exceeding five hundred yuan.” (Article 33).
“If a juristic person violates any of the conditions under which the authorization has been granted, the grant may be revoked by the competent authorities.” (Article 34).
“When the assets of a juristic person are insufficient to meet its liabilities, the directors shall forthwith apply to the Court for a declaration of bankruptcy.
“If a director has caused injury to the creditors of the juristic person through failure to apply to the Court for a declaration of bankruptcy, as provided in the preceding paragraph, he shall be responsible for damages.” (Article 35).
“Whenever the object or the activities of a juristic person are found to be contrary to law, public order or good morals, the Court may order the dissolution of the juristic person on the application of the competent authorities, the public procurator or any interested person.” (Article 36).
“All liquidators may be removed by the Court whenever the Court deems it necessary.” (Article 39).
“The liquidation of a juristic person shall be subject to the supervision of the Court.” (Article 42).
“A liquidator who disobeys a supervising order of the Court or who obstructs an inspection by the Court may be punished with a fine not exceeding five hundred yuan.” (Article 43).
Questions such as those involved in the registration of American business concerns with the Chinese authorities and the placing of such concerns under Chinese jurisdiction are directly involved in the process of working out a method for the abolition of extraterritorial jurisdiction, which is now under discussion between the American and the Chinese Governments.
In view of the fact, therefore, that the “Provisional Regulations” are closely interwoven with basic Chinese law, and that they provide for a kind and degree of Chinese administrative and judicial control over business concerns registering under them which would run counter to extraterritorial status, it would be extremely difficult, if not impossible, for American business concerns in China to effect registration and at the same time to retain their extraterritorial rights and status.
The Department is of the opinion that the Legation and American consular officers in China, if appealed to for advice on the subject, should point out to American business organizations the respects in which registration with the Chinese authorities would appear to involve such organizations in loss of extraterritorial status; and that [Page 559] the Legation should protest, as contrary to the treaties, any attempt of the Chinese authorities to compel American organizations to register.
Very truly yours,