893.5034 Registration/6–2945: Telegram

The Ambassador in China ( Hurley ) to the Secretary of State

1074. Embassy was advised June 28 by K. C. Wu, Vice Minister,28 that date for registration of branches of foreign companies has been postponed for 6, months until December 31, 1945. Please inform Department of Commerce and business groups such as National Foreign Trade Council and China–America Council of Commerce and Industry.

It is expected that during this period efforts will be made to complete revision of the company law and of the registration regulations. On June 18 the Supreme National Defense Council approved principles to govern the revision of the company law. These principles are to be sent to the Legislative Yuan as a basis for its revision of the company law. It is proposed that present regulations governing special limited liability companies will be incorporated as part of the revised company law, and that the latter will contain also a separate section of provisions relating to foreign companies. The Legislative Yuan will also revise the enforcement regulations for the company law and the regulations governing the registration of foreign companies. The approved principles as published in Ta Kung Pao June 19 providing that foreign companies establishing branches in China, after securing certificates of recognition and admission from the Chinese Government, will have the same rights and duties as domestic companies. The definition of a foreign company depends upon the location of its head office, which is to be interpreted as identical with the company’s domicile or place of incorporation. A company owned entirely by Chinese if incorporated in the United States, for example, would be regarded as a foreign corporation. In confirming the above interpretation, Dr. Kan Nai-kuang, Assistant Secretary General, Supreme National Defense Council, states that the Council’s intention has been to follow as closely as possible the recommendations of Judge Helmick. In the Council’s statement of principles the Chinese term used, in place of “registration”, is a combination of the characters meaning “to recognize” (jen) and “to permit” (hsu). This follows Helmick’s recommendation that a term for “admission” on [and?] “recognition” be used rather than the Chinese terms ordinarily translated “registration” (teng chi or chu tse). Following is the Embassy’s translation of the section of the principles governing the amendment of the company law which relates to foreign companies: [Page 1221]

The term “foreign companies” used herein is to designate companies that have their head office located outside China territory and that establish branch offices in China for the purpose of profit heading [seeking?].
Unless formed and registered in accordance with the laws of their own countries, foreign companies may not apply for recognition and an admission. Without recognition and admission, Co. branch offices may be established.
Under any one of the following conditions, foreign companies shall not be given certificates of recognition and admission: (a) When the purpose and activities of a company are in contravention of Chinese laws, public order, or good customs, (b) When it is proposed to establish a branch in a location in which residence by foreigners is admitted or to operate an enterprise in a field of activity in which participation by following is limited, (c) In the event that companies do not intend to set up branch offices in China, or do not have head offices in their own countries or do not have definite addresses even though they have head offices and branch offices, (d) If companies apply for recognition and remission [admission?] in China for the purpose of evading laws of their own countries, or to utilize the laws of a third country to acquire the state [status?] of a legal person in order to get the recognition of the Chinese Government, aiming at enjoying the privilege of the nationals of a third country, (e) If companies have made falsified reports in the items listed in Article 18.
Foreign companies established in countries that do not accord recognition and admission to Chinese companies may not be granted recognition and admission in China.
When applying for recognition and admission, a foreign company shall state simply the following items with documents attached. (a) Address of the home office in its own country and address of branch offices in China. (b) Projected business activities and total capitalization, (c) Name of the company, and kind, (corporation, partnership, et cetera), (d) Company by-laws and photographic copies of the documents testifying to its recognition (incorporation) in its own country, and the dates of its formation and registration. (e) Name, nationality and address of its representative, agent, or manager. (f) If a company has been organized in accordance with a special act in its own country, a copy of such act shall be submitted. (g) Other items that are required in accordance with Chinese laws.
All the above-mentioned papers, which are required to be submitted, with the exception of any name lists which may be required, must be accompanied by a copy in Chinese.
Application for recognition and admission for establishment of a branch of a foreign company shall be filed by shareholders participating in the operation of the business at its head office, or by directors of the head office, or by their representatives or managers in China, or by the latter’s commissioned attendant. Applicant shall submit credentials certifying to his national [nationality] as well as to his power of attorney to act for the company.
After being granted recognition and admission, foreign companies shall have the same legal rights and duties as Chinese companies of the same type.
After being given recognition and admission, foreign companies may rent or purchase land required for their business operations. Approval of the Government office in charge must, however, be secured for this rental or purchase, provided also that Chinese companies in the applicant’s country legally are permitted to the same privilege.
Where after granting of certificate or [of] recognition and admission, a foreign company fails to register any matter which should be registered or to apply for a registration of change, in case of any change in the matter already registered, such matters shall not be set up as a defense against a third party.
Foreign companies which have obtained certificates of recognition and admission and which subsequently decide not to undertake business operations shall return for cancellation the documents certifying to their recognition and admission. Responsibilities incurred prior to the return of the documents for cancellation shall remain to be borne by the companies.
Under any one of the following conditions, the Government office in charge may cancel the recognition and admission: (a) If business operations have not been started within 6 months following the date of recognition and admission, with no request having been made for an extension of the period, or, if operations are suspended for more than one year after an enterprise was started in business, (b) When a foreign company is declared bankrupt, (c) In the event that matters reported or documents submitted in the application for recognition and admission are found to be untrue, (d) When the head office of a foreign company has been dissolved, (e) In case the existence of a branch of a foreign company is in contravention of this law or other laws.
A foreign company not obtaining a certificate of recognition and admission in accordance with a law which undertakes to operate under its company name in China shall be fined and ordered to stop business operations.
The internal organization and manner of operation of a registered foreign company shall be governed by the company by-laws. Matters relating to the internal phases of the operation which are not provided for in these regulations shall be governed by the law of its country. External activities shall be conducted in accordance with Chinese laws and decrees.
After having given recognition and admission to a foreign company, the competent Government authority, when necessary, may inspect its roster of shareholders or other books and documents relating to business operations.
In case there are other legal provisions regarding business operations in addition to these laws, those provisions shall be followed.
With regard to penalties there will be a separate section in the revised company law. Penalties will be prescribed for particular violations in the individual articles of that law. (End of translation.)

A translation of the complete text of the principles for revision of the company law and a copy of the Chinese text is being forwarded by air mail. The published statement of principles consists of three sections: [Page 1223] (a) Relating to the general provisions (paragraph 1 to 4). (b) Relating to limited liability companies (paragraph 5 to 15), and (c) relating to foreign companies (translated above, paragraphs 15 to 29).

Main points of revision under sections (a) and (b) above include:

Recommendation that the provision of the present company law which limits total investment of any company in other companies to 25 percent of its paid-up capital be revised to permit such investment up to 5 percent of paid-up capital, with this limitation not applicable to investments in “productive” enterprises or by investment companies.
Recommendation that in distribution of profits by limited liability companies 20 percent of such profits should be allocated into the company’s reserve fund until such time as that reserve fund equals in amount the company’s total capitalization. The present company law provides that 10 percent of profit shall be so allocated.
Recommendation that the existing limitation that only one-third of the total shares of a company may be issued as bearer shares be revised to permit issuance of such shares up to 50 percent of the total shares issued.

As actual revision of company law and of registration regulations will soon be undertaken by the Legislative Yuan, it is important that the Embassy be advised promptly of any comments from the Department of State, Commerce, or business groups regarding this statement of governing principles and the projected outline for registration requirements. It is assumed Department will make this information immediately available to Judge Helmick, to Commerce, and to interested business groups.

Reference paragraph 17 (e), second sentence above, please inform Embassy whether or not there are any states which do not admit Chinese companies to do business.

  1. For Foreign Affairs.