The establishment of a Foreign Invested Company Limited by
Shares (also known as a "joint stock company") was designed to
accommodate investors seeking to issue shares to the public or
to list on the Shanghai, Shenzhen or foreign stock exchanges
(under Chinese foreign investment law nomenclature, the Hong Kong Stock Exchange qualifies as a "foreign" stock exchange).
Consequently, the establishment of FICLS is subject to stricter
conditions than the establishment of Equity Joint Ventures,
Cooperative Joint Ventures, and Wholly Foreign Owned
Enterprises – so far, applications for the establishment of
FICLS have been denied more often than not. Although an FICLS
may be set up directly, a Joint Venture is eligible to convert
to an FICLS after three profitable years if it meets the
conditions set forth below.

The Registered Capital of an FICLS must be no less than 5
million RMB (about US $ 625,000). There be at least 5
shareholders, and 25% foreign shareholding is required. Like
the Equity Joint Venture, profits and liquid net assets
must be distributed in proportion to shareholding.

Promoters

At least two promoters are required to form an FICLS, and more
than half of them must shelter in China. Further, a promoter's
shares in an FICLS are subject to a 3 year lock-up (they can not
be transferred within 3 years of the date of establishment of
the company). Share buy-backs are not permitted except under
limited circumstances. The promoters' share capital must be at
Least 35% of total share capital if shares are offered to the
public.

Shares

All shares may be paid for cash or property, in lump sum or
install payments. The initial installment payment must be
at least 20% of the total share capital, and promoters must pay
in full within 2 years after the date that the Business License
is issued. Stricter requirements may be set out in the Articles
of Association if so desired.

Corporate Governance

Management must be in proportion to shareholding. An FICLS must
appoint at least 3 members to a supervisory board, which is
responsible for supervising the performance and regulatory
compliance of directors and senior executives, and monitoring
the company's financial affairs. This requirement is more
strictly enforced than is the case with Joint Ventures and
Wholly Foreign Owned Enterprises.

An FICLS must appoint between 5 and 19 directors. Board
meetings are required biannually with at least 10 days notice.
50% of the directors constitues a quorum. A special meeting
may be forced by one-third of the directors or supervisors, or
shareholders holding 10% or more of the share capital.
Significantly for minority shareholders, all board decisions
must be passed by major vote or (in the case of important
decisions such as termination, increase or decrease of
Registered Capital, etc.) by a two-thirds majority vote –
unanimous approval can not be required. Thus a 25% foreign
shareholder would have no veto power over any board decisions.