Laws of the People's Republic of China

CHAPTER I GENERAL PROVISIONS CHAPTER II ESTABLISHMENT CHAPTER III SETUP AND TRANSFER OF STOCK RIGHT CHAPTER IV ORGANIZATION CHAPTER V FINANCIAL ACCOUNTING SYSTEM AND DISTRIBUTION OF PROFITS CHAPTER VI MERGER, SPLIT-OFF, BANKRUPTCY, DISSOLUTION AND LIQUIDATION CHAPTER VII SUPPLEMENTARY PROVISIONS

   Article 1 (Purpose)

With a view to standardizing the organization and conduct of joint-stock cooperative enterprises and to promoting their development, the present Procedures are formulated in the light of the actual situations in Shanghai.

   Article 2 (Scope of Application)

The present Procedures shall apply to the joint-stock cooperative enterprises established in Shanghai.

   Article 3 (Definition of Joint-stock Cooperative Enterprise)

The joint-stock cooperative enterprise specified in the present Procedures refers to the corporate entity of which the corporate property is constituted with funding mainly or solely coming from enterprise employees, which institutes cooperative labor, democratic management, distribution according to labor combined with dividends based on shares.

   Article 4 (Rights and Obligations of Enterprise)

The joint-stock cooperative enterprise shall enjoy the entire corporate property right formed through the investment of shareholders, and shall, according to law, enjoy civil rights and bear civil liabilities.

The joint-stock cooperative enterprise shall, according to law, practice autonomy in operation, and assume sole responsibility for its own profits and losses on the strength of its entire corporate property.

   Article 5 (Articles of Association of an Enterprise)

To establish a joint-stock cooperative enterprise, Articles of Association shall be formulated in accordance with the present Procedures. The Articles of Association shall be binding on the enterprise and its employees on the job, who are shareholders or non-shareholders.

The scope of operation of the joint-stock cooperative enterprise shall be defined by the Articles of Association, and shall be registered according to law. Those items in the enterprise's scope of operation which are restricted by laws and regulations shall be subject to approval according to law.

   Article 6 (Use of Enterprise Name)

If a joint-stock cooperative enterprise names itself a company, the words "cooperative company" shall be included in its name.

   Article 7 (Principles of Operational Management and Administrative Management)

The joint-stock cooperative enterprise shall implement the principle of separating enterprise operational management and social administrative management.

The right of operational management of the joint-stock cooperative enterprise shall be exercised, pursuant to the present Procedures and the Articles of Association, by the capital contributors according to the proportion of their shares.

The economic, social and other governmental administration for the joint-stock cooperative enterprise shall be under the charge of the people's government and its subordinate departments concerned in the district or county where the enterprise is registered, except where such governmental administration is to be exercised by the relevant municipal departments according to law.

The tax payable by the joint-stock cooperative enterprise shall be levied and administered by the department in the district or county where the enterprise is registered.

   Article 8 (Conditions for Establishment)

The establishment of a joint-stock cooperative enterprise shall meet the following conditions:

1. Having a certain number of shareholders;

2. Having the minimum amount of registered capital;

3. Having the Articles of Association jointly formulated by the shareholders;

4. Having a name for the enterprise and a standard organizational structure;

5. Having the fixed premise for production and operation and the necessary conditions for production or operation.

   Article 9 (Number of Shareholders)

The number of employee shareholders in a joint-stock cooperative enterprise shall not less than eight.

The number of non-shareholding employees on the job shall not exceed 10% of the total number of employees on the job in enterprise.

   Article 10 (Modes of Establishment)

The establishment of the joint-stock cooperative enterprise shall be of two types, namely promotional type and economic restructuring type.

The establishment under promotion refers to the establishment of joint- stock cooperative enterprise by more than two promoters in accordance with the present Procedures.

The establishment through economic restructuring refers to the transformation of an existing enterprise into a joint-stock cooperative enterprise in accordance with the present Procedures after inventory of the assets and the verification of capital, identification of the property right and appraisal of assets in the light of the relevant provisions of the state law and municipal regulations.

   Article 11 (Contents of the Articles of Association)

The Article of Association of the joint-stock cooperative enterprise shall clearly state the following items:

1. Name and address of the enterprise;

2. Type of the enterprise;

3. Scope of operations;

4. Registered capital;

5. Mode and limit of the capital contributed by shareholders;

6. Names of the shareholders;

7. Rights and obligations of the shareholders and non-shareholder employees on the job;

8. Conditions and procedures for acquisition and transfer of shares;

9. Organizational structure of the enterprise and its process of formation, functions and powers, and rules of procedure;

10. Production procedures of the enterprise's legal representative, his/her term and authority of office;

11. Financial management system and way of distributing profits;

12. Matters concerning dissolution of the enterprise and way of liquidation;

13. Procedure on amending the Articles of Association;

14. Other matters the shareholders consider necessary to stipulate.

   Article 12 (Registered Capital)

The amount of the registered capital of a joint-stock cooperative enterprise shall be commensurate with its scope of operations, and the minimum registered capital shall be defined according to relevant provisions governing the registration of corporate entity.

   Article 13 (Modes of Capital Contribution)

The shareholders may contribute capital in cash, in kind and also in industrial property right, non-patented technology, or land-use right at appraised value. The physical goods, industrial property right, non- patented technology or land-use right contributed as capital must be appraised and evaluated; over-evaluation or under-evaluation shall not be allowed in the verification of property. Appraisal and evaluation of the land-use right shall be conducted according to the provisions of the relevant laws and regulations.

The amount of capital contributed in the form of industrial property right and non-patented technology at appraised value shall not exceed 20% of the registered capital of the enterprise except where special provisions on the adoption of new high-tech achievements have been made by the State.

   Article 14 (Special provisions on Establishment of Joint-stock Cooperative Enterprise Through Economic Restructuring)

If a state-owned enterprise is transformed into a joint-stock cooperative enterprise, the state-owned assets or the collective assets may serve as borrowed assets or may also be purchased by the employees of this enterprise. If the state-owned assets or the collective assets are used as borrowed assets, the joint-stock cooperative enterprise established through Economic Restructuring shall pay to the department in charge of the assets or subject of investment the fee for holding the assets in possession.

The rate of the fee for holding the assets in possession shall be set by the state-owned assets administration department or the collective assets administration department jointly with the economic restructuring department, finance department and tax department.

   Article 15 (Procedure for Establishment Through Economic Restructuring)

The establishment of a joint-stock cooperative enterprise established through economic restructuring shall be subject to the consent of the owner or the representative of the owner of the assets and to the approval of the employees' (deputies) general meeting. The enterprise shall file an application with the relevant department and go through the procedures for the registration of establishment at the enterprise registration department after the application has been examined and approved.

   Article 16 (Examination and Approval of Establishment Through Economic Restructuring)

The commission, office, or bureau concerned at the municipal level or its authorized holding (group) company or group company shall be responsible for the examination and approval of the establishment through Economic Restructuring of the enterprises under the jurisdiction of the Municipality.

The department designated by the district (county) people's government shall be responsible for the examination and approval of the establishment through Economic Restructuring of the enterprises under the jurisdiction of district (county).

   Article 17 (Documents to Be Submitted for Establishment Registration)

When going through the procedures for establishment registration, the joint-stock cooperative enterprise shall submit to the enterprise registration organ the following documents:

1. Application;

2. Documents of examination and approval for establishment through economic restructuring;

3. Articles of Association;

4. Report on assets verification;

5. Names and addresses of shareholders;

6. Certificate of appointment and ID of legal representative;

7. Other documents provided by laws, regulations and rules.

   Article 18 (Registration of Enterprise)

The enterprise registration organ shall, within 30 days after receipt of the application for establishment registration of the joint-stock cooperative enterprise, decide on whether to approve or disapprove the registration according to the conditions stipulated in the present Procedures.

If the registration is approved, the enterprise registration organ shall issue a business license to the enterprise.

CHAPTER III SETUP AND TRANSFER OF STOCK RIGHT

   Article 19 (Setup of Stock right)

The shares of a joint-stock cooperative enterprise shall be classified into individual shares and corporate shares.

The individual shares refer to the shares formed by investment of the enterprise' employees and individual persons from outside the enterprise. The stock right shall be enjoyed by these employees and individual persons.

The corporate shares refer to the shares formed by investment from other enterprises, institutions or economic organizations with status of legal person The stock right shall be enjoyed by those legal person.

   Article 20 (Exceptional Circumstances of Setup of Stock Right)

When a collective enterprise is restructured into a joint-stock cooperative enterprise, the assets that are identified as collectively owned by all the employees of the original enterprise who have retired or left their post, can be converted into shares, and set up as collectively-owned shares. The stock right shall be exercised by the relevant department designated by the Municipal People's Government.

The procedures for the exercise of stock right of the collectively-owned shares and the distribution of profits will be stipulated separately by Shanghai Municiapl Economic Restructuring Commission jointly with other relevant departments.

   Article 21 (Proportion and Limit of Shares Bought by Employee Shareholders)

The total amount of shares held by the whole staff of a joint-stock cooperative enterprise shall not be less than 51% of the total amount of capital stock. If, because of the transfer of stock right, the total amount of the shares held by the whole staff of a joint-stock cooperative enterprise happens to be below 51% of the total amount of capital stock, the case shall be examined and approved by the district (county) people's government according to provisions which shall be worked out by the Shanghai Municipal Economic Restructuring Commission jointly with other relevant departments.

In respect of the joint-stock cooperative enterprise promotional type, the limit on the shares bought by an individual employee shall be set in the Articles of Association.

In respect of the joint-stock cooperative enterprise economic restructuring type, the lowest limit on the shares bought by an individual employee shall not be less than the total amount of average wage of an individual employee of this enterprise in the year previous to the economic restructure, and the highest limit shall not exceed ten fold the total amount of average wage of an individual employee of this enterprise in the year previous to the economic restructure or shall be set in the Articles of Association.

   Article 22 (Proportions of Total Amount of Shares Bought by Individual Persons and Legal Persons Outside This Enterprise)

The total amount of shares held by individual persons outside the joint- stock cooperative enterprise shall not exceed 10% of the total amount of after stock of the enterprise, and that held by legal persons outside the joint cooperate enterprise shall not exceed 39% of the total amount of the stock.

   Article 23 (Limit on Shares Bought by Operator)

The limit on the amount of shares held by the legal representative of a joint-stock cooperative enterprise shall be decided by the shareholders' general meeting, but the minimum limit shall not be below the average amount of shares held by individual employee shareholders.

   Article 24 (Certificate of Stock Rights)

The joint-stock cooperative enterprise shall not issue shares, but shall issue to the shareholders the certificates of stock right, which shall serve as evidence of contribution to investment by the shareholders and as the basis for dividends.

The certificate of stock rights shall clearly state the following items:

1. Enterprise name;

2. Registration date of the enterprise;

3. Registered capital of the enterprise;

4. Name of the shareholder, and the amount of capital paid-in and the date of payment;

5. Serial number and issuing date of the certificate of capital contribution.

The certificate of capital contribution shall bear the seal of the joint-stock cooperative enterprise.

   Article 25 (Restriction on Redemption of Shares)

After the establishment of a joint-stock cooperative enterprise the shareholders shall not redeem their shares, but in case the employee shareholder is transferred, discharged, or has resigned, retired or died, etc., the matter shall be handled by the enterprise according to the provisions of the Articles of Association, or the resolution of the shareholders' general meeting.

   Article 26 (Restriction on Transfer of Shares)

The shareholders of a joint-stock cooperative enterprise may transfer their shares, and the shareholders of the enterprise (including non-employee shareholders) shall have preemptive right under the same conditions. However, the proportion and number of shares transferred shall be subject to restriction under the provisions of Article 9, 21, 22 and 23 of the present Procedures.

The legal representative of a joint-stock cooperative enterprise shall not transfer his/her shares during his/her term of office and the fiscal year after he/she quits the enterprise.

   Article 27 (Shareholders' Roll)

The joint-stock cooperative enterprise shall set up a shareholders' roll and record there in the following items:

1. Names and addresses of shareholders;

2. Amounts of capital paid-in by shareholders;

3. Serial numbers of the certificates for capital contribution.

   Article 28 (Shareholders' General Meeting and Its Functions and Powers)

The shareholders' general meeting shall be the organ of authority of a joint-stock cooperative enterprise and shall exercise the following functions and powers:

1. To decide on the operation plan and the investment plan of the enterprise;

2. To elect or to change the legal representative or directors of the enterprise;

3. To elect or to change the supervisors who are representatives of the shareholders, and to decide on the matter concerning their remuneration;

4. To discuss and approve the report of the board of directors or of the enterprise's legal representative;

5. To discuss and approve the report of the board of supervisors;

6. To discuss and approve the annual financial budget programmer and the final accounts programmer of the enterprise;

7. To discuss and approve the profit distribution plan and the loss making-up plan of the enterprise;

8. To make resolutions on the increase or decrease in the registered capital and on the merger, split-off, bankruptcy, or dissolution of the enterprise;

9. To revise the Articles of Association;

10. To deal with other important issues stipulated by the Articles of Association.

   Article 29 (Convening of Shareholders' General Meeting)

The shareholders' general meeting shall be convened by the legal representative of a joint-stock cooperative enterprise. The enterprise's legal representative shall notify, 15 days before the convening of the shareholders' general meeting or within the period stipulated by the Articles of Association, all the shareholders of the matters relating to the convening of the shareholders' general meeting.

The shareholders' general meetings are of two kinds: regular and provisional. Both the regular and provisional shareholders' general meetings shall be convened on schedule as stipulated by the Articles of Association.

The provisional shareholders' general meetings shall be convened when one of the following circumstances occurs:

1. Being requested by the shareholders holding more than 10% of the stock;

2. Being requested by more than 10% of the employee shareholders;

3. Being deemed necessary by the enterprise's legal representative;

4. Being proposed by the board of suppressers.

The shareholders shall have the right to inspect the minutes of shareholders' general meeting.

   Article 30 (Voting Mode of the Shareholders' General Meeting)

Voting at the shareholders' general meeting shall adopt the mode of combining one vote per person and one vote per share.

When taking a vote on the matters covered by Article 28 (1), (2), with exception of the election and change of directors, and those covered by Article 28 (3-7) in the present Procedures, the shareholders' general meeting shall adopt the mode of one vote per person with its resolutions subject to the approval of the majority of the shareholders attending the general meeting.

When taking a vote on the matters covered by Article 28 (9), the shareholders' general meeting shall adopt the mode of one vote per person with its resolutions subject to the approval of more than 2/3 of the shareholders.

When taking a vote on the election and change of directors under Article 28 (2) and on the matters covered by Article 28 (8) in the present Procedures, the shareholders' general meeting shall adopt the mode of one vote per share with its resolutions subject to the approval of the shareholders with more than 2/3 of the stock.

   Article 31 (Establishment of Organization)

The joint-stock cooperative enterprise of comparatively large scale may set up the board of directors and the board of supervisors. The board of directors shall have 3-19 members with its chairperson acting as the enterprise's legal representative. The number of members of the board of supervisors shall be set by the Articles of Association, among whom the representatives of the employee shareholders shall not be less than 1/2 of the total number of members.

The joint-stock cooperative enterprise of comparatively small scale shall, instead of setting up the board of directors, only install an executive director, who shall be the enterprise's legal representative.

   Article 32 (Producing the Legal Representative)

The legal representative of a joint-stock cooperative enterprise established through economic restructuring must be approved by the majority of the shareholders attending the general meeting. The candidates for the legal representative may be recommended by the employees of the enterprise, or, when necessary, be nominated by the superior department in charge of the original enterprise or be invited through public notice.

The mode of prodding the legal representative and treasurer of the joint-stock cooperative enterprise established under sponsorship shall be stipulated by the Articles of Association.

   Article 33 (Organization and Operator's Functions and Powers)

The functions and powers of the board of directors, manager and board of supervisors of a joint-stock cooperative enterprise shall be stipulated by the Articles of Association with reference to the "Company Law of the People's Republic of China." The functions and powers of the executive director of a joint-stock cooperative enterprise shall be stipulated by the Articles of Association.

The functions and powers of the board of directors, manager (factory director), board of supervisors, and executive director of a joint-stock cooperative enterprise shall not conflict with the functions and powers of the shareholders' general meeting.

   Article 34 (Duties of Directors)

The directors of a joint-stock cooperative enterprise shall assume responsibility for implementing the resolutions of the board of directors. If the resolutions run counter to laws, regulations, rules or the Articles of Association, resulting in a heavy loss to the enterprise, the directors participating in the making of the resolution shall be responsible for compensating the enterprise. However, the director(s) who can be proved to have expressed objection at the time of voting as recorded in the minutes, shall be relieved from the responsibility.

   Article 35 (Circumstances Prohibiting the Assumption of the Office of Director, Executive Director, Manager (Factory Director) and Supervisor)

Any person found to be in one of the following circumstances shall not be allowed to assume the office of director, executive director, manager (factory director), or supervisor of a joint-stock cooperative enterprise:

1. With no capacity of civil act or with restricted capacity of civil act;

2. Having been convicted of the crime of graft, bribery, conversion of property, misappropriation or disrupting social economic order, and sentenced to imprisonment, and less than five years having elapsed after the term of enforcement of the sentence, or after his/her being deprived of political rights for criminal offenses;

3. Having assumed the office of director, executive director, or manager (factory director) of an enterprise and having been personally responsible for the losses incurred in the enterprise due to his/her mismanagement, and less than three years have elapsed after he/she quitted the enterprise;

4. Having assumed the office of legal representative of an enterprise whose business license was revoked for acts in violation of law for which he/she being responsible, and it was less than three have years after the business license was revoked.

5. Failing to clear on the date due his/her personal debt which amounted to (over) three times the amount of average annual wage of the employees in Shanghai;

The appointment of directors, executive director, manager (factory director) or supervisors produced by the joint-stock cooperative enterprise in violation of the stipulation of the preceding paragraph shall be null and void.

   Article 36 (Prohibited Acts of Directors, Executive Director, Manager (Factory Director) and Supervisors)

The directors, executive director, manager (factory director) and supervisors shall not be allowed to be engaged in operating in their own behalf or in the behalf of any other person any competing business against this enterprise, or in carrying out activities detrimental to the interests of this enterprise.

   Article 37 (Liability for Damages)

If the directors, executive directive director, manager (factory director) or supervisors cause damage to their enterprise or its shareholders by violating laws, regulations, rules, or the Articles of Association, they shall be liable for the damages so caused.

CHAPTER V FINANCIAL ACCOUNTING SYSTEM AND DISTRIBUTION OF PROFITS

   Article 38 (Financial Accounting System)

The joint-stock cooperative enterprise shall set up the financial accounting system in accordance with the provision of the law and regulations, and stipulation of the finance department in charge under the State Council.

   Article 39 (Financial Accounting Report)

The joint-stock cooperative enterprise shall prepare a financial accounting report at the end of every fiscal year and make it available for the shareholders' inspection twenty days before the convening of the shareholders' general meeting.

   Article 40 (Distribution of After-tax Profits)

The after-tax profits of the joint-stock cooperative enterprise shall be distributed in the following order:

1. To Cover the loss on confiscated properties, and to pay the fines and overdue fines payable for violation of the provision of tax law;

2. To Make up for the loss incurred in the previous year;

3. To draw 10% of the profits for the statutory accumulation fund, but the drawing may not be made when the statutory accumulation fund has reached 50% of the registered capital;

4. To draw 5-10% of the profits for the statutory public welfare fund;

5. To draw optional accumulation fund based on the resolution of the shareholders' general meeting;

6. To draw bonus distribution fund.

   Article 41 (Use of Accumulation fund)

The accumulation fund of a joint-stock cooperative enterprise shall be used for making up losses, expanding production/operation or increasing the enterprise's capital;

When the statutory accumulation fund is converted into the enterprise's capital, the remainder of the accumulation fund shall not be less than 28% of the registered capital.

   Article 42 (Use of Public Welfare Fund)

The public welfare fund of a joint-stock cooperative enterprise shall be used for the collective welfare of the employees of this enterprise.

   Article 43 (Distribution of Bonus According to Shares)

The bonus distribution fund of a joint-stock cooperative enterprise shall be distributed according to the number of shares.

CHAPTER VI MERGER, SPLIT-OFF, BANKRUPTCY, DISSOLUTION AND LIQUIDATION

   Article 44 (Merger or Split-off)

The merger or split-off of a joint-stock cooperative enterprise shall be effected by a resolution passed by the shareholders' general meeting and be notified to the creditors. The claims and debts of the original enterprise shall be taken over by the enterprise existing after the merger or split-off.

   Article 45 (Bankruptcy)

If a joint-stock cooperative enterprise is declared bankrupt according to law for its insolvency the people's court shall, according to the provision of the relevant law, organize the shareholders, relevant organs and related professionals to set up a liquidation group to carry out the bankruptcy liquidation of the enterprise.

   Article 46 (Dissolution)

A joint-stock cooperative enterprise shall be dissolved in one of the following circumstances:

1. The term of operation stipulated in its Articles of Association has expired, or other events necessitating the dissolution as stipulated in its Articles of Association has occurred;

2. The shareholders general meeting has made a resolution on the dissolution of the enterprise; or

3. It has been shut down for its violation of law.

   Article 47 (Liquidation)

If a joint-stock cooperative enterprise is dissolved according to the provisions of Article 46 in the present Procedures, it shall, according to the relevant provisions of the State, set up a liquidation group to check up the property and clear up various kinds of debts.

   Article 48 (Termination of Liquidation)

On completion of the liquidation of a joint-stock cooperative enterprise, the liquidation group shall put forward a liquidation report, and apply to the original enterprise registration department for cancellation of its enterprise registration, and make a public announcement after the report has been verified and attested by a registered accountant office, an auditing office, or an assets appraisal organization.

CHAPTER VII SUPPLEMENTARY PROVISIONS

   Article 49 (Joint-stock Cooperative Enterprise to Be Treated as Collective Enterprise)

The joint-stock cooperative enterprises established in accordance with the present Procedures and those established before the implementation of the present Procedures and standardized according to the present Procedures shall be treated as collective enterprises.

   Article 50 (Department Responsible for Interpretation in Application)

Shanghai Municipal Economic Restructuring Commission shall be responsible for the interpretation of the present Procedures in their specific application.

   Article 51 (Date of Implementation)

These present Procedures shall become effective on June 1,1997.