The Supervise Strategy Of Contractual Control Mode

The contractual control mode refers to the foreign-invested enterprise enteredinto a series contracts with the operation corporation in China to control the decisionbody of operation corporations and transfer the profit produced by the operationcorporations hereof to avoid the relevant laws and regulations on foreigninvestment.The core of this model is the one enterprise controls the other throughagreement instead of equity. The model base on a series of contracts, included but notlimited to Exclusive Management, Consultation and Service Agreement, AgencyAgreement, Equity Pledge Agreement, Exclusive Purchase Agreement and LoanAgreement and so on. Through the contractual arrangement, the operation corporationappears to be an independent company, which the all the management and operationof the company has been controlled by the foreign-investment enterprise.The contractual control mode originates from the overseas listing of sina inAmerica. On13April2000, the sina formally listed its stock in NASDAQ andbecame the first internet company in China realized its IPO. As the relevant laws andregulations of China forbidden the foreign capital enter the internet service industry,the CEO of creatively use the contractual control mode with the help of foreigninvestment bank, accounting firm and law firm. The mode has been approved by theMinistry of Industry and Information, therefrom the obstacles of the internet companylisting overseas has been broken. After that the model has been imitated by a varietyof private enterprise. From now on, there are more than one hundred Chinese enterprises successfully realizing overseas listing through contractual control mode.The paper will discuss the concept, origin, regulation and legal perfection ofcontractual control mode in forth parts. First part will introduce the basic concept,background andlegality of contractual control mode, laying the foundation of thepaper. Second part will illustrate the set up step of the contractual control mode andthe specific content of the contract in connection with the contractual control mode oftudoucompany.The third part will illustrate the relevant law and regulation ofcontractual control mode, including but not limited to the law and regulation refer toreturning investment, security review of merge and acquisition and foreign regulationof the SEC or securities exchange refer to contract control mode. The forth part willdiscuss the specific legal risk of contractual control mode, put forward relevantregulation policy in the line with legal risk and make some suggestion on the longterm institutional improvement.