*Preamble
Recently, the Pudong New Area Government formally issued the "Trial Measures for Domestic Natural Persons to Invest in and Establish Sino-foreign Equity Joint Ventures and Sino-foreign Cooperative Joint Ventures in Pudong New Area" (referred to as the "Trial Measures"), which came into effect on May 1, 2010. This initiated a pilot program in the field of foreign investment in Shanghai allowing domestic natural persons to act as shareholders in establishing Sino-foreign equity joint ventures and cooperative joint ventures, further innovating methods for attracting foreign investment, and taking the lead in forming an "equal Chinese-foreign" investment and cooperation environment.

*Analysis of the Background for the Policy Introduction
For a long time, relevant foreign-invested enterprise laws, including the "Law on Sino-foreign Equity Joint Ventures" and the "Law on Sino-foreign Cooperative Joint Ventures", have stipulated that foreign legal persons and natural persons can act as shareholders to establish Sino-foreign equity joint ventures and cooperative joint ventures, but domestic natural persons have never been included in the category of investors in foreign-invested enterprises. At the same time, the enactment and amendment of relevant laws have created obvious room for evading the restriction that domestic natural persons are not considered Chinese joint venture entities:
1. According to the 2005 amendment to the "Company Law", "one-person limited liability companies" were recognized for the first time. Therefore, by first establishing a sole proprietorship enterprise, partnership enterprise, or one-person limited liability company, and then using this shell entity to form a joint venture with a foreign party, domestic natural persons can achieve the establishment of a foreign-invested enterprise through a roundabout way.
2. Article 54 of the "Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors" promulgated in 2006 stipulates: "Chinese natural person shareholders of a domestic company whose equity is acquired may, upon approval, continue to act as Chinese investors in the foreign-invested enterprise established after the change." This means that domestic natural persons are allowed to become shareholders in cases where a domestic enterprise is converted into a Sino-foreign equity joint venture or cooperative joint venture through foreign capital acquisition.
3. Domestic natural persons participate as nominal shareholders in investing to establish foreign-invested enterprises.
In summary, the prohibition on domestic natural persons acting as shareholders to establish foreign-invested enterprises is merely a formal threshold. The introduction of the Trial Measures clarifies and legalizes the establishment of foreign-invested enterprises by domestic natural persons, protects the rights and interests of domestic natural persons to a greater extent in terms of legal rights, tax policies, etc., and greatly facilitates the organic integration of domestic natural persons with foreign capital, advanced technology, and management experience.

*Key Policy Points for Domestic Natural Persons Participating in the Establishment of Joint Ventures
I. Industry Restrictions
The scope of foreign-invested enterprises established by domestic natural persons is temporarily limited to projects encouraged or permitted as specified in the "Catalogue for the Guidance of Foreign Investment Industries".
II. Requirements for the Qualification of Domestic Natural Person Shareholders
Domestic residents who hold a Chinese Resident Identity Card and have full capacity for civil conduct. At the same time, the domestic natural person shall also comply with other provisions of national laws and regulations regarding natural persons becoming shareholders.
III. Methods of Capital Contribution
The Trial Measures stipulate that the investment or cooperative conditions provided by domestic natural persons may be in the form of currency, or non-monetary property such as physical goods, intellectual property rights, etc., which can be evaluated in monetary terms and legally transferred.
IV. Approval Authorities
The Trial Measures stipulate that the examination, approval, and registration of Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures established by domestic natural persons investing in Pudong New Area shall be handled by the Pudong New Area Commerce Commission and the Pudong New Area Branch of the Shanghai Administration for Industry and Commerce within their respective approval and registration authorities.
V. Scope of Application and Duration of the Pilot Program
The establishment of new foreign-invested enterprises, or changes that result in domestic natural persons becoming shareholders of Sino-foreign equity joint ventures or Sino-foreign cooperative joint ventures, shall be handled in accordance with these Trial Measures.
Pilot Area: Pudong New Area.
Pilot Duration: It shall come into effect on May 1, 2010, with a trial period of 2 years.

*Similarities and Differences with the Establishment Procedures and Submitted Materials of Ordinary Joint Venture Companies
I. Review of the Qualification and Creditworthiness of Domestic Natural Person Shareholders
Qualification refers to the identity card of the domestic natural person shareholder, and the original identity card of the domestic natural person shareholder needs to be presented during the application for registration, or a notarized certificate (certifying that the copy of the identity card is consistent with the original) may be used as a substitute.
Creditworthiness certificate refers to the credit information of the domestic natural person shareholder's bank deposit account. The approval authorities and industrial and commercial authorities mainly examine whether the natural person's deposit account is operating well and stably. It should be noted that: domestic natural persons as shareholders shall make capital contributions in Renminbi, and correspondingly, the reported bank creditworthiness certificate shall be issued by the bank where the natural person has opened a Renminbi account.
II. A formal written commitment signed by all investors in an official format needs to be submitted.
This commitment requires all investors to clearly acknowledge the legal fact of domestic natural persons participating in the establishment of the joint venture and assume the corresponding risks.

*Issues to Note in the Drafting of Legal Documents
In the process of drafting the articles of association and joint venture agreement of the joint venture enterprise, full evaluation should be made of the risks of establishing an enterprise in joint venture with domestic natural persons, more clauses protecting the rights and interests of the company's shareholders should be included, and liability for breach of contract should be clearly defined. At the same time, the pros and cons of the method for generating board members should also be fully considered, especially for important positions such as the chairman of the board, which can be appointed jointly by all parties to the joint venture to avoid situations where strong shareholders unilaterally replace key personnel of the company, thereby more appropriately protecting the rights and interests of natural person shareholders. In short, in accordance with the requirements of all parties to the joint venture, clauses should be properly drafted, and a corporate governance method and profit distribution method that fully realize the interests of all joint venture parties should be selected.

*Issues to Be Further Refined
The Trial Measures are limited to Pudong New Area. Due to the principle that the registered address must be consistent with the actual business address, many investors are restricted in choosing the company's location, and further opening of the policy in other regions is awaited.
The Trial Measures emphasize the review of the qualification and creditworthiness of domestic natural person shareholders. Correspondingly, a series of information such as the credit management and tax declaration of domestic natural persons should also be accessible through a network to ensure the authenticity of the review results.

*Conclusion
As Tang Chao, Deputy Director of the Foreign Investment Management Division of the Shanghai Municipal Commission of Commerce, pointed out: "This measure only breaks through at the local operational level and has not been elevated to the legal level." Investors should, on the basis of fully considering the feasibility of the investment project, the business costs in Pudong New Area, and the company's development strategy, seize opportunities and make prudent choices.