China's Supreme People's Court issued the Provisions on Issues Concerning the Trial of Disputes Involving Foreign-Invested Enterprises on August 16, 2010. Against the backdrop of China's further reform and opening up, the document contains positive news for foreign-invested enterprises.

The document sets out rules for appraising the validity of contracts that have not been subject to a process of administrative approval and the handling of unapproved equity transfer contracts. As well, it deals with disputes involving anonymous investors in foreign-invested enterprises, and identifies liabilities of foreign-invested enterprises' shareholders.

In addition, it puts forward detailed provisions for addressing disputes over equity pledge contracts involving foreign-invested enterprises, equity controversies resulting from offering false information when filing equity alteration applications, and disputes over shareholders' rights to consent. Preemption rights in equity transfers are also covered.

Experts in business law say the document will further improve China's legal environment for foreign investors.

"For foreign investors in China, a sound legal environment is an essential guarantee for them to make profits," said Lu Xiaojie, an associate professor of international business law with the Beijing-based Tsinghua University. "The provisions clarify the ambiguities in China's foreign investment laws, making foreign investments more predictable and certain."

A Commerce Ministry spokesperson had previously said cheap labor was no longer the primary attraction for foreign investors.

For the 290,000 foreign-invested enterprises currently doing business in China as well as prospective foreign investors, the most important factors were political stability, economic development and ongoing improvement of the legal environment.

The provisions reflect these changes in attitude.

With the expansion of China's reform and opening up, disputes involving foreign-invested enterprises have been on the rise. Statistics of the Supreme People's Court show such disputes account for about 20 percent of all foreign-related civil and commercial cases in recent years. Lawsuits have been filed over disputes at all stages of development of foreign-invested enterprises, from establishment to alteration and termination.

But as administrative approval plays an important role in current foreign investment laws, they inevitably conflict with domestic law, such as the Contract Law and the Company Law. These conflicts have resulted in confusion in the application of foreign investment laws and difficulties for courts in dealing with cases involving foreign investment.

"The provisions issued on August 16 resolve the three thorniest problems-the validity of unapproved contracts, anonymous shareholders' rights and the preemption rights of foreign-funded enterprises' shareholders," Lu said.