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April 24, 2012

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Case reveals foreign investment glitch

A court case in Shanghai serves as a warning to foreign investors about making investments via Chinese agent companies, as they can face problems and potentially suffer losses in the event they need to show they are the real investors.

A Japanese company which anonymously invested 1 million yuan (US$158,500) to open a company in Shanghai has won a civil lawsuit to confirm its role as the shareholder, a necessary step before it could go on with seeking compensation from its Chinese partner.

The Hongkou District People's Court said the Japanese company, whose name was not revealed, was an invisible investor for a local toy company for seven years. The president of the Japanese company, surnamed Fukuda, said he asked a friend, surnamed Ge, to open a toy company in Shanghai in 2004 and provided 1 million yuan registration capital to avoid complicated administrative procedures that would face a foreign investor.

Ge agreed and signed an agreement with Fukuda's company, under which Ge and his sister were named the legal representatives and the Japanese company was the anonymous investor. In return, Ge received a monthly salary of 10,000 yuan and 2.5 percent of the Shanghai toy company's annual profits, the court heard.

Disputes eventually arose between Ge and the Japanese company. In 2009, the Shanghai toy company suspended its business and the business license was revoked in 2010.

The Japanese company tried to seek compensation from Ge, but the anonymous investor could not file a lawsuit because it was not a legal shareholder. So it asked to regain its shareholder position and brought the case to the court, where judges ruled in its favor. The court noted that the defendants agreed to alter the shareholder and the Shanghai company ran a business that was legal for foreign investment.

But the headache is not over for the Japanese company. It still must go through a series of administrative procedures to acquire an approval of shareholder alternation from local authorities before it can pursue compensation.


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