Non-government non-corporate entities, commonly called “NGNCOs”, a term originally used in Interim Regulations 1998 of the State Council on Recordation of Non-Government Non-Corporate Entities. Non-government non-corporate entities under these Regulations mean enterprises, public services, social groups and other organizations established by other social forces or individuals using non-state assets to do non-profit activities, with apparent characteristics below:  

a. The registration authority is the department for civil and administrative affairs, not the administration of industry and commerce;

b. Many of them are non-government educational or medical institutions and few exist in other industries;

c. They do not pay operating income taxes;

d. Each NGNCO must be governed by one regulatory authority. For example, non-government, non-profit educational institutions are governed by the department for education administration and non-government, non-profit medical institutions are governed by the department for health administration;

e. They are established for non-profit purposes.  

What does “non-profit” mean? Two documents below may help to answer this question. The Accounting Systems for Non-Government Non-Profit Organizations states that “non-government non-profit organizations cannot be aimed or intended to gain profits and no person can receive economic compensations for their contributions to a non-government non-profit organization or have its ownership”. The Opinions on Administering the Classification of Medical Institutions in Cities and Towns states that “non-profit medical institutions mean medical institutions established and run in the public interests without aiming to gain profits, of which revenues can only be used to pay medical service costs and the balance between operating income and expenses can only be used for purposes of their own development, for example, improvement of medical conditions, introduction of technology, provision of new medical services, etc.”

1. How can an NGNCO founder (or investor) obtain profits from it?

As stated above, most NGNCOs are non-government educational or medical institutions and few exist in other industries. This is due to the apparent characteristics of planning economy in these two sectors, into which introduction of private money can relieve the conflicts between the state’s contributions and the people’s demands. The State Council legalized this form of organization in 1998.

The fact that NGNCOs are non-profit does not mean they have no profits but means they cannot distribute profits or dividends among their founders. Profits of an NGNCO can only be used for its own development and cannot be paid to any investor. In other words, an investor’s contributions to an NGNCO are considered as property owned by the NGNCO, which ultimately belongs to the society, not the investor, according to the true intention of “educational or medical institutions funded with donations”. In contrast the property of a company ultimately belongs to its shareholders.

In practice, however, it is common that an NGNCO distributes profits among its founders, usually in one of the following ways:

The first way is easy and hasty, in which service fees received are paid directly into the founder’s personal account and held by the founder (or investor) without being included in the NGNCO’s financial records, at the risk of being given an administrative penalty or even a cancellation of license granted by the administrative authority

The second way is indirect and legal but will incur some taxes, in which an NGNCO founder sets up a profitable enterprise in his/her name or in another person’s name to provide and charge the NGNCO service fees or royalties for technology or consulting services or an IP license.

2.Precedents for legal cases arising from “shares” in an NGNCO

The Interim Regulations 1998 of the State Council on Recordation of Non-government, Non-Corporate Entities is the only law governing NGNCOs for the moment. These Regulations has been in force for nearly 20 years and can hardly adapt to ongoing changes to NGNCOs. An NGNCO “share” dispute arising from its founder’s status or property rights may be decided in different ways.

a. Example case 1: Ms. Li vs ArtBox School contract dispute (Case No. (2015) H.E.Z.M.S.(S)Z.Z.No.1161)

This case was published on the 9th issue of 2016 of the Communique of the Supreme People’s Court. Pursuant to Chinese laws, this case has established a guide to the judgment of Chinese courts. The supreme court’s judgment for this case is outlined as follows:

i. Pursuant to the Law on the Promotion of Non-Public Schools in China and other relevant laws, the department for administrative licensing, not a court dealing with civil cases, is responsible for dealing with an application by the actual investor of a non-public school licensed by the department for education and registered with the department for civil affairs for a change of the founder(s) of the school.  

ii. Can the actual investor of a non-public school licensed by the department for education and registered with the department for civil affairs request a confirmation of his funding contributions to the school? The non-public school is a non-profit organization, funding contributions to it are actually donations to the society. A non-public school has property rights in the school’s assets as an independent legal entity. These assets are ultimately owned by the society, not investors. Therefore, investors have no interests in the school’s property and no legal property rights that are necessary for filing a request for confirming the amount of funding contributions.

iii. No claim can be made independently for confirming a fact that is not based on any legal rights. The people’s court should dismiss or turn down any claim for confirming a fact that is not based on any legal rights.

b. Example case 2: Shanghai Java Business Development Co., Ltd. vs Shanghai Java Education College, shareholder information right case (Case No. (2016) H.01 M.Z.No.4642)

The judgment for this case is outlined as follows: The founder of a non-public school, who is also an investor of the school should have access to important information about organization, management and other activities of the school. This access is a prerequisite for founder’s rights to receive reasonable rewards, make major decisions, appoint managers, etc. Founders of a non-public school (or NGNCO) have access to information about organization and management of the school.

In this case, considering the legal system as a whole and benefits of all parties involved, it is clear that a non-public school founder’s legal rights should include information right. In the absence of any relevant law, the founder’s legal rights are protected by referring to relevant legal documents and the Company Law. This case is a good example for dealing with different types of disputes between an NGNCO as a legal entity and its founders.  

c. Example case 3: an NGNCO founder’s status confirmation and asset assignment case between Ms. Liu and Jiang Shaosong (Case No. of the High People’s Court of Anhui Province: (2013) W.M.E.Z.Z.No.00319)

The judgment for this case is outlined as follows:

i. Sizhou Bilingual School is a non-government, non-corporate entity, not a company limited by shares under the Company Law. As stated above, according to the asset restructuring agreement in dispute, there was no share transferred between Ms. Liu and Jiang Shaosong. Actually, they made this agreement to assign assets of Sizhou Bilingual School. This agreement is valid.

ii. Ms. Liu took an action to confirm his ownership of shares in Sizhou Bilingual School. However, there were no shares in this school because it was not a company limited by shares. By performing the agreement in dispute, Ms. Liu had assigned assets of Sizhou Bilingual School to Jiang Shaosong, who had run the school for years. Then they no longer had the assignor-assignee relationship but had debtor-creditor relationship. Therefore, Ms. Liu’s claim for shares in the school was void.

Jiang Shaosong appealed to the Supreme People’s Court after the second trial. The Supreme People’s Court delivered the (2014) M.S.Z.No.1221 Judgment and turned down his application for re-trial.

d. Other cases

Cases relating to “shares” and “rights relating to shares” in an NGNCO decided by the People’s Court of Haidian District, Beijing, the Intermediate People’s Court of Zhengzhou, the Intermediate People’s Court of Nanjing and the Intermediate People’s Court of Nantong, whose decisions are not as authoritative as those made by higher courts, are not cited in this article.

3.Are an NGNCO founder’s status and funding contributions (“shares”) assignable?

Due to the slow advance in laws, courts have difficulties in dealing with status and property right cases between NGNCO founders and investors. Are an NGNCO founder’s status and funding contributions assignable? The Interim Regulations on Registration of Non-government, Non-Corporate Entities does not deal with an investor’s assignment of funding contributions, which can only be decided based on related legal theories and judgments. In my opinion, “shares” in an NGNCO (which actually mean its founder’s status and funding contributions) are assignable, according to either legal theories or precedents.

a. Existing judgments show that courts hold this share transfer, whether generating premiums or not, of non-government, non-corporate entities as valid.

It can be concluded from cases described in the second section above that:

i. an NGNCO investor have no legal rights to the NGNCO’s property, which ultimately belongs to the society, not its investors. Generally, courts can dismiss or turn down an application for change of founders of an NGNCO, which should be dealt with by the department for administrative licensing.

ii. There is no legal property rights that are necessary for claiming a confirmation of the amount of funding contributions to an NGNCO. No claims that are not based on a legal right can be made independently.

iii. Courts usually hold an NGNCO “share” transfer under the Civil Law and Article 52 of the Contract Law of China as a valid assignment of assets but may have different opinions on the transfer price.  

b. In no circumstance can “share” transfer of an NGNCO be considered as invalid under Chinese laws.

First, in no circumstance can “share” transfer of an NGNCO be considered as invalid, whether specified in General Principles of the Civil Law or Article 52 of the Contract Law of the People’s Republic of China. The “share” transfer agreement intended to assign an NGNCO founder’s status and funding contributions may not hurt the NGNCO’s interests.

Second, rules of the State Council and local governments do not prohibit such assignment. The Circular Notice on the General Office of the State Council Office Forwarding the Opinions of the Development and Reform Commission, the Ministry of Health and other Departments on Further Encouraging and Guiding the Use of Social funding to Found Hospitals states that in case of a change of property rights in a non-public hospital, related investment funds should be handled according to relevant rules, including local government policies.  

Moreover, in terms of local policies, some provincial government departments issued documents to support this opinion. The (Z.Z.B.F.(2016) No.72) Opinions of the General Office of the People’s Government of Zhejiang Province on Taking Action to Help and Accelerate the Growth of Non-Public Medical Institutions states that  “a certain percentage of the balance between income and expenses for the year can be used as a reward for those who have contributed to social funding, in order to encourage use of social funding to found non-profit medical institutions and ensure stable development of medical institutions”......“active action should be taken to study how to found new non-profit mixed-ownership medical institutions with social groups through joint investment or cooperation and make an agreement to specify the form, percentage and amount of funding contributions and corresponding rights and obligations of each party involved, in order to provide basic medical services of better quality”.....“The assets of a mixed ownership medical institution that remain after it is suspended and liquidated can be distributed according to its share structure”.

According to the (Y.Z.(2014) No.54) Opinions of the People’s Government of Henan Province on Further Improving Policies for Non-Public Medical Institutions, a non-public and non-profit medical institution has legal property rights to its assets as a legal entity, i.e. rights to possess, use, obtain proceeds from and dispose of its assets. No organization or individual can illegally hold, misuse or misappropriate these assets. funding contributions to a non-public and non-profit medical institution are property of its founders and can be assigned, inherited or given as a gift by obtaining approval of the decision-making authority over medical institutions and filing with the local department for health administration, without withdrawing investment funds or affecting the stability of the legal entity’s property in the medical institution.

The (J.Z.B.F.[2012] No.35) Circular Notice of the General Office of People’s Government of Beijing on Further Encouraging and Guiding Use of Social funding to Found Hospitals conservatively states that in case of a change of the owner of a non-public non-profit hospital, the added value should remain in the original non-profit hospital

To sum up, the basic reason for disputed opinions on “shares” in an NGNCO is the slow advance in law. “Share” transfer of an NGNCO (which actually means assignment of the founder’s status and funding contributions) is a product of special times and should be acknowledged by legal authorities. As we know, due to the amended Law on Promotion of Non-Public Education and in furtherance of the reform of medical institutions, the barrier that prevents private funds from entering these two sectors is crumbling. The number of NGNCO “share” cases that courts find troublesome will decrease considerably.