Under the Enterprise Law, a joint stock company may issue, among other things, dividend preference shares. Dividend preference shares allow owners of a joint stock company to have different profit sharing ratio and voting ratio.

Under the Enterprise Law, a limited liability company (LLC) cannot issue shares. Therefore, a LLC may not be able to issue dividend preference shares to its owners. That being said, it may still be possible for a LLC to be structured to allow its members to have different profit sharing ratio and voting ratio. In particular, the charter of a LLC may specifically provide for a profit sharing ratio for a member which is different from such member’s ownership interest and voting rights in the LLC. This position is supported by the following:

• Under the Enterprise Law, an enterprise has the right to enjoy autonomy in deciding on business affairs and internal relations, which may arguably cover deciding on ratio and/or principle of profits distribution;
• Principle for distribution of after-tax profit, among other things, is a required content in the charter of a LLC. It is arguable that if the Enterprise Law implies to impose a mandatory rule of profits distribution, it should not require the charter to incorporate such content; and
• In the past, there have been joint venture companies being a LLC which has a profit sharing ratio different from the ownership interest and voting rights of the joint venture party.

However, the conclusion above is subject to the following qualifications:

• The Enterprise Law specifically provides that members of a LLC will have the right to be distributed profits in proportion to their capital contribution. It is not clear whether the provision is interpreted as imposing a definite scope of right or as giving a minimum standard that may be subject to change upon agreement by parties. If the first approach to interpretation is adopted by the authority, a LLC may not be allowed to give a preferential profits distribution to its member; and
•  Although in the past, there has been joint venture which has different profit sharing ratio, it is not clear if the licensing authority takes the same view now.

Therefore, for a foreign invested company, to mitigate this risk, it would be useful to have the Investment Certificate issued to the foreign invested company to specifically record the different profit sharing ratio between its members.