New Regulatory Framework for Foreign Investments in China

On 31 December 2019, the State Council (the Chinese central government) published the Implementation Regulations of the Foreign Investment Law (中华人民共和国外商投资法实施条例), with almost immediate entry into force (i.e. on 1 January, 2020) (the “Regulations”) .

The promulgation of these Regulations was eagerly expected. This is because from its entry into force, the Foreign Investment Law repealed the previous legislation regarding foreign-invested enterprises (“FIE”) (namely, the Sino-foreign Equity Joint Venture Law, the Sino-foreign Cooperative Joint Venture Law, and the Foreign-invested Enterprise Law), thus creating an (apparent) regulatory vacuum.

In general, the Regulations:

• have, as their regulatory background, both the Foreign Investment Law and the Negative List, i.e. the list currently in force of sectors in which foreign investments are prohibited or subject to restrictions (for instance, limitations on the percentage of equity that a foreign shareholder may hold);
• confirm, albeit indirectly, that the legislation applicable on domestic companies, in particular the Company Law and the Partnership Law, now also apply to FIEs;
• provide for a five-year transition period (from 1 January 2020 to 31 December 2024) during which the existing FIEs need to adopt the corporate changes, regarding their corporate form and organization, in line with the Company Law and the Partnership Law. If these corporate changes are not adopted within this five-year transition period, the State Administration for Market Regulation (formerly, State Administration of Industry and Commerce) will not allow these companies to implement other corporate changes until their corporate form and organization are updated according to the law;
• expressly provide that investment incentives and subsidies granted by local governments be documented in “Letters of Commitment” or contractual agreements, which may however be subject to unilateral changes by the authority in the event of new investment policies dictated by national interest. In these cases, the foreign investor will be entitled to a “fair compensation”;
• set out that conducts by local officials discriminating against foreign investors, or aimed at forcing technology transfers be prohibited (and sanctioned).

At a first reading, the practical implications of the Regulations for FIEs and foreign investors appear, among others, to be the following:

• on the occasion of corporate changes such as, for example, replacement of the legal representative, appointment of new directors, transfer of the registered address, increase / reduction of the corporate capital, etc., the changes regarding the corporate form and organization need also to be adopted in accordance with the Company Law or the Partnership Law. A relevant corporate change is the adoption of the shareholders’ meeting in the Sino-foreign joint ventures;
• for already existing FIEs, the shareholders could renegotiate aspects of governance such as repealing the need of the consent of the Chinese minority shareholder for the transfer of shares or the liquidation of the company. In practice, these renegotiations of the governance of the joint venture will likely involve a restructuring of the corporate shareholding;
• in the newly created joint ventures (i.e. the joint venture established after 1 January, 2020), however, there is no longer the statutory obligation to provide for the need for the consent of the Chinese minority shareholder (i.e. his right of veto) for changes to the articles of association, dissolution and the liquidation of the joint venture, the increase (or reduction) of the company capital. Therefore, this entails greater flexibility in designing the shareholder relationships and company governance in the articles of association and the joint venture contract. In sum, there is a wider space for contractual autonomy;
• in the Letters of Commitment and / or in the investment agreements between local governments and foreign investors it will be useful to provide for the principle of “fair compensation” in favor of the foreign investor in case of revocation or modification of the incentives and subsidies originally granted to the investment project.

Taken from Vivishanghai.com