The door for foreign individuals and entities to invest directly
in partnership enterprises in China officially opened with the
issuance of the Administrative
Measures for Foreign Enterprises and Individuals to Establish
Partnership Enterprises in China (the
"Measures") by the State Council on December 2, 2009. Previously, only domestic individuals and entities registered in
China may be partners of partnership enterprises in China.
After the Measures take effect on March 1, 2010, foreign investors
will be able to set up foreign-invested partnerships
("FIP") in China either by themselves or by partnering
with domestic individuals or entities. FIPs will be governed
by the Partnership Enterprise
Law, issued as a general rule over partnership
enterprises in 2007, and will be limited by the Foreign Investment Industry
Catalogue. In an unprecedented development, the Ministry of Commerce and
its local counterparts ("MOFCOM") seem to have stepped
down from the gatekeeping role for FIPs. Historically, prior
approval from MOFCOM, as the watchdog for any form of foreign
investment, is a prerequisite for foreign-invested enterprises to
obtain a business license issued by the State Administration of
Industry and Commerce or its local branches (the "Registration
Authority"). Under the Measures, however, FIPs may go
directly to the Registration Authority for establishment, any
subsequent change, and termination. Instead of approving,
MOFCOM will only be notified by the Registration Authority after
the registration is completed. Note, however, that market
watchers maintain a significant amount of healthy skepticism as to
whether MOFCOM would indeed allow FIPs to operate without their
involvement. A pipeline of detailed rules on FIPs must follow to supplement
these sixteen-article-long Measures from various practical
standpoints including registration, tax, foreign exchange, bank
accounts, accounting, customs, etc. It remains to be seen how
the Measures will be interpreted and applied by various levels of
government departments, which may affect whether and when the FIPs
may be able to gain popularity against other existing forms of
foreign investment, such as equity joint ventures, cooperative
joint ventures and wholly-foreign owned enterprises. Special implications for private equity funds The Measures are of great interest to a wide range of Chinese
industries that involve foreign investment. Of particular
interest is the venture capital and private equity fund industries,
where partnership enterprises are the preferred legal form.
Currently, foreign participation in Chinese private equity funds is
predominantly structured by way of indirect investments in Chinese
partnership enterprises and direct investments in other Chinese
vehicles (including foreign-invested venture capital
enterprises). The Measures open up the possibility of having
direct foreign investment (the so-called "foreign LPs")
in Chinese private equity funds in the form of partnership
enterprises. Although a step in the right direction, the
Measures however do not fully allow such foreign LP
investment. Instead, the Measures have taken a classic
tentative approach: the Measures do not carve out FIPs from
the investment sector but at the same time suggest that other
regulations could more properly govern this space. In
addition, a set of Q&As issued by the Legal Affairs Office of
the State Council explaining the Measures make specific mention of
the private equity industry and indicate that a flexible approach
should be taken. Interested investors should continue to
follow the future rulemaking by various regulatory authorities on
this topic. O'Melveny & Myers LLP routinely provides
advice to clients on complex transactions in which these issues may
arise, including finance, mergers and acquisitions, and licensing
arrangements. If you have any questions about the operation of the
applicable statutory provisions or the case law interpreting these
provisions, please contact any of the attorneys listed on this
alert. The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
ARTICLE
28 January 2010
Foreign-Invested Partnership Rules Issued: Partnership Form Will Ease Foreign Investment In Industries
The door for foreign individuals and entities to invest directly in partnership enterprises in China officially opened with the issuance of the Administrative Measures for Foreign Enterprises and Individuals to Establish Partnership Enterprises in China (the "Measures") by the State Council on December 2, 2009.