China: China Amends Its Foreign-Investment Laws, Officially Reforming Its More Than Three-Decade-Old Foreign-Investment Approval Regime

On September 3, 2016, the Twelfth National People's Congress Standing Committee1 passed amendments to the current four main foreign-investment laws in China: Law of the People's Republic of China on Chinese-Foreign Equity Joint Venture Enterprises; Law of the People's Republic of China on Chinese-Foreign Cooperative Joint Venture Enterprises; Law of the People's Republic of China on Wholly-Foreign Owned Enterprises; and Law of the People's Republic of China on the Protection of Investments of Taiwan Compatriots, respectively (together, the "Amendments"), which Amendments will take effect October 1, 2016.

The Amendments officially mark China's nationwide shift from its existing "case-by-case approval" system (the "Existing Approval System") to a "negative list plus filing-for-records" approach2/system with respect to China's administration of foreign investment and FIEs.

Shift from Current Approval System to Filing-for-Records System

Under the Existing Approval System, which was first laid down when China started opening up to foreign investment in the early '80s of last century, foreign investors must apply for the prior approval from China's foreign investment approval authority, the Ministry of Commerce (together with its local offices and counterparts, MOFCOM) for the establishment of any wholly-foreign-owned subsidiaries and/or Chinese-foreign joint ventures in China (such wholly-foreign-owned subsidiaries and/or Chinese-foreign joint ventures established by foreign investors in China are customarily referred to as "foreign-invested enterprises" or "FIEs"), and for any subsequent changes in and to such FIEs (including changes to such FIEs' charter documents) on a case-by-case basis. In reviewing an FIE application case, MOFCOM officials have and do routinely exercise wide discretionary powers in blue-penciling provisions of the application documentation (including the charter documents of the FIE and any amendments thereto, the purchase and sale agreement with transfer of or changes in the equity interest in the FIE, the registered capital subscription agreement of the FIE, etc.) in the initial establishment of and any subsequent changes to the FIE. The back-and-forth negotiations with the MOFCOM officials for such application documentation could often interfere with the parties' freedom of agreement on commercial terms – especially in the case where the FIE is a Chinese-foreign joint venture – and certainly always delay the transaction.

The Amendments now authorize nationwide the replacement of the Existing Approval System with the so-called "negative list plus filing-for-records" system. Under the "negative list plus filing-for-records" system, the State Council3 is expected to soon issue the national catalogue of sectors into which foreign investments are restricted or prohibited, also known as the "negative list"4.

The establishment of and subsequent changes to an FIE that intends to carry on or carries on businesses outside the sectors listed in the applicable "negative list" will no longer be subject to the prior approval by MOFCOM; instead, a filing-for-records with MOFCOM for the establishment and changes will be required. The Existing Approval System, however, would remain applicable (and therefore the MOFCOM approval would still be required) if the foreign investment is made into sectors that fall within the "negative list" to be issued by the State Council.

The Draft Filing-for-Records Measures

In the bid to implement the Amendments, the MOFCOM issued a draft provisional administration measures on the filing-for-records procedures for the establishment of and changes to FIEs (the "Draft Filing-for-Records Measures") on September 3, 2016, for public comments. The final version of the Filing-for-Records Measures is expected to also take effect October 1, 2016.

The Draft Filing-for-Records Measures provide for the following key details regarding the filing-for-records procedures for the establishment of and changes to FIEs engaging in businesses outside the "negative list":

  1. Investors are permitted to file with the competent MOFCOM office for records for the establishment of an FIE either (i) after the company name pre-verification and registration, but before issuance of the business license of the FIE by the competent office of Administration for Industry and Commerce (or AIC, China's company registration authority), or (ii) within 30 days after issuance of the business license of the FIE by AIC.
  2. For subsequent changes to an existing FIE, the FIE is required to complete the filing-for-records procedures within 30 days after the changes occur.
  3. The filing procedures have been streamlined by requiring that submission of the filing materials be made through an online filing system established and maintained by MOFCOM. The required filing materials5 are simplified. The filing-for-records procedures shall be completed within three working days.
  4. MOFCOM's review of the filing materials filed with it appears to focus on whether the FIE's business fall within the "negative list", and the completeness and accuracy of the submitted materials from a non-substantive perspective6.
  5. MOFCOM is empowered to conduct random inspections into FIEs or their activities. If an FIE is found to be in non-compliance with what has been filed with MOFCOM for records, MOFCOM may impose on the FIE sanctions ranging from an order to rectify the non-compliance within a prescribed time period, to a fine up to RMB 30,000. Where an FIE is found to have invested or engaged in businesses that fall within the applicable "negative list" without first obtaining the MOFCOM approval, MOFCOM may order the FIE to cease its business operations or dispose of its business7. In addition, any violation of these MOFCOM measures will result in such non-compliant FIE and its investor(s) being blacklisted as "discredited" in the MOFCOM's credibility system.

Our Observations

  • While the "negative list plus filing-for-records" under the Amendments and the Filing-for-Records Measures will no doubt be a welcome step towards streamlining and making foreign investments in sectors outside the "negative list" easier, the Amendments nevertheless do not change any other respects of the current foreign-investment laws which contain many corporate-governance provisions that are either inconsistent with the PRC Company Law or have become obsolete.
  • As numerous implementing and subsidiary regulations, rules and notices under the current primary foreign-investment laws have been issued and implemented for the past 30 years, corresponding amendments to such regulations, rules and notices are in order for the effective implementation of the "negative list plus filing-for-record" system.
  • The Amendments or the Filing-for-Records Measures do not abolish the approval or filing of foreign investments administered by other Chinese governmental authorities (for instance, the approval by or filing with the National Development and Reform Commission (NDRC), the approval by or filing with the State-owned Assets Supervision and Administration Commission (SASAC) where state-owned assets are involved, the filing with State Administration of Foreign Exchange (SAFE), etc.). Foreign investors are advised to remain mindful of and carefully plan and consider all such other approval and filing requirements that may be applicable to their specific investment projects in China.
  • The Amendments are not clear on whether the MOFCOM approval is still required on foreign investment by a foreign investor through an acquisition of an existing Chinese domestic company (i.e., a Chinese company that currently has no foreign ownership), even if the business sector in which such Chinese domestic company is engaged is not on the "negative list". However, technically speaking, as a result of such acquisition, the Chinese domestic company will accordingly be converted into an FIE and as such, any changes thereafter in and to such converted FIE will be governed by the Amendments and the Filing-for-Records Measures, and no longer need to be approved by MOFCOM.

Footnotes

1  The National People's Congress is the highest legislative authority in China.

2  As one of the pilot reform measures, the "negative list plus filing-for-records" approach was first launched in Shanghai Pilot Free Trade Zone in September 2013.

3  The State Council is the highest administrative (executive) authority in China.

4  The "negative list" issued by the State Council on April 8, 2015 is only applicable in the current four pilot free trade zones (within Shanghai, Fujian, Tianjin and Guangdong) and includes 122 items in total.

5  In the case of filing for the establishment of an FIE, the required materials include, among others, the standard form to be filled with the particulars of the proposed FIE (including the company name, address, the scope of business, total investment amount, registered capital, the type of FIE, the term of operation, detailed information of the ultimate investor(s)/owner(s), etc.), and the identification certification of the immediate investor(s); in the case of filing for a change in an existing FIE, the required materials include the standard form to be filled with the particulars of the change and the relevant identification certification which is only necessary if the investor of the FIE or legal representative of the FIE is changed.

6  See, Article 11 of the Draft Filing-for-Records Measures.

7  See, Articles 24, 25 and 26 of the Draft Filing-for-Records Measures.

Client Alert 2016-255

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