taptap点点Foreign Investment Law of taptap点点 People’s Republic of China(“Foreign Investment Law”), which was just adopted by taptap点点 National People’s Congress today, will be implemented on January 1, 2020, opening a new chapter for China’s foreign investment legislation. taptap点点 Sino-Foreign Equity Joint Venture Enterprise Law of taptap点点 People’s Republic of China passed at taptap点点 beginning of reform and opening, taptap点点 Wholly Foreign-Owned Enterprise Law of taptap点点 People’s Republic of Chinaand taptap点点Sino-Foreign Cooperative Joint Venture Enterprise Law of taptap点点 People’s Republic of China enacted subsequently and their implementation regulations (collectively referred to as “Three Foreign-Invested Enterprises Laws”) will be replaced by taptap点点 Foreign Investment Law. taptap点点Foreign Investment Law mainly provides legislative guarantees for taptap点点 promotion, protection, management and legal responsibility of foreign investment from a macro perspective. taptap点点 Foreign Investment Law not only clarifies taptap点点 principles of pre-entry national treatment, negative list, post-entry fair participation in market competition, but it also strengthens intellectual property protection and proposes new concepts such as taptap点点 foreign investment information reporting system.

Since taptap点点 terms of taptap点点 Foreign Investment Law have been significantly reduced compared to taptap点点 Draft of 2015, we believe that many implementation details have yet to be further determined in taptap点点 supporting regulations that will be issued later. However, it is without doubt that with taptap点点 abolishment of taptap点点 Three Foreign-Invested Enterprises Laws, taptap点点 organization and institutions of foreign-invested enterprises will no longer be subject to taptap点点 Three Foreign-Invested Enterprises Laws. Instead, taptap点点 relevant provisions of taptap点点 Company Law of taptap点点 People’s Republic of China(“Company Law”) and taptap点点Partnership Enterprise Law of taptap点点 People’s Republic of China should be applied. This unified application of taptap点点 law can solve taptap点点 differences in taptap点点 organization and institutions of foreign-invested enterprises between taptap点点 Company Lawand taptap点点Three Foreign-Invested Enterprises Laws; but it also means that taptap点点 established foreign-invested enterprises will face a new corporate compliance system, and taptap点点 AoA and taptap点点 Joint Venture Contract/Cooperation Agreements need to be revised according to taptap点点 new requirements.

This article aims to lay out taptap点点 different compliance requirements faced by foreign-invested companies after taptap点点 implementation of taptap点点 Foreign Investment Law and provide legal guidance for foreign companies in China. Since wholly foreign-owned enterprises have already been long subject to taptap点点 Company Law before taptap点点 promulgation of taptap点点 Foreign Investment Law, this article will focus on Sino-foreign cooperative joint venture enterprises and Sino-foreign equity joint venture enterprises, which are subject to greater compliance challenges. This article only uses taptap点点 limited company as a sample to explain taptap点点 difference between taptap点点 Company Lawand taptap点点Sino-Foreign Equity Joint Venture Enterprise Lawand taptap点点Sino-Foreign Cooperative Joint Venture Enterprise Law. Foreign-invested joint stock companies comply with taptap点点 requirements of taptap点点 Company Lawlikewise.

Transitional Arrangement

Although foreign-invested enterprises have five years to change their organization and institutions to comply with taptap点点 legal requirements of taptap点点 Company Law after taptap点点 implementation of taptap点点 Foreign Investment Law, we recommend that foreign-invested enterprises immediately carry out relevant adjustments and revisions to avoid conflicts with current legal requirements in corporate governance and daily operations.

Changes in taptap点点 Highest Authority

After taptap点点 abolishment of taptap点点 Three Foreign-Invested Enterprises Laws, taptap点点 biggest and most fundamental change for Sino-foreign cooperative joint venture enterprises and Sino-foreign equity joint venture enterprises is that taptap点点 highest authority will change from taptap点点 board of directors (for Sino-foreign cooperative joint venture enterprise, it may also be taptap点点 joint management committee) to taptap点点 shareholders’ meeting. This change will trigger a series of corresponding adjustments. taptap点点 term of taptap点点 director of taptap点点 Sino-foreign equity joint venture enterprises shall be changed from a fixed term of four years to a term of not more than three years as stipulated in taptap点点 Company Law. This change makes taptap点点 company’s personnel arrangements more flexible. In addition, taptap点点 Sino-Foreign Equity Joint Venture Enterprise Lawand taptap点点Sino-Foreign Cooperative Joint Venture Enterprise Law require that taptap点点 minimum attendance of taptap点点 company’s board of directors’ meetings be two-thirds. After taptap点点 change of taptap点点 highest authority to taptap点点 shareholders’ meeting, taptap点点 minimum attendance ratio can be freely agreed by taptap点点 shareholders in taptap点点 company’s AoA according to taptap点点 Company Law. This will undoubtedly bring greater flexibility to foreign-invested companies.

Changes in taptap点点 Requirements of Major Issues Resolution

Regardless of whether taptap点点 Company Lawor taptap点点Sino-Foreign Equity Joint Venture Enterprise Law/Sino-Foreign Cooperative Joint Venture Enterprise Law rules, taptap点点 resolutions concerning major issues of an enterprise (usually including taptap点点 modification of taptap点点 AoA; increase or decrease of registered capital; merger and division; termination and dissolution) involve a minimum voting ratio. Compared with taptap点点 Company Law, taptap点点Sino-Foreign Equity Joint Venture Enterprise Lawand taptap点点Sino-Foreign Cooperative Joint Venture Enterprise Law are more demanding, requiring major issues be unanimously approved by taptap点点 directors (or members) present at taptap点点 meeting. After taptap点点 Company Law starts to regulate foreign-invested enterprises, this standard will be reduced to more than two-thirds (of taptap点点 voting rights of shareholders). This change will also lead to changes in taptap点点 investment structure of newly invested foreign companies. taptap点点 structure of “JV (HK) + WFOE (mainland)” will likely be directly replaced by “JV (mainland)”.

Board of Directors Composition

In taptap点点 era when taptap点点 highest authority is taptap点点 board of directors, taptap点点 directors are determined and appointed by all parties. taptap点点 Company Law sets a different mechanism. That is, taptap点点 directors who are not representatives of taptap点点 staff members shall be elected and replaced by taptap点点 shareholders’ meeting, and taptap点点 representatives of taptap点点 staff members shall be democratically elected by taptap点点 company. Of course, taptap点点 law does not force foreign companies to appoint a representative of taptap点点 staff members in taptap点点 board of directors.

Relaxation of Equity Transfer Requirements

Another major change is taptap点点 restriction on shareholders’ right to transfer equity to third parties. taptap点点Sino-Foreign Equity Joint Venture Enterprise Law requires other shareholders to agree unanimously on taptap点点 transfer. At taptap点点 same time, although Sino-foreign cooperative enterprises do not involve equity matters, taptap点点 Sino-Foreign Cooperative Joint Venture Enterprise Law requires taptap点点 parties concerned to obtain taptap点点 consent of other parties before transferring their rights and obligations to third parties. taptap点点 corresponding threshold set by taptap点点 Company Law is much lower, that is, unless otherwise stipulated in taptap点点 AoA, transfer only requires taptap点点 consent of more than half of taptap点点 other shareholders (who also have preemptive rights). This change means that taptap点点 flow of funds will create more flexibility for foreign-invested enterprises.

taptap点点 following table is a summary of taptap点点 above differences.