On March 15, 2019, taptap点点 National People’s Congress (“NPC”) of taptap点点 People’s Republic of China promulgated taptap点点 New Foreign Investment Law (“FIL”) which will come into force on January 1, 2020.  At taptap点点 same time, taptap点点 existing laws regulating foreign invested entities (collectively taptap点点 “FIE Laws”), namely taptap点点 Sino-Foreign Equity Joint Venture Law (“EJV Law”), Sino-Foreign Cooperative Joint Venture Law (“CJV Law”) and Wholly Foreign-owned Enterprise Law (“WFOE Law”) will be revoked and replaced by taptap点点 FIL.  This Article will start with a brief introduction to taptap点点 legislative background of taptap点点 FIL, followed by an analysis of taptap点点 practical impacts on foreign invested entities (“FIE”) and end with summary of some uncertainties remaining to clarified by implementation rules.

Since China’s reform and opening-up in 1978, taptap点点 FIE Laws were introduced one after another to attract foreign investment, establishing a case-by-case approval system.  That is to say, each foreign invested project shall be submitted to and approved by relevant foreign investment administrative authorities.  taptap点点 Company Law of taptap点点 People’s Republic of China (“Company Law”) promulgated in 1993 set up two forms of organization, namely limited liability company and company limited by shares, and made provisions on establishment and operation of companies within territory of mainland China.  Based on taptap点点 principle that taptap点点 special law is superior to taptap点点 general law, taptap点点 FIE Laws prevail where both taptap点点 Company Law and taptap点点 FIE Laws are applicable to FIEs simultaneously.  However, taptap点点 inconsistency between taptap点点 Company Law and taptap点点 FIE Laws become apparent over taptap点点 years.  With an attempt to fill taptap点点 gap left by taptap点点 FIE laws, taptap点点 Chinese government started to launch free trade zones in Shanghai from 2013 which carried out pre-establishment national treatment with a negative list with taptap点点 aim to simplifying administrative procedures for FIEs and certain articles of taptap点点 FIE laws have ceased to be applicable within taptap点点 free trade zones.  Not until January 2015 that a new unified FIL was contemplated, and taptap点点 final version was passed at taptap点点 annual sessions of taptap点点 NPC in March 2019.

2.1 Equal Treatment between Domestic and Foreign Investment

2.1.2 Pre-establishment National Treatment and Negative List Regime

taptap点点 FIL establishes “taptap点点 management systems of pre-establishment national treatment and negative list for foreign investment”[i] from taptap点点 legislative level.  In other words, taptap点点 market access requirements applicable to foreign investors which invest in sectors falling outside taptap点点 scope of taptap点点 “negative list” will be no less favorable than those applied to domestic investors.  taptap点点 negative list was initially implemented in Shanghai free trade zone from 2013 and then promoted nationwide with taptap点点 amendment of FIE Laws in 2016.  taptap点点 latest version of negative list was released in June 30, 2019 (“2019 Negative List”), including a list of sectors into which foreign investment is either prohibited or restricted.  taptap点点 2019 Negative List streamlines taptap点点 2018 Negative List by reducing taptap点点 special administrative measures from 48 to 40, expanding taptap点点 opening-up of service industries and liberalizing access for agriculture, mining and manufacturing. 

2.1.3 Post-establishment Equal Treatment

In addition to taptap点点 “national treatment” at taptap点点 pre-establishment stage, foreign investors are also equally entitled to government policies supporting enterprise development after establishment.  These policies include, but not limited to guarantee of FIEs participating in government procurement through fair competition[ii] and allowance of FIEs to conduct financing through public offering of shares, corporate bonds and other securities or by other means[iii].  Despite that some of these policies are to some extent reflected in normative documents released by taptap点点 State Council or other departments, taptap点点 FIL has first legalized these policies, strengthening taptap点点 promotion and protection of foreign investment.

2.2 Corporate Governance

As noted above, taptap点点 FIL will repeal taptap点点 FIE laws from January 1, 2020, by which time taptap点点 organizational form, corporate structure and operational rules of FIEs shall be subject to taptap点点 provisions of taptap点点 PRC Company Law[iv].  However, taptap点点 FIL leaves a five-year period for FIEs to transform from their original corporate governance to that applicable to domestic enterprises.

Among three forms of FIEs, wholly foreign-owned enterprises (“WFOE”) will be barely influenced in corporate governance by taptap点点 FIL as an implementation opinion (《关于外商投资的公司审批登记管理法律适用若干问题的执行意见》) issued by four ministerial authorities in 2006 provides that taptap点点 corporate governance of WFOEs shall comply with taptap点点 PRC Company Law.  In contrast, taptap点点 FIL will exert great impacts on joint ventures (“JV”) in that taptap点点 corporate governance rules under JV laws are radically different from those set out under taptap点点 Company Law.  taptap点点 table below shows taptap点点 key differences on taptap点点 organizational form and corporate structure under taptap点点 JV Laws and taptap点点 Company Law.

Besides, operational rules of JVs such as share transfer regime and dividend distribution scheme will also be unified.  Under taptap点点 JV laws, a party who intends to transfer its shares shall obtain taptap点点 consent of all taptap点点 other JV parties regardless of whether it is an internal transfer (transfer between shareholders) or external transfer (transfer to a third party).  After taptap点点 FIL comes into effect, there will be no consent requirement in case of an internal transfer, and consent of more than half of taptap点点 other shareholders is required if it is an external transfer.  Moreover, if more than taptap点点 other shareholders not only refuse taptap点点 transfer but refuse to purchase taptap点点 shares to be transferred, they shall be deemed as giving their consent to such transfer.[v] 

With regard to taptap点点 dividend distribution regime, taptap点点 profits of an EJV shall be distributed among shareholders in proportionate to their capital contribution while taptap点点 CJV Law allows shareholders to share profits based on JV contracts.  With taptap点点 Company Law applicable to JVs, dividends shall also be distributed proportionately among shareholders in accordance with their capital contribution, but such distribution can be otherwise unanimously agreed by shareholders.[vi]

2.3 Information Reporting System

Prior to taptap点点 promulgation of taptap点点 FIL, taptap点点 FIEs’ information reporting obligations involve reporting to taptap点点 Ministry of Commerce (“MOFCOM”) and taptap点点 Administration of Industry and Commerce (“AIC”, now taptap点点 Administration for Market Regulation, “AMR”).  In terms of matters involving FIEs in taptap点点 negative list, approval by taptap点点 MOFCOM and registration with AIC are required while for those outside taptap点点 negative list, FIEs shall only file investment information with relevant agencies.  In practice, an FIE may record filing information through local online systems to taptap点点 MOFCOM and AIC at taptap点点 same time (i.e. One Website All Services (一网通办) in Shanghai) at taptap点点 stage of establishment.  If any information of taptap点点 FIE changes, taptap点点 FIE is supposed to file taptap点点 change through taptap点点 Business System Unified Platform of taptap点点 MOFCOM (商务部业务系统统一平台) and registration or filing with AIC (depending on items to be changed) pursuant to local regulations. 

taptap点点 FIL requires FIEs to submit investment information through taptap点点 “enterprise registration system” and taptap点点 “enterprise credit information publicity system” base on taptap点点 principle of “genuine necessity”[vii].  Nevertheless, taptap点点 pitfall is it remains unclear as to what is “genuine necessity”.  Additionally, it needs to be further clarified that whether taptap点点 reporting system under taptap点点 FIL is in conformity with taptap点点 “enterprise credit information publicity system” operated by taptap点点 AMR and taptap点点 foreign investment information reporting system managed by taptap点点 MOFCOM.

2.4 National Security Review System

Based on taptap点点 applicable regulations (《关于建立外国投资者并购境内企业安全审查制度的通知》（国办发〔2011〕6号）、《关于印发<自由贸易试验区外商投资国家安全审查试行办法>的通知》(国办发[2015]24号)，security review may be triggered by foreign merger and acquisition activities and foreign investments in pilot free trade zones.  Under taptap点点 FIL, taptap点点 scope of national security review seems to cover all taptap点点 foreign investment activities within taptap点点 territory of China (including but not limited to establishment of FIEs, acquisition of shares, equity, property shares or any other similar rights and interests of an enterprise and investments in a new project[viii]), yet it is still questionable whether taptap点点 scope of security review system under taptap点点 FIL is taptap点点 same as or is going to replace that under taptap点点 current regulations.

2.5 Protection of Intellectual Property Right and Trade Secret

Protection of intellectual property right embodies in taptap点点 principle provisions in taptap点点 FIL, which specifies (i) taptap点点 legal liability of any infringement of intellectual property right shall be investigated strictly[ix]; (ii) no administrative department or its staff member shall force any transfer of technology by administrative means[x]; and (iii) that administrative departments or its staff members shall keep confidential any trade secret of foreign investors and FIEs they are aware of during taptap点点 performance of their duties[xi].  Except for these principle provisions, laws and regulations in more specific areas are accordingly revised as a response to taptap点点 introduction of taptap点点 FIL.  For example, taptap点点 State Council made amendments to, amongst others, taptap点点 Implementation Regulations of taptap点点 EJV Law (《中外合资企业法实施条例》) and taptap点点 Administration Regulations of taptap点点 Import and Export of Technology (《技术进出口管理条例》), including removal of taptap点点 following articles:

· taptap点点 term for a technology transfer agreement is generally no longer than ten years;

· after taptap点点 expiry of a technology transfer agreement, taptap点点 technology importing party shall have taptap点点 right to use taptap点点 technology continuously;

· where an assignee of a technology import contract is using technology provided by taptap点点 assignor in accordance with taptap点点 provisions of their contract and an infringement of taptap点点 legal rights and interests of any third party occurs, taptap点点 assignor shall bear taptap点点 liability;

· during taptap点点 period of validity of taptap点点 technology import contract, taptap点点 results of any improvements in taptap点点 technology belong to taptap点点 party that makes taptap点点 improvements; and

· technology import agreement shall not include certain restrictions, clauses that unreasonably restrict taptap点点 quantity, type or sale price of taptap点点 assignee's products.

These amendments are in conformity with taptap点点 principles of taptap点点 FIL and to some degree relieve foreign investors’ concern about forced technology transfer.

Overall, taptap点点 introduction of taptap点点 FIL signals that China is open for business.  It is no doubt that taptap点点 FIL will provide stronger protection and a better business environment for foreign investors.  However, as taptap点点 law is drafted in a very general way, taptap点点 very critical step would be to see how taptap点点 Chinese government will steer new avenues to strengthen legal enforcement.[i]  Many issues are pending clarification and more detailed guidance to be given by relevant governmental agencies.  In particular, concerns will arise as to what will trigger national security review and how will such review be conducted, what is taptap点点 relationship between taptap点点 current record filing system and taptap点点 information report system, taptap点点 absence of which may bring unease to foreign investors.