On January 19, 2015, MOFCOM issued a draft of the PRC Foreign Investment Law (FIL) for general public comment. While when and whether the proposal will be adopted is still unknown, it is clear that once passed, the new law will have a significant impact on foreign investment in China.
UNIFORM CORPORATE LAW FOR BOTH FIES AND CHINESE ENTITIES
If adopted, the FIL would consolidate and repeal the current three foreign investment enterprise (FIE) laws: PRC Wholly Foreign-Owned Enterprise Law, PRC Sino-Foreign Equity Joint Venture Law and PRC Sino-Foreign Cooperative Joint Venture Law.
The FIL proposes to eliminate the approval regime with respect to foreign investment enterprises. Under FIL, foreign investment enterprises will be subject to the general Chinese corporate law, in terms of incorporation, corporate governance, liquidation and other general corporate matters. FIL also incorporated the “actual control” concept. For example, any PRC enterprise that is under the “control” of a foreign investor will also be treated as a “Foreign Investor”. Therefore, the place of incorporation and the nationality of direct investors are not determinative. Rather, the ultimate control is the key factor in determining whether an investor is a Chinese investor or foreign investor.
FIL adopts a negative list in regulating market entry of foreign investors. The State Council will publish a list of industry sectors where foreign investors are restricted or prohibited to conduct business. If the business sector is on the prohibited list, then foreign investors are not allowed to enter into that market; if the business sector is on the restricted list with proposed investment above certain amount, the foreign investor must obtain market entry approval.
THE “NATIONAL SECURITY” CONCERN
The FIL incorporated into a national security review process modeled on the U.S. CFIUS approach. The State Council will establish a Joint Committee of Security Review that will review national security impact of foreign investments. The FIL provides a detailed outline of the procedures for the national security review process. It will be interesting to see if FIL follows U.S. general practice to exempt Greenfield projects from national security review.
TREATMENT OF VIE'S
The variable interest entities (VIEs) structure is that a foreign owned entity effectively controls a Chinese owned entity through an elaborate series of contracts. Because of the control concept, the VIE structure would likely no longer exist and no longer be viable in many instances. The Explanatory Note suggests a few possible solutions to deal with existing VIE structure: (i) the parties may acknowledge that the business is controlled by Chinese investors and the VIE structure can remain in place, (ii) the parties may ask MOFCOM to determine who has actual control of the business, and if MOFCOM determines the business is controlled by Chinese investors, the VIE structure can remain in place, and (iii) if the business is controlled by foreign investors, then market entry approval is required; and MOFCOM may make a final decision based on multiple factors.
There is no doubt that FIL, if passed, will bring about many changes for foreign investment in China. It will be important for foreign investors to submit their views and comments. Please also feel free to contact us if you would like us to address any of your concerns.