On 3 September 2016, the Standing Committee of the National People’s Congress (NPC) promulgated a decision on amending the four major laws regulating foreign direct investment in China (Decision). The Decision abolishes the existing approval requirement for foreign invested enterprises and replaces it by a simpler filing system. In addition the Ministry of Commerce (MOFCOM) released the Draft Interim Measures for the Record-Filing Administration of Incorporation and Change of Foreign-invested Enterprises (Filing Measures) for public comments on the same date. The Decision and the Filing Measures will take effect as of 1 October 2016. This regulatory reform is a milestone which will facilitate the company establishment for foreign investors in China.
Under the existing regime the establishment of any foreign invested enterprise is (amongst other administrative procedures) basically subject to a two-step approval and registration procedure: In the first step the incorporation documents (e.g. articles of association, joint venture contract, feasibility study report) are subject to the approval of MOFCOM or its competent local branches. In the second step, after obtaining the MOFCOM approval, the company is to be registered with the competent Administration for Industry and Commerce (AIC) which will issue the business license of the company.
The mandatory approval procedure under the present regime can be troublesome and delay the incorporation process. Furthermore, in practice MOFCOM often demands revisions of the incorporation documents from the foreign investor thus factually limiting the freedom of contract.
According to the new Decision the four major Chinese laws on foreign investment in China will be amended (the PRC Wholly Foreign Owned Enterprises Law, the PRC Sino-Foreign Equity Joint Venture Law, the PRC Sino-Foreign Contractual Joint Venture Law and the Taiwan Compatriots Investment Protection Law). The amendments generally abolish the requirement of a MOFCOM approval for establishment as well as other corporate changes of enterprises with foreign investment. The Decision regulates that in future foreign invested enterprises can be incorporated by simply filing the establishment with MOFCOM. However the simpler filing procedure is only applicable as long as the business of the enterprise is not restricted by the so-called “negative list”.
The filing system will only apply to industries and scenarios not listed in the negative list. The State Council will publish a negative list specifying all industries and other situations which are still subject to the old MOFCOM approval procedure. Consequently the current Foreign Investment Industry Guidance Catalogue which prescribes in which industries foreign investment is either prohibited, restricted, encouraged or permitted will be abolished and replaced by the negative list.
The concept of a filing procedure with a negative list was already tested under pilot projects in some Chinese free trade zones (e.g. in Shanghai, Tianjin, Guangdong). In these free trade zones the MOFCOM approval was replaced by a filing for those business activities outside the negative list of the respective free trade zone. It is noteworthy that the concept of the negative list known from the free trade zones is now rolled out nationwide.
MOFCOM’s draft Filing Measures
On 3 September 2016 MOFCOM published the draft Filing Measures for public comments. The public is invited to comment on the draft Filing Measures until 22 September 2016.
The draft Filing Measures apply to both the establishment of foreign invested enterprises as well as to the following changes of company particulars:
> Change of basic registration information of the company (including the change of the actual controlling shareholder of the enterprise – this means that overseas transactions can trigger the filing requirement in China),
> Change of basic information of the investor(s),
> Change of equity in a Sino-foreign equity joint venture and of rights in a Sino-foreign contractual joint venture (including pledge),
> Merger, division and termination of the foreign invested enterprise,
> Mortgage and transfer of property rights and interests of the foreign invested enterprise,
> Disinvestment by foreign joint venture partner(s) of a Sino-foreign contractual joint venture and entrusted operation management of a Sino-foreign contractual joint venture.
Conclusion and outlook
The Decision and the Filing Measures relax the legal framework for foreign direct investment in China. They facilitate and accelerate the establishment of foreign invested enterprises and corporate changes. The new regulations will also increase the freedom of contract for foreign investors in the field of company law.
However, there are still a number of open questions: Since the negative list has not been published yet, the concrete application scope of the new filing system is still unclear. Further the details of the filing and its relation to other administrative procedures need to be clarified by Chinese legislators and authorities. According to the draft Filing Measures the filing can take place before or after the incorporation or change of company particulars. If the final Filing Measures which are expected to be promulgated on 1 October 2016 stick to this flexible concept, then this would be a great legislative progress.
Since the draft Filing Measures do not address M&A, it is still unclear whether the liberalisation also applies to M&A transactions of foreign investors. If the new filing system also applied to M&A transactions, then this would greatly change and liberalise the legal framework for acquisition of Chinese enterprises. But there are still doubts in this regard, because for instance in the Shanghai free trade zone which serves as model for the new filing system M&A transactions are included in the negative list and therefore subject to MOFCOM approval.
To make best use of this new legislation foreign companies are advised to carefully observe the present legislation, its development and to review their investment projects.