The State Council recently issued a Framework Plan for the China (Shanghai) Pilot Free Trade Zone. For the purpose of its implementation, the relevant ministries and commissions under the State Council and as well as the Shanghai Municipal Government followed to issue a series of rules and regulations covering different aspects of the operation of the free trade zone (“FTZ”). Among them, the "Negative List" has made a breakthrough in the administrative approach of foreign investment in comparison with the previous "Positive List" based on the Foreign Investment Industrial Guidance Catalogue. For those that are not specified on the "Negative List", foreign investors and domestic investors will receive the same treatment, by going through filing procedures instead of approving requirements. It is anticipated that the new approach will improve the transparency and predictability of the relevant laws and regulations, achieve more efficient allocation of resources by market and stimulate economic vitality..
From the perspective of customs supervision, the free trade zone (“FTZ”) should still be viewed as "within the territory and custom territory". Except for transit trade and taxed cargo, all courses of processing trade and logistics are still under the bonded supervision. Howliwen will discuss that issue in one other article. With regard to anti-trust and national security review, the Overall Plan for the China (Shanghai) Pilot Free Trade Zone and the Measures for the Administration of the China (Shanghai) Pilot Free Trade Zone both provide the following rules targeted at foreign investment: "The Pilot Free Trade Zone shall cooperate the related departments of the State Council to strictly conduct anti-trust scrutiny on the concentration of business undertakings", "To improve the national security review system, conduct national security review with regard to foreign investment in the Pilot Free Trade Zone as experiment", "If the investment project or enterprise is within the scope of security review or anti-trust investigation, the Administrative Committee shall timely conduct security review or anti-trust investigation".
From the perspective of the "negative list" issued by Shanghai government, foreign investor who is engaged in operation on the "negative list" shall still adopt "Sino-Foreign Equity Joint Venture" or " Sino-Foreign Cooperative Joint Venture "pattern, or conduct equity acquisition and asset acquisition to enter the Pilot Free Trade Zone. That means the foreign investor who adopt the above plans will certainly face the concentration review conducted by the anti-trust enforcement authority, MOFCOM. In particular, merger or joint venture which is involved in certain sensitive sectors, such as agriculture, transportation, energy and equipment manufacturing, shall also be confronted with the national security review conducted by Ministerial Panel for the Security Review of M&As of Domestic Enterprises.
With regard to the "negative list management" of the Pilot Free Trade Zone, the number of industries which foreign investment is allowed to engaged in has been increased. Some of those newly-allowed areas are automatically falling into the scope of national security review, such as telecommunication and shipping service. Some industries are under control of Chinese government for quite a long time because of Chinese own situation or reason of history, such as culture, game player and finance service. Haoliwen anticipates that, at the time of loosening control for foreign investment to enter the Pilot Free Trade Zone, the national security review for those above industries will not be weakened, on the contrary, be strengthened. The pattern above is also required by the Overall Plan for the China (Shanghai) Pilot Free Trade Zone, which shows the approach that "improve government management by concurrent and afterwards supervision, instead of antecedent approval”. Article 2 of the Overall Plan provides the requirement that "to improve the national security review system, conduct security review with regard to foreign investment in the Pilot Free Trade Zone as experiment".
Foreign investor who is engaged in operation within the Pilot Free Trade Zone, no matter what kind of business pattern it chooses, say "Sino-Foreign Equity Joint Venture", " Sino-Foreign Cooperative Joint Venture ", equity acquisition, asset acquisition or even VIE, when reaches the threshold level as set by the State Council, the involved undertakings shall notify antitrust merger control authority. Even though MOFCOM only forbade one case by far, there were large amount of cases could not get approval within the 30 days of preliminary review phase and went to the stage of further review or extensive review(with the time of acceptance of the notification included, the procedure may be longer than 180 calendar days). Moreover, from the published cases, if the case comes to the stage of further review or extensive review, it is likely to be approved with restrictive structural conditions (such as divestiture of business or asset). Usually those conditions are not the behavioral conditions which impose less influences on undertakings at stake. If reaches the threshold level and fails to make the concentration notification, the foreign investor is likely to confront penalties including fine, writ of suspension to concentration, and reinstatement (“unscramble the eggs”). Therefore, foreign enterprise who intend to merger, acquire, or set up "Sino-Foreign Equity Joint Venture", " Sino-Foreign Cooperative Joint Venture " so as to enter the Pilot Free Trade Zone shall evaluate the time cost of concentration notification, the risk of being imposed with structural conditions and the risk of not making concentration notification prior to the transaction.
Besides, the government enforcement power will be strengthened by targeting to foreign investors entering the Pilot Free Trade Zone and failing to make concentration notification according to AML.Sourcing from whistleblowers, MOFCOM will launch investigation against transactions without making concentration notification. Also, the investigation will be more oftentimes relied on reports from MOFCOM’s lower level subordinates and the information sharing with other government departments. Even though the governing authorities of the Pilot Free Trade Zone will loosen the entering approval procedure with regard to foreign investment in some industrial sectors, the record-filing procedure is still a must. According to the Overall Plan, the records collected by the Pilot Free Trade Zone must be reported to anti-trust enforcement authority, such as MOFCOM, in order to facilitate MOFCOM in acquiring information of unreported concentration by foreign investors, and timely launch anti-trust investigation targeted those such foreign investors. Article 30 of the Measures for the Administration of the China (Shanghai) Pilot Free Trade Zone also provides similar information-sharing requirements. Those foreign investors who intend to set up "Sino-Foreign Equity Joint Venture", " Sino-Foreign Cooperative Joint Venture ", equity acquisition, asset acquisition or even VIE to enter the Pilot Free Trade Zone, for the clearest sign of anti-trust investigation given by the Overall Plan and the Measures for the Administration of the China (Shanghai) Pilot Free Trade Zone, shall pay attention to and conduct proactive assessment of risks of anti-trust and national security review.