Previously, the establishment and change of FIEs in China were subject to a prior approval of the competent Commission of Commerce ( “COFCOM” ). Since 1 October 2016, foreign investment projects not falling under the so-called foreign investment negative list have been changed to the COFCOM filing regime.
On 26 May 2017, the Ministry of Commerce ( “MOFCOM” ) issued the Measures on Filing Administration of Establishment and Change of Foreign-Invested Enterprises (Draft for Comments) ( “Draft Measures” ) and solicits public comments until 15 June 2017. The Draft Measures will purportedly amend the Interim Measures on Filing Administration of Establishment and Change of Foreign-Invested Enterprises promulgated by MOFCOM on 8 October 2016 ( “Interim Measures” ).
HIGHLIGHTES OF THE DRAFT MEASURES
Filing Administration for M&A of Domestic Non-FIEs by Foreign Investors
It is stipulated in the Draft Measures that the transformation of a domestic enterprise into a FIE through M&A, strategic investment, merger by absorption, etc., would no longer be subject to COFCOM approval, but instead would only need to undergo the simplified filing procedures with COFCOM, in case the FIE does not fall under the so-called negative list. This represents a major breakthrough since M&A of domestic enterprises by foreign investors, different from other FIE establishments, so far are explicitly excluded from the filing administration and are still subject to COFCOM approval.
Matters Subject to Change Filing
Pursuant to Article 6 of the Draft Measures, the following changes of a FIE require COFCOM filing:
- Change of basic information of establishment of FIE through M&A, including consideration, payment method, and appraised value of the target shares/assets;
- Change of basic information of strategic investment in listed company by foreign investor, including consideration and payment method.
Change Filing In Relation To Foreign-Invested Listed/NEEQ-Quoted Companies
According to Article 7 of the Draft Measures, COFCOM filing is also required for the following scenarios:
- Where a foreign-invested listed company introduces new foreign investor(s);
- If the proportion of the shares held by a foreign investor in a foreign-invested listed company or foreign-invested company quoted on the National Equities Exchange and Quotations changes by over 5% in aggregate, or there is a change to the controlling or relatively controlling position of a foreign investor;
- In the event that a foreign investor sells all of its shares in a listed company.
Documents for FIE Establishment or Change Filing
Comparing with the Interim Measures, Article 8 of the Draft Measures provides for some additional documents to be submitted:
- The shareholding structure chart of the ultimate actual controller of the FIE and its foreign investor(s). According to the interpretation on the Interim Measures by the Head of the Treaty and Law Department of MOFCOM dated 8 October 2016, the “ultimate actual controller” of a FIE/an investor of a FIE refer to the individual, enterprise, government authority or international organization that directly or indirectly controls the FIE/the investor of the FIE via equity, contract, trust or other means.
- In case a foreign investor uses shares of an overseas company as a means of payment, the Enterprise Overseas Investment Certificate of the domestic enterprise is required.
FURTHER POINTS TO WATCH
Foreign Investment Industries Guidance Catalogue (2017 Revision)
According to media reports, the Foreign Investment Industries Guidance Catalogue (2017 Revision) will be released soon.
Different from the previous versions, the draft revisions published on 7 December 2016 (“Draft Catalogue” ) are structured in a manner that foreign investment projects are grouped either as encouraged projects or projects subject to “Foreign Investment Access Special Administration (Foreign Investment Access Negative List)” (“Negative List”), which further differentiate restricted projects (restrictions in terms of foreign shareholding ratio, qualification of senior management, etc.) and prohibited projects. Foreign investment in projects under the Negative List is either prohibited in case of prohibited projects or subject to COFCOM approval in case of restricted projects.
Although under the Draft Measures, M&A of domestic enterprises by foreign investors in general are no longer subject to COFCOM approval, the “Negative List” under the Draft Catalogue provides that “acquisitions of domestic companies by companies lawfully established or controlled by domestic companies, enterprises or individuals overseas, if involving foreign investment projects as well as establishment and change of FIEs, shall be handled in accordance with existing regulations”. According to Article 11 of the Provisions on M&A of Domestic Enterprises by Foreign Investors, “acquisitions of domestic companies by companies lawfully established or controlled by domestic companies, enterprises or individuals overseas shall be submitted to MOFCOM for review and approval”. Therefore, we understand that it might be the intention of the Chinese regulators that affiliated acquisitions shall be dealt with differently and MOFCOM approval shall still apply for affiliated acquisitions.
If MOFCOM could follow the speed of the promulgation of the Interim Measures, the promulgation of the official version of the Draft Measures by MOFCOM could be expected within several weeks after public comments solicitation is closed.