Published in Asian-mena Counsel: Deals of the Year 2019
China’s foreign investment management regime has become more liberal and flexible, writes Mengyun Qiu of AllBright.
The Foreign Investment Law of the People’s Republic of China (“FIL”) became effective on January 1, 2020. Upon this effective date, the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises and the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures (hereinafter collectively referred to as the “previous three foreign-invested enterprise laws”) have been repealed by the newly adopted FIL.
Will the FIL affect the equity joint venture contracts, cooperative joint ventures contracts or shareholder contracts of the FIEs?
Regarding the administrative supervision over the equity joint venture contracts, cooperative joint venture contracts and shareholder contracts (hereinafter collectively referred to as “Contracts”), under the previous three foreign-invested enterprise laws, equity joint venture contracts and cooperative joint venture contracts were subject to the administrative approval by relevant governmental authorities, and where two or more foreign investors proposed to apply jointly for the approval for the establishment of a wholly foreign-owned enterprise (“WFOE”), the duplicate copy of the executed shareholder contract should also be filed to the relevant governmental authorities for record. However, under the FIL there does not exist any requirements of the administrative approval or record filing of those contracts either. Therefore, the FIL has lifted such administrative supervision over these Contracts.
Regarding the governing law of these Contracts, prior to the implementation of the FIL, although the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises did not have mandatory requirement on the government law of shareholder contracts, the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures (“Sino-foreign Equity Joint Ventures Law”) and the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures (“Sino-foreign Cooperative Joint Ventures Law”) required that the conclusion, effectiveness, interpretation, performance and dispute resolution of the equity joint venture contracts and cooperative joint venture contracts be governed by the laws of the People Republic of China (“PRC”). However, under the FIL, there does not exist any provisions regarding these Contracts, nor any mandatory requirements of their governing law. Therefore, the FIL has given foreign investors more flexibility in choosing these Contracts’ governing laws for the establishment of FIEs in the PRC.
What are the breakthroughs in the form of capital contribution to the capital of the FIEs under the FIL?
Regarding the statutory requirements of the proportion of capital contribution by foreign investors to Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures, prior to the implementation of the FIL, the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures and their implementation rules required that the proportion of capital contribution by a foreign investor to a Sino-foreign equity joint venture or a Sino-foreign cooperative joint venture in general be no less than 25 percent. However, under the FIL, it is notable that there is no requirement of the minimum proportion of capital contribution by foreign investors. Therefore, nowadays, foreign investors could liberally determine the proportion of capital contribution to be contributed to the FIEs based on commercial considerations.
Regarding the form of capital contribution by foreign investors, the previous three foreign-invested enterprise laws provided different statutory requirements for the form of non-cash capital contribution by foreign investors respectively. For example:
- WFOEs: The machinery and equipment contributed by the foreign investors shall be indispensable to the production of the FIEs. Where foreign investors make contributions to the WFOEs in the form of industrial property or know-how, relevant detailed materials shall be submitted to competent governmental authorities for approval, and such authorities are entitled to examination and inspection on these materials.
- Sino-foreign equity joint ventures: The machinery, equipment and other materials contributed by the foreign investors shall be indispensable to the production of Sino-foreign equity joint ventures. Where foreign investors make contributions in the form of industrial property or know-how, the foreign investors shall compensate for any losses due to their fraudulent contributions in the form of outdated technology or equipment. Furthermore, the contributions in the form of machinery, equipment, other materials, industrial property or know-how shall be approved by competent governmental authorities.
- Sino-foreign cooperative joint ventures: Where each party of a cooperative enterprise uses its own property or property rights as investment or as the condition of cooperation, the party must not set up any mortgage or encumbrances on such investment or condition.
On one hand, the FIL does not stipulate the statutory form of capital contribution by foreign investors, nor any provisions requiring that foreign investors obtain approval for their non-cash capital contribution. On the other hand, the FIL emphasises that “the state encourages technical cooperation based on free will and commercial rules in foreign investment. Technical cooperation conditions shall be determined under the principle of fairness by all investment parties upon negotiation”. Therefore, it is indicated that in terms of the form of capital contribution by foreign investors, administrative supervision has made a concession to commercial considerations and thus provides more flexibility for cooperation between Chinese and foreign investors.
Do the FIEs need to adjust their corporate governance structure and bylaws (and/or joint venture contracts) in compliance with the FIL?
Prior to the implementation of the FIL, there were statutory requirements specially applicable to Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures on the highest authority, the composition of the board of directors and the powers and functions under the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures and their implementation rules, including, but not limited to the followings: (i) the highest authority of Sino-foreign equity joint ventures shall be the board of directors, while the highest authority of Sino-foreign cooperative joint ventures shall be the board of directors or joint management committee; (ii) the increase or reduction of the registered capital, merger, division, dissolution, liquidation or change of company form or amendment of the articles of association of the company (Important Matters) shall be resolved by all members of its highest authority of the company (ie the board of directors or joint management committee); and etc.
However, under the FIL, the corporate governance structure and bylaws (and/or joint venture contracts) of the FIEs are subject to the provisions of the Company Law of the People’s Republic of China (“Company Law”), the Partnership Enterprise Law of the People’s Republic of China (“Partnership Enterprise Law”) and other applicable laws as domestic enterprises are. Take the limited liability companies as an example: the bylaws (and/or joint venture contracts) shall be made substantially modifications accordingly in compliance with the Company Law, including but not limited to the followings: (i) The FIE shall establish the shareholder meeting as its highest authority; (ii) accordingly, the voting mechanism for the Important Matters of a FIE shall be changed from the previous requirement of “consent of all the directors present at the meeting” to “consent of the shareholders representing two-thirds of voting rights” that is required by the Company Law; and etc.
Therefore, the FIL unifies the corporate governance structures, powers and functions, and rules of procedure of shareholder meetings and board of directors of both domestic enterprises and the FIEs.
Conclusion
As the FIL has been effective since January 1, 2020, the current foreign investment management regime has been changed by the FIL to a large extent, including, but not limited to, more flexible and liberal cooperation between Chinese and foreign investors in Sino-foreign equity joint ventures and the Sino-foreign cooperative joint ventures, and more flexible and liberal form of capital contribution by foreign investors.
E: qiumengyun@allbrightlaw.com
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