The Foreign Investment Law of the People’s Republic of China (“Foreign Investment Law”), which was just adopted by the National People’s Congress today, will be implemented on January 1, 2020, opening a new chapter for China’s foreign investment legislation. The Sino-Foreign Equity Joint Venture Enterprise Law of the People’s Republic of China passed at the beginning of reform and opening, the Wholly Foreign-Owned Enterprise Law of the People’s Republic of China and the Sino-Foreign Cooperative Joint Venture Enterprise Law of the People’s Republic of China enacted subsequently and their implementation regulations (collectively referred to as “Three Foreign-Invested Enterprises Laws”) will be replaced by the Foreign Investment Law. The Foreign Investment Law mainly provides legislative guarantees for the promotion, protection, management and legal responsibility of foreign investment from a macro perspective. The Foreign Investment Law not only clarifies the principles of pre-entry national treatment, negative list, post-entry fair participation in market competition, but it also strengthens intellectual property protection and proposes new concepts such as the foreign investment information reporting system.

Since the terms of the Foreign Investment Law have been significantly reduced compared to the Draft of 2015, we believe that many implementation details have yet to be further determined in the supporting regulations that will be issued later. However, it is without doubt that with the abolishment of the Three Foreign-Invested Enterprises Laws, the organization and institutions of foreign-invested enterprises will no longer be subject to the Three Foreign-Invested Enterprises Laws. Instead, the relevant provisions of the Company Law of the People’s Republic of China (“Company Law”) and the Partnership Enterprise Law of the People’s Republic of China should be applied. This unified application of the law can solve the differences in the organization and institutions of foreign-invested enterprises between the Company Law and the Three Foreign-Invested Enterprises Laws; but it also means that the established foreign-invested enterprises will face a new corporate compliance system, and the AoA and the Joint Venture Contract/Cooperation Agreements need to be revised according to the new requirements.

This article aims to lay out the different compliance requirements faced by foreign-invested companies after the implementation of the Foreign Investment Law and provide legal guidance for foreign companies in China. Since wholly foreign-owned enterprises have already been long subject to the Company Law before the promulgation of the Foreign Investment Law, this article will focus on Sino-foreign cooperative joint venture enterprises and Sino-foreign equity joint venture enterprises, which are subject to greater compliance challenges. This article only uses the limited company as a sample to explain the difference between the Company Law and the Sino-Foreign Equity Joint Venture Enterprise Law and the Sino-Foreign Cooperative Joint Venture Enterprise Law. Foreign-invested joint stock companies comply with the requirements of the Company Law likewise.

Transitional Arrangement

Although foreign-invested enterprises have five years to change their organization and institutions to comply with the legal requirements of the Company Law after the implementation of the Foreign Investment Law, we recommend that foreign-invested enterprises immediately carry out relevant adjustments and revisions to avoid conflicts with current legal requirements in corporate governance and daily operations.

Changes in the Highest Authority

After the abolishment of the Three Foreign-Invested Enterprises Laws, the biggest and most fundamental change for Sino-foreign cooperative joint venture enterprises and Sino-foreign equity joint venture enterprises is that the highest authority will change from the board of directors (for Sino-foreign cooperative joint venture enterprise, it may also be the joint management committee) to the shareholders’ meeting. This change will trigger a series of corresponding adjustments. The term of the director of the Sino-foreign equity joint venture enterprises shall be changed from a fixed term of four years to a term of not more than three years as stipulated in the Company Law. This change makes the company’s personnel arrangements more flexible. In addition, the Sino-Foreign Equity Joint Venture Enterprise Law and the Sino-Foreign Cooperative Joint Venture Enterprise Law require that the minimum attendance of the company’s board of directors’ meetings be two-thirds. After the change of the highest authority to the shareholders’ meeting, the minimum attendance ratio can be freely agreed by the shareholders in the company’s AoA according to the Company Law. This will undoubtedly bring greater flexibility to foreign-invested companies.

Changes in the Requirements of Major Issues Resolution

Regardless of whether the Company Law or the Sino-Foreign Equity Joint Venture Enterprise Law/Sino-Foreign Cooperative Joint Venture Enterprise Law rules, the resolutions concerning major issues of an enterprise (usually including the modification of the AoA; increase or decrease of registered capital; merger and division; termination and dissolution) involve a minimum voting ratio. Compared with the Company Law, the Sino-Foreign Equity Joint Venture Enterprise Law and the Sino-Foreign Cooperative Joint Venture Enterprise Law are more demanding, requiring major issues be unanimously approved by the directors (or members) present at the meeting. After the Company Law starts to regulate foreign-invested enterprises, this standard will be reduced to more than two-thirds (of the voting rights of shareholders). This change will also lead to changes in the investment structure of newly invested foreign companies. The structure of “JV (HK) + WFOE (mainland)” will likely be directly replaced by “JV (mainland)”.

Board of Directors Composition

In the era when the highest authority is the board of directors, the directors are determined and appointed by all parties. The Company Law sets a different mechanism. That is, the directors who are not representatives of the staff members shall be elected and replaced by the shareholders’ meeting, and the representatives of the staff members shall be democratically elected by the company. Of course, the law does not force foreign companies to appoint a representative of the staff members in the board of directors.

Relaxation of Equity Transfer Requirements

Another major change is the restriction on shareholders’ right to transfer equity to third parties. The Sino-Foreign Equity Joint Venture Enterprise Law requires other shareholders to agree unanimously on the transfer. At the same time, although Sino-foreign cooperative enterprises do not involve equity matters, the Sino-Foreign Cooperative Joint Venture Enterprise Law requires the parties concerned to obtain the consent of other parties before transferring their rights and obligations to third parties. The corresponding threshold set by the Company Law is much lower, that is, unless otherwise stipulated in the AoA, transfer only requires the consent of more than half of the other shareholders (who also have preemptive rights). This change means that the flow of funds will create more flexibility for foreign-invested enterprises.

The following table is a summary of the above differences.