On March 15, 2019, the National People’s Congress (“NPC”) of the People’s Republic of China promulgated the New Foreign Investment Law (“FIL”) which will come into force on January 1, 2020.  At the same time, the existing laws regulating foreign invested entities (collectively the “FIE Laws”), namely the Sino-Foreign Equity Joint Venture Law (“EJV Law”), Sino-Foreign Cooperative Joint Venture Law (“CJV Law”) and Wholly Foreign-owned Enterprise Law (“WFOE Law”) will be revoked and replaced by the FIL.  This Article will start with a brief introduction to the legislative background of the FIL, followed by an analysis of the practical impacts on foreign invested entities (“FIE”) and end with summary of some uncertainties remaining to clarified by implementation rules.

Since China’s reform and opening-up in 1978, the FIE Laws were introduced one after another to attract foreign investment, establishing a case-by-case approval system.  That is to say, each foreign invested project shall be submitted to and approved by relevant foreign investment administrative authorities.  The Company Law of the People’s Republic of China (“Company Law”) promulgated in 1993 set up two forms of organization, namely limited liability company and company limited by shares, and made provisions on establishment and operation of companies within territory of mainland China.  Based on the principle that the special law is superior to the general law, the FIE Laws prevail where both the Company Law and the FIE Laws are applicable to FIEs simultaneously.  However, the inconsistency between the Company Law and the FIE Laws become apparent over the years.  With an attempt to fill the gap left by the FIE laws, the Chinese government started to launch free trade zones in Shanghai from 2013 which carried out pre-establishment national treatment with a negative list with the aim to simplifying administrative procedures for FIEs and certain articles of the FIE laws have ceased to be applicable within the free trade zones.  Not until January 2015 that a new unified FIL was contemplated, and the final version was passed at the annual sessions of the NPC in March 2019.

2.1 Equal Treatment between Domestic and Foreign Investment

2.1.2 Pre-establishment National Treatment and Negative List Regime

The FIL establishes “the management systems of pre-establishment national treatment and negative list for foreign investment”[i] from the legislative level.  In other words, the market access requirements applicable to foreign investors which invest in sectors falling outside the scope of the “negative list” will be no less favorable than those applied to domestic investors.  The negative list was initially implemented in Shanghai free trade zone from 2013 and then promoted nationwide with the amendment of FIE Laws in 2016.  The latest version of negative list was released in June 30, 2019 (“2019 Negative List”), including a list of sectors into which foreign investment is either prohibited or restricted.  The 2019 Negative List streamlines the 2018 Negative List by reducing the special administrative measures from 48 to 40, expanding the opening-up of service industries and liberalizing access for agriculture, mining and manufacturing. 

2.1.3 Post-establishment Equal Treatment

In addition to the “national treatment” at the pre-establishment stage, foreign investors are also equally entitled to government policies supporting enterprise development after establishment.  These policies include, but not limited to guarantee of FIEs participating in government procurement through fair competition[ii] and allowance of FIEs to conduct financing through public offering of shares, corporate bonds and other securities or by other means[iii].  Despite that some of these policies are to some extent reflected in normative documents released by the State Council or other departments, the FIL has first legalized these policies, strengthening the promotion and protection of foreign investment.

2.2 Corporate Governance

As noted above, the FIL will repeal the FIE laws from January 1, 2020, by which time the organizational form, corporate structure and operational rules of FIEs shall be subject to the provisions of the PRC Company Law[iv].  However, the FIL leaves a five-year period for FIEs to transform from their original corporate governance to that applicable to domestic enterprises.

Among three forms of FIEs, wholly foreign-owned enterprises (“WFOE”) will be barely influenced in corporate governance by the FIL as an implementation opinion (《关于外商投资的公司审批登记管理法律适用若干问题的执行意见》) issued by four ministerial authorities in 2006 provides that the corporate governance of WFOEs shall comply with the PRC Company Law.  In contrast, the FIL will exert great impacts on joint ventures (“JV”) in that the corporate governance rules under JV laws are radically different from those set out under the Company Law.  The table below shows the key differences on the organizational form and corporate structure under the JV Laws and the Company Law.

Besides, operational rules of JVs such as share transfer regime and dividend distribution scheme will also be unified.  Under the JV laws, a party who intends to transfer its shares shall obtain the consent of all the other JV parties regardless of whether it is an internal transfer (transfer between shareholders) or external transfer (transfer to a third party).  After the FIL comes into effect, there will be no consent requirement in case of an internal transfer, and consent of more than half of the other shareholders is required if it is an external transfer.  Moreover, if more than the other shareholders not only refuse the transfer but refuse to purchase the shares to be transferred, they shall be deemed as giving their consent to such transfer.[v] 

With regard to the dividend distribution regime, the profits of an EJV shall be distributed among shareholders in proportionate to their capital contribution while the CJV Law allows shareholders to share profits based on JV contracts.  With the Company Law applicable to JVs, dividends shall also be distributed proportionately among shareholders in accordance with their capital contribution, but such distribution can be otherwise unanimously agreed by shareholders.[vi]

2.3 Information Reporting System

Prior to the promulgation of the FIL, the FIEs’ information reporting obligations involve reporting to the Ministry of Commerce (“MOFCOM”) and the Administration of Industry and Commerce (“AIC”, now the Administration for Market Regulation, “AMR”).  In terms of matters involving FIEs in the negative list, approval by the MOFCOM and registration with AIC are required while for those outside the negative list, FIEs shall only file investment information with relevant agencies.  In practice, an FIE may record filing information through local online systems to the MOFCOM and AIC at the same time (i.e. One Website All Services (一网通办) in Shanghai) at the stage of establishment.  If any information of the FIE changes, the FIE is supposed to file the change through the Business System Unified Platform of the MOFCOM (商务部业务系统统一平台) and registration or filing with AIC (depending on items to be changed) pursuant to local regulations. 

The FIL requires FIEs to submit investment information through the “enterprise registration system” and the “enterprise credit information publicity system” base on the principle of “genuine necessity”[vii].  Nevertheless, the pitfall is it remains unclear as to what is “genuine necessity”.  Additionally, it needs to be further clarified that whether the reporting system under the FIL is in conformity with the “enterprise credit information publicity system” operated by the AMR and the foreign investment information reporting system managed by the MOFCOM.

2.4 National Security Review System

Based on the applicable regulations (《关于建立外国投资者并购境内企业安全审查制度的通知》（国办发〔2011〕6号）、《关于印发<自由贸易试验区外商投资国家安全审查试行办法>的通知》(国办发[2015]24号)，security review may be triggered by foreign merger and acquisition activities and foreign investments in pilot free trade zones.  Under the FIL, the scope of national security review seems to cover all the foreign investment activities within the territory of China (including but not limited to establishment of FIEs, acquisition of shares, equity, property shares or any other similar rights and interests of an enterprise and investments in a new project[viii]), yet it is still questionable whether the scope of security review system under the FIL is the same as or is going to replace that under the current regulations.

2.5 Protection of Intellectual Property Right and Trade Secret

Protection of intellectual property right embodies in the principle provisions in the FIL, which specifies (i) the legal liability of any infringement of intellectual property right shall be investigated strictly[ix]; (ii) no administrative department or its staff member shall force any transfer of technology by administrative means[x]; and (iii) that administrative departments or its staff members shall keep confidential any trade secret of foreign investors and FIEs they are aware of during the performance of their duties[xi].  Except for these principle provisions, laws and regulations in more specific areas are accordingly revised as a response to the introduction of the FIL.  For example, the State Council made amendments to, amongst others, the Implementation Regulations of the EJV Law (《中外合资企业法实施条例》) and the Administration Regulations of the Import and Export of Technology (《技术进出口管理条例》), including removal of the following articles:

· the term for a technology transfer agreement is generally no longer than ten years;

· after the expiry of a technology transfer agreement, the technology importing party shall have the right to use the technology continuously;

· where an assignee of a technology import contract is using technology provided by the assignor in accordance with the provisions of their contract and an infringement of the legal rights and interests of any third party occurs, the assignor shall bear the liability;

· during the period of validity of the technology import contract, the results of any improvements in the technology belong to the party that makes the improvements; and

· technology import agreement shall not include certain restrictions, clauses that unreasonably restrict the quantity, type or sale price of the assignee's products.

These amendments are in conformity with the principles of the FIL and to some degree relieve foreign investors’ concern about forced technology transfer.

Overall, the introduction of the FIL signals that China is open for business.  It is no doubt that the FIL will provide stronger protection and a better business environment for foreign investors.  However, as the law is drafted in a very general way, the very critical step would be to see how the Chinese government will steer new avenues to strengthen legal enforcement.[i]  Many issues are pending clarification and more detailed guidance to be given by relevant governmental agencies.  In particular, concerns will arise as to what will trigger national security review and how will such review be conducted, what is the relationship between the current record filing system and the information report system, the absence of which may bring unease to foreign investors.