China Justice Observer

中国司法观察

China's Foreign Investment Law Series -02:Changes and Impacts of the PRC Foreign Investment Law on China's Existing Regulatory Framework for Foreign Investment

Wed, 19 Feb 2020
Categories: Insights

 

With changes to the mechanism of enterprise operation and management, the new Legislation demonstrates an optimized and more accessible protection mechanism for foreign investment.

In accordance with our previous post, Changes and Impacts of the PRC Foreign Investment Law on China's Existing Regulatory Framework for Foreign Investment (I), we give a brief introduction to changes and impacts on the forms of regulated foreign investment, the foreign investment regulatory framework and the legitimacy of the VIE structure arising from the implementation of the PRC Foreign Investment Law (“the Law”) and “Implementing Regulations of the PRC Foreign Investment Law”(中华人民共和国外商投资法实施条例) (“the Regulations”, collectively referred to as “the new Legislation” with the Law). Besides, the new Legislation also changes previous mechanism of enterprise operation and management pursuant to “the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures” (中华人民共和国中外合资经营企业法), “the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures” (中华人民共和国中外合作经营企业), and “the Law of the People's Republic of China on Wholly Foreign-owned Enterprises”(中华人民共和国外资企业法) (collectively referred to as “three Foreign-funded Enterprise Laws”), and demonstrates an optimized and more accessible protection mechanism for foreign investment. This post will focus on these two issues.

I. Adjust models of enterprise operation and management to increase flexibility in corporate governance

1. Changes in the nature of the enterprise and its organizational structure

Pursuant to Article 31 of the Law, the organizational form, organizational structure and activities of foreign-funded enterprises shall be governed by the PRC Company Law (“the Company Law”), and the PRC Partnership Law (“the Partnership Law”), etc. In particular, for foreign-funded enterprises in the form of limited liability companies, the highest decision-making body is no longer the board of directors, but the general meeting of shareholders. Important matters related to corporate governance, such as different authorities of the general meeting of shareholders and the board of directors, procedure rules, etc., will be determined with reference to relevant provisions of the Company Law. For example, resolutions related to the amendment of the articles of association, increase or decrease of registered capital and other important decisions are no longer the matters requiring the unanimous agreement by the board of directors, but require a two-thirds majority of valid votes in the general meeting of shareholders pursuant to the Company Law.

2. Law application of joint venture contracts /shareholder agreements

In accordance with three Foreign-funded Enterprise Laws, joint venture/cooperation contracts, constitutional documents, and amendments thereof may come into force only with the approval of the competent regulatory authority. As the Law has removed the concept of joint venture /cooperation contracts and no longer requires the enterprise to go through the approval or record-filing procedure in terms of its articles of association, previous requirements for the approval and validity of joint venture contract and articles of association are no longer applicable, and relevant regulatory authorities will no longer interfere with the specific content of shareholder agreements and articles of association of the enterprise. [1]

Meanwhile, provisions of important shareholders' rights in the shareholder agreement or articles of association will be more flexible. For example, the equity transfer will no longer require the consent of the other party of the joint venture or cooperation. Instead, Article 71 of the Company Law applies, which stipulates that the equity transfer of a limited liability company can be made with the consent of shareholders with more than half of the equities. Meanwhile, shareholders can also reach an agreement restricting the equity transfer different from those provided by the Company Law.

3. Transition period and retention of existing covenants

Before the implementation of the Law, the organizational structure and organizational form of the existing enterprises may be inconsistent with the provisions of the Company Law or the Partnership Law. Therefore, the Law stipulates a five-year transition period, during which the existing enterprises can adjust their organizational structure and constitutional documents, or continue to retain them, but need to go through the formalities of modification upon the expiry of the transition period.

II. Improve the supplementary protection mechanism of foreign investment for the market opening-up

1. Establish and improve the service system for foreign investment

Article 16 of the Law entitles foreign-funded enterprises the right to participate in government procurement activities through fair competition; Article 15 hereof, on the one hand, stipulates the right of foreign-funded enterprises to have equal access to the standard-setting work, on the other hand, clarifies that foreign-funded enterprises shall not be prejudiced due to unfair conditions such as the ownership structure, organizational structure, investor nationality, or product brand, etc. Such provisions are a response to the requests of major trade partners for China to loosen its market entry. However, where inconsistencies still exist between these provisions and national standards and specific regulations on the national procurement, further guidance documents need to be issued.

2. Strengthen the protection of intellectual property rights

In addition to the provisions on foreign equity investment in China, the Law reaffirms China's standing on strengthening the protection of foreign intellectual property rights. The key issue of Sino-US trade negotiation is the protection of intellectual property rights of foreign investment in China. The Law and the Regulations clearly stipulate a series of measures to strengthen the protection of intellectual property rights of foreign investment, such as prohibiting compulsory technology transfer, protecting trade secrets and strengthening the law enforcement of intellectual property rights, all of which demonstrate an optimized regulatory framework to protect the intellectual property rights of foreign investors. [2]

After these two posts, we have a better understanding of the major changes to China's foreign investment regulatory framework brought by the implementation of the new Legislation. However, we cannot ignore that the smooth implementation of the new Legislation requires further abolition or adjustment of current legislation and relevant policies related to foreign investment, apart from the three Foreign-funded Enterprise Laws. At present, the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Justice and other departments have already and will continue to comprehensively improve the current relevant legislation, and relevant regulatory authorities have also been constantly clarifying and explaining the difficult issues in the process of law implementation. It is believed that the smooth change from the old foreign investment regulatory framework to a new one will eventually be achieved through the efforts of all parties.

 

 

[1] 徐萍,姚丽娟:《外商投资开启全新时代:<外商投资法实施条例>评析》2020年1月2日发布< https://www.chinalawinsight.com/2020/01/articles/crossing-borders/%E5%A4%96%E5%95%86%E6%8A%95%E8%B5%84%E5%BC%80%E5%90%AF%E5%85%A8%E6%96%B0%E6%97%B6%E4%BB%A3%EF%BC%9A%E3%80%8A%E5%A4%96%E5%95%86%E6%8A%95%E8%B5%84%E6%B3%95%E5%AE%9E%E6%96%BD%E6%9D%A1%E4%BE%8B%E3%80%8B/>

[2] 杨讯:《外商投资法下改进的知识产权保护》收录于威科先行法律信息库2020年1月20日发布< https://law.wkinfo.com.cn/professional-articles/detail/NjAwMDAwNzAyMjk%3D?searchId=3bc5cec5bab14401a60826facd98a7a5&index=1&q=&module=>。

 

Cover Photo by Jerry Wang(https://unsplash.com/@jerry_318) on Unsplash

Contributors: Xiaodong Dai 戴晓东

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