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22 Jan 2015
On 19 January 2015, the PRC Ministry of Commerce (“MOFCOM”) released for public comment the Foreign Investment Law of the People’s Republic of China (Draft Bill for Public Comment) (“Bill”), which marks the PRC government’s dramatic shift from the way it has regulated foreign investment for over 30 years. Specifically, the Bill proposes to replace the current regime under which foreign-invested projects are approved on a case-by-case basis with a more universally accepted investment review/screening system. The key changes proposed in the Bill are summarized below.
Equal Treatment for Foreign Investors
The Bill would guarantee that foreign investors enjoy equal treatment vis-à-vis PRC nationals when they invest in China. Most foreign-invested projects would no longer need to be approved by the government. The only foreign-invested projects subject to government approval would be those falling within the scope of a few sensitive industries to be named in a so-called “negative list.”
National Security Review
The Bill proposes to bring China’s review of foreign investments more in line with international practice by strengthening the review in respect of national security. Under the Bill, the National Development and Reform Department and MOFCOM would have greater discretion to review and evaluate the national security implications of foreign investment projects. Accordingly, the government may take more time to review and approve foreign investments into sensitive industries and applications for foreign investment into such industries are likely to involve more uncertainty.
The Bill would introduce a reporting system with respect to foreign investors. This system would require foreign investors to submit three different kinds of reports: an “investment project report”, an “investment project amendment report” and a “periodic report”. According to the Bill, all foreign investors would be required to submit such reports regardless of the area of investment.
Exercise of Control through Contractual Arrangements
The Bill also introduces the new concept of “de facto control” for regulating foreign investment. Specifically:
PRC domestic companies under the de facto control of one or more foreign investors will be deemed as foreign investors, including those domestic companies where foreign investors effectively hold, including by means of contracts, trusts or otherwise, the ownership and/or control of the company and/or decisive influence over the company’s management, finance, personnel, technologies and other key areas; and
A foreign investor’s investments will be deemed as having been made by a domestic PRC investor if such domestic PRC investor exerts de facto control over the foreign investor.
As such, it is foreseeable that, in those industries where foreign investments are prohibited or restricted (e.g., the provision of certain value-added telecommunications services), the continuing legality and operability of the currently popular variable interest entity (“VIE”) structure may become subject to regulatory challenges of varying degrees.
That said, however, the Bill does not specifically address those foreign investments already made via the VIE structure in industries where foreign investment are prohibited or restricted. Instead, the Bill’s explanatory notes only state that the government will examine this issue more closely once the period for public comment on the Bill has concluded.
If the Bill were formally adopted and promulgated, the following laws would be abolished: Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Ventures and Law of the People’s Republic of China on Wholly Foreign-owned Enterprises. As a result, within three years after the Bill’s promulgation, all wholly foreign-owned enterprises, equity joint ventures and cooperative joint ventures established pursuant to the three aforesaid laws would be required to amend their company and organizational structures in accordance with relevant laws including the Company Law of the People’s Republic of China.
In summary, the Bill reflects a substantial change in the attitude of the PRC government towards regulating foreign investment. If formally adopted and promulgated, the Bill certainly would have a broad impact. At the moment, foreign investors should closely follow any updates in respect of the Bill so they may anticipate and adapt to any changes with the assistance of competent counsels.