The new China’s foreign investment law: news and changes in Chinese corporate law

ABSTRACT

The amendment of 27 October 2005, in the matter of Company Law [1], although it is the result of the previous reform in the corporate field of 1993, represented a decisive turning point with respect to the Sino-Foreign Equity Joint Venture Law of 1979, which determined the general principles for the first form of foreign investment of the People’s Republic of China, but which was still rooted in Maoist thought. The new law, drawn up in both Chinese and English so as to be understood not only in China but also in the rest of the world, entered into force on January 1, 2006 and contained an organic regulation of the Limited Liability Company (LLC), which can be assimilated to our SRL, and to the Joint stock liability company, similar to our SPA [2]. With 2020, a further step has been taken towards the ever more total opening of the Chinese market to foreign investment companies in China, with the implementation of the new law on foreign investment, or FIL (China’s Foreign Investment Law).

In this article, after briefly resuming the ways in which foreign investors can (or rather could) affirm their presence in China, we will present the innovations introduced precisely with the FIL of 1 January 2020 along which the law on Sino-Foreign Joint Ventures, Foreign-funded Enterprises and Sino-Foreign Cooperative Enterprises were all abolished.

1. Equity Joint Ventures

The most classic way to make your way in a foreign market, taking advantage of local know-how, sales and distribution channels already present in the area, is certainly the Joint Venture, an associative contract whose object includes production, commercial or of services. The Equity Joint Venture, or EJV [3], takes the form of a limited liability company with mixed capital, subject to authorization and registration. To set up a company of this type, before the introduction of the new law on foreign investment, at least two contractual parties were required, one of which absolutely had to be a company or a different Chinese business entity, while the counterparty could be either a company or also an individual entrepreneur of different nationality. The characteristics of a pre-reform Equity Joint Venture can be listed as follows, referring to the Sino-Foreign Equity Joint Ventures Law:

• The share capital: for the EJVs, the Equity Joint Venture Law (EJVL) does not establish a minimum capital, but by resorting to the consolidated practice it is indicatively believed that it should not be less than 1,000,000 CNY (approximately 100,000 euros) [4].
• With regard to contributions, Article 4, Paragraph 2 of the EJVL establishes that the foreign partner cannot be the owner of less than 25% and more than 99% of the contributions, of which, in addition to money, machinery, technologies and real estate. The site, on the other hand, cannot constitute contributions, as it belongs to the State [5].
• The deed of incorporation must be subjected, together with the statute, to the approval of the authority responsible for the control of the EJVL, which must rule within three months of submitting the application. The minimum content of the deed of incorporation perfectly follows the classic model (registry of the investors, name, registered office, corporate purpose, capital, contributions …).
• The letter of intent and the feasibility study, or a preliminary contract between the counterparties and a company business plan, are the last two documents required by law in order to establish a Joint Venture. Once registered with the State Administration for Industry and Commerce (SAIC), the Business License is issued.
• The state does not impose expropriation on the investment of foreign investors. Under special circumstances, the state may expropriate or requisition the investment of foreign investors in accordance with the law to meet the needs of the public interest. Expropriation and expropriation shall be carried out in accordance with legal procedures, and fair and reasonable compensation shall be provided in a timely manner.

2. The new law on foreign investments

With the aim of providing greater clarity and transparency, and above all to promote equal treatment of Chinese and foreign companies, the new Foreign Investment Law (FIL) came into force on January 1, 2020. The new FIL, applicable to all forms of corporate investment, both direct and indirect, in the Chinese territory, applies to the following cases:

1. Establishment of a foreign invested company in China by a foreign investor, with or without additional investors;
2. Acquisition of stakes, shares, ownership interests or other similar rights of a Chinese company by a foreign investor;
3. Investments to start a new business in China by a foreign investor, with or without additional investors;
4. Other cases expressly provided by law.

Compared to the previous law, the new FIL aims to promote fair competition, fair application of policies in support of foreign-invested companies and greater protection of the rights of investors, also in reference to forced technology transfers. In particular, by equating foreign investment firms with national ones, we guarantee:

• Equal access to the market in the initial constitution of the investment;
• Equal rights in support of business development;
• Autonomy in carrying out technological cooperation;
• Equal participation in the definition of standards;
• Fair competition when participating in public procurement projects.

Another new element concerns the limitation of the powers of the state, through the adoption of measures to protect intellectual property rights and prevent forced technology transfers and the sharing of trade secrets.

Access to foreign investments, and therefore the possibility of establishing a Sino-foreign Joint Venture, takes place according to the principle of pre-access national treatment and the Negative List. The Negative List refers to special administrative measures for accessing foreign investments in specific sectors as established by the state; it follows that it is not possible to have access to some strategic sectors such as telecommunications, mining, oil, gas, entertainment and agriculture, albeit with some exclusions [6]. The state grants national treatment to foreign investment outside of the negative list. Foreign investors and foreign-invested enterprises may enjoy preferential treatment in accordance with laws, administrative regulations or the provisions of the State Council based on the needs of national economy and social development in specific industries, fields, and regions.

3. The new forms of joint ventures

Before the entry into force of the new China’s Foreign Investment Law, the two types of Joint Ventures were the Equity Joint Venture (EJV), described above, and the Cooperative Joint Venture (CJV). Compared to the first type, the CJV presented greater flexibility, being able to operate as a limited liability company or as a legal entity, and profits and risk did not depend directly on the percentage of shareholdings held by investors, but rather on contractual agreements.

With the entry into force of the new law of 2020, a distinction is no longer made between the two types of Joint Ventures. According to Article 42, in fact, the law on Sino-foreign JVs and the law on CJVs are repealed, leaving room for more uniform regulation. In addition, foreign-funded enterprises, which were formed in accordance with the Law of the People’s Republic of China on Sino-Foreign Joint Ventures prior to the implementation of the new law, have the option of retaining their original organizational forms for five years from implementation of the new FIL. After this five-year transition, they will be subject to the same laws as national companies, and will have to adapt their structure in accordance with the new law.

4. Changes for Joint Ventures

The impacts on the JVs also include more purely structural and organizational aspects. In particular, the Shareholders’ Meeting assumes a greater weight than the Board of Directors, qualifying as the most important body within the company. Furthermore, the amendments to the Articles of Association, with particular regard to the extraordinary operations of increase and reduction of the share capital, merger, dissolution and liquidation, no longer require the unanimity of the votes of the Board of Directors, but the adoption of measures by a majority of the two. third parties.

5. Impacts for WFOEs

The acronym WFOE (Wholly Foreign Owned Enterprise) refers to the limited liability company, under Chinese law, subject to the totalitarian control of one or more foreign shareholders. The company enjoys the perfect patrimonial autonomy regime, and limited liability. It represents the most appropriate choice in the event that a foreign entity intends to operate on the Chinese market, without using a local partner. Even for wholly foreign-owned companies, the new FIL provides for decisive changes, which affect various corporate aspects. Firstly, newly created WFOEs will no longer have to be limited liability companies, but can also take the typical form of joint stock companies. In addition, they will be required to allocate to funds specified by law at least 10%, and up to a maximum of 50%, of the amount of the profit after tax, and 10% of the same to the legal reserve. The last important change concerns the liquidation committee, which will no longer have to include the legal representative, but which will be established through the Shareholders’ Meeting.

(A cura di Lorenzo Nobile and Jiawen Liu)

References and notes

[1] Minkang G., Understanding Chinese Company Law, Hong Kong University Press, Hong Kong, 2006

[2] In general, LCCs are similar to limited liability companies in the Common Law areas, and joint stock companies are similarly comparable to joint stock companies.

[3] Beamish B., The Characteristics of Joint Ventures in the People’s Republic of China, in “Journal of International Marketing”, 1993, February, pp. 29-48.

[4] The registered capital of an equity joint venture must be adequate for the corporate purpose and operations.

[5] In fact, we cannot speak of land contributions but only of the right to use land.

[6] For further information on the topic of Negative List: cicc.court.gov.cn

Rivista scientifica digitale mensile (e-magazine) pubblicata in Legnano dal 2013 – Direttore: Claudio Melillo – Direttore Responsabile: Serena Giglio – Coordinatore: Pierpaolo Grignani – Responsabile di Redazione: Marco Schiariti
a cura del Centro Studi di Economia e Diritto – Ce.S.E.D. Via Padova, 5 – 20025 Legnano (MI) – C.F. 92044830153 – ISSN 2282-3964 Testata registrata presso il Tribunale di Milano al n. 92 del 26 marzo 2013
Contattaci: redazione@economiaediritto.it
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