Expert Insight: China's New Foreign Investment Regulations

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Originally, FIEs (foreign-invested entities) were treated differently from domestic companies (i.e., companies incorporated by Chinese citizens) under the three separately promulgated “FIE Laws” (i.e., Wholly Foreign-owned Enterprise Law, Sino-Foreign Equity Joint Venture Law, and Sino-Foreign Cooperative Joint Venture Law) and their relevant implementation regulations. These FIE Laws were enacted several decades ago, and were more restrictive in nature compared to the Company Law enacted more recently, regulating domestic companies. Take a Sino-Foreign JV for instance: under the three FIE Laws, (a) the highest authority of a Sino-Foreign JV was its board, and certain matters needed a unanimous consent of all the directors, which could easily trigger a dilemma between the foreign and the Chinese JV partners in practice; (b) the share transfer of the equity interest in the Sino-Foreign JV required the other non-transferring shareholder’s approval, which created difficulties for M&A transactions ora foreign partner’s exit; (c) the distribution of profits could only be inproportion to the shareholder’s actual capital contribution, which made it impossible to agree upon a more innovative profit-sharing mechanism between the shareholders to address their commercial needs. With the repealing of the three old “FIE Laws,” FIEs now will be regulated in the same manner as domestic companies under the unified Company Law, and FIEs will now be able to enjoy a more liberal and commercially oriented legal regime in terms of corporate governance.

Prior to the Foreign Investment Law, setting up an FIE engaging in “restricted business” as set forth in the “Negative List” promulgated by the commerce department of the PRC (i.e., the MOFCOM) would be closely examined by MOFCOM before an approval would begranted. In order to receive such approval, all the required constitutional documents were put under strict scrutiny by local offices of MOFCOM where the FIE would be set up, and in practice, a different local office of MOFCOM might hold its own discretional view when granting the approval, which created practical issues or difficulties for foreign investors. FIEs not engaging in the restricted business in the Negative List would also be required to file a registration with MOFCOM post-establishment.

Unlike under the old approval regime, FIEs are now regulated via clearly defined and more comprehensive and market-oriented disclosure requirements. FIEs shall submit certain required corporate information, including some basic information about the corporation and its shareholders, corporate investments, and certain operating and financial information. This information will be submitted to MOFCOM via an “enterprise registration system” and “enterprise credit information disclosure system,” and will be made publicly available. 

In addition to the “Negative List” setting forth what can and can not be invested in by foreign investors, the new Foreign Investment Law also introduced a national security review regime to review foreign investments in order to protect national security. However, the law omits the details of how this review regime will be established; comprehensive regulations may be issued in due course. What is clear is that China’s National Development and Reform Commission (NDRC) announced that it will take over responsibility from MOFCOM for the conduct of the review process.

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