China Streamlines Foreign Investment – New Filing Regime
By Meka Meng, Sophie Han & Jiru Xu
On October 8, 2016, China’s Ministry of Commerce (“MOFCOM”) published the Provisional Administrative Rules on Foreign-Invested Enterprises’ Establishment and Amendment (《外商投资企业设立及变更备案管理暂行办法》), effective immediately. On the same date, MOFCOM and the National Development and Reform Commission jointly issued a circular to further clarify the Decision to Amend Four Laws including the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises by China's Standing Committee of the National People's Congress (《全国人民代表大会常务委员会关于修改〈中华人民共和国外资企业法〉等四部法律的决定》). Earlier on September 30, 2016, the State Administration for Industry & Commerce issued the Notice on Implementing Foreign Invested Enterprises Filing Requirements (《工商总局关于做好外商投资企业实行备案管理后有关登记注册工作的通知》).
These new rules represent China’s efforts to cut red-tape from its foreign investment regime and improve China’s business environment. The main target of the reform is MOFCOM’s approval process for the establishment of foreign invested enterprises (“FIE”), which had been in place for over two decades and is now replaced by an online filing system for industries that are not identified as restricted or prohibited to foreign investments. The head of the Treaty and Law Department of the MOFCOM publicly noted that the new process will be a “true filing process” and will not be a prerequisite for other procedures.
It is important to note that the new rules do not affect foreign investment in industries that are subject to special administrative measures, namely industries that are identified to be (i) restricted or prohibited to foreign investments, and (ii) encouraged to foreign investments but subject to minimum shareholding for Chinese shareholders or management personnel requirements (collectively, the “Negative List”), in each case specified in the Catalogue of Industries for Guiding Foreign Investment (2015 Revision) (《外商投资产业指导目录（2015年修订）》). The Negative List covers certain industries that are attractive to foreign investments at the moment, such as telecommunications, media and content, education, medical institutions, large-scale theme parks, market research, and credit scoring agencies. All industries that are not named on the Negative List are broadly covered by the new rules.
In practice, less than 5% of all foreign investments involved restricted or prohibited industries, so the vast majority of projects would be streamlined under the new rules.
With respect to industries not named on the Negative List, foreign investors no longer need MOFCOM’s approval to make Greenfield Investments. Instead, foreign investors only need to file, via MOFCOM’s online platform, certain basic corporate information about the FIE, its investors and their respective ultimate controllers, as well as ancillary documents such as copies of the FIE’s business license, a confirmation letter signed by all investors, incorporation or identification documents of the investors, and the FIE’s legal representative’s identification.
The new MOFCOM filing is required to be made either before the issuance of the FIE’s business license by the Administration of Industry and Commerce or within 30 days after the issuance of the business license. Since a FIE can generally start conducting businesses after obtaining its business license, removing MOFCOM’s approval process will significantly reduce the time and uncertainty in in getting an FIE up and running in China.
It is also important to note that the new rules no longer require foreign investors to submit the FIE’s joint venture contract or the articles of association for MOFCOM’s review or approval, which means certain western-style shareholder rights in joint venture transactions that were often rejected by MOFCOM or required to be removed from joint venture contracts or articles of associations in the past (such as put options, call options, drag-along rights, co-sale rights and buy-sell rights) may now be incorporated into deal terms.
Since MOFCOM’s approval is no longer the trigger for the effectiveness of the joint venture contracts and articles of association, the prior uncertainty related to the enforceability of such shareholder rights in a “side letter” would presumably be removed. In addition, the exercise and enforcement of such rights will no longer require MOFCOM’s approval—which means the parties will have greater flexibility to structure their transactions. As a result, we expect to see more investments structured as direct investments into Chinese company—which were often considered to be undesirable in the past due to limitations on shareholder rights.
Acquisition of FIEs that are not covered by the Negative List will also no longer be subject to MOFCOM’s approval. Instead, the targets only need to file related information with MOFCOM within 30 days after the acquisition. This provides greater flexibility in deal term negotiation and greater certainty that the negotiated and agreed deal terms would not require further revision.
That being said, the new rules only apply to the acquisition of existing FIEs, while foreign investments in domestic Chinese companies (including equity acquisitions and asset acquisitions) are still subject to the requirements in the Provisions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors (《关于外国投资者并购境内企业的规定》) (predecessor commonly known as “Circular 10”), including MOFCOM’s approval and a substantive review of the transaction agreements.
Most real estate investments, except for investments in restricted sectors such as large-scale theme parks and prohibited sectors such as golf courses, now only require filings rather than MOFCOM’s approval. This is a significant change from the prior regime, which required each foreign real estate investment to be approved by central government level MOFCOM or a lower level MOFCOM office. The new rules significantly reduce the time required between the execution of definitive documents and the closing of certain real estate investments from 2-3 months to potentially less than one month.
Corporate restructurings that were subject to MOFCOM’s approval are similarly streamlined. The rules specify that an FIE’s corporate acts such as increase and reduction of registered capital, and dissolution, are no longer subject to MOFCOM’s approval. The filing needs to be made within 30 days after the occurrence of such corporate act, which generally takes effect upon the adoption of corporate resolutions. As the MOFCOM’s approval process used to require significant wait time and approval was uncertain in many cases, the new rules are expected to streamline the corporate structuring and restructuring of FIEs.