China’s New Foreign Investment Law: what are you going to do? (2)
On January 1, 2020 a new Foreign Investment Law ("FIL") came into force as the new framework to govern foreign invested companies (“FIEs”) in China. The FIL has replaced the three foreign investment-related laws (collectively as “FIE Laws”) enacted in the earlier years of China's economic reform. Meantime, the Implementation Regulations on the Foreign Investment Law ("Implementation Regulations") was also released, aiming at clarifying and facilitating the FIL.
The first article gave an overview of what forms of foreign investment are regulated. In this second article you will read what measures enterprises must undertake to be compliant to the FIL.
Foreign invested enterprises and Joint Ventures
Investors should pay more attention to the FIL’s practical implications to their daily operations or future investments. For instance, the FIL will lead to a change of company structures, especially for Joint Ventures (“JV”).
According to the FIL, existing FIEs will be allowed a transitional period of five years to reorganize and even renegotiate their corporate and governance structures to comply with the FIL. Which means, foreign enterprises formed under the FIE laws may maintain their original business forms for another five years until 1 January 2025. Accordingly, the FIEs are then required to revise their Articles of Association ("AOA") to comply with the FIL. Most enterprises have to, because several articles are not in compliance with the FIL. For instance, voting mechanism of the board of directors, and the establishment of a shareholder meeting as the highest authority is mandatorily required under the FIL.
To be more specific: before the FIL, the board of directors was the highest authority of a JV. A resolution made on revising the AOA, increasing or reducing the registered capital, merger, split-up, dissolution or change of the company form had to be unanimously approved by the directors present at the board meeting. While according to the FIL, the issues mentioned above shall be adopted by the shareholders representing 2/3 or more of the voting rights.
Based on the numbers released by the Ministry of Commerce, PRC, most of the foreign investments in China are JV’s and WFOE’s. Those legal entities must amend their AOAs and the JV contracts, which means parties must go back to the negotiation table for the new terms. This will involve the adjustment and redistribution of the rights and interests of the shareholders of the FIE’s. While some of the terms that need to be amended are likely to pose no problem to agree upon, others will not.
What are the consequences if the parties still have not reached agreement to the amendments after the expiration of the transition period? The Implementation Regulations answered this question by stipulating that if the adaptation is not completed within five years, the related authority will not process other registration matters for such company, and may disclose such incompliance in the credit information disclosure database, which is an online resource that provides free information about companies to the public. However, if the companies fail to amend, whether the original Joint Venture contract is still valid or whether the resolutions of the board are still effective, remains uncertain.
Instead of waiting, JV’s and their shareholders should start to adjust their charter documents, organizational form, organizational structure and other matters in a timely manner. It is highly recommended to keep tracking of the new regulations and to react properly. Think ahead and move forward.