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On 15 March 2019, the Foreign Investment Act (the “FIA”) of People’s Republic of China was passed by the National People’s Congress. It will come into effect on 1 January 2020.

Background
The existing three acts on wholly foreign-owned enterprises, equity joint ventures and cooperative joint ventures (“FDI Legislation”) will be abolished and all companies in China, including both domestically invested and foreign invested ones, will be governed by the general Company Act.

Major changes
The FIA introduces a number of significant changes some of which are listed in the following:

  • The FIA establishes a nationwide "pre-establishment administration system". The system is intended to create an environment where foreign investments will be treated on equal footing with domestic investments, save for foreign investments into industries listed in the Negative List (in full, Market Access by Foreign Investors Special Administrative Measures).
  • At the same time, the FIA abandons the requirement of prior approval by the Ministry of Commerce and registration with the Administration of Industry and Commerce of any foreign investment into China.
  • All foreign invested enterprises will be required to comply with the corporate governance rules under the general Company Act.
  • The FIA also contains principles designed to encourage foreign investors into China, and 
  • The FIA includes specific provisions designed to address certain issues that foreign investors have previously encountered in China.

 

Investments China - New Act

Transition period – 5 years
The FIA provides for a 5-year transition period during which all foreign invested companies incorporated under the current FDI Legislation must revise their corporate documents in accordance with the general Company Act. The requirement will apply to and be relevant for all Foreign Invested Entities in China, in particular joint ventures. The main changes required for joint ventures pertains to corporate governance (corporate bodies, number of directors, quorum rules, voting mechanisms and etc.) and matters such as profit distribution and share transfers.

Although Wholly Foreign-Owned Enterprises (“WFOEs”) will be less affected by the FIA, certain provisions of a WFOE’s articles of association will need to be revised. The shareholders and management of all Foreign Invested Entities (including JVs and WFOEs) should therefore be aware of this new development and be prepared for the changes to be made.

Recommendation
We highly recommend that all owners of Foreign Invested Companies initiate a review of such companies’ corporate documents to prepare necessary revisions. Also, we recommend that owners of interests in JV’s take steps shortly to assess the corporate documents and contracts for such JV’s with a view to soon initiate renegotiations with its JV partners (and other) if and as relevant.