Out-Law Guide | 26 Nov 2020 | 3:21 pm | 13 min. read
The FIL came into effect on 1 January 2020, and is said to be a response to persistent international criticism of China's lack of market openness.
The FIL is the basic law for the foreign investment legal framework, establishing core principles for the promotion, protection and market access of foreign investment. An innovation of the FIL is that it promises foreign enterprises "national treatment", on a par with domestic enterprises, for permitted investments. However, the FIL does not provide national treatment with respect to market access. Foreign investment is still prohibited and restricted in a number of areas, through the use of a so-called 'Negative List'. Yet, in order to implement the principle of national treatment, FIL abolished long-standing separate laws on wholly foreign-invested enterprises and Sino-foreign joint ventures. With that, in areas permitted to foreign investment, foreign invested enterprises of all types will be subject to the same legal frameworks as domestic Chinese companies, for example the Company Law.
Under the FIL regime, the applicable Chinese foreign investment control rules - i.e. rules for investments in greenfield ventures as well as acquisitions of all or parts of a domestic companies' equity or assets - largely depend on whether the intended investment activity is on the Negative List.
The FIL covers several types of foreign investment:
Companies registered in Hong Kong, Taiwan and Macao are treated as 'foreign' for the purposes of most Chinese regulations governing foreign investments.
Foreign investment oversight and administration is primarily managed by the following organisations:
The Negative List itself is not new. This is a document called "Special Administrative Measures for Foreign Investment Access that is jointly issued by MOFCOM and the NDRC. It is updated periodically and has been steadily shrinking over the years.
In addition to the national Negative List, there is also:
One of the first steps in contemplating any investment is a thorough review of the relevant investment catalogues.
Recently China's National People's Congress passed the first Foreign Investment Law, ushering in a new era of foreign investment legislation in China.
Items included in the Negative List may be either prohibited outright to foreign investment, or may be restricted. Prohibited activities include tobacco wholesale and retail; stem cell and genetic treatments; social surveys; film and TV production; compulsory education; and others. Restricted activities include automotive manufacturing; basic and value-added telecommunications services; transportation; energy; utilities; banks and financial institutions; agriculture; and others. Where an activity is restricted, approval is expressly at the discretion of the competent authorities. The authorities may approve of, ask for modification of or deny the investment. In any case, a joint venture with a Chinese party will be required for any restricted venture, often with the Chinese party holding a controlling interest.
Activities not on the Negative List or the Encouraged List are in principle permitted to foreign investment. However, this is subject to the discretion of the local authorities. Moreover, there are a number of areas (e.g. training) where foreign investment should be permitted in practice, but in fact are not. Approvability needs to be confirmed with the local officials at SAMR and NDRC.
Besides the restrictions on foreign investments that fall under the Negative List, a foreign investment will also be subject to a national review if it "affects or may affect national security". The rules do not expressly apply to joint ventures with Chinese parties, although an analogous informal review may take place in those cases.
Under the existing review system, the security review applies to acquisitions of all or parts of domestic military industrial enterprises and tertiary enterprises, enterprises located near major and sensitive military facilities, and other entities related to national defence or security. The review mechanism is also triggered by acquisitions in other national security related sectors such as major agricultural products, major energy and resources, infrastructure, transportation services, key technologies and key equipment manufacturing.
If an acquisition by a foreign investor is likely to trigger national security concerns, the foreign investor should notify MOFCOM of the transaction. Upon receiving a notification, if MOFCOM determines that a national security review is required, it will establish an inter-ministerial panel, principally run by NDRC and MOFCOM, to conduct the review and issue a decision within 100 to 120 working days. Depending on the sensitivity of the transaction, the inter-ministerial panel will conduct a "general review" or "special review". If the inter-ministerial panel determines that the transaction is likely to have a major impact on national security, MOFCOM will require the applicant to either terminate or restructure the transaction (including transferring back equity interests or assets if the acquisition has already been closed).
There are further approval procedures and formalities to take into consideration depending on the individual investment.
Complex approval requirements by the China Securities Regulatory Commission and MOFCOM apply where an investor intends to acquire parts of a listed company, e.g. in case of major acquisitions and changes of control of listed companies. Particular care may be required to avoid the need to make a general tender offer when acquiring more than 30% of the shares of a listed company.
Foreign investors can acquire equity or assets of state-owned enterprises or their subsidiaries. The governmental process is administered primarily by the State-owned Assets Supervision and Administration Commission (SASAC) at central and lower levels. It is overall a quite cumbersome and burdensome process. The process is designed to ensure that state assets are not undervalued and to minimise the impact on employees. In any transaction potentially involving SOEs or state assets, it is critical to ensure that the seller complies with the mandatory procedures for state asset transfers. These include use of a local state asset clearinghouse, internal approval and approval by the relevant SASAC, auditing, evaluation, publication of and invitation to bid, and undertaking a bidding process if two or more interested parties respond.
05 Jun 2019
05 Jun 2019