|16 July, 2019

A flatter field

Dan Roules is the Shanghai office managing partner at Squire Patton Boggs. He has been living and working in China for nearly 25 years, advising on numerous cross-border transactions in the country and throughout the Asia Pacific region.

Website: https://www.squirepattonboggs.com/en/insights/

A new Chinese company law aims to extend similar rights to joint ventures with foreign investors as those enjoyed by domestic firms

A general view of the skyline of Pudongs Lujiazui Financial District on April 16, 2010 in Shanghai, China. The Shanghai World Expo will be held from May 1 to October 31 and is expected to attract 70 million visitors. Image used for illustrative purpose.

A general view of the skyline of Pudongs Lujiazui Financial District on April 16, 2010 in Shanghai, China. The Shanghai World Expo will be held from May 1 to October 31 and is expected to attract 70 million visitors. Image used for illustrative purpose.

Getty Images/Feng Li

Since the adoption of its first joint venture law in 1979, China has maintained separate rules governing foreign-invested entities (FIEs) and Chinese-invested ones (CIEs). In March 2019, however, the National People’s Congress approved a new Foreign Investment Law (FIE Law) that abolishes the prior joint venture laws. As a result, all Sino-GCC joint ventures should review the FIE Law, which comes into effect on 1 January 2020.

According to the FIE Law all companies in China, whether foreign-invested or domestically-invested, will receive “national treatment”. This means that FIEs will generally be entitled to treatment that is no less favourable than that available for CIEs. However, excluded from that will be a number of industries where foreign-investment will continue to be either prohibited or restricted.

The FIE Law also says that FIEs may enjoy state protection of foreign investments, the right to be consulted for recommendations in the adoption and interpretation of laws, the right to equal participation in standard development work, protection from expropriation (except in accordance with statutory procedures), and the right to transfer money out of China, in accordance with the law. Many of those rights essentially exist under current law, and the language such as “in accordance with law” may limit the benefits, but articulation in the FIE Law may prove helpful for FIEs.

For many investors from the GCC, the most salient feature of the FIE Law is the mandate that in the future, the existing PRC Company Law will govern the relationship between joint venture partners, not the separate joint venture laws and regulations that govern those relationships today. As a consequence, every existing Sino-GCC joint venture in China must be amended to conform to the PRC Company Law.

The FIE Law allows a five-year grace period to make those changes, but given the challenges of negotiating with joint venture partners in China, GCC companies should ensure that changes to joint venture agreements and articles of associated are done well in advance, as corporate governance structures under the PRC company law differ materially from the current joint venture structures.

For example, under the PRC Company Law the board of directors reports to the shareholders committee/meeting, whereas under the joint venture laws, the board of directors, not the shareholders committee/meeting, is the highest authority.

Also under the FIE Law, unless otherwise agreed, decisions may be made on the basis of majority vote, whereas the current joint venture laws require unanimous approval at the board level for any decision to (1) amend the articles of association, (2) increase or decrease the registered capital, (3) terminate or dissolve the company, or (4) merge or split the company. Accordingly, the board of directors of a joint venture under the FIE Law will serve much the same function as is common in the West, rather than as the ultimate decision-making authority, with statutory minority protections.

The FIE Law makes other important changes to existing law. For example, current laws apply only to the formation of new FIEs, whereas M&A and other activities of FIEs are the subject of other regulations, and there are numerous industry - and sector-specific - regulations that apply only to foreign investors.

By contrast, the FIE Law applies to all direct and indirect investment, meaning that it will cover even investments in China made by an existing FIE. Also, for the first time, a foreign natural person may be an investor, which has previously not been the case.

* Any opinions expressed in this article are the author’s own.

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