March 18, 2019

China Adopts New “Foreign Investment Law”

On 15th March 2019, China's National People's Congress formally adopted the amended Foreign Investment Law ("FI Law").  The new FI Law will come into force 1 January 2020.

Although many of the provisions of the FI Law are aspirational statements of principle, nonetheless there is one detailed provision of the new FI Law to which all current and future shareholders of 'Foreign-Invested Enterprises' ("FIE") in China (including foreign shareholders) should pay close regard.  Article 31 of the new FI Law states that an FIE's 'Organisational Form, Organisational Framework and Governance Rules' should henceforth adhere to and utilise those legal principles and rules contained in China's Company Law, Partnership Law and related legislation.

What this will mean in practice is that those provisions of China's current Regulations on the Implementation of the Sino-Foreign Equity Joint Ventures Law which stipulate that the Board of Directors (and not a Shareholders Assembly) is the highest governing body of an FIE will effectively be repealed by the new FI Law, and all FIEs incorporated on or after 1 January 2020 will have as their highest governing body the Shareholders Assembly and not the Board of Directors.

All FIEs incorporated prior to 1 January 2020 will be granted a 5-year grand-fathering period within which period they too will be required to amend their constitutional documents to reflect a Shareholders Assembly, and not the Board of Directors, as their highest governing body.

This change means that those statutory minority protection rights currently enshrined in both China's Company Law and Sino-Foreign Joint Venture Law - (i) amendment to Articles of Association; (ii) merger/de-merger; (iii) liquidation/wind-up; and (iv) increase/decrease in registered capital - will be determined, for FIEs, by a 2/3 majority shareholder resolution rather than a unanimous board resolution.