February 25, 2020

China’s Foreign Investment Law (‘FIL’) Supporting Regulations

On 15th March 2019, China's National People's Congress formally promulgated the new and revised FIL. Subsequently, and as contemplated by the FIL, on 31st December 2019, China's State Council and Ministry of Commerce separately published the Foreign Investment Law Implementing Regulations and the Foreign Investment Information Reporting Measures (collectively the 'FIL Regulations'). The FIL Regulations came into force 1st January 2020.

The FIL Regulations stipulate that the constituent and governance framework for all Foreign Invested Enterprises ('FIE') incorporated or established on or after 1st January 2020 shall be governed by the provisions of those laws which currently govern 'domestic' China corporate entities - including China's Company Law and Partnership Law - rather than the existing FIE laws (i.e. Sino-Foreign Equity Joint Venture Law, Wholly Foreign-owned Enterprise Law & Sino-Foreign Contractual Joint Venture Law - collectively the "Superseded FIE Laws").

However, all existing FIEs incorporated or established prior to 1st January 2020 ('Grandfathered FIEs') will be 'grandfathered' under, and continue to be governed by, the relevant provisions of Superseded FIE Laws (and not/not the FIL Regulations) for a period of five years, ending 31st December 2024 ('Grandfathering End Date').

The FIL Regulations stipulate that on or before the Grandfathering End Date, all Grandfathered FIEs must amend and convert their respective 'forms' of constituent and governance to be compliant with the FIL Regulations ('Corporate Conversion'). Such Corporate Conversion by Grandfathered FIEs must be registered with China's State Administration for Market Regulation ('SAMR'). Should a Grandfathered FIE fail to register its Corporate Conversion on or before the Grandfathering End Date, then on or shortly after 1st January 2025, SAMR will publicly post details of this Corporate Conversion failure. It is anticipated Corporate Conversion failure by a Grandfathered FIE will entail material penalties and disruptive operating restrictions for the Grandfathered FIE in question.

One critical difference between the FIL Regulations and the Superseded FIE Laws is that the FIE Regulations mean that the highest internal governing authority for any FIE is its shareholders and shareholder meeting, and not its board of directors and board meetings (as is the case under the Superseded FIE Laws). One outcome of this change is that China statutory minority shareholder protection rights - (i) amendment to Articles of Association; (ii) merger/de-merger; (iii) liquidation/wind-up; and (iv) increase/decrease in registered capital - will be determined by a two-thirds shareholder resolution (FIL Regulations & China’s Company Law), rather than by a unanimous board resolution (Superseded FIE Laws).

The FIL Regulations contain a number of additional, albeit less critical, differences with the Superseded FIE Laws.