Almost three years ago, before the pandemic, China made a bold move forward by opening its economy to foreign investors with the launching a new Foreign Investment Law of the People's Republic of China ("FIL"). The FIL replaced key laws in existence since the 1980s for joint ventures and wholly foreign-owned enterprises. The groundbreaking legislative offered foreign investors greater business opportunities in China and met China's goal of creating a business platform on par with the global economy. The government's goal was clear: all investments in China - domestic and foreign - are to be treated equally.
The FIL, which previously focused on regulatory obligations, allows for greater flexibility to foreign investors when entering the China market by removing significant mandatory provisions from the articles of association. For a company currently operating in China, related regulations were adopted allowing a five-year transition period for existing foreign-invested enterprises, requiring compliance on or before by December 31, 2024. Many new companies have enjoyed the benefit of the FIL but many businesses that were established before the FIL was enacted have not yet focused on this deadline but should to take advantage of the FIL’s benefits and become compliant. A few key changes were:
- a shareholders' board is the top governing authority, not the board of directors;
- the board of supervisors is to monitor directors and senior managers acts, not the shareholders;
- the proportion of a joint venture foreign investment is now a negotiable term;
- key decisions are now negotiable terms, and not protected by a mandatory veto power to the joint venture partner;
- the registered capital amount is a negotiable term, not a specific right base on a formula; and
- the distribution of liquidation income is according to the shareholders' proportionate investment.
The PRC government provided five years for compliance as time is needed to appreciate the changes and integrate them into the company. Recommendations for Foreign Investors before opening a new business or to manage an existing one are:
- Have a deep and clear understanding of an investor’s rights and obligations regarding the abandoned mandatory principles and new ones allowing flexibility.
- Inquire with the local government about its sentiment on certain issues.
- Consider how the articles of association could be drafted or revised to a) influence the company’s operation in and out of China, and b) give flexibility (or not) in the event of a corporate change.
- Evaluate the big picture (global effect), including re-structuring.
- Rely on a reputable consultant (after a background check), and not an unknown agent, for guidance and to artfully represent or negotiate for you.
- Focus on the potential mismatch and confusion in the new law and its co-existence with other laws until December 31, 2024.
- Understand what benefits have been afforded to you under the FIL and take advantage of them.
Although the FIL was enacted with some inherent uncertainty, with some still existing, companies must consider the benefits and include in their planning compliance by the deadline, now, not in two years.