The Standing Committee of the National People’s Congress on 3 September 2016 passed a decision on amending four laws, including the Law on Wholly Foreign Owned Enterprises, and the amendment became effective on 1 October. Under the decision, a recordal system for the establishment and administration of corporate changes of foreign-invested enterprises (FIEs) in “industries that are not subject to special administration measures for entry” has been implemented on a nationwide basis.
On the same day, the Ministry of Commerce (MOFCOM) released a draft of the Interim Measures for the Administration of the Recordal of the Establishment and Change of Foreign-Invested Enterprises for public comment until 22 September 2016. Under the draft measures, which came into effect from 1 October 2016, “industries that are not subject to special administration measures for entry” are those which will be listed in a “negative list” for foreign investment, similar to the ones that have been adopted in the four pilot free trade zones (FTZs) in Shanghai, Guangdong, Tianjin and Fujian.
The decision and the draft measures represent China’s attempts to further relax the regime for administration of FIEs on a nationwide basis.
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The new negative list. The draft measures, once promulgated, mean a nationwide launch of the recordal system now in place in the FTZs. In the FTZs, only foreign investments in the restricted industries on the negative list are still subject to the decades-long examination and approval system by MOFCOM and/or its local counterparts.
At the same time, the new negative list is expected to be promulgated simultaneously with the official release of the draft measures. It will supersede the Catalogue for Guiding Foreign Investment in Industries. It is expected that the negative list will be similar to the negative lists for foreign investments that are currently being adopted in the FTZs.
REPORTING AND RECORDAL
Under the draft measures, the provincial, sub-provincial and municipal branches of MOFCOM or their equivalents in the FTZs (the commerce authority) will be responsible for administering the recordal system.
Formation of newly established FIEs. Foreign investors may report and record the establishment of an FIE prior to the issuance of a business licence to it. Alternatively, the FIE can file for such recordal with the commerce authority after the issuance of its business licence. This seems to be a major change to the long-established two-step approval and registration system for the establishment of FIEs. However, based on the history of establishment of FIEs in the FTZs, the local Administration for Industry and Commerce (AIC) bureaus is still likely to insist on issuing the business licence after the recordal with the commerce authority has been completed.
In China, domestic companies may become FIEs as a result of an acquisition by a foreign investor. Such acquisitions are regulated by circular No. 10 − the Regulations for the Acquisition of Domestic Enterprises by Foreign Investors, which provides for the two-step approval and registration system. Based on the provisions of the draft measures and the recordal form attached to it (which only addresses greenfield FIEs), it would seem that the simple recordal system does not apply to FIEs that are established as a result of an acquisition. The acquisition of a domestic company by a foreign investor would still be subject to the two-step approval and registration system.
Corporate changes of FIEs. Under the draft measures, an FIE is required to report to and record with the commerce authority any major change within 30 days after such change is made.
Major changes include: (1) change of basic company particulars such as name, registered address, type of enterprise, term, industry, type of business, business scope, registered capital, total investment, organization, legal representative, or ultimate controller; (2) change of information of the shareholder; (3) transfer and pledge of the FIE’s equity; (4) merger, de-merger and termination; (5) early recoupment of investment by a foreign investor of a Sino-foreign co-operative enterprise; (6) pledge of assets of a wholly foreign-owned enterprise; and (7) entrustment management of a Sino-foreign co-operative enterprise.
Effective date of corporate changes. The draft measures further state that the changes discussed in paragraph (b) above are deemed to occur when the highest authority of the FIE (being the board of directors for Sino-foreign joint ventures, and the shareholder for wholly foreign-owned enterprises) passes the relevant resolution approving the change.
In light of such change, we expect that for intra-group transactions, the recordal and registration of such changes will become post-closing matters, hence provide more certainty on the timing for these transactions. However, a prudent party to a transactions with third parties will probably still require, as conditions precedent to closing, evidence of the completion of the recordal with the commerce authority, and registration with the AIC of the corporate changes.
SIMPLIFIED PROCESS
Documentation and procedures for the recordal. The entire recordal process will be completed online. The necessary paperwork for the recordal has been simplified to include a recordal form, the supporting documents, a letter of undertaking and the identity documents of the foreign shareholders and legal representative (only required in case of the change of shareholders or legal representative).
The commerce authority will only perform a cursory review of the documents to confirm their completeness and accuracy, and that the relevant matter is registrable under the new recordal system. The recordal will be completed within three business days after receipt of the full set of documents.
TIME FACTOR
Based on the authors’ experience of implementing corporate changes of FIEs in the FTZs, in addition to the filing online, the officials still require the online forms to be printed, signed and then re-submitted. Furthermore, the officials could always request additional information and documents under the draft measures, and thus defer the timeline. Therefore, the actual time for recordal in practice could be longer than expected.
The recordal system and the simplified documentation requirement are premised on the assumption that an FIE, its shareholders and their representatives themselves will comply with the relevant corporate governance and articles of association of the FIE.
While the legal representative of the FIE signing the undertaking could assume personal liability for any false declaration, the parties will need to have some additional safeguards to ensure compliance with the relevant corporate governance.
DISCLOSURE FEATURE
A new feature required under the recordal system is the disclosure of information relating to the “ultimate controller” of the FIE and the shareholder of the FIE. Ultimate controllers of an entity include the following: (1) persons who have more than 50% shares or voting rights in such entity; (2) persons who have less than 50% shares or voting rights, but have sufficient voting rights to significantly influence the resolutions of such entity; and (3) persons who otherwise have significant influence on the operational, personnel, financial and technological matters of such entity.
This new disclosure requirement no doubt will increase the administrative burden on foreign investors. In certain cases, such as foreign investors that are private equity funds or listed companies, it may be difficult to identify who the “ultimate controller” is.
COMPLIANCE SUPERVISION
The commerce authority may conduct spot-checks for non-compliance with the draft measures. Findings of non-compliance can be shared with other government agencies and will be stored in MOFCOM’s database. In the event of any non-compliance, the defaulting FIEs will be ordered to rectify, terminate the illegal operation, divest the equity/assets in question (in the case of the performance by the FIE of any business prohibited for foreign investment), and be subject to a fine capped at RMB30,000 (US$4,350).
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Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com
