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LEGAL: About the PRC Foreign Investment Law. Things Foreign Investors Should Know
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About the PRC Foreign Investment Law
Things Foreign Investors Should Know

BT 201906 legal 04关于中华人民共和国外商投资法
外商投资注意事项

2019年3月15日,即中华人民共和国外商投资法草案征求公众意数月后,中华人民共和国全国人民代表大会(“全国人大”)批准了“中华人民共和国外商投资法”(“外商投资法”)将于2020年1月1日生效,同时废除中华人民共和国中外合资企业法(“EJV法”)形成的现行外商投资法律框架,中华人民共和国中外合作合资企业法(“CJV法”)和中华人民共和国外商独资企业法(“外商独资企业法”),统一了中华人民共和国外商投资法律制度。

“外商投资法”的要点如下:

1.外商投资的范围
外商投资是指外国自然人,实体或其他组织直接或间接进行的投资活动,进一步澄清了 “间接外商投资活动”,“投资任何新项目”的定义或范例,

2.针对企业建立前的待遇和禁入行业的管理
这是法律层面首次立法针对企业建立前的待遇和禁入行业进行管理。国家对在国务院批准或者经国务院批准的禁入行业之外的外商投资给予国民待遇。

3.保护外商投资者和外商投资企业的知识产权
“外商投资法”进一步强调保护外商投资者和外商投资企业的知识产权,并规定行政机关及其工作人员不得以行政手段强制转让任何技术。
此外,在外商投资法公布后不久,国务院关于修改某些条例的决定(“第709号决定”)于2019年3月18日发布,删除了对技术进口的部分限制

4.公司的组织结构和活动
在外国投资法生效之日,即2020年1月1日,新成立的外商投资企业应遵守中华人民共和国公司法(“公司法”)或中华人民共和国合伙企业法。 “外国投资法”授予根据EJV法,CJV法和外商独资企业法设立的外商投资公司,将其原始组织形式保持在2020年1月1日起的五年过渡期内。考虑到大多数外商投资企业为有限责任公司,本文重点讨论“公司法”对中外合资经营企业设定的有限责任公司在组织结构,董事会,增资,股权转让和利润分配方面的主要变化。

5.其它
除上述的主要变化外,“外商投资法”重申对外国投资的鼓励和保护,将外商投资信息报告制度和外商投资安全审查制度升级为法律规定的基本制度。

“外商投资法”的出台导致了商业登记,外商投资申请,外汇和税收优惠等方面的一些不确定性。预计将发布进一步立法,澄清这些未解决的问题。在这方面,我们将继续关注并报告监管发展情况。

BT 201906 legal 02

United States Trade Representative Ambassador Robert Lighthizer, senior staff and cabinet members meet with Chinese Vice Premier Liu He and members of his delegation for trade talks in January 2019.

On March 15th, 2019, several months after the launch of soliciting public opinion on the draft PRC Foreign Investment Law , the National People’s Congress of the PRC (the “NPC”) approved the PRC Foreign Investment Law (the “Foreign Investment Law”), which will come into force on January 1st, 2020, repealing simultaneously the present foreign investment legal framework formed by the PRC Sino-Foreign Equity Joint Ven-tures Law (the “EJV Law”), the PRC Sino-Foreign Contractual Joint Ventures Law (the “CJV Law”) and the PRC Wholly Foreign Owned Enterprises Law (the “WFOE Law”) and unifying the PRC foreign investment legal regime.
 

The highlights of the Foreign Investment Law are as follows:

1. The Scope of Foreign Investment

According to Article 2 of the Foreign Investment Law, foreign investment means those investment activities directly or indirectly carried out by foreign natural persons, entities or other organizations, including:
 

(i) the incorporation of foreign invested entity in the PRC, individually or collectively with other investors;
 

(ii) the acquisition of a PRC entity’s shares, equities, property shares or other similar rights and interests;
 

(iii) the investment in a new project, individually or collectively with other investors; and
 

(iv) other methods of investment regulated by the laws, regulations or pro-visions of the State Council.
 

Issues to be further clarified under the definition of foreign investment include the definition or example of the “indirect foreign investment activity”, “invest-ment in any new project” and whether the investors from HK S.A.R., Macau S.A.R. and Taiwan region shall be classified as foreign investors.
 

(i) Indirect Foreign Investment Activity

Without the definition or example of the “Indirect Foreign Investment”, whether it intends to regulate the down-stream entities invested by second-tier foreign invested entities, or whether it refers to the invest-ment with VIE structure, variable interest entity, remains uncertain.
 

(ii) Investment in a New Project

It is subject to further clarification whether the project refers to those Sino-foreign contractual projects regulated by the CJV Law, such as the Sino-foreign cooperative agreements on the exploitation of petroleum resources, as well as its intention to focus on new project only.
 

(iii) Classification of Investors from HK S.A.R., Macau S.A.R. and Taiwan Re-gion

The investors from HK S.A.R., Macau S.A.R. and Taiwan Region are not in the scope of foreign investor set by the Foreign Investment Law, and the law keeps silent on whether the investment by the investors from HK S.A.R., Macau S.A.R. and Taiwan Region are regulated with reference to the Foreign Investment Law.

However, on March 15th’s press conference, when this question was raised by Phoenix Media, Premier Li Keqiang replied that the investment from HK S.A.R., Macau S.A.R. and Taiwan Region could be administrated with reference to the Foreign Investment Law. We expect the State Council to further clarify this issue in writing.

BT 201906 legal 062. Management System of Pre-Establishment National Treatment and Negative List

It is the first time the adoption of management system of pre-establishment national treatment and negative list to foreign investment has been officially stipulated in law-level legislation. The State will give national treatment to for-eign investment outside of the negative list released by or upon approval by the State Council.
 

The negative list indicates the industries with restrictions or prohibition on for-eign investment shall be subject to special administrative measures for access of foreign investment. The latest 2018 national negative list was released on June 28th, 2018.
 

The Foreign Investment Law also empowers the State to establish special economy zone or implement pilot policies and measures for foreign invest-ment, when necessary. Currently, foreign investment in the Pilot Free Trade Zones (“FTZ”) is subject to the FTZ negative list, which may adopt more flexible policies to the foreign investment within the FTZ on a trial basis. For instance, the Pilot Free Trade Zone Negative List released on June 30th, 2018 removes the foreign investment in performance brokerage institutions from the FTZ Nega-tive List and allows foreign investors to invest in cultural and artistic perform-ance groups, provided the group is controlled by a Chinese party.
 

3. Protection of the Intellectual Property of Foreign Investors and Foreign In-vested Enterprises

The Foreign Investment Law further emphasizes the protection of the intellec-tual property of foreign investors and foreign-invested enterprises and stipu-lates that the administrative organ and its staff are not allowed to force the transfer of any technology by administrative means.

BT 201906 legal 07A visitor walks past a sign for intellectual property rights (IPR) protection during a trade fair in Beijing

Furthermore, shortly after the publicity of the Foreign Investment Law, Decision of the State Council on Modification of Certain Regulations (“Decision No. 709”) was released on March 18th, 2019, which deletes following restrictions to the technology import contract set by Regulations for the Implementation of the PRC Sino-Foreign Equity Joint Ventures Law (“Implementation Regulation of EJV Law”) and Regulations on Technology Import and Export Administration of the PRC:
 

(i) The term of a technology transfer agreement is generally no longer than ten years;
 

(ii) After the expiry of a technology transfer agreement, the technology im-porting party shall have the right to use the technology continuously;
 

(iii) Where an infringement of third party’s legal rights and interests occurs when an assignee of a technology import contract is using technology provided by the assignor in accordance with the provisions of the con-tract, the assignor shall bear the responsibility;
 

(iv) During the period of validity of the technology import contract, the right over any improvements in the technology shall be vested with the party which has made the improvements;
 

(v) A technology import contract shall not contain the following restrictive clauses:

(1) requiring the assignee to accept incidental provisions that are not essential to the importing of the technology, including the purchase of unnecessary technology, raw materials, products, equipment or services;

(2) requiring the assignee to pay fees for the usage of or bear related obligations for technology, where the patent rights have expired or have been declared invalid;

(3) restricting the assignee from improving the technology provided by the assignor or using the improved technology;

(4) restricting the assignee from obtaining the technology similar to or competing with the technology provided by the assignor from other sources;

(5) unreasonably restricting the channels or sources that the assignee may procure raw materials, parts, products or equipment from;

(6) unreasonably restricting the quantity, type or sale price of as-signee's products; and

(7) unreasonably restricting the assignee's export channels for products produced by using the imported technology.
 

Decision No. 709 came into effect on March 18th, 2019, so does it mean the above deleted rules shall no longer apply to the technical transfer contracts be-tween the foreign assignors and domestic assignees? The answer may not be so certain.
 

For the technical contract governed by the PRC laws, it shall also be governed by the PRC Contract Law and the Interpretation of the Supreme People's Court on Issues relating to Applicable Laws for Trial of Dispute Cases involving Techni-cal Contracts.
 

Regarding item (i) “the term of a technology transfer agreement” and item (ii) “right to use the technology continuously after the expiry of term”, since there are no restrictive provisions set by the PRC laws and regulations on said matter, the parties could freely negotiate the corresponding term.
 

Regarding item (iii), the PRC Contract Law allows the parties to negotiate the liability allocation of the infringement caused by the performance of the tech-nology contract.
 

Regarding item (iv) “the ownership of the right over improvement of technol-ogy”, the parties could agree on the ownership of the right over any improve-ments in the technology. If there is no such agreement or such agreement is not clear, the party made the improvement shall be the right owner . In addi-tion, under the scenario the technology contract is recognized as void and the parties are unable to reach an agreement on the ownership of the right over the improvements in the technology, the court may rule that the party made the improvement shall own the right over said improvement .
 

Regarding item (v) “the restrictive clauses”, although they have been deleted from the Regulations on Technology Import and Export Administration of the PRC, those restrictions are still applied to the technology contracts in accor-dance with the PRC Contract Law, which stipulates that a technology contract with restrictions (1) to (7) will be regarded as illegally monopolizing technology and impeding technological progress, and shall cause the technology contract be void . Same as we elaborated above regarding item (iv), when the contract is regarded as invalid, it will bring uncertainty to the ownership of the improve-ment of the technology.
 

To those foreign assignors seeking less restriction to the technology transfer, selecting laws in favour of the foreign assignor might be an alternative. Fur-thermore, the foreign assignors may persuade the assignees to agree to resolve the dispute through an overseas arbitration institution in the territory of any signatory of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, the enforceability of said option is an open question and it is subject to further interpretation to the law by the law makers, the Su-preme People’s Court and opinions made by the judges.

BT 201906 LEGAL 014. Organization and Activities of the Company

After the effective date of the Foreign Investment Law, i.e. January 1st, 2020, the newly incorporated foreign invested companies shall comply with the PRC Company Law (the “Company Law”) or the PRC Partnership Enterprise Law. The Foreign Investment Law grants the foreign invested companies established in accordance with the EJV Law, CJV Law and WFOE Law to keep their original organization forms within a five-year transitional period commencing from January 1st, 2020.
 

In consideration that most of the foreign invested entities are limited liability companies, our discussion hereinafter will focus on the main changes of limited liability companies set by the Company Law against the Sino-foreign equity joint venture companies (“EJV”):
 

(i) Organization

The launch of the Foreign Investment Law will also change the corpo-rate governance structure of foreign-invested entities from board-centrism to shareholder-centrism. According to the Company Law, the shareholders’ meeting is the authority of the company, therefore the power to decide the major issues of the company shall be shifted from the board of directors (executive director) to the shareholders’ meeting (shareholder). Resolutions on (1) amendment to the articles of associa-tion of the company; (2) increase or reduction of registered capital; and (3) company merger, division, dissolution or change of company’s struc-ture shall be passed by shareholders holding two-thirds or more of the voting rights on a shareholders' meeting, replacing the previous re-quirement of the unanimous approval of all directors present at a duly convened board meeting.
 

The voting rights exercisable by shareholders on a shareholders' meet-ing shall be based on the ratio of capital contribution, but the Company Law allows the shareholders to reach agreement on the allocation of the voting rights in the articles of association of the company.
 

(ii) Board of Directors

Under the Company Law, board of directors (executive director) is a management and executive organ of a company, not the highest organ-izational organ provided by the EJV Law.
 

The non-employee’s representative directors shall be elected or dis-missed by the shareholders on the shareholders’ meeting, instead of being appointed or removed by the shareholders.
 

(iii) Subscription of Incremental Capital

Other than the subscription of incremental capital on pro rata basis, the shareholders could agree on the ratio of future incremental capital sub-scription in the articles of association.
 

(iv) Transfer of the Equity Interest

Instead of obtaining consent from the other shareholder(s), the Com-pany Law only requires the shareholder(s) proposing to transfer its eq-uity interest to a non-shareholder to obtain the consent of more than half of the non-proposing shareholder(s), the transfer of equity interest between shareholder(s) is not subject to any prior consent.
 

In addition, if shareholders reach agreement on the transfer of equity interest in the articles of association of the company, such provisions shall prevail.
 

(v) Profit Distribution

It is compulsory for the companies governed by the Company Law to contribute 10% after-tax profits into their statutory surplus before profit distribution, till the aggregate sum of the statutory surplus reserve is more than 50% of its registered capital, while the EJV Law allows the board of directors to determine the contribution percentage of the re-serve funds.
 

The Company Law not only allows the company to distribute profit in proportion to the ratio of each shareholder’s respective actual contribu-tions to the registered capital, but also allows the shareholders to freely determine the profit distribution proportion, provided the agreement is reached by all of the shareholders.

BT 201906 legal 05

An advertising board (L) showing a Chinese stone lion is pictured near an entrance to the headquarters (R) of China Securities Regulatory Commission (CSRC), in Beijing

5. Others

Other than the above commented main changes, the Foreign Investment Law reiterates the encouragement and protection to the foreign investment, up-grades the foreign investment information reporting system and security re-view system for foreign investment as the basic system set by law, grants the power to take actions against any discriminatory, prohibitive or restrictive measures made by other nations or regions, and specially carves out the finan-cial industry and financial market, where the provisions stipulated by the State shall prevail.
 

The Foreign Investment Law grants the foreign investors a five-year transitional period to convert the present foreign invested entities to the unified corporation forms under the Company Law (or the PRC Partnership Enterprise Law as the case may be). It takes time for the foreign investors, especially those investing in EJVs or a Sino-foreign con-tractual joint ventures (“CJV”), to digest the rights and obligations set by laws, the changes and new formalities requirements, to discuss internally and externally with their advisors regarding the challenges and strategies, to renegotiate the terms of shareholders’ agreement and its ancillary contracts, usually including the technology transfer arrangements, and the articles of association. Due to the flexibility set by the CJV Law, e.g., co-operative conditions, different forms of corporation, either in a legal person or a non-legal person form, profit distribution, etc., the foreign investors of CJVs face more challenges and obstacles on such conversion.
 

The launch of the Foreign Investment Law has led to some uncertainty in fields of commercial registration, foreign investment filing, foreign exchange and preferential tax treatment, among others. Further legislation providing clarification to these unset-tled questions is expected to be issued. In this regard, we will continue to follow and report the regulatory developments.

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