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Doing M&A in China under the New Foreign Investment Law Leading Lawyer for Cross Border Projects of the One Belt One Road Strategy” - All China Lawyers’ Association, September 2016 “Recommended lawyer for . WAYNE WANG LAWYER FROM CHAINA


The Foreign Investment Law of the PRC (the “FI Law”) was passed by China’s parliament on March 15, 2019 and will come into force on January 1, 2020.    

As an iconic event of China’s efforts to further open up its market, the FI Law will overhaul China’s foreign investment legal framework, with extensive impact on both incorporation of foreign invested enterprises (“FIEs”) and mergers and acquisitions of domestic companies by foreign investors.   


This article will address a few key issues under the FI Law.


  1. Market access 


Historically, foreign investment in China was subject to regulatory approval and the joint venture contracts and articles of association of FIEs were subject to regulatory review.  In recent years, the approval requirement has been replaced by filing procedures.  The FI Law has reaffirmed that foreign investment in China only needs to be filed with (rather than approved by) the relevant authorities.      


The FI Law has referred to the list of industries where foreign investment is restricted or prohibited (the “Negative List”), last updated in June 2019 by the National Development and Reform Commission and the Ministry of Commerce. 


According to the Negative List, foreign investors are not permitted to invest in the prohibited industries and must not acquire more than a certain percentage of shares in companies in certain restricted industries.


Notably, the number of restricted or prohibited industries has been reduced from 48 to 40.  Several industries have been further opened up for foreign investment, such as exploration and exploitation of petroleum and natural gas, construction and operation of cinemas.


Foreign investors are now permitted to invest in any industries not set out on the Negative List.  This has effectively given a “national treatment” to foreign investors in China in non-sensitive industries.


  1. Registered capital (i.e., share capital)


Previously, shareholders of FIEs are required to pay up their “registered capital” within a certain timeframe and there was a minimum registered capital requirement for FIEs in many cases.


In recent years, such requirements of minimum registered capital and statutory timeframe for capital contribution have been removed.  These changes occurred prior to enactment the FI Law, but are worth noting by foreign investors as well.   


To some extent, the PRC’s company law is more similar to the common law in these respects.  For example, an investor may stipulate in the articles of association of the FIE that it will pay up the registered capital in 20 years, which is legal.  If a foreign investor acquires shares in a PRC company, it is not required by law to pay the consideration before it can be registered as the shareholder of the target company (although its dividend and voting rights may be restricted before it fully pays the consideration).           


  1. State security review


According to Article 35 of the FI Law, a state security review shall be conducted by the relevant authority to confirm whether a foreign investment project will affect or potentially affect China’s state security.  Detailed implementation measures regarding state security review will be enacted later.  This is a new area of law in China. The PRC government is of the view that this is in line with international common practice of other jurisdictions.   


It is expected that the new “state security review” mechanism will apply to foreign investors doing both M&A and greenfield investment in China.  If the foreign acquisition target in China holds sensitive technology or is of a significant size, it is likely that the “state security review” will be triggered. 


  1. Anti-trust 


According to the FI Law, where a foreign investor is involved in a concentration of business by merging or acquiring a domestic company, such transaction shall be examined by the relevant authority under the Anti-monopoly Law.


If any party involved in the transaction has met the following thresholds, the parties shall file an application with the relevant authority in advance:


  1. The aggregate global turnover of all parties participating in the concentration during the previous financial year had exceeded CNY 10 billion, while at least two parties had respectively reached a turnover of more than CNY 400 million in China during the previous financial year;


  1. The aggregate turnover in China by all parties participating in the concentration during the previous financial year had exceeded CNY 2 billion, while at least two parties had respectively reached a turnover of more than CNY 400 million in China during the previous financial year.


  1. VIE Structure


In the past, many foreign investors (including PRC domestic investors setting up companies in overseas and making “round trip” investment back to China) have used the so called “VIE” structure to effectively control PRC companies operating in industries where foreign investment was prohibited or restricted.  Many well-known internet companies of China, such as Alibaba and Baidu, have also used this structure.  It has also been used by many foreign investors in the eduction sector as well.   


For years, it has been an arguable issue whether foreign investment via the VIE structure is legal and should be subject to regulatory supervision.  To some extent, it is commonly understood as a “grey area”. 


In the earlier discussion draft of the FI Law, it was proposed that all VIE structures shall be considered as foreign investment and subject to regulatory supervision.  However, the formally released FI Law has removed VIE structure from the definition of “foreign investment”, while retaining a “catch all” provision referring to “other forms of foreign investment as stipulated by the State Council”.  It remains to be seen as to whether and when the State Council will stipulate what are the “other forms of foreign investment” and what would be the new regulatory requirements on VIE structure. 


  1. Equal opportunity


The FI Law has expressly provided that the state’s various policies on supporting enterprises shall equally apply to FIEs pursuant to law.  Further, before the government enacts any laws, regulations or measures affecting interests of FIEs, they shall seek opinions and comments from FIEs.


FIEs are also entitled to equally participate in the formulation of product quality standards, bid for government procurement projects, conduct IPOs, issue corporate bonds or other securities or raise funds in the PRC by other means. 


Moreover, it is stipulated in the FI Law that local governments must not enact regulations to derogate legal interests of FIEs or impose further obligations on them.


The policy undertakings given by local governments to FIEs must be honored, and the “investment contracts” signed by local governments and FIEs must be performed.


As such, the FI Law has provided more certainty for operation of FIEs in China after completion of M&A projects.         


  1. Foreign exchange


The FI Law has clarified that foreign investors’ capital contribution, profits, capital gain, sales proceeds of assets, IP licensing fees, legally obtained damages and indemnity, and liquidation proceeds, can all be freely remitted to overseas from China, or to China from overseas. 


For foreign investors doing M&A in China, the FI Law has provided more certainty for their exit strategy post-acquisition. 


  1.  IP protection and technology transfer


It is well known that IP protection is a key issue during the trade talks between China and the USA.  The FI law has expressly prohibited government entities or their officials from using administrative measures to force technology transfer.  Furthermore, the terms and conditions of technology cooperation shall be determined by the parties following negotiation based on the principles of fairness and equality. 


Foreign investors setting JVs with Chinese partners may resort to these provisions of the FI Law when dealing with technology licensing / transfer issues.          


  1. Complaint mechanism


Under the FI Law, the state will establish a mechanism to handle complaints of FIEs, coordinate and improve key policy measures relating to complaints of FIEs, and handle their complaints timely.  FIEs are entitled to lodge complaints against government entities and their officials who infringe their legal interests, apply for review of administrative decisions or initiate court proceedings against government entities. 


The detailed implementation measures for the said mechanism have yet to be released.  However, in the future, foreign investors doing M&A in China may also enjoy the aforementioned rights.




In general, there are many significant changes brought by the FI Law.  The above is only a non-exhaustive list. 


There is no doubt that the PRC’s legal environment is becoming more friendly to foreign investors and in line with international standards in many respects.  In the other hand, according to the general practice of the PRC, it remains to be seen as to what will the detailed implementation measures under the national law (such as the FI Law) look like and how will the “implementation measures” be implemented in practice.  It is expected that most of the implementation measures will be released after the FI Law becomes effective on 1 January 2020. 

Wayng wang is a  Leading Lawyer for Cross Border Projects of the One Belt One Road Strategy”  China Lawyers’ Association, September 2016 “Recommended lawyer for China (Projects & Infrastructure, Banking &Finance)

       Mr. Wang specializes in M&A and FDI into China, as well as China outbound M&A.

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