CBL Team’s Introduction
CBL’s translation of the Ministry of Commerce guidance pertaining to foreign investment practices is vital for businesses in maneuvering the Chinese business environment. The MOJ delineates the process for recognition of foreign investments, demonstrates regulatory benchmarks, elucidates antitrust filing procedures and outlines how security reviews for foreign investments are conducted. Business can use the official guidance to ensure their Chinese operations align with the country’s legal and regulatory framework. To make the information easier to access, we excerpted this from the Chinese government’s much longer and less organized guidance on the topic. This guidance is translated to American English using the User Centered Translation approach.
Common Questions About Market Access under the Foreign Investment Law
- How is the validity of foreign investment contracts determined in practice?
The validity of foreign investment contracts is generally determined based on the following factors:
- Foreign investment contracts in sectors prohibited by the Foreign Investment Access Exception List (hereinafter referred to as the “Exception List”) are invalid. However, the Exception List does not apply to certain foreign investors approved by the State Council.
- Foreign investors may only enter into contracts for sectors restricted by the Exception List if they meet the criteria (such as shareholding ratio or executives’ requirements) provided in the Exception List or the contracts shall be voided. However, a contract may still be considered valid if the investors satisfy the criteria provided by administrative regulations and the contract is approved by the appropriate jurisdictional agency (National Development and Reform Commission or the agency with jurisdiction over investments), provided that business entity registration is completed or the necessary licenses are obtained prior to the court issuing a decision.
- Foreign investment contracts involving sectors not prohibited or restricted by the Exception List shall be deemed valid provided that they do not violate other mandatory laws of the People’s Republic of China. Both the Foreign Investment Law and the Exception List may be used to determine the validity of foreign investment contracts executed prior to the Foreign Investment Law taking effect on January 1, 2020, if the court has not issued a decision by January 1, 2020.
The appropriate agency with jurisdiction will order the cessation of any investment activities, the disposal of all shares or assets, or take any other necessary action to achieve restitution to put the entity in the position prior to the investment if a foreign investment contract is deemed invalid, and any illegal income accrued as a result will be forfeited.
- What does foreign investment regulation cover?
Business entity that has foreign investors must comply with the law and central government regulations governing occupational safety and social insurance, as well as manage taxation, accounting, foreign exchange, and other matters in compliance with the law, central government regulations, and applicable national regulations. They must also cooperate with lawful oversight and audits carried out by any agency with jurisdiction. Furthermore, a business entity that has foreign investors must be aware of the following regulatory issues:
- Information Reporting System
Foreign investors must submit investment information to the agency with jurisdiction over commerce in the business entity filing system and the national business entity credit lookup system. The above information is shared among different government agencies and repeat submissions are not required. Moreover, information reporting is not a requirement for foreign investors to form and register a business entity. The market regulator will not review foreign investment information reports, and foreign investors may submit their information reports after applying to register a business entity.
The foreign investment reporting system supersedes the Ministry of Commerce’s previous approval and filing requirements, however, entities with foreign investors are still required to obtain approval from and file with the National Development and Reform Commission (NDRC). Note that the NDRC approval and filing requirements apply to both domestic and foreign investments in China. Refer to the Government-Approved Investment List for more information on investment reporting, documents required by the State Council, and approvals required by provincial governments. The above list provides that investments (including capital increases) of US$300 million or more restricted by the Exception List must be approved by a jurisdictional State Council investment agency, and investments (including capital increases) of US$2 billion or more must be reported to and filed with the State Council. Investments (including capital increases) under US$300 million must be approved by the provincial government.
- The same industry access and licensing rules apply to all Chinese entities, regardless of whether they are funded through domestic or foreign investment. The Market Access Exception List (2020 edition) provides both prohibited and permitted activities. Commercial enterprises are prohibited from investing in or engaging in any of the activities prohibited by the Market Access Exception List. The government agency will apply the law to decide whether to grant a commercial enterprise market access, and all commercial enterprises are entitled to market access in sectors not covered by the Market Access Exception List. Business filings cover both pre-formation approvals and post-formation approvals. The law provides that securities companies, distributors for the government tobacco monopoly, tobacco wholesalers, and for-profit private schools are required to go through pre-formation approvals with the State Council, which also administers pre-formation approvals for publishing, securities broker, securities depository, and clearing business licenses. Other entity types may obtain administrative approval during the period of time between formation, and actually commencing business operations.
- Antitrust Filings
Foreign investors must file a market concentration review request should their acquisition or control of a mainland Chinese domestic business entity through a cross-border transaction potentially adversely impact market concentration in China (if China is the end user market for the acquired business’ products). The request is governed by the Antitrust Act of the People’s Republic of China, the Temporary Rules on Market Concentration Reviews, the Guidelines for Simplified Market Concentration Filings, and the State Council Rules on the Thresholds for Prior Notification of Market Concentration.
The following criteria are used to determine control: (1) Foreign investors owning over 50% of voting shares;
(2) Foreign investors having veto power over major corporate governance matters; (3) The power to name executives; (4) When businesses participating in the concentration have a combined global total gross revenues of over RMB 10 billion or a combined total gross revenues in China of over RMB 2 billion, and at least two of the businesses have a total gross revenues in China exceeding RMB 400 million;
Antitrust filings should generally be completed after the execution of the market concentration agreement and before the transaction takes effect. We recommend contacting the Antitrust Bureau of the Market Supervision Administration during the negotiation stage to expedite review.
- Security Review System
Any foreign investment that affects or may affect national security will be subject to a security review.
(1) Entities or actions to be reviewed
- A security review is required whenever a foreign investor purchases assets or equity from a domestic business entity directly or indirectly involved with national defense and security.
- A security review is required in certain cases if foreign investors obtain actual control of a business entity through merger and acquisition even if there is no direct involvement with national security. This applies for domestic business entities in fields critical to economic security, such as agricultural products, energy, natural resources, infrastructure, transportation services, essential technologies, or heavy equipment.
(2) Determination of Actual Control
- A foreign investor, together with its controlling parent company and holding subsidiary own over 50% of the total shares through merger and acquisition.
- Over 50% of the total shares are held by multiple foreign investors through mergers and acquisitions.
- The voting power held by foreign investors owning less than 50% of the shares through merger and acquisition is sufficient enough to materially affect decisions during shareholders or board of directors meetings;
The National Development and Reform Commission and the Ministry of Commerce conduct joint national security reviews for mergers and acquisitions, and their decisions are final.