Ⅰ．OVERVIEW

On March 15, 2019, the Foreign Investment Law of thePRC (the “New FIL”) was approved at the second session of the 13thNational People’s Congress of the PRC (the “NPC”), which will come into forceon January 1, 2020. The New FIL, upon taking effect, will replace the Lawon Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign ContractualJoint Ventures and the Law on Wholly Foreign Owned Enterprises (the“three existing laws on foreign investment”) and will serve as the fundamentallaw of China in the foreign investment area.

FIL consists of six (6) chapters and forty-two (42)articles, covering areas including the definition and situations of foreigninvestment, the promotion, protection and management of foreign investment. Theintroduction of the new foreign investment law has been interpreted by foreignmedia as the latest move for China to continue its expansion and open-up. Its introductionwill help to optimize the business environment for foreign investors in China,attract new foreign investment while concurrently ensuring that existinginvestors continue to invest in the Chinese market, thereby enhancing thediversification of foreign investment entities and expanding the field offoreign investment so as to promote the rationalization of an industrialinvestment structure.

Ⅱ．BACKGROUND

On January 19th, 2015, the Ministry of Commerce of PRCpromogulated the Foreign Investment Law of the People's Republic of China(Exposure Draft) (“FIL Draft”) and the Explanation on the Foreign InvestmentLaw of the People's Republic of China ((Exposure Draft)) on its website tosolicit comments on the draft from the general public. On December 26th, 2018,the Standing Committee of the National People's Congress published the ForeignInvestment Law of the People's Republic of China (Draft) (Second Draft forReview) on the NPC's website to solicit comments on the draft from the generalpublic. The Foreign Investment Law of the People's Republic of China (Draft)(Second Draft for Review) (the “Second Draft for Review”), which waspromulgated on January 29, 2019, was submitted to the Second Session of the13th NPC on the afternoon of March 8.

The New Foreign Investment Law simply adheres to thebasic ideas of the Second Draft for Review, namely:

(i) The combination of the three existing laws on foreigninvestment into one unified fundamental law on foreign investment;

(ii) The content shall cover areas including thepromotion, protection, and management of foreign investment;

(iii) With respect to the management, it adheres to theapplication of “pre-entry national treatment plus negative list managementsystem to foreign investment” and creates systems including the foreigninvestment information reporting system;  

(iv) In order to enhance the protection of foreigninvestment, it creates a compliant mechanism for foreign invested enterprises,pays more attention on the protection of their Intellectual Property Rights andthe prevention on the transfer of compulsory technology, all of which adapts tothe variation in demand of the foreign investors and provides legal protectionthat meets the requirement of keeping pace with the times;

(v) This law merely provides for special issuesconcerning foreign investment; the principle of ensuring equal treatment ofdomestic and foreign-funded enterprises have been applied in respect of theapproval/filing of investment projects, industry licensing, and enterprisesregistrations, these activities will be further governed and regulated by otherlaws and regulations. For instance, foreign invested entities established afterthe implementation of the New FIL shall be subject to the Company Law of thePRC and Partnership Law of the PRC mainly in respect of their organizationalstructures.

Ⅲ．ANALYSIS OF THE HIGHLIGHTS OF THE NEW FIL AS COMPARED TOTHE FIL DRAFT

As compared to the FIL Draft, further amendments to theprovisions were made to the extent that the length of the New FIL was greatlyreduced, the scope of the definition of foreign investment was adjusted andcertain provisions on the prevention of the use of administrative means byadministrative agencies, or their officers, to compel the transfer oftechnology were included. This article specifically focuses on the followinghighlighted issues:

1. THE NEW FIL EXPRESSLY EXCLUDES agreementcontrol (NAMELY, vie STRUCTURE) FROM THE SCOPE OF FOREIGN INVESTMETNt butrettains the Miscellaneous Provision

Article 15 of the FIL Draft explicitly provided that “Forthe purpose of the present Law, the term ""foreign investments"" refersto the following investment activities conducted, directly or indirectly, byforeign investors:… (6) Control domestic enterprises or hold equity in domesticenterprises by contracts, trust or other ways.” Variable Interest Entities(""VIE""), also known as ""agreementcontrol""/""contractual arrangement"", refers to achievingactual control and consolidation in the financial statements of PRC operatingentities through various contractual agreements rather than through equityownership. The incorporation of the VIE structure into the scope of theregulation of foreign investment attracted widespread attention from overseasregulatory authorities including the Hong Kong Securities and FuturesCommission and the Stock Exchange of Hong Kong. The Stock Exchange of Hong Konghas required every applicant for IPO in the form of the VIE structure todisclose the impacts and the relevant risks the FIL Draft may have on the VIEStructure. It also requested that applicants to have a certified PRC's legalcounsel to provide legal opinion in this regard.

However, according to the New FIL, domesticallycontrolled enterprises or parties who hold equity in domestic enterprisesthrough contracts, trust or other ways are. expressly excluded from thesituations of foreign investment, the New FIL merely retains the miscellaneousprovision, which is “investments in other forms as provided by law,administrative regulations, or by the State Council”.

In terms of the deletion of all provisions about VIEstructures from the New FIL. We understand this as a move in line with China’sactual national conditions with such a move aiming to avoid delays indeliberation due to disputes over the specific implementation of matters andwhich helps to let the New FIL be implemented as soon as possible to the extentthat assurance is given to the foreign investors.

In view of the fact that VIE structures have been widelyused by Chinese domestic enterprises which are involved in the foreigninvestment of business areas that are subject to restriction or are of aprohibited nature with respect to foreign investment, such as TMT and privateeducation industries, to build overseas red-chip financing or overseaslistings. In addition to the previous arguments the fact that the current PRClaws and regulations have not made explicit certainty towards the VIEstructure, results in the existence of long-term controversy over theimplementation of the VIE structures. How to deal with the VIE structure mayhave an effect of “a slight move in one part may affect the situation as awhole”. The issue of the legitimacy of the VIE structure and the legislativeand law enforcement dynamics of the regulatory model have also become the focusof Chinese companies.

The New FIL will no longer incorporate the VIE structureinto the scope of regulation of foreign investment, which effectively dispelsthe concerns of enterprises, overseas regulatory authorities and investors. Itis reasonably predictable that VIE structure will for a long term in the futureremain to be the primary choice in terms of structuring for companies applyingfor overseas listing, the main business of which involves restricted orprohibited industries with respect to foreign investment. At the same time, wecannot ignore the role of the Miscellaneous Provision. The MiscellaneousProvision clearly reserves the legal basis and operational space for the futureimplementation of the special supervision of the VIE structure. The possibilitythat the NPC or relevant authorities may promulgate a series of relatedsupporting policies in the future to solve the common problems of legalapplication in respect of agreement control and round-tripping cannot beruled out.

2. pre-entry national treatment + negativelist management system to foreign investment

In the past, foreign investors investing in China werefaced with strict restrictions and thresholds when entering China, despite thefact that they can enjoy preferential policies including those relating to tax.The New FIL emphasizes “pre-entry national treatment”, which means China willnot treat foreign investors and their investment less favorably than thedomestic investors. During the entry stage of the investment; the foreigninvestment authorities merely implement the entry permit system for investmentin areas expressly listed under a Catalogue of Special Management measures(also , the “Negative List”) and the objects subject to review are no longerthe contract or the articles of association, but the foreign investors andtheir investment behaviors. This shows China's exploration of the foreigninvestment management model since its trial in the Shanghai Pilot Free TradeZone. We expect that such a system will greatly relieve the regulatory burdenfor most of the foreign investments in China, will greatly speed up the processand will make foreign investment more convenient.

In fact, the pre-entry national treatment plus negativelist management system is not a brand-new measure to be introduced in the PRC.It is the result of a re-consolidation of achievements made in the reformationof the format of existing laws. We can expect further actions to cancel orrelease foreign investment from restrictions not only in areas that are alreadyannounced including finance, automobiles, aircraft and ships, but also in areasof energy, resources, infrastructure, transportation, trade logistics and otherprofessional services. What we have also seen is that since the trial of thepre-entry national treatment plus negative list management system in theShanghai Pilot Free Trade Zone in 2013, some foreign investors have reportedthat they are still restricted by certain regulations that are targetingforeign investment but not listed in the Negative List. This situation has beencaused by a delay in the promulgation of departmental rules and normativedocuments as well as some misunderstanding by the staff members and issues ofthe inadequate implementation. The New FIL once again manifests the strongwillingness of the Ministry of Commerce to take the implementation of pre-entrynational treatment as priority in order to achieve, and further realize theexpansion of the scope of application for the national treatment obligationfrom the stage of post-entry to that of pre-entry.

3. MAKE IT EXPLICIT THAT Foreign-investedenterprises equally enjoy the various State policies supporting the developmentof enterprises

According to Article 9 of the New FIL, “foreign-investedenterprises equally enjoy, in accordance with law, the various State policiessupporting the development of enterprises.” In addition, Article 10 furtherprovided that,” Before a law, regulation, or rule regarding foreign investmentis made, opinions and suggestions of foreign-invested enterprises shall beobtained.” We can see from the process of amendment to this provision that theinsertion of the term ""in accordance with law"" manifests theprinciple of national treatment, the emphases on the importance of compliancewith laws and regulations, also serves as the legal protection forforeign-invested enterprises to enjoy equal and fair treatment. This means,foreign-invested entities within China will not only enjoy various Statepolicies supporting the development of enterprises but also have to undertakecorresponding obligations and comply to any relevant laws and regulations.

4. MAKE IT EXPLICIT THAT FOREIGN-INVESTEDENTERPRISES WILL BE ABLE TO EQUALLY PARTICIPATE IN STANDARD-MAKING AND INGOVERNMENT PROCUREMENT IN ACCORDANCE WITH LAW;

According to Article 15 of the New FIL, “The Stateensures that foreign-invested enterprises equally participate instandard-making in accordance with law, strengthening information disclosureand social supervision. The mandatory standards made by the State equally applyto foreign-invested enterprises.” Standard-making and government procurementare key areas for implementation of the principle of Competitive Neutrality.They are also areas where foreign investors direct a majority of theircomplaints. This provision under the New FIL will significantly improve thebusiness environment of foreign-invested enterprises in China markets, enhancethe attractiveness of the Chinese capital market. It is deemed as an effectiveextension of the ideas of equal treatments towards domestic and foreigninvested enterprises.

5. MAKE IT EXPLICIT THAT FOREIGN-INVESTEDENTERPRISES MAY obtain financing through public offering of securities such asstocks or through issuing corporate debts OR THROUGH OTHER MEANS

According to Article 17 of the New FIL, Foreign-investedenterprises may obtain financing through public offering of securities such asstocks or through issuing corporate debts, as well as through other methods. Infact, as early as October 8th, 2001, the China Securities Regulatory Commissionhas issued Opinions on Issues relating to Foreign-invested Listed Companies,according to which qualified foreign-invested enterprises may make publicoffering of shares. According to the Guidelines for the Application of BasicStandards for the listing of Stocks in National SME Share Transfer System(Trial), foreign-invested enterprises may apply for listing on the New OTCMarket, but conditional on their provision of the approval documents issued bythe competent commercial authorities. In January 2017, the State Councilpromulgated the Notice of the State Council on Several Measures for Expansionof China's Opening up to the Outside World and Active Use of Foreign Capital(""Several Measures"") where the further creation of a fair competitionenvironment attracts greater focus and acts as a key policy. The SeveralMeasures proposed that foreign-invested enterprises may list on the main-boardmarket, SME board, GEM and new OTC market according to law, and may finance byissuing corporate bonds, company bonds and convertible bonds, and by using debtfinancing instruments of non-financial institutions. The promulgation ofSeveral Measures indicates that foreign-invested enterprises will usher in amore open and fair investment environment. Foreign-invested enterprises mayobtain financing through public offering of securities such as stocks orthrough issuing corporate debts, as well as through other methods has beenraised by the New FIL to the level of a law, which demonstrates the strongsupport for foreign invested enterprises to finance through the capital marketin the form of law.

6. ENCOURAGE AND GUIDE FOREIGN INVESTMENTIN ACCORDANCE WITH LAWS AND REGULATIONS

In order to enhance the protection of the legitimaterights and interests of foreign investors, the New FIL expressly provided underthe General Provisions that, “Protecting the legitimate rights and interests offoreign investors, regulating foreign investment, administration, so as to pushon and form a new structure of comprehensive opening up”. At the same time.,the New FIL sets a specific chapter regarding the “Protection of Investment”,which mainly covers the following content:

To strengthen the protection of property rights offoreign-invested enterprises;

To strengthen the constraints on the formulation ofnormative documents with respect to foreign investment;

To urge local governments to observe promises;

To establish a complaint mechanism for foreign-investedenterprises.

In particular, it is worth paying attention on followinghighlighted issues:

(i) Foreign investors’investments are not to beexpropriated by the State.  

Article 20 of the New FIL provided that “Foreigninvestors” investments are not to be expropriated by the State. Under specialcircumstances, the State may, for public interests and in accordance with law,expropriate or requisition the investment of foreign investors.” Compared tothe relevant provisions under three existing laws on foreign investment “TheState shall not subject equity joint ventures to nationalization orexpropriation. In special circumstances, however, in order to meet publicinterest requirements, the State may expropriate an equity joint venture inaccordance with the legal procedures, but certain compensation must be paid”,the New FIL deletes the expression of nationalization and emphasizes that ifthe State, under special circumstances, needs to expropriate or requisition theinvestment of foreign investors, the relevant processes shall be in compliancewith law and the foreign investment entities shall be compensated timely,fairly and reasonably.

(ii) Profits may be freely remitted inward and outward inRMB or foreign currency.
 

Article 21 of the New FIL provided that “The capitalcontribution made by foreign investors within China, and the profits, capitalgains, proceeds out of asset disposal, intellectual property rights’ licensingfee, indemnity or compensation legally obtained, or proceeds received uponsettlement by foreign investors within China, may freely remitted inward andoutward in RMB yuan or foreign currency.” Compared to the three existing lawson foreign investment, this article refines the types of assets that foreigninvestors can freely remitt inward and outward, and further allows “freeremittance outward”, which fully reflects the continuous simplification offoreign exchange management regulations and the continuous improvement of thedegree of convenience in the facilitation of investment.

(iii) Emphases on protection of the Intellectual Propertyrights

Article 22 of the New FIL clearly sets forth that “TheState protects the intellectual property rights of foreign investors andforeign-invested enterprises, protects the legitimate rights and interests ofintellectual property right holders and relevant right holders thereof,encourages technological cooperation during foreign investment based onvoluntariness and commercial rules. The terms for technological cooperation areto be determined through equal consultation by the investors in compliance withthe principle of fairness. Administrative agencies and their employees shallnot force technological transfer through administrative measures. “

As we all know, the protection of intellectual propertyrights has been one of the key issues in proceeding trade negotiation betweenUnited States and PRC. The majority of U.S. companies have been placed abovethe line of international industrial chain and value chain in today's globaltrading. In order to enhance their competitive strength, the U.S. governmenthas set the protection of intellectual property rights as a fundamental concernin terms of trading policies. On the other hand, with the development of theChinese' open-up policies, China also hopes that the international communitywill strengthen intellectual property protection for Chinese enterprises.
 

Compulsory technology transfer has been specifically paidattention to by foreign investors for the recent years. Article 7 under theProtocol on the Accession of the People’s Republic of China stated that Chinawill not set compulsory technology transfer as the pre-requisite for approvingentry of foreign investment.  At the same time, China has made similarcommitments in relevant international agreements, such as the 2007 InvestmentAgreement between the Government of the Republic of Korea and the Government ofthe People’s Republic of China, the 2012 Agreement Among the Government ofJapan, the Government of the Republic of Korea and the Government of thePeople’s Republic of China for the Promotion, Facilitation and Protection ofInvestment, and the 2015 China-the Republic of Korea FTA. China hasfaithfully fulfilled this commitment and has no regulations on the transfer oftechnology in the relevant laws and regulations governing the entry of foreigninvestment. In order to ""retain"" foreign companies in China, aimingat the source of pain for investors such as insufficient protection of propertyrights and the arbitrary nature relevant policies, the New FIL once againclarifies that the state protects the intellectual property rights of foreigninvestors and foreign-invested enterprises according to law, and encouragestechnological cooperation during foreign investment based on voluntariness andcommercial rules, while also making it explicit that administrative agenciesand their employees shall not force technological transfer, better respond toforeign investors’ concerns regarding issues of intellectual propertyprotection and compulsory technology transfer and help to reduce relatedinternational disputes.

(iv) Mechanism for foreign-invested enterprises to lodgecomplaints
 

Article 25 of the New FIL provided that “The Stateestablishes a mechanism for foreign-invested enterprises to lodge complaints,timely resolving the issues presented by foreign-invested enterprises or theirinvestors, and coordinating and improving the relevant policy measures. Whereforeign-invested enterprises or their investors believe that an administrativeact conducted by an administrative agency and its employee(s) infringes upontheir legitimate rights and interests, they may apply for coordination andresolution through such complaining mechanism for foreign-invested enterprises.Where foreign-invested enterprises or their investors believe that theadministrative act conducted by an administrative agency and its employee(s)infringes upon their legitimate rights and interests, they may apply foradministrative review or initiate an administrative litigation in accordancewith law, in addition to applying for coordination and resolution through thecomplaining mechanism for foreign-invested enterprises.”

At the earlier time, the member of the Financial andEconomic Committee of the NPC, QIAN Fangli, proposed to amend the FIL Draft tothe extent that “Where foreign-invested enterprises or their investors believethat the administrative act conducted by an administrative agency and itsemployee(s) infringes upon their legitimate rights and interests, they mayapply for resolution of such disputes through the entity complaint workingmechanism of foreign-invested enterprises” and the main reasons for such aproposal are:
 

(a) During the stage of entry of foreign investment,there is no foreign-invested capital.

(b) It includes extra protection for foreign investors’investment in non-enterprise forms.

(c) It provides the possibility of making a request inthe name of a foreign-invested enterprises due to the differences in opinionamong different investors.

(d) It covers the situation where the rights andinterests of the foreign investors might have been injured, while the rightsand interests of the foreign-invested enterprises have not been affected.
 

The Deputy Director of the provincial department ofjustice of the Shandong Province, XIE, Weijun while giving a speech at theNPC's annual conference also proposed to establish a working mechanismspecially for foreign invested enterprises, and put the administrativecomplaint or the administrative review in the first place. We reasonablybelieve that this article under the New FIL provides for the establishment of atimely and effective communication between Chinese governments andforeign-invested enterprises, the promotion of conflict resolution, problemsolving, the increase of mutual trust and the clarification of doubts. It holdshistorical meaning in terms of safeguarding the legitimate rights and interestsof foreign investors and enhancing the confidence of foreign investors. It isalso more conducive to creating a market environment for fair competition ofdomestic and foreign invested enterprises and protecting the legitimate rightsand interests of foreign investment.

7. MAKE IT EXPLICIT THAT The Stateestablishes a mechanism for reporting foreign investment

Article 33 of the New FIL stipulates that “The Stateestablishes a mechanism for reporting foreign investment information. Foreigninvestors and foreign-invested enterprises shall, through the enterpriseregistration system and the enterprise credit information disclosure system,report investment information to the competent departments in charge ofcommerce. The content and coverage of foreign investment information report aredetermined based on the principle of actual necessity; the investmentinformation available through the departmental information sharing system shallnot be required to further report.”

In June 2017, the Ministry of Commerce promulgated the""Notice of the Ministry of Commerce on Further Strengthening theInformation Reporting System for Foreign Investment and the Construction ofInformation Publicity Platform (Commercial Letter [2017] No.3180)"" in aneffort to propose to further strengthen the foreign investment informationreporting system and information publicity platform construction. This articleunder the New FIL raises this reporting system to the level of the law, furtherdeepens the i"