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China Releases Measures on Filing for the Establishment and Change of Foreign-Invested Enterprises
2017-06-22 Jerry Liu | Jessica Foo

By Jerry Liu 刘展 and Jessica Foo 符玉玲

 

On 26 May 2017, the PRC Ministry of Commerce (“MOFCOM”) released the draft Measures on Filing for the Establishment and Change of Foreign-Invested Enterprises (the “Proposed Measures”) [1] for public comments. [2]

 

The Proposed Measures introduces several changes to the current Interim Administrative Measures on Filing for the Establishment and Change of Foreign-Invested Enterprises (the “Interim Measures”) [3] and further deregulates foreign direct investments into China.

 

Background

 

On 3 September 2016, the Decision of the Standing Committee of the National People’s Congress on Revising Four Laws, Including the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (the “Decision”) [4] was adopted. [5] Under the Decision, the previous MOFCOM approval regime was replaced with a record filing procedure for a number of routine corporate filings (including capital increase, change of shareholders, extension of operating period, change of business scope, incorporation, and mergers) for foreign-invested enterprises (“FIEs”) provided however, that the business of the enterprise is not restricted by the so-called Negative List. The Negative List is a list that specifies all the industries and situations which are still subject to the old MOFCOM approval regime.

 

In furtherance of the Decision, MOFCOM promulgated the Interim Measures on 8 October 2016, which provided the implementation rules for the new record filing system. These changes included a sharp reduction in the number of documents required to be submitted to MOFCOM and timeline to complete the record filing. On the same day, MOFCOM and the National Development and Reform Commission (“NDRC”) jointly issued Order No. 22 (the "Order No. 22"), [6] which introduced another exception to the application of the record-filing procedure: mergers and acquisitions (“M&A”) of non-FIEs (domestic companies) by foreign investors would still require MOFCOM’s approval.

 

Changes to the Interim Measures

 

1. Creation of an FIE through an M&A

 

Article 5(2) of the Proposed Measures states that if:

 

a. a non-FIEs is converted into an FIEs by such ways as merger or acquisition, strategic investment, or merger by absorption; and

 

b. if the industry falls outside the Negative List,

 

the new FIEs can be established following the simplified record-filing procedure under the Interim Measures.

 

Our interpretation of this paragraph is that the Proposed Measures intends to put also under the record-filing regime the M&A exception set up under the Order No. 22. If the Proposed Measures are implemented as currently drafted, this change will indeed be welcomed and very likely facilitate the reduction of closing timelines for such M&A deals.

 

2. Corporate changes to listed companies

 

MOFCOM’s approval for the following corporate changes to a listed company has been repealed under the Proposed Measures:

 

a. if a foreign-invested listed company wishes to include a new foreign shareholder. The listed company will now only be required to file a report of change of shareholder with MOFCOM before or 30 days after registering the change with the Securities Registration and Clearing Institutions;

 

b. if the foreign shareholder of a foreign-invested listed company or company trading on the National Equities Exchange and Quotation (the “NEEQ”) alters their shareholding by more than 5% or if the absolute or relative controlling position of the foreign investor is altered. The listed company will only be required to file such a change in MOFCOM’s online system; and

 

c. if a single foreign investor sells all of their shares in a listed company, the listed company must also file such a change in MOFCOM’s online system.

 

3. “Apply and file” has been replaced with “report"

 

The Interim Measures provide that companies shall apply and file to MOFCOM for the establishment or change of FIEs. The Proposed Measures has replaced “apply and file” with the word “report”, further cementing the record-filing concept and removing any indication that approval is required.

 

4. Additional matters requiring record filing

 

Consistent with revisions in paragraphs 1 and 2 above, Article 6 of the Proposed Measures states that if the following situations occur, such changes will also need to be filed via MOFCOM’s online system:

 

a. change of basic transaction information regarding the establishment of FIEs through M&As, including changes to the consideration, payment method, the valuation of shares or assets being acquired; and

 

b. change of the foreign investor’s basic information, including change of ultimate controlling shareholder of the foreign investors.

 

This new requirement will impose a greater compliance burden on companies to accurately disclose the foreign investors’ ultimate controlling shareholder.

 

5. Change of signatory

 

Previously, when establishing a new FIE, all the investors (or founders) or their authorized representatives were required to sign the commitment letter. This would often be a cumbersome procedure the founders and authorized representatives would often be in different geographical locations. Under the Proposed measures, foreign investors now have a choice of allowing only the FIE’s legal representative to execute the commitment letter, making FIE incorporation much more convenient.

 

6. Additional documents

 

Two additional documents are required to be submitted when filing via MOFCOM’s online system:

 

a. the FIE’s shareholding organization chart and details of the ultimate controlling shareholder of the foreign investors; and

 

b. scanned copies of the Certificate of Overseas Investment to the MOFCOM online system, if a foreign investor makes payment via shares of an offshore company.

 

Conclusion

 

As different local authorities in various regions across China have different understandings and interpretations of the relevant laws and regulations, the MOFCOM approval regime has always carried a risk of subjectivity and uncertainty. The additional deregulations introduced by the Proposed Measures, if implemented as currently drafted, will significantly improve efficiencies in the corporate filing process and introduce predictability into the process of foreign investments into China.

 

 

[1]《外商投资企业设立及变更备案管理办法》(征求意见稿)

[2] Comments to be submitted by 15 June 2017

[3]《外商投资企业设立及变更备案管理暂行办法》(商务部令2016年第3号,下称3号令)

[4]《关于修改<中华人民共和国外资企业法>等四部法律的决定》

[5] Which took effect on 1 October 2016

[6] 第22号公告规定