New Revision on Record-filing of the Establishment and Change of Foreign-invested Enterprises
On July 30, 2017, the Ministry of Commerce (“MOFCOM”) issued two important regulations relating to foreign investment in China, one is the Decision on Revising the Interim Administrative Measures for the Record-filing of the Establishment and Change of Foreign-invested Enterprises (the “Decision”) and the other is Notice on Matters Related to the Administration of the Record-filing of the Establishment and Change of Foreign-invested Enterprises (the “Notice”). These two regulations have taken into effect on the same day of issuance.
Comparing to the rules regulated in Interim Administrative Measures for the Record-filing of the Establishment and Change of Foreign-invested Enterprises published on October 8, 2016 (the “Measures”), the main changes according to the Decision are as follows:
- The record-filing system on merger and acquisition transactions
The record-filing system will apply to transactions of merger and acquisition of domestic enterprises (excluding the foreign invested enterprises in China) and strategic investments in listed enterprises in China by foreign investors.
Before the Decision, all merger and acquisition transactions shall be subject to the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (“M&A Provisions”), which means that M&A transactions shall be reviewed and approved by the Chinese government.
However, the Decision significantly changes this rule so that the record-filing system will replace the review and approval system for M&A transactions except special cases mentioned below.
- The exception of application of record-filing system in the Decisiona. Special administrative measures
Special administrative measures stipulated in the “Catalogue on Industry Guidelines for Foreign Investment (2017)” out of pilot free trade zone (“FTZ”) and “Special Administrative measures on Foreign Investment in the pilot free trade zone (Negative List) 2017” within the FTZ.
The foreign investment subject to the restricted and prohibited categories in the Negative List shall not apply to the record-filing system. Instead, it shall be approved by MOFCOM.
This regulation increases the close connection between the record-filing system and negative list system in respect of the application on the subject of merger and acquisition transactions in China.
b. Merger and acquisition with related parties
Transactions of merger and acquisition with related parties will not apply to the record-filing system. Instead, it shall be still subject to Article 11 of M&A Provisions “If domestic enterprises or individuals merge with or acquire their related domestic enterprises through a duly established or controlled company out of China, such merger and acquisition shall be approved by MOFCOM.”
The exclusion of merger and acquisition with related parties from the record-filing system explicitly shows the strict attitude of MOFCOM on such transactions.
- New requirement of disclosure of final beneficiary ownership structure of foreign invested enterprises
Based on the previous requirement, the party who is responsible for the record-filing only needs to provide the final beneficiary information in the application form for record-filing. However, the Decision added the new requirement to the record-filing procedure that the complete information of final beneficiary ownership structure shall be disclosed and submitted. According to our analysis, such information will probably range from the foreign invested enterprise under the merger and acquisition transaction eventually to the final beneficiary.
This requirement may create the possibility of discretion applied by MOFCOM during the review of record-filing documents and the information control of final beneficiary by MOFCOM. The real intention of this new requirement will depend on the result of the implementation of this rule in practice in future.
- Condition and Procedure of Cross-Border Equity Swapa. Condition of Cross-Border Equity Swap
According to M&A Provisions, if a foreign investor intends to merge with or acquire a domestic enterprise (excluding a foreign-invested enterprise in China) by using its equity over a foreign company out of China which is regarded as a cross-border equity swap (the “Equity Swap”), this overseas company involved in the Equity Swap must be an overseas listed company or a special purpose vehicle (“SPV”).
The analysis on Article 8 of the Decision and application form for establishing the foreign invested enterprise (for M&A) attached in the Notice may only make us conclude in this stage that even though the Decision allows the foreign investor to use the equity over a foreign company as one of the payment methods for the Equity Swap, it doesn’t explicitly release the condition of identification of the overseas company – listed company or SPV.
As a result, whether the equity of other ordinary overseas companies can be used for the Equity Swap is not clear in the Decision. It will be verified based on the practice of implementation of the Decision by the relevant authorities in future.
b. Procedure of Cross-Border Equity Swap
Procedure of operation of Cross-Border Equity Swap is adjusted according to the Decision.
According to M&A Provisions, the foreign investor shall apply for the approval of M&A transaction and finish the registration change of the foreign-invested enterprise in China with the local Administration of Industry and Commerce (“AIC”). Then the foreign investor (as one shareholders of foreign-invested enterprise in China) shall apply for the permission of overseas investment with MOFCOM and foreign exchange department since it will hold the equity of the overseas company after the Equity Swap.
However, the Decision requests the foreign-invested enterprise or its investors shall apply for the approval of overseas investment permission to obtain the Certificate of Overseas Investment (“Certificate”). Then they could submit all documents including this Certificate for the registration change of the foreign-invested enterprise in China.
The reason of such change of procedure under this matter is not clear right now. The real influence will come out after the operation of the relevant authorities for certain period.
- Commentsa. Firstly, the Decision achieves that the record-filing system will apply to transactions of merger and acquisition of domestic enterprises (excluding the foreign invested enterprises in China) and strategic investments in listed enterprises in China by foreign investors, which is the most important and positive change in the field of foreign investment in China. This change completely proves that the Chinese government is deepening the performance of national treatment of foreign-invested enterprises in China, which will become one of the fundamental basis (together with the Negative List System) of the establishment of Foreign Investment Law of China.
b. Secondly, the application of record-filing system on M&A transactions subject to the Decision will simplify the required application documents and increase the efficiency of the relevant procedure, which reflects that the management of market entry for foreign investment will be gradually changed and improved from prior approval system to the supervision during and after the foreign investment procedure.