What Can Foreign Investors Do Under The Record-Filing System?
What Can Foreign Investors Do Under The Record-Filing System?
Background
On 30th July 2017, the Ministry of Commerce (“MOFCOM”) issued the <Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises>(“<the Measures>”) and <Announcement on Matters Related to the Administration of the Record-filing of the Incorporation and Change of Foreign-invested Enterprises> (“<the Announcement>”).
The application of the record-filing system marks that foreign investment has come to a new era, so-called “Pre-establishment National Treatment (PENT) and negative list”.
China as a target country is becoming more attractive and has increased opportunities, but at the same time, it has created some challenges for foreign investors.
This article will analyse the changes and remarks briefly.
Change one：
Expansion of the application of record-filing system
1. Merger and Acquisition (“M&A”) of domestic enterprises by foreign investors is subject to the record-filing
Article 5(2) of <the Measures> stipulates that “Where a non-foreign-invested enterprise changes into a foreign-invested enterprise due to acquisition, consolidation by merger or otherwise, which is subject to record-filing as stipulated in the Measures, it shall complete the record-filing formalities for incorporation and submit the Incorporation Application in accordance with Paragraph 1 hereof mutatis mutandis.”
According to <the Announcement>, the “M&A” refers to equity acquisition and asset acquisition.
1) Equity acquisition means that a foreign investor purchases the stock right of a shareholder of a non-foreign-invested enterprise in China, or capital increase of a domestic company so as to convert and re-establish a domestic company as a foreign-invested enterprise.
2) Asset acquisition means that a foreign investor establishes a foreign-invested enterprise and purchases and operates the assets of a domestic enterprise by the agreement of that enterprise, or, a foreign investor purchases the assets of a domestic enterprise by agreement and uses this asset investment to establish a foreign-invested enterprise and operate the assets.
It is noted that not all M&A shall be subject to the record-filing.
M&A between affiliates is explicitly excluded from the scope of record filing, reflecting the strict stance on affiliated transactions by MOFCOM.
Any related-party M&A shall be submitted to MOFCOM for approval in accordance with the M&A Provisions.
2. Strategic investments in listed companies by foreign investors is also subject to record-filing.
The strategic investments in listed companies by foreign investors means that foreign investors acquired A-shares of the listed company having finished reform of non-tradable shares and of the new listed companies by means of long-and-mid-term strategic investment of a merger or acquisition.
Change two:
More documents are required in the record-filing
The article 8 of <the Measures> requires a “share chart of the final actual controllers of a foreign-invested enterprise” when involving the change of final actual controllers.It is stipulated to avoid the loss of domestic assets.
However, the specific details of the “share chat of the final actual controllers” are not clear.
Foreign investors shall consult with MOFCOM when making an investment in China.
“An Outbound Investment Certificate for the domestic enterprise which obtains the equity of overseas companies” is also required.
This is stipulated to protect the profits of the domestic enterprises in the event that the foreign investor counterfeits the investment through fraudulent transactions.
It is worth mentioning that in the <Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors>, there are two kinds of enterprises which can make the M&A through payment of equities; the overseas listed enterprises, and special purposes enterprises.
Notably, in the incorporation application form attached to <the Announcement>, special purpose enterprises are not listed as a choice for payment by equities.
Note one: Exceptions regarding the application of the <the Measure>.
There are two exceptional circumstances: one is the M&A between affiliated companies as we mentioned before. Another is written in <the Announcement>, concerning those which fall into the scope of the “negative list”, record-filing shall not be applied.
Note two: Additional regulations in the incorporation application form.
Besides the relevant materials stipulated in article 8 of <the Measure>, it should be noted whether the transaction involves China's time-honored brand enterprises and/or the transfer of state-owned assets. It is worth checking before making an investment in China.
As we speculated, more and more coordinate laws and regulations shall be issued to further attract foreign investment.
It is recommended that foreign investors pay sustained attention to the update of laws and regulations.
