It refers into the Company Law and into the Partnership Enterprise Law, i.e. Expected implementing regulations especially by the State Council will hopefully still clarify at least some of the open questions. In all other areas, the joint venture partners will be free to decide and agree on different majority rules and more flexible structures. 1979, surpa note 5, at 177. The law was adopted by the National People's Congress on March 15, 2019 and came into effect on January 1, 2020. In 1986, the Wholly foreign-owned Enterprise Law was added, followed by the Contractual Joint Venture Law in 1988. negative list for foreign investment. Joint Venture Law, supra note 1, art. In certain sensitive economic sectors, wholly foreign-owned enterprises (WFOEs) are not permitted. [3], Jake Parker, senior vice president at the U.S.-China Business Council, said the Law still falls short of "specifying what kinds of trade secret disclosures will be prohibited, and clarifying which kinds of administrative departments the provisions on technology transfer may apply to." variable interest entities, or other structures like financing arrangements will also be covered by the Foreign Investment Law, still needs clarification. • A foreign investor may freely transfer inward and outward its contributions, profits, capital gains, income from asset disposal, royalties of intellectual property rights, lawfully obtained compensation or indemnity, income from liquidation and so on within the territory of China in CNY or a foreign currency. Instead, foreign-invested enterprises in the form of a CJV or EJV will need to change their governing structure to a three-tier structure in accordance with the Company Law – establishing the board of shareholders, the board of … At the same time, the current Equity Joint Venture Law, Contractual Joint Venture Law and the Wholly Foreign Owned Enterprise Law are all abolished. In contrast, Chinese-invested … On March 15, 2019, China’s National People’s Congress promulgated the new Foreign Investment Law. The competition law implications of any restrictive covenants included in the joint venture agreement should be considered and care should be taken to ensure that such restrictions are reasonable and likely to be enforceable. • The government implements the management systems of pre-establishment national treatment and Examples include: Above examples show that China did not just start legal unifications in 2019, but has been in a respective process already for many years. There are also numerous sets of detailed regulations. "[2], Joerg Wuttke, president of the European Union Chamber of Commerce in China, said the Law puts a "strong emphasis on preventing Chinese entities from forcing foreign companies to transfer valuable technology" in order to do business in China, while improving protection of trade secrets. The legislative process started in 2015. The national treatment principle would be an argument in favor of such change. The next generation search tool for finding the right lawyer for you. into laws that currently have mainly been used for Chinese invested companies. Questions? When done right, China joint ventures do share risk. But according to Chinese law, he was still a director of the joint venture until 2019. The law contains general principles which are currently being presented as positive developments of China’s further opening up. Vice Premier Deng Xiaoping decided in 1978 opening up China to international investors. In summary it can be stated that with the Foreign Investment Law, the so far largest legal reform for invested enterprises has been started since the opening of the country in 1978. But the underexplored benefits to China of encouraging or requiring joint ventures are clear. At the same time, the Foreign Investment Law, as currently passed, is more h… 1. However, China's strict commercial laws mean that joint ventures often have to be entered into despite the risks. Soon after China's reform and opening up, the country adopted its first law on equity joint ventures in 1979, and the laws on wholly foreign-owned enterprises and cooperative joint ventures … "[2], Vivian Jiang, vice chair of Deloitte China, said the Law sends the signal of "greater transparency", and will "boost Chinese market's appeal to foreign capital. Joint ventures are a commonly used company structure in China: many of the most well-known companies, such as McDonald's, Starbucks, and most recently the Chinese ride-sharing unicorn Didi Chuxing have all adopted a joint venture (JV) company structure in China.. For foreign investors, there are two distinct reasons that a company may choose to enter into a joint venture. The law itself, and still more the utterances of the Chinese, have spelt out that its fundamental purpose is to obtain much needed capital investment and technology. JV Formation in China China is an attractive and lucrative market to enter into, but many are not aware of the challenges and risks involved in entering the market. The Law's key provisions are as follows:[1]. Upon its implementation, the Foreign Investment Law will supersede and replace the existing PRC Sino-foreign Equity Joint Venture Law (the “EJV Law”), PRC … Many foreign investors will need to take action. Since then, the legislator decided in favor of a much leaner alternative. But from January 1, 2020, the new law applies already mandatorily to all newly established companies. It is currently not clear whether the Foreign Investment Law will also abolish currently applicable minimum capital requirements for joint ventures and wholly foreign owned enterprises, for example on the basis of the total investment amount, or will also abolish current restrictions of cross-border financing. ", © Copyright 2006 - 2020 Law Business Research. 6 A contractual joint venture which meets the conditions for being considered a legal person under Chinese law, shall acquire the status of a Chinese legal person in accordance with law. The government establishes a service system for foreign investment, and provide foreign investors and foreign-funded enterprises with consultation and services in respect of laws and regulations, policies and measures, investment project information and other aspects. • All national policies on supporting the development of enterprises shall equally apply to foreign-funded enterprises in accordance with the law. Over the past decades, they have provided legal safeguards for foreign firms and promoted foreign investment and cooperation in China. I gauge a firm’s expertise by the insight in their articles. Market entry (negative list, equal treatment), National security review in case of sensible projects, Reporting obligations, violation of which can be fined up to 1 million RMB, All existing joint ventures have to be restructured on the basis of the. This means that actions may be needed for existing companies: The largest effects will very likely be seen in case of joint venture companies: certain unanimous decision requirements for the board of directors have been abolished. Joint ventures are usually set up to last from 30 to 50 years, but can be unlimited in duration. CH-004347 CH-004975 20200731 China joint venture business scope China joint venture’s commercial objectives Special economic zones were designed to allow initial foreign shareholdings. On the basis of the original Equity Joint Venture Law for instance, the first joint venture between Volkswagen and SAIC was established in Shanghai in 1984. In the middle of the 1990s, China started unifying the treatment of foreign and Chinese legal subjects and their investments. This historically significant new law will enter into effect on January 1, 2020. "[3], National Development and Reform Commission, Ministry of Commerce of the People's Republic of China, "Foreign Investment Law of the People's Republic of China", "La Chine adopte la loi sur les investissements étrangers", "EU Chamber says China's new foreign investment law is "surprisingly accommodating, https://en.wikipedia.org/w/index.php?title=Foreign_Investment_Law_of_the_People%27s_Republic_of_China&oldid=975742654, Articles needing additional categories from November 2019, Creative Commons Attribution-ShareAlike License, This page was last edited on 30 August 2020, at 05:01. the Chinese government. Article 2 The Chinese government protects, in accordance with the law, the investment of foreign partner in a joint ventures, the profits due them and their other lawful rights and interests in a joint venture, pursuant to the agreement, contract and articles of association approved by the Chinese government. We draft all agreements in English and Chinese, including the main joint venture agreement, articles of incorporation for the joint venture company, service agreements, technical support agreements, intellectual property licensing agreements, import/export agreements, territorial restriction agreements, trade secret and non-disclosure agreements and many agreements related to the … With China’s economy in a downturn and so much uncertainty regarding the future of US/China (and even EU/China) relations, our China business lawyers have of late been seeing a massive uptick in companies looking to do China joint ventures “to share in the risk.”. Please contact customerservices@lexology.com. By Dan Harris on June 3, 2020. Soon after China's reform and opening up, the country adopted its first law on equity joint ventures in 1979, and the laws on wholly foreign-owned enterprises and cooperative joint ventures were enacted in the 1980s. Standard clause, Minority shareholder protection: international joint ventures is a clause for inclusion in a shareholders' agreement or bye-laws of a joint venture company in which the minority shareholder has veto rights. It is also still open weather current M&A related regulations or the regulations governing holding companies in China will be abolished or revised. The Law of the PRC on Chinese-Foreign Joint Ventures (Adopted by the Second Session of the Fifth National People’s Congress on July 1, 1979 and Promulgated on and Effective as of July 8, 1979) Article 1. The Chinese Government protects, in accordance with the law, the investment of foreign joint venturers, the profits due them and their other lawful rights and interests in a joint venture, pursuant to the agreement, contract and articles of association approved by the Chinese Government. Power up your legal research with modern workflow tools, AI conceptual search and premium content sets that leverage Lexology's archive of 900,000+ articles contributed by the world's leading law firms. • The competent departments for commerce (Ministry of Commerce) and for investment (National Development and Reform Commission) are delegated major responsibility to promote, protect and manage foreign investment. Equity joint venture (EJV) vs Cooperative joint venture (CJV) An EJV(Equity Joint Venture) Equity joint ventures are one of the most common ways that foreign companies enter the Chinese market.. It’s probably a preferred choice for the Chinese government and the local partners in China.. Usually, an EJV’s business structure is a separate limited liability company (LLC). Ekso Bionics Announces CFIUS Determination Regarding China Joint Venture RICHMOND, Calif., May 20, 2020 (GLOBE NEWSWIRE) -- Ekso Bionics … By Dan Harris on August 28, 2014. Equity joint ventures The EJV Law is between a Chinese partner and a foreign company. Wang Chen, vice chairman of the NPC Standing Committee, said the Law shows China's will and determination to follow through with reform and opening up in a new historical context, and that "it is a full testament to China's determination and confidence in opening wider to the outside world and promoting foreign investment in the new era. The most common ways foreign companies start doing business in China (legally) is by forming a WFOE (A Wholly Foreign Owned Entity) or by partnering with an existing Chinese business through some form of joint venture. The finally promulgated law has only 42 articles and is of much more general nature than the first draft. During a transitional period of five years (until December 31, 2024), existing foreign invested enterprises may keep their corporate forms, organ structures and articles of association/bylaws. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. Exciting new possibilities might in particular arise regarding minority participations, for instance in case of equity incentives to be granted to local management (i.e. • The government establishes a safety review system for any foreign investment affecting or having the possibility to affect national security. On the basis of the original Equity Joint Venture Law for instance, the first joint venture between Volkswagen and SAIC was established in Shanghai in 1984. A Q&A guide to joint ventures law in China. Also older wholly foreign owned enterprises established prior to 2006, with current structures still in analogy to joint ventures need to restructure accordingly. The Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment (Joint Venture Law) was promulgated by the National People's Congress on July 1, 1979 as part of the Chinese modernization program. Article 42 of the new law will repeal the Law on Sino-foreign Equity Joint Ventures (EJV Law) and the Law on Sino-foreign Cooperative Joint Ventures (CJV Law). Many joint ventures failed to endure, and as multinationals gained experience in China, and foreign investment restrictions loosened, multinationals found it easier in many sectors to start a business from scratch—or to acquire an existing one outright—than to negotiate, establish, and manage a joint venture … With the promulgation of the Foreign Investment Law, one further important part of the legal framework is adjusted. The purpose of the Joint Venture Law is to attract Foreign investment was mainly governed by theSino-foreign Equity Joint Ventures Law, Wholly Foreign-owned Enterprise Law and Sino-foreign Cooperative Joint Ventures Law (collectively the “Initial Foreign Investment Laws”). The emphasis, furrhermore, is on export earnings. In the future, the same rules as for Chinese invested companies will apply. It replaces the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures. Foreign companies operating in these sectors have to choose between investing through a joint venture and not investing at all. This lack of legal flexibility for instance also regarding equity transfer related preemptive purchase rights, or regarding dividend distributions, sometimes lead to complex offshore structures, e.g. A first draft contained approximately 170 rather detailed articles. It is accompanied by a detailed drafting note. We show that these arrangements between domestic firms and foreign partners generated far-reaching impacts, for firms inside and outside the joint venture. According to statistics of the Ministry of Commerce, in January 2019, approximately 4,650 foreign invested enterprises were newly established China-wide, out of which 21% as equity joint ventures and 79% as wholly foreign owned enterprises. Only a few decisions will then require a 2/3 majority on the level of the shareholders meeting. via Hong Kong or Singapore. Deciding what form of new corporate structure to undertake is crucial for Companies interested in entering the vast Chinese market. Posted in Basics of China Business Law. As China becomes one of the world's top recipients of FDI, with some 960,000 foreign-invested enterprises and over 2.1 trillion US dollars of accumulated FDI by the end of 2018, the legal framework for foreign investment needed to be updated in order for further reform and opening up.[2]. A JV is an enterprise undertaken by two or more Continue Reading This is an important consideration for any country … This error, however inadvertent, on Ross’s financial disclosure report has not been previously reported. Prior to the Law, there was no unified law to regulate foreign investment in China. Only a year later, the first Equity Joint Venture Law entered into effect, which - with certain amendments - is still effective today. The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures … It contains principles on : Weather certain indirect investments, e.g. A minority shareholder could block decisions through its veto power regarding all major changes within the joint venture. The original law governing joint ventures, which has been amended a number of times since, is the Law on Joint Venture Using Chinese and Foreign Investment, 1979. "The Newsfeeds are very relevant and topical. The quality of the newsfeeds is good and I like reading different firms' contributions on the same topic, as it provides an opportunity to compare their insights. The Foreign Investment Law has been widely promoted as a framework that will emphasize equal national treatment of foreign investment, putting foreign investors on equal footing with domestic investors in the Chinese market and giving them equal protections. In contrast, Chinese-invested stock companies and equity based LLCs, had their legal basis in a different Company Law since 1993. The new law does not contain any rules regarding the legal form, internal organ structures and articles of association/bylaws of foreign invested companies. China Joint Ventures: A Warning. Joint ventures currently in the negotiation stage should already now consider potential changes and additions in their contracts and articles of association to reflect the future law, if a delayed establishment until 2020 is not feasible. Become your target audience’s go-to resource for today’s hottest topics. One of the key components of the reform from a practical perspective is the equal treatment of shareholders regarding the internal organization of companies. participation in LLCs). Emphasizing the principles again in the Foreign Investment Law, will not necessarily change the practice, especially also since certain explicit references to other laws might even lead to currently unforeseen future legal restrictions. Joint Ventures in China: Advantages and Disadvantages China’s strict commercial laws dictate that western Corporations wishing to do business in China may have to partner with a Chinese entity upon arrival. This unanimity requirement was one of the main reasons why joint ventures had lost its attractiveness. 16 The parties shall stipulate in the joint venture contract (based on the production and operation requirements of the venture) the duration of the investment to be made and the co-operation conditions to be contributed. 27The Chinese media emphasize repeatedly in their discussions of the joint venture law that joint ventures do not represent any infringement of China's sovereignty. Joint ventures established in China are subject to the Laws of the People’s Republic of China and the law for foreign investments.Such establishments are prohibited from functioning on Chinese territory if they violate the Chinese law, if they do not comply with the requirements for aiding the country’s economic development of if they are found to be detrimental to the environment. But it seems currently less likely that the parties to joint venture contracts, M&A contracts and other contracts for foreign investment companies in the future would be able to freely choose the applicable law. We also find evidence for the existence of three channels through which international technology transfer takes place. The Sino-foreign Equity Joint Ventures Law was applicable if foreign investors partnered with Chinese investors to conduct bus… But they very likely will play a less important role in practice. • The government protects the intellectual property rights and trade secrets of foreign investors and foreign-funded enterprises, and encourages technology cooperation on the basis of free will and business rules. Understand your clients’ strategies and the most pressing issues they are facing. The actual implementation of these laws was often much more problematic in practice. Many of the current Chinese laws in substance already contain sufficient legal protection according to international standards. For a joint venture with a Chinese legal person status, unlike the equity joint venture, there is no minimum investment made by the foreign party. Joint ventures in China: overview. Introducing PRO ComplianceThe essential resource for in-house professionals. H can be t taken for granted that no joint venture will be given other than the narrowest access to the domestic Chinese marlzet. It is incorporated in both Chinese (official) and in English (with equal validity), with limited liability. ${name} sign out Services The unified Foreign Investment Law, replacing the three existing laws, was adopted at the Second Session of the 13th National People's Congress on March 15, 2019 and comes into effect on January 1, 2020. If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. • The government is not to expropriate any investment made by foreign investors; Under special circumstances, the government may expropriate or requisition an investment made by foreign investors for public interests in accordance with the law. In this respect, Lexology provides a buffet and I make the assessment. 7 Article 3 8 The State shall, according to law, protect the lawful rights and interests of the contractual joint ventures and of the Chinese and foreign parties. Keep a step ahead of your key competitors and benchmark against them. From a high-level perspective, the Foreign Investment Law embodies China's resolve to continue to modernize its laws to reflect the changing global economy. Article 2 The Chinese Government protects, according to law, the investment of foreign joint ventures, the profits due them and their other lawful rights and interests in an equity joint venture, pursuant to the agreement, contract and articles of association approved by the Chinese Government. 6 A contractual joint venture which meets the conditions for being considered a legal person under Chinese law, shall acquire the status of a Chinese legal person in accordance with law. For approximately 1 million foreign invested enterprises already existing in China, the Foreign Investment Law will apply from January 1, 2020. China’s economy remains closed to foreign businesses in many industries and part of that closure involves requiring foreign companies enter into the Chinese market only via a joint venture. US policymakers have aired their grievances over Chinese foreign investment policy. It seems at least partially redundant to emphasize foreign investors’ protection of intellectual property, involvement in formulation of standards, the prohibition of forced technology transfers, national treatment principles (for example also in case of public bidding), as well as available administrative legal remedies. • It defines "foreign investment" as the investment activity directly or indirectly conducted by a foreign natural person, enterprise or other organization, including establishing a foreign-funded enterprise in China; acquiring shares, equities, property shares or any other similar rights and interests of a local enterprise; making investment to initiate a new project independently or jointly with any other investor; and making investment in any other way stipulated by laws or regulations. Prior to China's entry into WTO – and thus the WFOEs – EJVs predominated. For the first time in one statutory piece, the Foreign Investment Law summarizes the general framework for direct and indirect foreign investments, including greenfield projects, M&A, and other projects. The Foreign Investment Law[1] is a law of the People's Republic of China governing foreign direct investment in China. Forward-thinking international law firm . Posted in Basics of China Business Law, Legal News. The new Law will replace the three existing laws: Law on Chinese-Foreign Equity Joint Venture (1979) Law on Foreign Capital Enterprises (1986) Law on Sino-Foreign Contractual Joint Ventures (1988) China’s three laws related to foreign investment date back to the late 1970’s when China opened its door to foreign investors. Lubman, Institutional Changes in Trade with China, in Doing Bus. It is also "vague on how communication channels between government agencies and foreign entities will be managed, and how feedback will be incorporated. 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