Exploring legal systems facing foreign investors in China

By Ni Xudong, East & Concord Partners
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Important changes in the legal systems governing foreign investment have occurred since the implementation of the Foreign Investment Law. In order to ensure the smooth progress of investment, as well as merger and acquisition (M&A) activities in China, foreign investors need to pay due attention to China’s competition and anti-corruption laws, in addition to the new law.

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The Foreign Investment Law, implemented on 1 January 2020, supersedes the Law on Wholly Foreign-Owned Enterprises, the Law on Sino-Foreign Co-operative Joint Ventures, and the Law on Sino-Foreign Equity Joint Ventures, commonly known as the “three foreign-invested enterprise laws”.

The new law specifies that if the governance structure of a previously established foreign-invested enterprise is inconsistent with the mandatory provisions of such laws as the Company Law, the Partnership Law, etc., amendment procedures are required to be carried out in accordance with the law within five years of the implementation of the Foreign Investment Law. Newly established foreign-invested enterprises are subject to such laws as the Company Law, the Partnership Law, etc.

The new law subjects foreign investment to pre-establishment national treatment and a system of administration by the Negative List for Access by Foreign Investors, and establishes an environment for foreign investors to compete fairly in China. Foreign investors may not invest in sectors where their investment is prohibited by the negative list.

Where a foreign investor wishes to invest in a sector that is restricted by the negative list, it is required to satisfy the conditions set out in the list. Where an investment is to be made in an industry or sector that requires, in accordance with the law, the securing of permission, the relevant permission procedures are required to be carried out in accordance with the law.

The new law establishes a foreign investment information reporting system, where investment information is submitted to the competent commercial authority through the enterprise registration system and the enterprise credit information disclosure system. The new law also establishes a foreign investment security review system, which provides for the conduct of security reviews of foreign investments that affect, or could affect, national security.

Competition law

The Anti-Monopoly Law (AML), China’s first competition law, officially entered into effect in August 2008. With this law at the apex, the framework of China’s competition law system has gradually emerged, with several subsequent laws fleshing out the competition law system, including the Law Against Unfair Competition, the Price Law, the Law on the Invitation and Submission of Bids, the Foreign Trade Law, and the Provisions for the Acquisition of Domestic Enterprises by Foreign Investors.

The main targets of regulation of the AML are monopoly agreements, abuse of dominant market position, administrative monopolies and business operator concentrations. Although the law fails to prohibit business operators from having a dominant market position, it successfully prohibits them from abusing the privileges that come with such a position. Monopoly agreements governed by the law include agreements, decisions or other co-ordinated acts that eliminate or restrict competition.

The law also gives parties that suffer injury from monopoly acts the right to sue for damages. The AML additionally covers certain situations not normally covered in this legislative area, such as unfair competition arising from the abuse of administrative power by government officials, and requirements for requiring foreign investors wishing to acquire or take over a substantive industry in China to submit a merger notice, if certain conditions are met, and later submit to a national security review if certain conditions are met.

Pursuant to the AML, China established the Anti-Monopoly Committee of the State Council, which was charged with organizing, co-ordinating and guiding anti-monopoly work. In November 2018, it was merged to establish the State Administration for Market Regulation, which became the sole national-level anti-monopoly law enforcement authority.

The Law Against Unfair Competition focuses on regulating counterfeit and poorly made products, misleading and deceptive advertising, commercial bribery, technology infringement, unfair raffle sales, trade libel, and unfair competition conducted using information network technologies.

Anti-corruption

In recent years, numerous countries including China have reached a high-level common understanding of the importance of combating corruption and bribery in the commercial sector. China has not yet formulated a unified anti-commercial corruption law, however, it has demonstrated its resolve to combat commercial bribery by such measures as amending existing laws to incorporate anti-corruption provisions. The investment and M&A activities in China of foreign investors will necessarily face regulation by, and be subject to, China’s anti-corruption and anti-commercial bribery laws.

China’s anti-commercial corruption regulations can be divided into four levels: (1) party discipline and party regulations; (2) civil and administrative regulations; (3) criminal laws and regulations; and (4) state anti-corruption policies.

In the broadest sense, commercial bribery refers to any act of bribery that could occur in the course of commercial activities. To be specific, commercial bribery in China is regulated by the Criminal Law, the Interim Provisions Prohibiting Commercial Bribery, the Law Against Unfair Competition, and the AML.

Pursuant to the Criminal Law, the crime of commercial bribery includes 10 criminal acts: (1) acceptance of a bribe by a non-state employee; (2) bribing a non-state employee; (3) accepting a bribe; (4) acceptance of a bribe by an entity; (5) offering a bribe; (6) offering a bribe to an entity; (7) acting as an intermediary in the offering of a bribe; (8) offering a bribe by an entity; (9) using influence to accept a bribe; and (10) offering a bribe to a foreign public official or official of an international public organization.

In anti-commercial bribery practice, judicial authorities have in the past mainly relied on administrative and criminal measures to combat commercial corruption. However, authorities have added new measures, including such legal means as rescission of contracts entered into as a result of a bribe, and rely on these to create a fair business environment.

China will, in the course of its modernization drive characterized by ongoing reform and opening-up, present to foreign investors an increasingly relaxed legal and investment environment, and a more attractive, expansive market. Foreign investors need to duly prepare for their entry into China by obtaining an in-depth understanding and knowledge of China’s investment law environment, in particular its competition laws, and anti-corruption and anti-commercial bribery regulations.

Ni Xudong is a partner at East & Concord Partners. Associate Wang Xinyu and trainee associate Ding Anqi also contributed to this article

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