Seize the Opportunity to Improve Corporate Governance
Updated: May 19, 2020
With implementing the new Foreign Investment Law ("FIL") and abolishing the Old FIE Laws, China relaxes the restrictions on Foreign-Invested Enterprises ("FIEs"). The relaxation is reflected in incorporation and investment administration. FIEs are now subject to the same rules (the Chinese Company Law and Partner Law) as their Chinese peers. (Please read China's Foreign Investment Law: Incorporation Made Simpler if you are interested in more details regarding incorporation)
According to the Foreign Investment Law, FIEs in China established under the old laws entered a five-year transition period from the enactment of the Foreign Investment Law on January 1, 2020. During the transition period, FIEs can maintain their existing structure. After the transition period, all FIEs should comply with the Chinese Company Law ("Company Law"). Concerning the regulations of corporate governance, there are many differences between the Old FIE Laws and the Chinese Company Law. As a result, FIEs established under the Old FIE Laws need to make adjustments to convert to appropriate corporate forms and update the articles of association as required promptly.
At present, Chinese and foreign parties of many Chinese-Foreign Equity Joint Ventures may have difficulties to agree on the changes to be made. Foreign investors are facing prominent challenges in safeguarding their rights and interests. This article intends to illustrate essential adjustments a Chinese-Foreign Equity Joint Venture should make, according to the Foreign Investment Law. We will provide a few tips for foreign investors regarding how to negotiate with their Chinese parties.
Essential adjustments to make during the transition period
The table below shows a comparison between what specified in the Old FIE Laws and the Company Law.
Things to remember in a negotiation
According to the Foreign Investment Law, shareholders can regulate corporate governance by reaching an articles of association. How shareholders negotiate about their own interests and what they agree ultimately is not just important for each party, but also indicates the future development of a company. Foreign shareholders need to evaluate their own bargaining power and core interests. Shareholders can be divided into majority shareholders and minority shareholders, based on the proportion of equity. Below we will give a brief note for each type of shareholders so that a foreign shareholder can pay attention to some key issues during the negotiation.
Majority Shareholders: How to Ensure the Control over the Company
Majority shareholders usually intend to increase control of the company. They may consider reducing the restrictions of "unanimous decision", strengthening the advantages of voting rights, and managing the company's transition and changes as soon as possible. Given the fact that the board of directors of some Chinese-Foreign equity joint ventures still controls the decision-making power over important matters, we recommend that foreign major shareholders revise the articles of association as soon as possible to ensure their control of the enterprise.
Minority Shareholders: How to Secure Their Interests
Minority shareholders usually make efforts to avoid their rights being weakened or deprived. Therefore, when negotiating, minority shareholders should strive to maintain a "unanimous decision" approach if possible. Remember, if shareholders have over one-third of the voting rights, they can exercise their veto power over matters apart from the ones stipulated in the Chinese Company Law (i.e. changing the company's articles of association, increasing or decreasing registered capital, merger & acquisition, division and dissolution). Also, the shareholders can seek a supermajority vote for more specific matters. If there is a deadlock in negotiations, or if there is an irreconcilable situation, minority shareholders may also consider resolving the deadlock by transferring equity.
Foreign investors should fully understand the new rules and prepare to adjust the corporate governance system. Before starting or during a negotiation, foreign shareholders need to counterbalance their position in the enterprise, each party's bargaining power, interdependence, and core interests. Foreign investors may also consult local experts to take full advantage of the enhanced provision in the Foreign Investment Law to guarantee their own interests.
How we can help you
There are many services Connect Flow International provide to help you make the transition swiftly and effectively. Just to list a few:
Review, draft, revise, and compliance services of articles of association
Consult and propose solutions to corporate structure and establishment of the authorisation system
Propose a corporate managerial system, policy and rules for decision-making.
Negotiate on corporate governance matters on your behalf.
Contact us to learn more details.