New Law of Business
With China’s new Foreign Investment Law taking effect, experts are hoping that it will achieve its goals of creating a uniformed legal framework and level playing field for overseas firms.
investment needed is at different than what was of use in the past. There are opportunities, but they are changing,” Ms Li says. “Today, investments in ecofriendly and tech-friendly sectors are more welcomed. In many ways, this makes it a good time for Norwegian businesses to come to China since many of them have products and knowledge focused on sustainable growth and development that are in real demand in the market here.”
She adds that if foreign investors think there is a genuine need for their products in China and those are not in the negative list of sectors, they do not have to worry much about the legal aspects of investment.
Future of forced tech transfers
Forced technology transfers have long been a sore spot for overseas businesses operating in China. A survey conducted by the European Union Chamber of Commerce founded that 20 percent of European companies doing business in China were subject to a forced technology transfer. This was nearly double the total from its 2017 survey.
When Mr Wang Shouwen, a Chinese Vice Commerce Minister, announced the new FIL would end the practice, it was met by generally positive reviews from the foreign business community even if the law hasn’t been released in its entirety with detailed implementation rules.
“Forced technology transfer is a big area of concern and while it currently doesn’t happen a lot, it is something businesses think about. The new law will be the first to have the guiding principles protecting free technology transfer clearly written into law,” Ms Li reports. “It makes it a business decision, not a government decision. There are still some areas of the law where things aren’t entirely clear, such as establishing a clear system of compensation for infringement of intellectual property, but these will likely be reviewed. Ultimately, more companies will be protected as a result.”
She explains that Zhong Lun Law Firm is comfortable about how the regulations regarding encouraging voluntary tech transfers will be applied due to a government change in relevant laws that ensure there is no confusion. The new FIL also puts into a place more robust framework for international businesses to challenge the government on decisions they do not agree with.
“The new law puts into place mechanisms where businesses can challenge government decisions. There will now be a clear legal framework for foreign businesses to bring complaints against authorities through various means should they deem it necessary,” Ms Li notes. “Additionally, companies unhappy with decisions of the government may also consider whether to try international investment arbitration.”
At the moment, Zhong Lun Law Firm is fielding a lot of questions from businesses about what they need to do to adjust to their current structure. The FIL is includes some changes that existing firms might need to adjust to during a five-year transition period.
“Under current FDI laws, the board of directors is the highest authority, but the new FIL makes shareholders the highest authority to comply with the Company Law of China. Companies may need to change to meet this requirement. Corporate governance will also change under the new law,” Ms Li points out. “It will be important for companies to revisit their current structure and make sure they comply with the new laws after this transition period passes.”
For new businesses entering China, the existing FDI laws covering joint venture structure have also changed as a result of the new law and Ms Li believes this brings with it several benefits if you are a majority shareholder in a joint venture company.
“Currently, minority shareholders have a larger say under the existing laws covering foreign investment since full consent of all shareholders is needed in cases such as share transfer. Under the new law, this will be reduced to more than half of the shareholders’ approval and now will be deemed to have approved if no response is made within a 30-day period after receiving the notice of share transfer. This makes the entire process much more manageable and flexible for businesses. There will also be changes to the dividend payments to bring it in line with global standards,” Ms Li details.
Ms Li points out that the FIL highlights China’s willingness to further open its doors to overseas businesses and should provide a greater level of comfort for investors. That being said, it doesn’t remove all the obstacles facing foreign firms in China.
“It is very important to have good lawyers that understand the complex laws and regulations in China as well as the culture of both sides. Communication is important and something that is required when traversing complicated landscapes,” Ms Li says.
However, it is another step in the right direction according to Ms Li who has observed the business landscape during her time at Zhong Lun Law Firm.
“Our firm has grown a lot in the 13 years I’ve been here. This growth matches the growth of the Chinese economy and international interest in investing here. We hope these new laws will attract more foreign investment since it should make it easier to do business in China,” Ms Li concludes.
Above left: Ms Audry Li noted the new foreign investment law is a step in the right direction, but more clarification is needed. Above: China’s National People’s Congress passed the new Foreign Investment Law in 2019.