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On 19 January 2015, the Ministry of Commerce of the People's Republic of China ("MOFCOM") published a draft of the Law of the People's Republic of China on Foreign Investments (the "Draft Law") for public consultation. The Draft Law, if passed, will replace the existing Foreign Invested Company Law, the Sino-Foreign Equity Joint Venture Law and the Sino-Foreign Cooperative Joint Venture Law, and may grant foreign investors more access to the Chinese market. At this point in time, the Draft Law is still undergoing the legislative process, and the Draft Law may undergo significant amendments before it is finalised.
According to the Draft Law, the PRC State Council will publish a Negative List of industries in which foreign investment is restricted or prohibited, similar to the model adopted by the China (Shanghai) Pilot Free Trade Zone. It is generally expected that most foreign investment projects will no longer require pre-approval by the MOFCOM or its local agency when the Draft Law comes into effect. This will reduce the time required for foreign investment projects and offer parties greater flexibility in structuring their investment as relevant contracts, such as joint venture contracts and equity transfer agreements, will no longer require MOFCOM's approval.
The Draft Law also targets the variable interest entity ("VIE") corporate structure, which is set up to sidestep Chinese restrictions on foreign investment in sensitive industries. The Draft Law has introduced a concept of "actual control", upon which domestic companies which are controlled by foreign investors will be subject to the Draft Law; but on the other hand, if the actual controller can be qualified as a PRC investor, their investment will be deemed as domestic investment which means they will not be subject to the restrictions in the Negative List.
Currently, we do not know when this Draft Law will be passed, whether it will be in its current form if passed, and how the restricted and prohibited industries in the Negative List will be reduced. However, we will provide a separate update if there is any significant change to this Draft Law.
The PRC draft Anti-terrorism Law (the "Anti-terrorism Law") was published for public consultation in late 2014. The draft Anti-terrorism Law is China's first Anti-Terrorism Law to better counter-terrorist activities while protecting citizens' rights. In late February 2015, Chinese lawmakers began reviewing the second draft of the Anti-terrorism Law.
As currently drafted, the draft Anti-terrorism Law could strengthen China's counter-terrorism efforts at the legal front and improve how information is collected and shared in the intelligence field. According to the draft Anti-terrorism Law, terrorism is defined as "any speech or activity that, by means of violence, sabotage or threat, generates social panic, undermines public security, and menaces government organs and international organisations."
Of particular concerns to tech companies are Article 15 and 16 of the draft Anti-terrorism Law, which require, amongst other things, companies to keep servers and user data within the country and hand over encryption keys to the government.
In March 2015, it was reported that the Chinese government had decided to suspend the third reading of the draft Anti-terrorism Law, putting it on hiatus for now. Many commentators are of the view that this is a result of pressure from the US government and the concerns raised by US tech companies about the implications of the draft Anti-terrorism Law on their businesses in China.
While it is unclear whether the draft Anti-terrorism Law will proceed or not, it could be picked up again at any point as only the Standing Committee of the National People's Congress – and not the full Congress – is required to pass the law. It is also unclear if the draft Anti-terrorism Law will be passed in its current form, or if there will be any substantial amendments to the provisions.
Please note that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only
intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice.
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Rajah & Tann Singapore LLP
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Contacts: Chia Kim HuatPartnerD +65 62320464kim.huat.chia@rajahtann.comYang Lih ShyngPartnerD +86 21 6120 8818F +86 21 6120 8820lih.shyng.yang@rajahtann.comLinda QiaoHead, Shanghai OfficeD +86 21 6120 8818F +86 21 6120 8820linda.qiao@rajahtann.com| Rajah & Tann Asia is a network of legal practices based in Asia. |
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