Recently, the 13th National People’s Congress adopted the “Law of the People’s Republic of China on Foreign-Capital Enterprises” (“Foreign Investment Law”), which will be implemented on January 1, 2020. This law will replace the “Three Foreign Investment Laws” consisting of “Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures”(“EJV Law”), “Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures”(“CJV Law”), and “Law of the People's Republic of China on Foreign-Capital Enterprises”(“Foreign-Capital Enterprises Law”)to eliminate differences between “Company Law of the People's Republic of China” and the “three foreign investment laws” on the organization form and institutional regulations of foreign-invested enterprises(“foreign enterprises”), as well as strengthening the intellectual property protection of foreign companies.
In this article, we will review the changes to the organizational structure of enterprise and intellectual property rights according to the new law. Take the form of limited liability companies as an example.
Changes in Corporate Organization and Governance
After the implementation of the “Foreign Investment Law”, the main changes to the organization and governance institutions of foreign enterprise include the supreme authority, the resolution requirements of major events, the terms of directors, the ways of selecting directors, the restrictions on the transfer of equity or rights and obligations, etc,.
According to “EJV Law" and “CJV Law”, board of directors is the supreme authority.
Term of Director
EJV: 4 years;
CJV: no more than 3 years.
No more than 3 years.
Ways of Selecting Director
Internally negotiated and appointed by the company both in EJV and CJV.
The directors of non-employee representatives would be elected and replaced by the shareholders’ meeting; employee representative directors would be democratically elected by the company.
Major event resolution
The amendment of the articles of association, an increase or reduction of the registered capital of the Company, or any merger, division, dissolution or change of corporate form in relation to the Company requires board resolutions.
Affirmative votes by shareholders representing two-thirds of the votes.
Restrictions on the Transfer of Equity or Rights and Obligations
EJV: equity transfer should be agreed by all related parties.
CJV: although the transfer of equity is not involved, the transfer of rights and obligations should be agreed by all related parties.
The consent of more than half of all shareholders is enough on transfer (unless the bylaws declare otherwise).
EJV: the related parties share profits, risks and losses in proportion to the registered capital.
CJV: the related parties allocate revenue according to the contract.
Limited liability company could distribute profits according to shareholders’ agreement.
Residual Property Distribution
EJV: negotiation of the remaining property distribution is allowed.
CJV: distributing remaining assets according to contract is allowed.
The distribution based on the proportion of capital contribution.
Changes in Intellectual Property Protection
Shortly after the introduction of the “Foreign Investment Law”, Premier Keqiang Li signed a State Council order to promulgate the “The Decision of the State Council on Amending Some Administrative Regulations”, which revised the provisions on technology import and export contracts in “Regulations of the People's Republic of China on Administration of Import and Export of Technologies” (“Import and Export of Technologies Law”).
Clauses of “Foreign Investment Law” in Relation to Intellectual Property
Many American and European companies have been worried about forced technology transfer and intellectual property protection in China for a long time. Now, the “Foreign Investment Law” has made clear regulations, which not only dispel the concerns of foreign companies, but also help resolve trade disputes. What’s more, the addition of intellectual property license fees shows China’s determination to protect intellectual property rights.
Article 21: A foreign investor may, according to the law, freely transfer into or out of China, in RMB or a foreign currency, its contributions made, profits, capital gains, proceeds from disposition of assets, and royalties of intellectual property rights derived from, indemnity or compensation lawfully acquired, and income from liquidation, among others, within China.
Article 22: The state protects the intellectual property rights of foreign investors and foreign-funded enterprises, and protects the lawful rights and interests of owners of intellectual property rights and relevant right holders; and for infringements of intellectual property rights, strictly holds the infringers legally liable according to the law.
The state encourages technology cooperation on the basis of free will and business rules in the process of foreign investment. Technology cooperation conditions shall be determined under the principle of fairness by all investing parties through equal consultation. No administrative agency or its employee may force the transfer of any technology by administrative means.
Clauses of “Import and Export of Technologies Regulations” in Relation to Intellectual Property
China has been blamed for restricting foreign intellectual property owners in technology transfer or licensing contracts, regulating that the technical improvements and achievements belong to Chinese enterprises, but the foreign party has to take the responsibility if there is any related infringement. The new “Import and Export of Technologies Regulations” deleted Article 24 Clause 3, Article 27 and Article29, which directly dispels the concerns of foreign intellectual property owners and facilitate the import of foreign advanced technology.
Article 24, clause 3
Where the receiving party to a technology import contract infringes another person's lawful rights and interests by using the technology supplied by the supplying party, the supplying party shall bear the liability therefore.
Within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.
A technology import contract shall not contain any of the following restrictive clauses:
(1) requiring the receiving party to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;
(2) requiring the receiving party to pay exploitation fee for a technology when the term of validity of the patent right in which has expired or the patent right of which has been invalidated, or to undertake other relevant obligations;
(3) restricting the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology;
(4) restricting the receiving party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;
(5) unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;
(6) unduly restricting the quantity, variety, or sales price of the products the receiving party produces; or
(7) unduly restricting the receiving party from utilizing the channel for exporting products manufactured using the imported technology.
In conclusion, the “Foreign Investment Law” has strengthened the rights of shareholders and emphasized the role of the market as well as weakening the administrative intervention. In the subsequently revised “Import and Export of Technologies Regulations”, the protection of the assignee improves further. Regarding the risk of infringement or invalidity of related patents, the parties could reach an agreement to bear their own responsibility.
The new “Foreign Investment Law” and revised “Import and Export of Technologies Regulations” would dispel many obstacles and concerns of foreign companies when entering Chinese market, bring new opportunities for domestic and foreign enterprises as well as laying the foundation for the win-win cooperation. We believe that there would be a new era for Chinese-Foreign cooperation in the near future.