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“No-Unanimity Law” in force
Photo credits to Worawut
The Joint Venture Law and the WFOE Law have been repealed since January 1, 2020. This marks the end of an era, when foreign invested companies were subject to a specific set of rules significatively different from those of domestic Chinese companies.
Although foreign investments still undergo specific regulation for market access in China, we can now say that – at least from corporate law and corporate governance perspective – the very notions of Foreign-Invested company, Joint Venture and of WFOE lost their distinctive function.
What – in practice – the impact for foreign invested companies? Here a short summary, based on our experience.
Photo credits to Worawut
IMPACT ON JOINT VENTURES
First of all, joint ventures shall have a shareholder meeting as supreme company organ – under previous regulation, JV had no such organ.
In practical terms, maybe the most important impact of the new corporate governance is that unanimity of decision is no more required by law for the so-called “mandatory reserved matters”:
- capital increase,
- capital reduction,
- amendment of AOA,
- liquidation/dissolution.
Instead, these decisions can now be approved by the shareholders within the assembly with a majority of 2/3 of the shares (unless more protective thresholds for minority shareholders are set in the AOA and JV contract).
Also transfer of participation by a shareholder to a third party now is less restricted, as it does not require unanimous approval by all other shareholder, but rather just requires approval by the majority of the other shareholders.
Moreover, in case that half or more of the other shareholders disagree to the transfer, the shareholders who disagree to the transfer have then the obligation to purchase the shares.
The maximum duration of directors of Joint Ventures changes from four (4) years to three (3) years.
Photo credits to Mapo
IMPACT ON WFOEs
WFOEs are also – by default – subject to the same provisions applicable for domestic companies in China.
For example, WFOEs with more than one shareholder shall also have a shareholder meeting. Mandatory reserved matters can be approved by the shareholders within the assembly with a majority of 2/3 of the shares (unless more protective thresholds for minority shareholders are set in the AOA and JV contract).
Photo credits to Monster Ztudio
OTHER CHANGES APPLICABLE TO BOTH WOFEs and JOINT VENTURES
It appears that the notion of total investment (i.e. sum of register capital and allowed funding gap in foreign exchange) has been abolished; this should mean that funding in forex is no more quantitatively limited for foreign invested companies – although still subject to stringent SAFE regulations.
The new Foreign Investment Law and its implementing regulation de-facto give a five-year term to all foreign invested companies to update their article of associations in order to reflect the new corporate structure and governance.
In fact, starting from January 2025 companies that have failed to meet such deadline will not be able to carry on any further change of registration (for example, change of business scope, change of address, change of directors, etc..) until they will have changed their AOA.
Photo credits to Uzhursky
IN CAUDA VENENUM?
In theory, this new scenario gives to majority shareholders of JV (at least, to those having more than 66% of the shareholding) a tremendous opportunity to get control of the decision-making process in the above-mentioned reserved matters.
At the same time (at least for Joint Ventures) – in order to modify current AOAs and JV contracts into the new ones – local authorities will still require one last time (in compliance with the provisions of the AOA-to-be-changed) a unanimous vote of the board (in which case the minority shareholder may still have a leverage to try and negotiated more favorable terms in the new AOA).
Negotiations with minority shareholders are therefore not finished yet…
HFG Law&Intellectual Property
