International Investment Law ♦ Online 64 Va. J. Int’l L. Online 2 (2024)

Meeting the Looming Deadline for the Corporate Reorganization of Sino-Foreign Joint Ventures Under China’s 2020 Foreign Investment Law

DANIEL C.K. CHOW

Foreign direct investment in the People’s Republic of China (P.R.C. or China) entered a new era when the Foreign Investment Law (FIL) became effective on January 1, 2020. In this context, foreign direct investment refers to the establishment of a business entity in China using capital supplied, in whole or in part, by a company based in the United States or another foreign country. Since China’s open era began in 1979, foreign direct investment in China was governed by a special set of laws, including the Equity Joint Venture Law, the Contractual Joint Venture Law, the Wholly Foreign Owned Enterprise Law, and related regulations. All foreign investment enterprises—i.e., business entities formed by foreign corporations in China—were established under these laws by undergoing an elaborate set of approval procedures.

Most foreign companies chose to establish Sino-foreign joint ventures consisting of two or more partners, usually a foreign company that was either U.S.-based or multinational, and a local Chinese company. For a U.S. company, a joint venture would be appealing because of the local partner’s understanding of Chinese culture and its ability to navigate China’s complex laws and politics. The local partner was usually a state-owned enterprise—a business entity owned by the state and under the control of the Communist Party. Further, most of China’s industrial sectors were legally inaccessible to foreign companies in the absence of an established joint venture with a local partner. Thus, joint ventures with Chinese partners granted foreign companies the ability to do business in certain highly lucrative industries. As of the first quarter of 2022, there were approximately 124,600 Sino-foreign joint ventures in China.

All prior laws governing joint ventures lapsed when the FIL and the Foreign Investment Law Implementing Regulations (FILIR) came into effect on January 1, 2020. All previously established joint ventures under the prior legal regime became subject to the FIL, P.R.C. Company Law and related regulations. However, these joint ventures received a safe harbor period of five years by the end of which they were required to reorganize and register under the Company Law. The deadline marking the end of the five-year grace period is looming in the near future: December 31, 2024. The FIL Implementing Regulations indicate that registration is still possible beyond this date but missing the deadline would result in a host of serious legal and regulatory problems. For these reasons, all joint ventures organized under the previous legal regime are well-advised to file for corporate reorganization by the statutory deadline.

A successful reorganization under the Company Law, however, involves a number of complex issues that could become a trap for the unwary or unsophisticated. This Article explains and analyzes these issues, as well as proposes several approaches to successfully comply with the registration requirements of the FIL in advance of the December 31st deadline.