byKWMXuPing，MarkSchaubandJenniferYao

　　On19January2015，theMinistryofCommerceofthePRC(MOFCOM)publishedadiscussiondraftoftheproposednewForeignInvestmentLaw(DraftFIL)onitsofficialwebsiteforpubliccomments.Aspartofatrendoftransformingtheroleofgovernmentintheeconomyandsimplifyingredtape，thisnewlegislationwillrevamphowChinainteractswithforeigninvestmentwhichhasbeenlong-awaited.

　　ChinaisnotthesamecountrywhentheSino-foreignEquityJointVentureEnterpriseLawwaspromulgatedin1979.Inadditiontoitsrapidgrowthanddevelopingeconomy，therehasbeeninrecentyearsstrongandsustainedgrowthinoutboundinvestmentsbyChineseenterprises.ThishasledtoChinachangingfromanetcapitalinflowcountrytoanetcapitaloutflowcountryin2014.NodoubtChina’sperspectivesandstrategiesonbothinboundandoutboundinvestmentregimehavereshapeddramaticallyreflectingthechangingeconomiclandscape.

　　TheDraftFIL，onceenacted，willeventuallyreplacethetriooftheSino-foreignEquityJointVentureEnterpriseLaw，theSino-foreignCooperativeJointVentureEnterpriseLawandtheWhollyForeign-investedEnterpriseLawaswellasitsimplementationrulesandancillaryregulations(collectively，“ThreeFIELaws”)，andwillhavealong-lastingimpactuponforeigninvestmentbysignificantlyreshapingtheentireChineseforeigninvestmentregulatoryregime.

　　TheDraftFILcontains11chaptersand170articles，andcovers:(1)definitionsofforeigninvestorsandforeigninvestments;(2)administrationofforeigninvestmentswhicharesubjecttoentryclearance;(3)nationalsecurityreview;(4)comprehensiveforeigninvestmentinformationreportingsystem;(5)promotinginvestment，protectinginvestmentandcoordinatingcomplaints;(6)legalliabilitiesand(7)miscellaneousprovisions.ComparedtothemoreabstractprovisionsintheThreeFIELaws，theDraftFILismoreextensiveandspecificastohowforeigncapitalwillbeadmittedandadministeredwithinChina.

　　Then，whatarethemajorinstitutionalchangesundertheDraftFILandhowwillitimpactontheforeigninvestmentactivities?

　　LimitedEntryClearanceReplacingForeignInvestmentApprovals

　　TheDraftFILspecifiesthatforeigninvestmentswillreceivenationaltreatment，exceptforonesthatfallunderthespecialadministrativemeasurecatalogue(i.e.the“negativelist”).Thenegativelistwillonlycompriseoftwocategories:theprohibitedindustriesandtherestrictedindustries;foreigninvestmentinindustriesnotlistedinthenegativelistwillnotberequiredtoapplyforentryclearanceormakerecordfilingandwillonlyberequiredtosubmitinformationreports.

　　ThenegativelistisverydifferentfromthecurrentIndustryCataloguefortheGuidanceofForeignInvestments(InvestmentCatalogue)，whichisthekeydocumentcomplementarytotheprevailingforeigninvestmentapprovalregime.TheInvestmentCataloguespecifiestheencouraged，restrictedandprohibitedindustriesforforeigninvestment，andtheindustriesnotspecifiedaretreatedaspermittedindustries.Nonetheless，ineffectforeigninvestmentineachcategoryrequiresMOFCOMapproval.

　　Inthefuture，whentheForeignInvestmentLawcomesintoeffect，anegativelistwillbeneededtoreplacetheInvestmentCatalogue.Thenegativelistisaentryclearanceapproachadoptedbymanydevelopedcountriesandhasbeenwidelyacceptedbyglobalinvestors.AccordingtoMOFCOMstatistics，currentlymorethan70countrieshaveadoptedanegativelistapproach.TheshiftfromcomprehensiveapprovalregimeonforeigninvestmenttoanegativelistapproachisamajorlegislativeandregulatoryimprovementforChina.

　　ComprehensiveInformationReportingSystemforForeignInvestment

　　Theinformationreportingsystemisdisparatefromtheapprovalorrecordfilingsystem，butmoresimilartoex-postreportingaftercompletionofinvestment.However，thepenaltyforcontraventionunderthereportingsystemissevere.Anycompanyfoundtobenon-compliantwithitsinformationreportingobligationsorconcealingtruth，providingmisleadingorfalseinformationwillnotonlybesubjecttomonetaryfinesarisingfromadministrativeorcriminalliabilities，thepersonsdirectlyresponsiblemayalsobecriminallyliable(Article147and148).

　　TheInformationreportingsystemincludestheinvestmentimplementationreport，theinvestmentamendmentreport，theannualreportandthequarterlyreport.Itisworthnoting:

　　◆Investmentimplementationreportmaybesubmittedbeforeorwithinthirtydaysafterthecompletionofaninvestment.However，weunderstand，ifaforeigninvestorsubmitsthereportbeforethecommencementofaninvestment，thereisariskthatsuchreportwillneedtobeamendedorwithdrawnatalaterdateduetopossibleadjustmentintheinvestmentstructure，terminationorabandonmentoftheinvestment.Hence，itmaybemoreefficientifallreportsaresubmittedafterthecompletionoftheinvestment.

　　◆Sharetransfer，pledge，capitalincreaseandothermattersthatusedtorequirepriorapprovals，cannowbereportedwithinthirtydaysafterthecompletionofsuchevent.

　　◆Quarterlyreportonlyappliestolargeforeigninvestedenterprisescontrolledbyforeigninvestors，namely，thoseenterpriseswithtotalassets，salesorrevenuesoverRMB10billionorhavemorethan10subsidiariesinChina.

　　NationalSecurityReview

　　Since2011，thenationalsecurityreviewrelatedrulesandregulationshavebeenpromulgatedbytheStateCouncilorbywayofannouncementsissuedbyMOFCOM.However，undertheDraftFILforthefirsttimethenationalsecurityreviewwillbeincorporatedasaseparatechapterintheForeignInvestmentLaw(ChapterFour).Thiselevatesthenationalsecurityreviewfromdepartmentalregulationstoofficiallaw.Inadditiontofollowingtheexistingjointministerialmechanismtocarryoutsecurityreviewsonforeigninvestmentandthegeneralandspecialreviewprocedures，thenationalsecurityintheDraftFILhasthefollowingdistinctcharacteristics:

　　◆Thescopeofnationalsecurityreviewseemstobeexpanded.Accordingtothecurrentnationalsecurityreviewprovisions，thenationalsecurityreviewsarelimitedtoforeigninvestmentincertaindomesticindustriesrelatingtonationaldefensesecurity，andforeigninvestmentinothernationalsecurityareaswhichmayhaveanimpactonnationalsecurityandwhereforeigninvestorsmayacquiredefactocontrolofsuchenterprises.Althoughthelistoftargetedindustrieswasneverpublished，rumorsarethatthenationalsecurityreviewisapplicableto57industries.However，underArticle48oftheDraftFIL，nationalsecurityreviewwilllikelyapplyto“anyforeigninvestmentthatharmsorlikelyendangerthenationalsecurity”andisnotlimitedtoacquisitionofcontrollingstakeofdomesticenterprisesortoanyparticularindustry.

　　◆Thenationalsecurityreviewandentryclearancearebetterinter-connectedundertheDraftFILandatthesametimemorespecificinapplication.Ifanyrelevantforeigninvestmentdepartmenthasconcernsastoapotentialnationalsecurityrelatedissueduringtheentryclearanceprocess，thenitwillsuspendthereviewandtransferthecasetothejointministerialpaneltoconductnationalsecurityreview.

　　◆AsthenationalsecurityreviewisnowembeddedintheDraftFILandthushasitsleveloflegaleffectescalated，thenationalsecurityreviewhasajudicialimmunityclausetotheeffectthatthedecisionsofthereviewcannotbeappealedorsubjecttoadministrativereview.

　　ActualControlerandPotentialImpact

　　onVIEStructure

　　TheDraftFILintroducesforthefirsttimetheconceptofactualcontrollerfromtheforeigninvestmentperspective，i.e.whetheracompanyisconsideredasaforeigninvestedordomesticcompanyisnotsolelybasedontheplaceofregistrationbutfocusingon“actualcontrol”.Accordingtothedefinitionof“ChineseInvestor”，ChinesenationalsandthecompaniesundertheircontrolwillbeclassifiedasChineseInvestors.Atthesametime，thedefinitionof“control”alsoreferencesfrominternationallyaccepteddefinition，includingcontrolofshares，votingrightsorotherequityinterestsofacompany，controlofthedecision-makingbodiesofthecompany，orpossessionofdecisivepowertoinfluencethemanagement，finance，personnelortechnologyofthecompanythroughcontractual，trustorotherarrangements.Accordingtotheabovedefinitions，thelegalvalidityandtheassociatedrisksofvariableinterestentities(VIE)structuremayneedtobereassessed.

　　ThelegalityofVIEstructuresandfundstransferundertheVIEstructurehavebeenthefocusofforeigninvestorsforalongtime.Allmajoroverseascapitalmarketregulatorsarealsoassessingthelegalandregulatoryrisksunderthestructure.AccordingtotheDraftFIL，undertheVIEstructure，iftheactualcontrollerisofChinesenationality，thentherelevantdomesticcompanyshallbetreatedasaChineseinvestorand，therefore，theentryclearanceandtheinformationreportingsystemsapplicabletoforeigninvestedenterpriseswillnotapply.Accordingly，underthissituation，theVIEstructuremaybeconsideredaslegitimate.Conversely，iftheactualcontrollerisaforeignentityornational，thenthedomesticcompanieswillbetreatedasforeign-investedcompanies，andanyoperationwithoutentryclearancemaybeconsideredasillegal.

　　However，forcompaniesthataresuccessfullylistedoverseasorcompaniescontrolledbyforeigninvestorswithoperationsinChinausingVIEstructurespriortothepromulgationoftheForeignInvestmentLaw，theDraftFILdoesnotprovideaclearanswerastohowtheywillbeperceivedifdomesticcompaniesfallintotheNegativeListandsuchdecisionislikelytobeinfluencedbythefeedbackreceivedfromthecommentssolicationprocess.Basedonourspeculation，becauseoftheinfluentialpowerofmanycompaniesusingVIEstructuresinvariousindustries，therisksthattheexistingVIEstructureisconsideredasillegalafterthepromulgationofForeignInvestmentLawarerelativelylow.Inthefuture，theregulatorswilllikelytakeaverycautiousapproachandmakedecisionsonacase-by-casebasisdependingontheactualsituation.

　　TheForeignInvestmentLaw，ifpromulgatedinitscurrentdraftform，willfundamentallychangethecurrentforeigninvestmentregulatorylandscape.Assuchitsimplementationwillrelyontheformulationofrelevantimplementationrulesaswellasothercomplementaryguidance，suchastheNegativeList，thenationalsecurityreviewguidanceandinformationreportingrules.WhilethecirculationoftheDraftFILisanimportantfirststepinthecontextofthelandmarkreform，thereisstillaverylongwaytogointheestablishmentofanewforeigninvestmentregimeandthefullimplementationoftheForeignInvestmentLaw.AccordingtotheLegislativeWorkPlanfortheStateCouncilin2014，theamendmentoftheThreeFIELawsfallswithinthe‘researchprojects’of2014.MOFCOM，asthedepartmentresponsiblefordraftingtheForeignInvestmentLaw，hasstartedtocirculatetheDraftFILforpubliccommentsattheverystartof2015.ThisdemonstratesthedeterminationoftheChinesegovernmenttocarryoutreform.Uponexpirationoftheperiodsolicitingpubliccomments(approximately1month)，MOFCOMwillrevisetheDraftFILonthebasisofcommentsgatheredfromthepublic，andsubmitthereviseddrafttothestandingmeetingoftheStateCouncilfordeliberationandthencirculateanupdateddraftfortheStandingCommitteeoftheNationalPeople’sCongresstoreview.Withtheobjectiveofestablishinga“newopeneconomysystem”andalongwiththenegotiationofSino-USandSino-EUbilateralinvestmentagreements，webelivewearenowatthedawnoftheeraofthenewForeignInvestmentLaw.