MOFCOM amends the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises

On 30 July 2017, the Ministry of Commerce (the “MOFCOM”) announced a decision to amend (the "Amendment Decision”), the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (the “Measures”). On the same day, the MOFCOM also issued a notice with a serial number of No. 37 providing detailed guidance on the implementation of the Measures (the “No. 37 Notice”).

According to the Amendment Decision, the Measures have been amended in the following aspects:

1. In an M&A transaction where a purely domestic company is the target company of a foreign investor, where the transaction will result in a conversion of the domestic company to a foreign invested enterprise (“FIE”), if the target company does not fall within the scope of the implementation of special access administrative measures prescribed by the state, the relevant party must submit the application for incorporation and complete the relevant record-filing procedures.
2. When a foreign-invested enterprise is established by merger or acquisition, if the basic elements of the transaction change, the designated representatives or entrusted agents of the foreign-invested enterprise must submit an online application for change and complete the recording-filing procedures within 30 days after the occurrence of such change.
3. If the strategic investment by a foreign investor in a non-foreign-invested listed company falls within the scope prescribed in the Measures for record-filing, the relevant party should complete the formalities to file a record within 30 days before or after the registration of securities with the securities depository and clearing agency. If the strategic investment introduced by a foreign-invested listed company from a new foreign investor falls within the scope for record-filing, the relevant party should complete the equivalent record-filing formalities. Once the record-filing is complete, the relevant formalities should be completed in order to update the filed records within 5 days from the date on which the obligor for information disclosure fulfills its obligation to disclose information.
4. An ownership structure chart showing the ultimate actual controlling party of the foreign-invested enterprise must be submitted when a foreign-invested enterprise or its investors complete the record-filing procedures for the incorporation or change of such foreign-invested enterprise. An ownership structure chart does not need to be submitted if there has been no change in the ultimate actual controlling party.
5. If a foreign investor makes a payment using the equity of an overseas company that it owns, a Certificate for Outbound Investment by an Enterprise must be provided by the domestic enterprise that receives the equity of the overseas company.
6. The “Application Form for Record-filing of the Incorporation of Foreign-invested Enterprises” and the “Application Form for Record-filing of the Change of Foreign-invested Enterprises” that were attached to the previous version of the Measures, have been replaced with the new forms attached to the No. 37 Notice.

The Measures, which came into effect on 1 October 2016, aimed to simplify the regulatory regime for foreign investment, stating that as long as the business of the FIEs did not fall within the negative list in the Catalogue for the Guidance of Foreign Investment Industries (the “Catalogue”), the establishment and alterations of FIEs would only be subject to record filing instead of the original foreign investment approval. The Measures, when it was first issued, excluded M&A transactions completely from the scope of record-filing, meaning that all M&A transactions still needed approval from MOFCOM.

The Catalogue, which was amended on 28 June 2017, for the first time excluded ordinary M&A transactions from the negative list, as a market access guidance. The revised Measures newly released by MOFCOM further provided the legal basis for the foresaid relaxed procedures, as a supporting document to the Catalogue, especially from an implementation perspective. According to the revised Measures, ordinary M&A transactions that do not fall within the scope of the implementation of special access administrative measures will be subject to the record-filing procedures. MOFCOM approval will still be required for M&A transactions in the negative list, or connected party M&A transactions where an acquisition is made by a domestic enterprise or individuals using a company legally established abroad or controlled by domestic shareholders as an investment vehicle, of the domestic companies that have relationships connected to the purchasers themselves.

Overall, the Revised Measures is a positive development for foreign investors who are planning to enter the Chinese market or expand their business that do not fall into the negative list in China by way of M&A, as the very time-consuming MOFCOM approval has been replaced with the easier record-filing procedure which should mean that such transactions will be closed in a shorter timeframe. Accordingly, the parties involved in the M&A transaction must be aware that when drafting the transaction documents, common clauses that are currently used in typical M&A transactions may need to be amended for future transactions, such as the effectiveness of the acquisition agreement, the conditions precedent for the closing etc. The parties also need to be aware that the record-filing procedure will be required if the consideration, payment method and evaluation value of the target of the transaction change, in accordance with the new application form published in No. 37 Notice.

In addition, as the main M&A Rule still remains effective, aka the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, it is important to keep a close eye on the possible conflict between the M&A Rule and the revised Measures from an implementation perspective.