1. Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors (Draft)
On 18 June 2020, the Ministry of Commerce of the People’s Republic of China (MOFCOM) published the Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors (Draft) (外国投资者对上市公司战略投资管理办法（修订草案公开征求意见稿) (Draft Measures), seeking public comments by 19 July 2020. Comments may be made via the Ministry of Justice of the People’s Republic of China’s website (http://www.chinalaw.gov.cn), MOFCOM’s website (http://www.mofcom.gov.cn), via email, fax (010-65197322) or post.
The Draft Measures were published for the purpose of better implementing the Foreign Investment Law and the relevant regulations. Compared with the existing Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors, which was published by the MOFCOM on 28 October 2015 and came into effect the same day, the Draft Measures contain the following key changes:
- Clarify the scope of “Strategic Investment” – The Draft Measures define “Strategic Investment” as foreign investors acquiring A-shares of listed companies through lawful methods (such as contractual transfers, private placement of new shares by listed companies and tender offers) and holding such shares for a certain period of time. The Draft Measures also clarify the circumstances that do not fall within the scope of "Strategic Investment", being:
- investments by Qualified Foreign Institutional Investors (QFIIs) and RMB QFIIs in listed companies;
- investment by foreign investors in listed companies through the stock market inter-connection mechanism for transactions such as the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Shanghai-London Stock Connect;
- investment by foreign investors in listed companies by acquiring A-shares through initial public offering and listing of the foreign investment company limited by shares; and
- investment by foreign natural persons who meet the relevant provisions of the China Securities Regulatory Commission (CSRC), by buying and selling shares of listed companies in the secondary market or acquiring shares of listed companies through equity incentive plans.
- Significantly lower the investment threshold – The Draft Measures:
- clarify that qualified foreign natural persons are allowed to make Strategic Investments;
- state that a non-controlling foreign investor should have total assets of no less than 50 million US dollars, and their wholly-owned investors should have as assets under management of no less than 300 million US dollars (reduced from 100 million US dollars and 500 million US dollars respectively);
- reduce the lock-up period from 3 years to 12 months; and
- for foreign investors conducting Strategic Investment through private placement of new shares by listed companies, eliminate the shareholding ratio requirement; for foreign investors conducting Strategic Investment through contractual transfer, reduce the shareholder ratio requirement from 10% to 5%; and for foreign investors conducting Strategic Investment through tender offer, set the minimum proportion of shares of the listed company to be purchased as 5% of the issued shares.
- Allow more investment methods – The Draft Measures:
- allow foreign investors to conduct Strategic Investment through tender offer;
- for private placement by listed companies, allow foreign investors to conduct Strategic Investment by means of share swap i.e. using shares of offshore non-listed companies investors hold as the purchase price; and
- allow foreign investors to conduct Strategic Investment in companies listed on the national SME share transfer system.
- Implement an innovative supervision mechanism – The Draft Measures:
- eliminate the MOFCOM approval and filing requirements that currently apply on Strategic Investment, but request that Strategic Investment be subject to the foreign investment information reporting requirements;
- request that foreign investors and listed companies engage agencies to issue professional opinions on whether the Strategic Investment conforms to the provisions of the Measures; and
- request that foreign investors and listed companies make necessary disclosures about whether Strategic Investment conforms to the provisions of the Measures for War Investment in relevant securities filing documents.
2. China further updates its Negative List for Admission of Foreign Investment
On 23 June 2020, the National Development and Reform Commission of the People’s Republic of China (NDRC) and the MOFCOM jointly published the Special Administrative Measures (Negative List) for Admission of Foreign Investment (2020) (Negative List (2020)) and the Special Administrative Measures (Negative List) for Admission of Foreign Investment in Pilot Free Trade Zones (2020) (PFTZs Negative List (2020)). Both the Negative List (2020) and the PFTZs Negative List (2020) will come into effect on 23 July 2020 and will repeal the existing negative lists published on 30 June 2019.
Comparing the 2019 and 2020 versions, the industry sectors in the Negative List have been reduced from 40 to 33, and the industry sectors in the PFTZs Negative List have been reduced from 37 to 30. Major changes include:
- Accelerating the process of opening up key service sectors – In the financial sector, the restrictions on the foreign shareholding percentage in securities companies, securities investment fund management companies, futures companies and life insurance companies will be lifted. In the infrastructure sector, the requirement that an entity engaging in construction and operation of water supply and drainage networks in cities with a population of more than 500,000 must be controlled by the Chinese shareholder will be abolished;
- Relaxing entrance requirements in manufacturing and agriculture sectors – In the manufacturing sector, the restrictions on the foreign shareholding percentage in commercial vehicle manufacturing entities will be lifted, and the ban on foreign investment in radioactive mineral smelting, processing and nuclear fuel production will be lifted. In the agriculture sector, the requirement that an entity engaging in breeding of new wheat varieties or seed production must be controlled by the Chinese shareholder(s) will be reduced so that the equity held by Chinese shareholders should not be less than 34%; and
- Continue to carry out pilot programs in the pilot free trade zone – In the pharmaceutical sector, the ban on foreign investment in Chinese herbal medicine will be lifted. In the education sector, foreign investors will be allowed to set up diploma-based vocational education institutions.
Key messages delivered by the Negative List (2020) include:
- Foreign investment is prohibited in the cultural and news-related sectors, including:
- manufacturing of ground receiving facilities and key components of satellite television broadcasting systems;
- Internet news and information services, Internet publishing services, Internet audio-visual program services and Internet cultural services;
- news institutions (including, but not limited to, news agencies);
- editing, publishing and production of books, newspapers, periodicals, audio-visual products and electronic publications;
- radio stations, television stations, radio and television channels, radio and television transmission coverage networks (transmitting stations, relay stations, radio and television satellites, satellite uplink stations, satellite receiving and forwarding stations, microwave stations, monitoring stations and cable radio and television transmission coverage networks etc.) at any level, radio and television video-on-demand services, and installation services of satellite television broadcasting ground receiving facilities; and
- radio and television program production and operation companies (including import businesses), film production companies, distribution companies, cinema companies and film import businesses.
- Although foreign investment is allowed in the publication printing sector, the Chinese shareholders must be in control.
- Further, foreign investment is also prohibited in the following sectors:
- legal services;
- social surveys; and
- humanities and social sciences research institutions.
3. Regulations on the Registration and Administration of Commercial Entities of the People’s Republic of China (Draft)
On 15 June 2020, the State Administration for Market Regulations (SAMR) published the Regulations on the Registration and Administration of Commercial Entities of the People’s Republic of China (Draft) (中华人民共和国商事主体登记管理条例（草案）) (Draft Regulations), seeking public comments.
Pursuant to the Draft Regulations, “Commercial Entities” include individual industrial and commercial households, limited liability companies, joint stock companies, other corporate legal persons (nationally owned enterprises, collectively owned enterprises and joint ventures), other profitable legal persons and their branches, farmers’ specialised cooperatives, farmers’ cooperatives, other special legal persons and their unincorporated enterprises, branches, partnerships, sole proprietorships, and foreign company branches.
Upon the Draft Regulations taking effect, the following regulations or measures will be repealed: the Regulations of the People’s Republic of China on Administration of Company Registration (中华人民共和国公司登记管理条例), the Administrative Regulations of the People’s Republic of China on Registration of Enterprise Legal Persons (中华人民共和国企业法人登记管理条例), the Administrative Measures of the People’s Republic of China on the Registration of Partnerships (中华人民共和国合伙企业登记管理办法), and the Administrative Regulations of the People’s Republic of China on Farmer Professional Cooperatives (农民专业合作社登记管理条例).
4. CFSTC will publish Guidelines for the Security Classification of Financial Data
On 16 June 2020, it was reported that the China Financial Standardization Technical Committee (CFSTC) had recently issued a draft of the Financial Data Security – Data Security Classification Guidelines (Guidelines) for official review. The Guidelines elaborate on the principles, methods and processes for data security classification, and also include a Reference Chart regarding Classification Rules of Typical Data of Institutions in the Financial Industry as its attachment.
Data security classification is of great significance for protecting personal information, clarifying data rights and interests, and commercialising data assets. It is expected that the Guidelines will further clarify the major procedures for classification and the corresponding competent authority or review body. As such, we suggest that the relevant enterprises in China pay close attention to the finalization of the Guidelines in accordance with Technical Specifications for the Protection of Personal Financial Information promulgated by the CFSTC at the beginning of this year.
5. Zhejiang Promulgates Interim Measures for the Opening and Security Management of Public Data
On 17 June 2020, the Interim Administrative Measures of Zhejiang Province for the Opening and Security of Public Data (Measures) were officially released and will come into force on 1 August 2020. The Measures expressly state that people disseminating public data should prioritize the publication of data closely associated with public security, public health, urban governance, social governance, safeguards for people’s livelihood, administrative licensing, enterprises’ public credit information closely related to the development of the digital economy, and data regarding natural resources, the ecological environment, transportation and weather etc.
Recently, Hangzhou also issued the Administrative Measures for the Specifications for the Development and Operation of the Hangzhou Health Code (Hangzhou Measures), encouraging qualified enterprises to develop and use resources related to the Health Code in accordance with the law to provide convenient and efficient health service products on the premise that the legitimate rights and interests of individuals’ personal information are protected.
We recommend that all enterprises intending on participating in the publication and development of public data strengthen cooperation with relevant entities and adhere to network security obligations to ensure the security of the relevant networks and data.
Foreign Exchange & Customs
6. PBC and SAFE Have Been Promoting Financial Policies Supporting the Development of the Hainan Free Trade Port
On 8 June 2020, Mr Pan Gongsheng, deputy governor of the People’s Bank of China (PBC) and director of the State Administration of Foreign Exchange (SAFE), introduced financial policies in support of the construction of the Hainan Free Trade Port.
The development of financial policies will follow three principles:
- to establish the policies and institutional system for the free trade port in steps and phases according to the overall design;
- to enable the liberalization and facilitation of cross-border trade and investment; and
- to ensure systemic financial risks do not eventuate.
The overall framework will primarily include the following aspects:
- facilitating the capital flow of cross-border trade and investment;
- opening up the financial services industry;
- supporting the development of the real economy through financial reform and innovation; and
- constructing a financial risk prevention and control system.
Further, financial policies of the PBC and SAFE will facilitate the free flow and management of cross-border funds in the Hainan Free Trade Port and streamline cross-border trade and investment.
7. SIPO Issued Trademark Infringement Judgment Standards
On 17 June 2020, the State Intellectual Property Office (SIPO) issued the Trademark Infringement Judgment Standards (Standards). The Standards are a specific measure to implement the Opinion on Strengthening the Protection of Intellectual Property Rights, aiming to strengthen trademark enforcement guidance, unify enforcement standards, and create a better business environment.
The Standards contain 38 sections which outline and elaborate upon certain concepts, including the standards of use of trademarks, types of commodities, identical commodities, similar commodities, the “easily confusing” rule, sales exemption, conflicts of rights, suspension of applications and the identification of rights holders.
We suggest that enterprises in China which have existing or pending trademark infringements refer to the detailed requirements of the Standards.
Should you need any additional information, or if you would like to discuss how recent updates in Chinese law may affect your business, please feel free to contact us.
This client alert is not intended to be legal advice. Readers should seek specific legal advice from KWM legal professionals before acting on the information contained in this alert.