International Investment Law (9) ZHANG Jiao

FDI vs. National Industries Negative Impacts

- Unfair competition; - Monopoly; - Reliance on foreign investment; - Imbalance between industries as well as regions; … Impacts of FDI on National Industries

Regulatory Power of the Host Country 0 Entry - admission and establishment 0 Corporate form and governance 0 National Security Review 0 Post-investment report

Admission and Establishment 0 States have a wide discretion over whether and how far to admit investors into the national economy and market. 0 States have sought to control the entry and establishment of foreign investors as a means of preserving national economic policy goals, national security, public health and safety, public morals and serving other important issues of public policy … 0 But, 0 States that seek to encourage foreign investment may restrict their wide area of discretion through international treaties, by the inclusion of a clause embodying rights of entry and establishment for foreign investors.

Trend More restrictive laws have been passed in a number of countries, mainly in the natural resources sector. Latin America Has introduced sectoral restrictions. Russia Has proposed a more restrictive foreign investment law. Thailand Concern over foreign take-overs has also become more common place. EU Member States New Protectionism ??

AdmissionEstablishmentMarket Access Non- discrimination Standard

Conflicting Interests Investor Host Country -Capital -Technical knowledge -Distribution channels -…… -Infrastructure -Geographic position -Natural resources -Technical skills -Low-Cost Labour - attractive domestic market - ……

Restriction on Admission and Establishment Sectoral Restrictions ‘positive or negative list’ Limits on foreign shareholdings ‘Screening’ - Ownership or control - Performance requirements Local sourcing of inputs, export requirements, local personnel employment quotas, capital requirements …… TRIMs ??

Questions 0 The acceptance of state sovereignty in the field of admission of aliens and results in a voluntary exclusion of national regulatory discretion. Free entry is the best in all cases ?? 0 Given the gradual acceptance of pre-entry rights of non- discriminatory admission and establishment, how far will such international developments control developments under national laws ?? 0 Potential conflict between the market-opening provisions of an IIA and inconsistent subsequent laws that seek to control admission and establishment ??

Foreign Investment Law China

‘Pre-entry National Treatment’ & ‘Negative List’ Future Catalogue of Special Management Measures (the Negative List) “restricted” Past and Current Industry Catalogue for the Guidance of Foreign Investments (the Investment Catalogue) “encouraged”, “restricted”, “prohibited” Entry license

2015 FTZ Negative List (20 April 2015) National Security Trial Measures for FIEs in the FTZ (State Council); - A series of administrative measures (MOFCOM)

Cooperate Form and Governance Foreign-Invested Enterprises (FIEs) Equity Joint Venture (EJV) Contractual Joint Venture (CJV) Wholly Foreign Owned Enterprise (WFOE) Limited Liability Company 3 years to change

National Security Review 0 “The 2011 Circular”: - Acquisitions by foreign investors in specific industries - military, agriculture, energy, infrastructure, transport and technology 0 Foreign Investment Law: - Codifies the national security review regime - Expands its scope: any form, endangers or likely endangers national security - Voluntary reporting regime - fine

Post-Investment Reporting System Major changes to an FIE (share transfer, capital increases): - report within 30 days after they occur. Foreign investors in compliance with periodic reporting obligations: - file an annual report each year. Large FIEs with total assets, sales or revenues in excess of RMB 10 billion or more than 10 subsidiaries in China: - file reports on a quarterly basis Monetary fineCriminally liable

Variable Interest Entities (VIEs) Initial Public Offering (IPO) Onshore listing (A-share) Offshore listing (red-chip) Straight forward structure VIE structure

Variable Interest Entities (VIEs) Internet Companies Alibaba, Tencent, Baidu, Sina, Tudou, …… Private Education Companies New Oriental, Global Education & Technology Group, AMBOW Education …… Media Companies Focus Media, Vision China Meida and Bona ……

Variable Interest Entities (VIEs) -The Consulting and Service Agreement - The Asset License Agreement - The Voting Rights Agreement - The Call Option Agreement - The Equity Pledge Agreement - The Loan Agreement

VIEs under the Draft Foreign Investment Law 0 foreign investors’ control of domestic enterprises via a VIE structure is explicitly captured as a form of foreign investment. 0 Control is achieved by a series of contracts, without giving the foreign entity direct ownership in the onshore operating entity. 0 foreign investors may no longer be able to make foreign investments via VIE in a restricted industry without an entry license. 0 a foreign entity that is controlled by Chinese investors, when making a restricted investment, shall apply to be treated as a Chinese investor at the same time that it applies for an entry license. Uncertainty ??

“Control” 0 (1) directly or indirectly holding 50 percent or more of the shares, equity, property shares, voting rights or other similar rights and interests of an enterprise; 0 (2) despite holding less than 50 percent of the shares, equity, property shares, voting rights or other similar rights and interests of an enterprise, (a) being entitled to directly or indirectly appoint at least half of the members of the board or a similar decision-making body; (b) being able to ensure that its nominees obtain at least half of the seats on the board or a similar decision-making body; or (c) being able to exert a material impact on the resolutions of the shareholders meetings or the directors meetings; or 0 (3) being able to exert a decisive influence on such matters as the operations, finance, personnel, and technology of an enterprise through contracts, trusts or other means.

World FDI 0 Inflow 0 Outflow

China FDI Inflow

China FDI Inflow – Three Industries

China FDI Inflow – M&A – Three Industries

How ? 0M0M arket Control 0S0S hare Control 0T0T echnology Control 0B0B rand Control

Countermeasures ? Foreign Investment Law Negative List …… Foreign Investment Law Anti-Trust Law Company Law …… General Law BITs or FTAs Agreement for the Avoidance of Double Taxation …… International Law Coherence ??

Pre- Establishment National Security Review Post- Investment

Industry security evaluation system

Foreign Investment Monitoring Authorities Multi-LayerTrans-SectorHigh-Level