Urgent Compliance Alert for Foreign-Invested Enterprises in China
Attention all foreign investors in China!
A recently passed mandate from the Chinese government demands immediate action to update your corporate governance structure and documents. Whether you’re a Wholly Foreign-Owned Enterprise (WFOE) or part of a Chinese Joint Venture Entity, adhering to China’s revised PRC Company Law is no longer optional – it’s essential to ensure smooth business operations in the years ahead.
The Chinese government has mandated that all foreign-invested enterprises in China — think WFOEs and Joint Ventures — revise their corporate governance structures and documents to conform to the PRC Company Law. Failing to comply with this mandate can lead to major disruptions in your business operations, starting in 2025.
PRC Company Law Amendments: What Foreign Companies Must Know
This Chinese government directive follows recent amendments to the PRC Company Law, adopted at the end of 2023 and set to take effect on July 1, 2024. These sweeping amendments aim to overhaul how shareholding, equity capital, and corporate governance work in China, impacting every company, including all foreign-invested enterprises. If you are an owner of any company in China, it’s time to pay close attention!
Deadline Looms under China’s Foreign Investment Law
Per the deadline set by the Foreign Investment Law, FIEs must by the end of this year revamp their corporate documents to conform to the recently updated China Company Law.
500,000 Foreign Companies in China Must Change Their Governance Documents
These new requirements impact more than 500,000 foreign-invested enterprises (FIEs) across China. However, due to the pandemic and the introduction of scores of other new laws and regulations over the last few years, few FIEs have started this mandatory conversion process. But the impending year-end deadline has rapidly made this conversion process a top priority for all FIEs in China for 2024.
On a somewhat brighter note, this development legally levels the playing field for foreign enterprises, offering them essentially the same treatment as domestic enterprises. This has been promised for years. But as is true of pretty much all laws in China, the proof of this will be in the enforcement, and the jury is still out as to whether Chinese companies will remain more equal than others. No matter what though, these new laws will replace China’s old-style corporate WFOE and Joint Venture governance laws with more robust provisions under the Company Law, which allows for more international-style corporate governance provisions.
Our China corporate lawyers have already seen foreign companies cite to these new provisions to justify updating and improving upon their joint venture documents and relationships.
The Governance Document Conversion Process
Navigating this complicated and multi-faceted conversion process is not going to be fast, easy, or cheap, but if you have a company in China, you have no choice but to bite the bullet and just do it. To give you a quick idea of the complexity, our law firm is doing these conversions using checklists that include more than 100 elements for WFOEs and more than 150 elements for Joint Ventures. Many of these elements include items that must be changed, items that are recommended to be updated, as well as options newly available under the Company Law.
Our job as attorneys will be to help our foreign company clients decide which of the recommended and optional updates makes sense for their situation, as no two foreign company’s decisions will be identical. Joint Ventures face an added layer of complexity, as they need to reach consensus with their JV partners on any changes.
To maximize quality, increase efficiency, and reduce costs, our law firm has contracted with a specialized provider of bilingual English-Chinese legal resources tailored to handle these conversions. This will enable us to use a comprehensive FIE conversion workflow tool that incorporates all recent changes to China’s Company Law. This allows us to deliver high-quality customized FIE conversion work product in both English and Chinese in substantially less time than would be required under a traditional legal services model. Most importantly, this allows us to flat fee our work.
Time is of the Essence
Considering the sheer volume of FIEs needing their entity and documents reviewed and amended by year-end, foreign companies that initiate the process immediately will benefit by avoiding a last-minute scramble and rising costs. They can also avoid regulatory trouble they are likely to encounter in 2025 for failing to adapt to these amendments. Our phone lines are open.
