Approval and regulatory requirements for Chinese foreign direct investment

Transcription

1 Corporate May 2014 Update Approval and regulatory requirements for Chinese foreign direct investment 1. Introduction The Chinese Government has been providing incentives for Chinese enterprises to invest abroad for many years in order to execute its Going Out strategy. It has encouraged domestic enterprises to execute their plans for overseas investment by introducing a series of regulations and policies that provide favourable conditions for investors. In recent years, Chinese enterprises have increasingly invested in various industrial sectors in foreign countries by means of asset acquisitions and M&A. Significant outbound investments conducted by Chinese enterprises in the last five years include: The USD 15.1 billion acquisition of Nexen, a Canadian listed oil company, by CNOOC in February 2013, which is the biggest outbound M&A project conducted by a Chinese company The USD 1.8 billion acquisition of Volvo by Zhejiang Geely Holding Group in August 2010; the USD 7.27 billion acquisition of Addax by Sinopec in August 2009 The recently announced sale of the Las Bambas mining project in Peru by Glencore, which is being acquired by Minmetals Resources Limited (a subsidiary of the Chinese state-owned mining giant China Minmetals Corporation), as part of a consortium that also includes Guoxin International Investment Limited and CITIC Metal Co. With a total price of USD 5.85 billion, the purchase of the Las Bambas mining project represents the biggest outbound acquisition in the history of the Chinese mining industry In order to meet the increasing demand for outbound investment and to facilitate the entrance of Chinese enterprises into overseas markets, the approval and regulatory regimes for overseas investments have been adapted. The bodies that govern overseas investments and the methods of entering such transactions are numerous and varied. The scope of this article will be limited to a discussion of overseas direct investment ( overseas investment or outbound investment ) undertaken by enterprises established within the territory of the PRC in accordance with PRC law. According to the Provisions on the Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions issued by the State Administration of Foreign Exchange ( SAFE ), the term Overseas Direct Investment refers to a domestic institution s overseas formation of an enterprise or project or overseas acquisition of the ownership of, the controlling stake in, or the business management right to an

2 existing enterprise through formation (in the form of exclusive investment, joint investment or cooperation), merger, acquisition or purchase of shares, upon the approval of the competent administrative department of overseas direct investment. 1 In general, any outbound investment by a Chinese enterprise should be approved, verified or recorded by the competent department for outbound investment and other relevant departments, before it is actually carried out. The competent department of the PRC Government is the Ministry of Commerce of the People s Republic of China ( MOFCOM ). The approval or recordation of outbound investment can also involve the National Development and Reform Commission ( NDRC ) and SAFE. In addition, if the enterprise is an SOE or a listed company, the outbound investment approval or recordation process may also involve the State-owned Assets Supervision and Administration Commission of the State Council ( SASAC ) and the China Securities Regulatory Commission ( CSRC ). Each competent department has its own approval or regulatory requirements for overseas investment which vary, according to the authority of the department, the investment body, the amount of investment in question and other relevant factors. Considering the variety of competent regulatory authorities and the complexity of the process for obtaining approval or recordation, the purpose of this article is merely to provide an introduction to the general approval and recordation requirements for outbound investment, and to provide a point of reference for Chinese enterprises who intend to make such investments. 2. NDRC Investment project approval or recordation 2.1. The decentralization of approval authority Outbound Investment to be conducted by a Chinese enterprise must first be approved or recorded by either the NDRC or the local NDRC. The transformation of the approval and recordation regimes and the decentralization of the approval authority for outbound investment projects have become increasingly important issues in recent years. The general trends for the reform of the approval authority for outbound investment projects are: decentralization of the approval authority and the enhancement of the investment amount threshold for outbound investment projects that should be approved by the State Council or the NDRC (meaning that more outbound investment projects will be approved by the local NDRC) narrowing the scope of the approval process but expanding the scope of the recordation process (meaning that more outbound investment projects will be recorded rather than approved by the NDRC) The earliest legislation relating to approval of outbound investment projects is the Interim Measures for the Administration of Examination and Approval of the Overseas Investment Projects (the Interim Measures ), which were issued by the NDRC in October At the time, the amount of foreign exchange involved in the investment was one of the factors taken into account when considering the approval of an outbound investment project, which is no longer the case following the recent reform. 2 Due to the continuing development of the Chinese economy and the increase in outbound investment conducted by Chinese enterprises, the workload of the State Council and the NDRC for approval and recordation became significantly more onerous. In light of the above, the NDRC issued the Notice of the National Development and Reform Commission about Decentralizing the Approval Authority of Foreign Investment Projects (the Notice ) in February This was the first time that the decentralization of approval authority was expressly provided for in the form of regulation. In April 2014, the Measures for the Administration of Approval and Recordation of the Overseas Investment Projects (the Measures ) were issued and replaced the old 2004 Interim Measures. They further expanded the extent of the decentralization of the project approval authority, while enhancing the investment amount threshold for projects to be approved by the State Council to USD 2 billion and the investment amount threshold for projects to be approved by the NDRC to USD 1 billion. 1 See Article 2 of the Provisions on the Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions. 2 See Article 4 of the Interim Measures for the Administration of Examination and Approval of the Overseas Investment Projects, The overseas investment projects using large amounts of foreign exchange refer to the overseas investment projects, outside the fields prescribed in the preceding paragraph, with the foreign exchange amount of the Chinese party being 10 million dollars or more, and this kind of project shall be subject to the examination and approval of the National Development and Reform Commission, and the projects having an investment amount by the Chinese party of 50 million dollars or more shall be subject to the examination of the National Development and Reform Commission, and then be reported to the State Council for examination and approval.

3 When carrying out a comprehensive comparison of the three regulations issued by the NDRC regarding the approval of outbound investment projects, the process of reform of the investment project approval authority can be clearly observed. See Table 1 below: Unit: USD Regulations Approval Competent Authorities Interim Measures for the Administration of Examination and Approval of Overseas Investment Projects (2004) Notice of the National Development and Reform Commission about Decentralizing the Approval Authority of Foreign Investment Projects (2011) Measures for the Administration of Approval and Recordation of Overseas Investment Projects (2014) State Council Projects of resources development in the amount of over 200 million; Projects using large amounts of foreign exchange in the amount of over 50 million (Approval). 3 Projects in the amount of over 2 billion and relating to sensitive countries and regions, as well as sensitive industries (Approval). 4 NDRC Projects of resources development in the amount of over 30 million; Projects using large amount of foreign exchange in the amount of over 10 million (Approval). 5 Centrally administrated SOEs: Projects of resources development in the amount of less than 30 million and projects using foreign exchange in the amount of less than 10 million (Recordation). 6 Centrally administrated SOEs: Projects of resources development in the amount of less than 300 million and projects of non-resources development in the amount of less than 100 million (Recordation). Projects of resources development in the amount of over 300 million and projects of non-resources development in the amount of over 100 million (Approval). 7 Projects in the amount of over 1 billion; or projects relating to sensitive countries and regions, as well as sensitive industries, irrespective of the investment amount (Approval). 8 Centrally administrated SOEs; or local enterprises projects in the amount of over 300 million and less than 1 billion (Recordation). 9 Local NDRC Projects of resources development in the amount of less than 30 million; Projects using foreign exchange in the amount of less than 10 million (Approval). 10 Local enterprises: Projects of resources development in the amount of less than 300 million and projects of non-resources development in the amount of less than 100 million (except for special projects 11 ) (Approval). 12 Local enterprises: Projects in the amount of less than 300 million (Recordation). 13 The 2014 Measures define both sensitive countries and regions and sensitive industries. 14 Sensitive countries and regions include: countries without established diplomatic relations, sanctioned countries, and investment projects in countries and regions where war or upheaval occurs. Sensitive industries include: baseline telecommunication operations, utilization of transborder water resources, massive land development, electric mains, power grid and media. 3 See Article 4 of Interim Measures for the Administration of Examination and Approval of Overseas Investment Projects. 4 See Article 7 of Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 5 Ibid. 6 See Article 6 of the Interim Measures for the Administration of Examination and Approval of Overseas Investment Projects. 7 See Article 1 of the Notice of the National Development and Reform Commission regarding Decentralizing the Approval Authority of Foreign Investment Projects. 8 See Article 7 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 9 See Article 8 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 10 See Article 5 of the Interim Measures for the Administration of Examination and Approval of Overseas Investment Projects. 11 Regarding the approval of special projects, article 2 of the Notice provides that investment projects in countries without diplomatic relations or sanctioned countries, or investment projects in countries and districts where war or upheaval occurs, as well as foreign investment projects regarding baseline telecommunication operations, utilization of transborder water resources, massive land development, power grid and media, irrespective of the amount of investment, shall be pre-approved by the provincial NDRC or central SOEs and then reported to the NDRC for approval, or examined and approved by the NDRC and then reported to the State Council for approval. 12 See Article 1 of Notice of the National Development and Reform Commission regarding Decentralizing the Approval Authority of Foreign Investment Projects. 13 See note See Article 7 of Measures for the Administration of Approval and Recordation of Overseas Investment Projects.

4 2.2 Specific procedures and requirements for project approval or recordation Preliminary reporting requirement For overseas acquisitions or bidding projects with an investment amount of over 300 million, the NDRC prior report regime requires Chinese investors to submit a projects information report to the NDRC in accordance with the format prescribed by the NDRC, prior to commencing substantive overseas works (e.g. signing binding agreements, making binding offers, and submitting applications to counterpart countries or local government departments) Approval procedures and requirements The project approval application requires the submission of a Project Application Report by Chinese enterprises. The 2014 Measures provide a detailed submission procedure and specify the requirements for completing the Project Application Report. For overseas investment projects approved by the NDRC or the State Council, local enterprises shall apply directly to their local provincial NDRC and submit the Project Application Report. The provincial NDRC shall provide a verification opinion and report to the NDRC for its subsequent approval. Applications for projects invested in by centrally administrated SOEs shall be made to the NDRC by the group company or parent company. 16 The Project Application Report shall be filled out in accordance with article 12 of the 2014 Measures, the format of which is published by the NDRC. 17 Article 12 of the 2014 Measures provides the basic contents of the Project Application Report, i.e. the name of the project, information about the investor, a feasibility analysis for the project, a description of the investment environment, an implementation plan for the project, a financing plan and risk analysis, etc. In addition, the following documents should be attached to the Project Application Report: the board resolution, the assets, operation and credit status of the investor, a letter of intent for financing issued by the bank, a framework agreement signed by parties, etc. 18 Having received the Project Application Report, the NDRC will approve eligible overseas investment projects within 20 working days, or report its approval opinion to the State Council for final approval. The period for examination and approval can be extended by 10 working days in particular cases, but this must be approved by the head of NDRC. The period for examination and approval does not include the time for assessment by commissioned consultants and consultation with relevant departments Recordation procedures and requirements With regards to projects that need to be recorded with the NDRC, local enterprises shall fill out the Recordation Application Form with the relevant documents attached, and submit them to their local provincial NDRC. The provincial NDRC will report them to the NDRC. In the case of centrally administrated enterprises, the Recordation Application Form should be submitted to the NDRC by the group company. 20 The NDRC will issue a Recordation Notice to eligible overseas investment projects within 7 working days. 21 It should be noted that the 2014 Measures emphasize the importance of approval or recordation by the NDRC. They stress that the notice of approval or recordation issued by the NDRC to investors shall be a prerequisite for other relevant procedures such as foreign exchange, customs, entry and exit control, taxation, etc. In the absence of approval or recordation notices issued by the NDRC, the competent regulatory authorities shall not carry out the relevant procedures listed above and financial institutions shall not grant loans to investors MOFCOM and Provincial Departments of Commerce Foreign Investment Approval Measures for Overseas Investment Management Overseas investment projects must be approved by the MOFCOM The Measures for Overseas Investment Management issued in 2009 provide that the MOFCOM and the provincial departments of commerce are the competent authorities for outbound investments in China. The MOFCOM and its local departments are responsible for: (a) Examining and approving FDI conducted by domestic companies (b) Granting Enterprise Overseas Investment Certificates to eligible domestic enterprises See Article 10 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 16 See Article 11 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 17 See Article 12 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 18 Ibid. 19 See Article 16 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 20 See Article 19 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 21 See Article 21 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 22 See Article 24 of the Measures for the Administration of Approval and Recordation of Overseas Investment Projects. 23 See Article 4 of the Measures for Overseas Investment Management, The Ministry of Commerce shall be responsible for administering and supervising overseas investment. The competent departments of commerce of the provinces, autonomous regions, municipalities directly under the Central Government, cities under separate state planning and the Xinjiang Production and Construction Corps (hereinafter referred to as the provincial commerce departments ) shall be responsible for administering and supervising the overseas investment within their respective administrative regions., and Article 5.

5 Therefore, Chinese enterprises conducting outbound investments are also required to obtain foreign investment approval from the MOFCOM or the relevant provincial department of commerce. The main legislation governing foreign investment approval is the Measures for Overseas Investment Management (the Measures ), which were issued by the MOFCOM in March The Measures provide a detailed procedure and specific requirements for applications for foreign investment approval. The Measures divide overseas investment approval into two levels, namely approval by the MOFCOM and approval by provincial departments of commerce. Overseas investment projects which shall be approved by the MOFCOM are: (a) Overseas investment in a country which has not established a diplomatic relationship with China (b) Overseas investment in a specific country or region (c) Overseas investment by a Chinese party in the amount of USD 100 million or more (d) Overseas investment which involves the interests of multiple countries or regions (e) Setting up a special-purpose company overseas 24 Overseas investment projects which shall be approved by the provincial departments of commerce are: (a) Overseas investment by a Chinese party in the amount of USD 10 million to USD 100 million (b) Overseas investment in the field of energy or minerals (c) Overseas investment which needs to attract capital from within China 25 The Specific Country or Region referred to in article 6 was not defined in the Measures. However, the MOFCOM together with the Ministry of Foreign Affairs jointly issued the National Overseas Investment Industrial Guidance Catalogue (the Catalogue ) in 2004, which provided that all investment by approved enterprises in countries or regions listed in the Catalogue shall enjoy national preferential policies in terms of capital, foreign exchange, taxation, customs, entry and exit control, etc. The MOFCOM also issued second and third editions of the Catalogue in 2005 and 2007, which included further countries and regions Specific procedures and requirements for approval The Measures also divide the specific application procedure for outbound investment approval into two levels, namely (1) approval by the MOFCOM and (2) approval by the provincial departments of commerce. Applicants shall fill out the Overseas Investment Application Form. Centrally administrated SOEs shall apply to the MOFCOM and local enterprises shall apply to their respective provincial departments of commerce. In the latter case, the provincial departments of commerce shall pre-verify the application, and then submit the pre-verification opinion together with all application materials to the MOFCOM for final approval. 26 Article 12 of the Measures also lists all materials that applicants shall prepare and submit, including the application form, copies of the business license, the articles of association of overseas enterprises and the relevant agreements or contracts, approval or recordation documents issued by relevant state departments, etc. It should be noted that (1) if the enterprise plans to conduct an overseas acquisition, it must submit a Preliminary Report for Overseas Acquisition Matters; 27 and (2) the term approval or recordation documents issued by relevant state departments should be understood to mean approval or recordation documents issued by the NDRC, in accordance with the relevant procedure. Regarding the Preliminary Report for Overseas Acquisition Matters, the MOFCOM together with SAFE jointly issued the Notice of the Ministry of Commerce and the State Administration of Foreign Exchange about Issuing the Initial Stage Reporting System for the Overseas Merger and Acquisition Related Matters of Enterprises (the Notice ) in March, The Notice provides that when an enterprise intends to conduct an overseas merger and acquisition transaction, it shall promptly report the decision to the MOFCOM or the provincial departments of commerce, and SAFE or the provincial SAFE. The enterprises that are subject to the administration of the State-owned Assets Supervision and Administration Commission shall report directly to the MOFCOM and SAFE, and other enterprises shall report to the local provincial commerce administrative departments and the local provincial SAFE, which shall forward the report to the MOFCOM and SAFE respectively. 28 In light of the Notice and article 12 of the Measures, it can be understood that in the case of outbound investment involving M&A, preliminary reporting is one of the prerequisites for obtaining outbound investment approval. 24 See Article 6 of the Measures for Overseas Investment Management. 25 See Article 7 of the Measures for Overseas Investment Management 26 See Article 13 of the Measures for Overseas Investment Management. 27 See Article 12 of the Measures for Overseas Investment Management. 28 See Article 3 of the Notice of the Ministry of Commerce and the State Administration of Foreign Exchange regarding Issuing the Initial Stage Reporting System for the Overseas Merger and Acquisition Related Matters of Enterprises.

6 Apart from ensuring that the application materials are complete and valid, Chinese enterprises should pay particular attention to situations in which the Measures specifically provide that approval shall not be granted. 29 Article 9 of the Measures lists four such situations: (a) Endangering state sovereignty, national security and public interests of China or violating a law or regulation of China (b) Damaging the relationship between China and a relevant country or region (c) Potentially violating any international treaty concluded by China with a foreign party (d) Involving any technology or goods prohibited from import by the Chinese government 3.2 Significant Revolution brought about by the 2014 Exposure Draft of Measures for Overseas Investment Management (Amendments) Revolution the priority of recordation On 16 April 2014, just one week after the release of the new Measures for the Administration of Approval and Recordation of Overseas Investment Projects by the NDRC, the MOFCOM issued the Exposure Draft of Measures for Overseas Investment Management (Amendments) (the Exposure Draft ) which marks a significant change in the original approval regime of overseas investment projects. The Exposure Draft changes the approval regime to a new system in which most overseas investment projects will only need to be recorded rather than approved. According to article 6 of the Exposure Draft, the approval by MOFCOM is only necessary where an overseas investment project involves sensitive countries (regions) or sensitive industries. In all other cases, regardless of the amount of investment, overseas investment projects only need to be recorded. 30 It is clear that in accordance with the project approval revolution launched by the NDRC, the Exposure Draft expressly provides that only the MOFCOM and the provincial departments of commerce have the authority for recordation. All centrally administrated enterprises shall be recorded with the MOFCOM and local enterprises shall be recorded with the provincial department of commerce. 31 The Exposure Draft also defines sensitive countries and regions and sensitive industries. Regarding sensitive countries and regions, the Exposure Draft provides a very similar definition to that of the NDRC. However, their definitions of sensitive industries are different. According to article 9 of the Exposure Draft, sensitive industries includes industries involving use of products and techniques that are restricted to export by the state, or industries involving multinational interests. 32 In contrast to NDRC definition of sensitive industries (baseline telecommunication operations, utilization of transborder water resources, massive land development, electric mains, power grid and media), the MOFCOM definition is much narrower Specific procedures and requirements for recordation and approval The Exposure Draft provides a very simple procedure for recordation. Centrally administrated and local enterprises fill out the Overseas Investment Recordation Form by using the MOFCOM Overseas Investment Management System. The Overseas Investment Recordation Form should be stamped with the enterprise s official seal and be submitted to the MOFCOM or provincial department of commerce, together with a copy of the enterprise s business license. The MOFCOM or provincial department of commerce will issue an Enterprise Overseas Investment Certificate to eligible enterprises within 3 working days. 33 The Exposure Draft also simplifies the approval procedure. There are two primary changes: (a) Regarding overseas M&A, enterprises are not required to submit the Initial Report about Matters Related to the Overseas Merger and Acquisition (b) Application materials exclude the approval or recordation documents issued by relevant state departments, which means that under the new regime, departments of commerce at all levels will no longer deem obtaining approval or recordation documents issued by the NDRC as a prerequisite In other words, it seems that Chinese enterprises can apply to the NDRC for project approval and to the MOFCOM for overseas investment approval at the same time. If so, it will save time for Chinese investors. After receiving the application for approval, the MOFCOM will decide whether or not to approve the project within 15 working days (excluding the time for consulting with embassies or consulates in foreign countries) 34. It should be noted that 29 See Article 9 of the Measures for Overseas Investment Management. 30 See Article 6 of the Exposure Draft of Measures for Overseas Investment Management (Amendments). 31 See Article 8(1) of the Exposure Draft of Measures for Overseas Investment Management (Amendments). 32 See Article 9 of the Exposure Draft of Measures for Overseas Investment Management (Amendments). 33 See Article 8 of the Exposure Draft of Measures for Overseas Investment Management (Amendments). 34 See Article 9 of the Exposure Draft of Measures for Overseas Investment Management (Amendments).

7 the Exposure Draft retains the extra procedural requirements for approval of overseas investment in the category of prospecting and development of mineral resources, which reflects the fact that the Chinese government still maintains stringent regulations on Chinese enterprises overseas investments in resources development SASAC and Local Competent Authorities of State-owned Assets Supervision of Foreign Investment of State-owned Enterprises In addition to applying to the NDRC and the MOFCOM for project approval and overseas investment approval, SOEs which carry out overseas investment must obtain approval regarding the valuation requirements for state-owned assets from the SASAC. Article 47 of the Law of the People s Republic of China on the State-Owned Assets of Enterprises stipulates that state-owned enterprises making overseas investments of non-monetary property should carry out appraisals of state-owned assets. 36 In August 2005, the SASAC issued the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises (the Interim Measures ), which stipulate that the state-owned assets supervision and administration institutions at all levels shall be responsible for the supervision and administration of the assessment of state-owned assets, 37 and the projects for the assessment of state-owned assets of enterprises shall be subject to the examination and approval system as well as the recordation system. 38 In relation to the approval or filing requirements for certain projects, it makes a determination based on the type of the enterprise, namely state-owned or local state-owned enterprises. Asset assessment projects for overseas investment by local state-owned enterprises shall be subject to the examination and approval of the corresponding state-owned assets supervision and administration institutions. Asset assessment projects for overseas investment by state-owned enterprises only need to be filed with the NDRC. In any case, centrally administrated enterprises themselves shall be responsible for the recordation of the assets assessment projects for overseas investment by their subsidiary enterprises at all levels. 39 Article 6 of the Interim Measures lists activities that should be assessed, including investment outside China by state-owned enterprises using nonmonetary assets, which requires asset assessment. 40 Article 8 states that where an enterprise conducts any of the acts mentioned in Article 6, the entity, as the holder of the enterprise s property rights, shall authorize a qualified asset assessment institution to make the assessment. 41 Since the property rights of local state-owned enterprises are held by the SASAC at all levels, and the property rights of centrally administrated enterprises are held by the SASAC of the State Council, the entities capable of authorizing a qualified assets assessment institution are the State Council and local SASAC. When the subsidiary of state-owned enterprises makes an overseas investment, the entrusting party is their parent company. In addition, the Interim Measures demand that when carrying out an assets assessment project that shall be subject to examination and approval, the enterprise shall, prior to the assets assessment, report the following information to the state-owned assets supervision and administration institution: (1) The approval of the relevant economic acts (2) The selection of the date of assessment benchmark (3) The determination of the scope of the asset assessment (4) The conditions, scope, and procedures for the asset assessment institution and the qualifications and professional strengths of the candidate institution (5) The arrangement for the progress of assets assessment See Article 11 of the Exposure Draft of Measures for Overseas Investment Management (Amendments), Before approving an overseas investment in the category of prospecting and development of mineral resources, the Ministry of Commerce or the provincial commerce department shall solicit the opinions of the relevant chamber of commerce and association in China as references for making a decision on approval or disapproval. The relevant chamber of commerce and association shall give a response within 3 working days. 36 See Article 47 of the Law of the People s Republic of China on the State-Owned Assets of Enterprises, For the merger, splitting, restructuring, transfer of major property, investment of non-monetary property or liquidation of a wholly state-owned enterprise, wholly state-owned company or company in which the state has a controlling stake, or any other matter in which the assets appraisal shall be conducted according to a law or administrative regulation or the enterprise bylaws, the appraisal of the relevant assets shall be conducted according to the relevant provisions.. 37 See Article 3 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises. 38 See Article 4 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises. 39 See Article 4 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises. 40 See Article 6 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises. 41 See Article 8 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises. 42 See Article 12 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises.

8 Moreover, an enterprise shall report the information about the progress of the assets assessment project to the state-owned assets supervision and administration institution promptly. When the state-owned assets supervision and administration institution deems it necessary, it may follow up, guide and conduct on-the-spot inspections for the project CSRC Approval of Material Asset Reorganizations in Listed Companies 5.1 Verification of Material Asset Reorganizations Chinese listed companies that carry out outbound investment are subject to laws and regulations which may require them to obtain approvals from the China Securities Regulatory Commission (the CSRC ). In accordance with the Administrative Measures for the Material Asset Reorganizations of Listed Companies (the Administrative Measures ), which were issued by the CSRC in 2008 and revised in 2011, the approval of the CSRC is only required for an overseas investment by a listed company if the investment constitutes a Material Asset Reorganization of the listed company. Article 2 of the Administrative Measures defines a Material Asset Reorganization as assets trading behavior conducted by listed companies and companies held or controlled by them beyond their daily operating activities, such as the purchase and sale of assets which reach the prescribed proportion and cause substantial changes in the principal business, assets and income of listed companies. 44 It should be noted that unless the funds used in the assets trading behavior referred to above are the listed companies own funds the Administrative Measures do not apply. If listed companies use raised funds to purchase assets and invest overseas for the purposes of raising funds as disclosed in the stock issuance documents approved by the CSRC, the Administrative Measures do not apply. 45 Regarding the proportion required in order to constitute a Material Asset Reorganization, the Administrative Measures provide three conditions in order to constitute a Material Asset Reorganization in Article 11: 46 The total assets purchased or sold account for 50% or more of the end-of-period total assets in the audited consolidated financial statement of the last accounting year of the listed company The business income from the purchased or sold assets in the last accounting year account for 50% or more of the business income in the audited consolidated financial statement of the same period The net assets purchased or sold account for 50% or more of the end-of-period net assets in the audited consolidated financial statement of the last accounting year, and are over 50 million yuan If a listed company s outbound investment project meets one of the above conditions, it should be approved and supervised by the CSRC. 47 The CSRC shall decide whether or not to approve the application for material asset reorganization in accordance with the statutory conditions and procedures. 48 In addition, the Administrative Measures provide further regulations which require certain Material Asset Reorganizations to be examined by the Review Sub-committee for Mergers, Acquisitions and Restructurings of Listed Companies (the Sub-Committee ), which was established by the CSRC for this purpose. The Sub-Committee shall put to vote the material asset reorganization applications submitted for its deliberation and issue examination opinions. 49 Article 28 specifically sets forth the conditions under which the listed company shall submit its material asset reorganization plan to the Sub-Committee for examination and approval: 50 The listed company must satisfy the requirements of Article 12 of the Administrative Measures, i.e., since the date of change of control power, the total assets purchased by the listed company from the buyer account for 100% or more of the end-of-period total assets in the consolidated financial statement of the last accounting year before the change of control power of the listed company The total assets sold and purchased by the listed company account for 70% or more of the end-ofperiod total assets in the consolidated financial 43 See Article 13 of the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises. 44 See Article 2 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies. 45 See Section 3, Article 2 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies. 46 See Article 11 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies. 47 See Article 8 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies, The CSRC shall be in charge of supervising and administering the material asset reorganizations of listed companies. 48 See Article 26 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies. 49 See Article 9 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies, The CSRC will set up the Review Sub-committee for Mergers, Acquisitions and Restructurings of Listed Companies (hereinafter referred to as Sub-committee ) within the Issuance Review Committee. The Sub-committee shall put to vote the material asset reorganization applications submitted for its deliberation and put forward examination opinions. 50 See Article 28 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies.

9 statement of the last accounting year The listed company intends to sell all its operating assets and purchase other assets at the same time Other requirements which the CSRC deems necessary in order to submit the reorganization plan to the Sub-Committee for examination and approval are satisfied If the reorganization meets any of the following criteria, the listed company may apply to the CSRC to submit the reorganization plan to the Sub- Committee for examination and approval: The assets purchased by the listed company are an integrated business entity which satisfies the provisions of Article 50 of the Administrative Measures, and the performance thereof needs to be evaluated through analog computation The listed company has objections to the feedback opinion of the relevant functional department of the CSRC 5.2 Specific approval procedure of Material Asset Reorganizations of Listed Companies Article 26 of the Administrative Measures stipulates that lawful conditions and procedures should be complied with by the CSRC when it approves a material asset reorganization. This reference is taken from a specific rule released by the CSRC on 16 April 2008: No. 26 of Content and Format Guidelines Regarding Information Disclosure by Companies for Publicly Issuing Securities Application Documents of Listed Companies Material Asset Reorganizations (the No. 26 Guidelines ). According to the Administrative Measures, a listed company shall compile application documents in accordance with the No. 26 Guidelines and entrust an independent financial advisor who shall be responsible for reporting to the CSRC, within 3 working days of the decision to carry out a material asset reorganization (by a general meeting of shareholders and a public announcement). 51 The application documents must include the 5 categories of documents that are listed in the Catalogue of Application Documents of Listed Companies Material Asset Reorganizations, which is an appendix to the No. 26 Guidelines. 52 During the period of examination and approval, the CSRC could give feedback to a listed company and request that it provides an explanation in writing. The listed company shall submit the response in writing within 30 working days after receiving the feedback, and the independent financial advisor shall cooperate in this regard. 6. SAFE Registration and Administration of Foreign Exchange After the Chinese enterprise has obtained the approval of and has registered with the above competent authorities, the last step of outbound investment approval is applying to the foreign exchange administrative department of the PRC for foreign exchange registration in accordance with the law, which is required under the Regulation on Foreign Exchange Administration (the Regulation ), issued and revised by the State Council in Article 17 of the Regulation on Foreign Exchange Administration stipulates that enterprises that make direct investments shall carry out the registration formalities at the foreign exchange administrative department of the State Council, and if the relevant state provisions require it to obtain the approval of the competent department or file the issue with the competent department, it shall do so before handling the registration formalities. 53 In 2009, the SAFE issued the Provisions on the Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions (the Foreign Exchange Provisions ), which clearly set out the foreign exchange registration and filing system and procedure for the opening of a foreign exchange account for overseas investment. The Foreign Exchange Provisions set out the foreign exchange registration and filing system for overseas direct investment by domestic institutions, as well as the assets and relevant equities formed by the overseas direct investment. In addition, the Foreign Exchange Provisions require that where a domestic institution carries out the foreign exchange registration formalities for its overseas direct investment at the local foreign exchange authority, it shall state the sources of the foreign exchange funds used for its overseas investment. 54 The Foreign Exchange Provisions also stipulate that before carrying out the foreign exchange registration formalities, the domestic institution should obtain domestic approval of its overseas direct investment from the competent administrative department of overseas direct investment, the MOFCOM or local 51 See Article 24 of the Administrative Measures for the Material Asset Reorganizations of Listed Companies. 52 See the Appendix of No. 26 Guidelines. 53 See Article 17 of the Regulation on Foreign Exchange Administration. 54 See Article 6 of the Regulation on Foreign Exchange Administration.

10 administrative department of commerce. After obtaining approval from the MOFCOM, a Chinese enterprise can register with its local SAFE. The documents that should be submitted include: (1) An Application Form for the Foreign Exchange Registration of Overseas Direct Investment (2) An explanation of the sources of foreign exchange funds (3) The enterprise s valid business license or registration certificate and organizational code certificate (4) The approval document or certificate issued by the competent administrative department of overseas direct investment, etc. The SAFE will, after examining the above materials, register the relevant information and issue a Foreign Exchange Registration Certificate to the Chinese enterprise. The Chinese enterprise shall then be entitled to conduct foreign exchange revenue and expenditure matters 55 Furthermore, before opening an account and carrying out the formalities for the outward remittance of funds for overseas direct investment at a designated foreign exchange bank, the domestic institution should have obtained the approval document issued by the competent administrative department for overseas direct investment and the foreign exchange registration certificate for overseas direct investment. Only with both of the above can the formalities for the outward remittance of funds be carried out Example acquisition of Highland Group Holdings Limited by XinjieKou Department Store Co. Ltd In order to illustrate the approval requirements for outbound investment, we shall examine a recent example of an overseas acquisition by a Chinese enterprise. XinjieKou Department Store Co. Ltd ( XinjieKou ) is a PRC domestic listed company. Its controlling shareholder is Sanpower Group Co. Ltd ( Sanpower ), which owns 21.98% of the shares of XinjieKou. 57 On 15 April 2014, XinjieKou released a public announcement of its overseas investment, declaring it had signed a Share Purchase Agreement with Highland Group Holdings Limited ( Highland Group ). It spent more than GBP 150 million (USD 250 million) in order to acquire around 89% of the shares of Highland Group. According to Chinese law, this transaction constitutes an overseas direct investment. Since the value of the transaction is less than USD 300 million, and it is an acquisition in the retail industry conducted in the UK, it does not involve a sensitive industry or a sensitive country or area. Thus, this transaction only needs to be recorded in the Development and Reform Commission of Jiangsu Province, and does not need to be approved. XinjieKou are required to fill out the Recordation Application Form for overseas investment project with the relevant documents attached, and submit them to the Jiangsu NDRC for recordation. Although article 30 of the new 2014 Measures for the Administration of Approval and Recordation of Overseas Investment Projects requires all local provincial competent departments to enact corresponding rules or regulations for recordation, Jiangsu province has not yet enacted new rules regarding recordation. Thereforethe current Jiangsu Province Interim Management Measures of the Overseas Investment Projects Approval do not involve procedures regarding recordation. Therefore, the specific recordation procedures in Jiangsu province still need to be determined by the Jiangsu NDRC. However, since the Chinese party invested more than USD 100 million, according to the Measures for Overseas Investment Management, it should apply to MOFCOM for approval, after satisfying the NDRC recordation procedure. XinjieKou shall apply to the Department of Commerce of Jiangsu Province and submit an Approval Application Form, which shall contain the name, registered capital, amount of investment, scope of business and duration of business of the overseas enterprise, an explanation of sources of investment capital, the specific contents of the investment, the equity structure, the analysis and assessment of the investment environment, and a statement of the lack of any of the circumstances prescribed in Article 9 of the Measures. Moreover, a copy of the business license of XinjieKou, the Shares Purchase Agreement signed between XinjieKou and Highland Group, the Initial Report about the Matters Related to the Overseas Merger and Acquisition, as well as the Recordation Notice issued by Jiangsu NDRC, should also be submitted. 55 See Article 7 of the Regulation on Foreign Exchange Administration. 56 See Article 8 of the Regulation on Foreign Exchange Administration. 57 See page 6 of 2013 Annual Report of Nanjing XinjieKou Department Store Co. Ltd.

11 After receiving all the above application materials from XinjieKou, the Department of Commerce of Jiangsu Province will conduct a preliminary examination and submit the opinion together with all materials to the MOFCOM. The MOFCOM will decide whether to accept the application within 5 working days. If the application is accepted, the MOFCOM will decide whether or not to approve the application within 15 working days. Since XinjieKou is a listed company, and (according to Item 6 of its announcement of overseas investment), the turnover for this trade accounts for more than 100% of the end-of-period net assets of XinjieKou in the 2013 audited consolidated financial statements 58, the transaction constitutes a Material Asset Reorganization according to the Administrative Measures for the Material Asset Reorganizations of Listed Companies, and thus should be approved by the CSRC. According to the Administrative Measures, the general meeting of shareholders shall pass a resolution for material asset reorganization and make a public announcement. Application documents shall be prepared in accordance with the No. 26 Guidelines within 3 working days after the public announcement. Then, XinjieKou shall entrust an independent financial advisor to apply to the CSRC, and copy the application to the Jiangsu provincial securities regulatory bureau. 8. Conclusion In summary, it is clear that the threshold for overseas direct investment approval of domestic institutions has been reduced, especially with regard to NDRC approval. The reduction of the approval threshold and the scope of the extension of registration will decrease the costs of overseas investment for Chinese enterprises. The very recent issuance of the Exposure Draft of Measures for Overseas Investment Management (Amendments) also decentralizes the overseas investment approval regime to a large extent. Once the Exposure Draft has been enacted as a formal regulation, there is no doubt that the overseas investment approval procedures will be further simplified. In general, Chinese enterprises only need to be approved by or registered with the NDRC, MOFCOM and SAFE. In addition, if the enterprises are state-owned and/ or listed companies, they must satisfy the approval, registration and supervision requirements of the SASAC and the CSRC, which makes for a total of five relevant competent authorities for the purposes of approval or registration. XinjieKou and its holding company, Sanpower, are both private companies and are not state-owned enterprises. Thus, they do not need to apply to the SASAC for appraisal of state-owned assets. After obtaining approval for overseas investment from the MOFCOM, XinjieKou can apply to the branch of SAFE in Jiangsu Province for foreign exchange registration, by submitting the Application Form for the Foreign Exchange Registration of Overseas Direct Investment, an explanation of the sources of foreign exchange funds, the business license, the organizational code certificate and the approval document issued by the MOFCOM. The Jiangsu provincial SAFE will issue a Foreign Exchange Registration Certificate to XinjieKou after examining all application materials. Once it holds this certificate, XinjieKou will be entitled to handle the formalities for the outward remittance at a designated bank. 58 See Item 6 of the Overseas Investment Public Announcement Regarding Shares Acquisition of Highland Group Holdings Limited by Nanjing XinjieKou Department Store Co. Ltd. The public announcement was released on 15 April 2014.