FROM VIE TO SAFE: TECH INVESTMENTS INTO AND FROM CHINA

Transcription

1 TECHNOLOGY MAY-RATHON FROM VIE TO SAFE: TECH INVESTMENTS INTO AND FROM CHINA Maurice Hoo May 2, Morgan, Lewis & Bockius LLP

2 AGENDA Investments in Chinese companies general Investments in Chinese companies tech Investments by Chinese companies 2

3 Introduction Preinvestment Considerations: Wholly Owned Entity vs. Joint Venture with Chinese Partners Onshore Investment vs. Offshore Investment Some factors to consider: Control over assets Flexibility Enforceability Exit Venue 3

4 PRINCIPAL WAYS TO INVEST IN CHINESE COMPANIES 4

5 Principal Ways to Invest in Chinese Companies Investing in Listed Companies Investing in A shares Investing in B shares QFII, RQFII Shanghai-HK/Shenzhen-HK Stock Connect Strategic Foreign Investor Companies Incorporated in China Investing in H shares WFOE Investing in Non- Listed Companies Sino-Foreign Joint Venture Companies Joint Stock Companies Listing as A shares or H shares onshore Companies Incorporated outside China Investing in Listed Companies Offshore Listing, Nasdaq offshore Investing in Nonlisted Companies 5

6 Listed in China A Shares Banks, securities companies Other Investors Investing through QFII and RQFII Investing as Qualified Foreign Institutional Investors (QFII, RQFII) Investing as Strategic Foreign Investors onshore CSRC - grants QFII and RQFII licenses SAFE - approves quotas for individual QFII, RQFII Requires approval from MOFCOM and CSRC offshore Some Restrictions: must not exceed the Investment Quota granted by SAFE must not hold more than 10% of a company s A shares A Shares Some Restrictions: must purchase at least 10% of a company s A shares (and less than 30% in order not to trigger general offer) 3 year transfer restriction 6

7 Listed in China B Shares A shares B shares Listed on Shanghai or Shenzhen Stock Exchange Shanghai or Shenzhen Stock Exchange Traded in Renminbi SHSE: US Dollar SZSE: HK Dollar Foreign Investment Generally Restricted Allowed Examples of Foreign Controlled Listed Companies SEB Internationale S.A.S. (France based) holds 71.3% of Supor ( 苏泊尔 ) through an acquisition of A shares Alstom Group (France based) holds 51% of Wuhan Boiler ( 武汉锅炉 ) through an acquisition of B shares B shares are officially called Domestically Listed Foreign Investment Shares Foreign investors may trade B shares, provided that the investment accounts are in the proper currency 7

8 Listed in Hong Kong - H Shares or Red Chip Shares H shares are shares of China incorporated companies traded on the Hong Kong Stock Exchange in Hong Kong dollars Red Chip shares are shares of offshore holding companies traded on the SEHK in HK dollars, in the United States in US dollars, or in London in GBP, etc. 8 8

9 Wholly Foreign-Owned Enterprise (WFOE) Foreign companies may directly set up a WFOE (subsidiary) in China Some Issues: Holding Company Capital Structure Restricted Industries Negative List 9

10 Joint Ventures with Chinese Parties Joint Venture Company Capital Structure or Joint Stock Company Registered Capital vs. Total Investment Difficulties with Valuation Rigidity of Capital Structure Capital must be actually contributed Veto power of minority Conversion to Joint Stock Company Listing Only stock companies can become listed Converting a Sino-Foreign Joint Venture into a Joint Stock Company: No Mofcom approval required if not falling into the Negative List Foreign Investor Acquires Shares of an Existing Joint Stock Company: MOFCOM s approval may not be necessary 10

11 Joint Ventures with Chinese Parties (continued) Cooperative Joint Venture or Equity Joint Venture Parties contribution Cash/Noncash intangibles? Profit sharing Must be proportional to shareholdings? In reality. 11

12 Red Chip Companies The businesses of Red Chip companies are based in China but they are incorporated internationally and listed on the Hong Kong Stock Exchange or other international stock exchanges. 12

13 Red Chip Companies Holding Structure Individual Individual Onshore Individual BVI Holding Company International Investors Cayman Company BVI Company Offshore Onshore HK Company WFOE 13

14 Red Chip [Tech] Companies with VIE Individual Individual Onshore Individual BVI Holding Company International Investors Cayman Company BVI Company Offshore HK Company Onshore WFOE Control Documents PRC Operating Company 14

15 Typical VIE Control Documents Exclusive Services Agreement Loan Agreement Exclusive Equity and Assets Transfer Option Agreement Equity Pledge Agreements Spouse Acknowledgements Articles of the PRC Operating Company 15

16 MATTERS OF CONCERN 16

17 A. Foreign Exchange Control Offshore Holding Company offshore onshore Purchase of goods or services Capital Loan Repayment of principal/interest Dividends/ liquidation proceeds Purchase price of goods or services WFOE 17

18 B. Dealing with State-owned Enterprises (SOE) State-Owned Assets Supervision and Administration Commission ( SASAC ) every sale and purchase decision of an SOE is subject to SASAC s appraisal, approval and/or bidding procedures SOE deals agreed to with the management of an SOE could be later deemed invalid Investor 18

19 C. Other Matters of Concern Multiple Layers of Companies in Different Jurisdictions Restricted Industries Registered Capital Rather Than Shares Exit by IPO Exit by Sale 19

20 OUTBOUND INVESTMENTS FROM CHINA 20

21 Relevant Approval Authorities NDRC National Development & Reform Commission MofCom Ministry of Commerce CSRC China Securities Regulatory Commission CIRC, CBRC, and Other Industry Regulators SAFE State Administration of Foreign Exchange 21

22 Biography Maurice Hoo has more than 25 years of experience advising private equity and venture capital investors, as well as multinationals and strategic investors, in their cross-border mergers, acquisitions, investments, restructurings, and divestments. Maurice is a Registered Foreign Lawyer in Hong Kong and is admitted to practice in California. Maurice Hoo Hong Kong maurice.hoo@morganlewis.com Maurice focuses on technology companies that do business in Asia, especially in China, and his deal experience spans a wide range of industries, including education, life sciences and medical devices, environmental protection and renewable energy, food, media and entertainment, mobile technology, and retail

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