9 November 2017 China s new approach to regulation of outbound investment. Proposals indicate more comprehensive regulatory scrutiny alongside procedural simplifications Contents NDRC publishes draft revisions to Administrative Rules for Outbound Investments by Enterprises for public consultation Introduction Following the State Council s articulation, in August 2017, of the government s new approach to the regulation of outbound investment (see our earlier alert), the NDRC, in a consultation draft released on 3 November 2017, has now taken a further key step in proposing changes to its current rules for the approval and filing of outbound investment transactions by Chinese enterprises. Offshore and other transaction structures brought in scope The current regime captures various forms of outbound investment made by an entity incorporated in the PRC, and also extends to any investment made by an offshore entity financed, or supported by a guarantee or security from, a PRC entity. Introduction... 1 Offshore and other transaction structures brought in scope... 1 More extensive penal powers... 2 Procedures simplified and clarified... 2 Approval... 2 Filing and reporting... 3 New national interest considerations... 4 Process and timing... 4 Overall assessment... 5 Reference... 6 The consultation draft further extends the current regime to any investment made by an offshore entity controlled by a PRC entity or PRC individual (irrespective of who provides the finance or credit support). Control of an entity is defined as direct or indirect ownership of 50 per cent. or more of its voting rights, or the ability to direct its operations, finance, human resources, technology and other significant matters. Also, the proposals expressly apply the regime to financial institutions a possible consequence of which is that, in addition to the approvals from the relevant regulators (such as CBRC), a financial institution will also need to seek NDRC approval or filing when making an outbound investment. Accordingly, after the consultation draft comes into effect and assuming it is unchanged from the present form, if the offshore subsidiary of a PRC company intends to make an investment outside the PRC, its onshore parent would need to seek the approval of the NDRC, make a filing with the NDRC or its relevant NDRC branch or make a report to the NDRC, except in limited circumstances China s new approach to regulation of outbound investment 1
where the requirements for approval or filing do not apply and the proposed investment is less than US$300 million and into a non-sensitive sector (as further explained below). The consultation draft aims to close structural loopholes and bring all forms of outbound investment within the regime. Apart from broadening the scope of offshore entities covered by the regime, the definition of what constitutes an investment is also widened, and the consultation draft proposes that obtaining the management rights of offshore assets or control of offshore assets through contractual or trust arrangements should be covered, in addition to the various forms of ownership of assets and shares covered by the current rules. More extensive penal powers As an additional incentive for compliance, the consultation draft proposes a new anti-avoidance provision. This enables the NDRC to refuse an application for approval or filing if the investor is found to have sub-divided a project in order to circumvent the requirements or otherwise concealed or falsified information. The NDRC will also withdraw an approval or cancel a filing record that is found to have been based on fraudulent information. In addition, investors and the key responsible personnel would receive warnings from the NDRC and be prosecuted if they commit a criminal offence. On the other hand, if an investor is required to make an application, filing or report, but it fails to do so, the NDRC will order the investor to rectify within a specified period or suspend or terminate the investment project. The consultation draft also proposes that details of sanctions imposed by the NDRC for breaches of the outbound investment rules be recorded on the nationwide inter-governmental and credit online database, and made available to relevant government departments and organisations to facilitate a consolidated approach to future sanctions against the responsible investors. Procedures simplified and clarified The consultation draft makes several important changes to the NDRC approval and filing requirements and process for outbound investments. Approval The consultation draft retains the existing NDRC approval requirements for investments in sensitive countries/regions, or in sensitive sectors. If an outbound investment in a sensitive country, region or sector is made by a Chinese entity or the offshore subsidiary of a Chinese entity, the approval requirement applies. The obligation to apply for approval is discharged by the Chinese onshore investing entity, or (if the investment is made by an offshore subsidiary) by the onshore parent of such subsidiary. As before, sensitive countries/regions include those with no diplomatic relations with China or which are in a state of war or civil disturbance. An additional category of countries/regions in which investment is restricted by China s international treaties has been added, showing the government s resolve to comply with its obligations under such treaties. China s new approach to regulation of outbound investment 2
The consultation draft expands the definition of a sensitive sector, making significantly more transactions subject to NDRC approval, rather than filing. New additions include research, manufacture, production and maintenance of weapons and military equipment, as well as a catch-all category of sectors in which overseas investment is restricted by China s macroeconomic policies. The reference to policy restrictions echoes the list of sectors the State Council declared in August 2017 as restricted investment sectors (including real estate, hotels, cineplexes, sports and entertainment, investment funds and investment platforms, and investments using outdated equipment or in breach of host jurisdiction environmental, energy efficiency or safety standards). The consultation draft refers to a list of sensitive sectors to be separately published. The approval regime is cut back in one aspect the express requirement that the NDRC seek the approval of the State Council of all investments of US$2 billion or more is proposed to be removed. Together with the list of sensitive sectors to be separately released, the reforms are thus expected to add more transparency to the approval process, by making more explicit the factors on which the NDRC is expected to base its decision to grant or withhold approval. Filing and reporting The consultation draft preserves the current filing requirement (involving the online submission of a form) for all outbound investments that do not require NDRC approval and are made directly by, or supported with the assets, interests, financing, guarantee or security from, an onshore PRC entity. The consultation draft s concern with scrutiny of investments by offshore entities is, further reflected in a new proposed requirement for the onshore parent of a PRC-controlled offshore entity making an offshore investment of US$300 million or more in a non-sensitive sector to file a large non-sensitive investment report. The NDRC may request further information within 5 working days after the report is filed, and the format of the report is to be separately published. The introduction of this new reporting requirement would mean that the PRC parent of an offshore subsidiary making an offshore investment could be required to: > seek the approval of the NDRC, if the investment is in a sensitive country, region or sector; > make a filing with the relevant level of NDRC, if approval is not required and the investment is supported with the assets, interests, financing, guarantee or security from the parent; or > file a large non-sensitive investment report with the NDRC, if the investment is of value US$300 million or more and in a non-sensitive sector and does not otherwise require filing with or approval by NDRC, and if none of the above apply to the investment, no filing, reporting or approval requirement under the NDRC outbound investment regime would apply. China s new approach to regulation of outbound investment 3
New national interest considerations In the consultation draft, the NDRC is required to consider the impact of outbound investments on the national interest and national security. This results in the following proposed changes to the approval and filing process: > In the report submitted to seek NDRC approval (if approval requirements apply), the investor is required to provide an analysis of the impact of the investment on the national interest and national security. > NDRC can refuse an application for approval or filing if it considers that the investment would prejudice or jeopardise the national interest or national security. > In the process of an outbound investment, if there is occurrence of any significant death or injury to personnel seconded from China, material loss to overseas assets or damage to diplomatic relations, the investor must file an online report within 5 working days. > If the national interest or national security is found to be prejudiced, NDRC can suspend or discontinue an outbound investment and order remedial action to be taken; and the investing entity and key responsible personnel are potentially subject to criminal liability. The action taken by NDRC can be mitigated if a major incident had previously been reported online (as mentioned above) by the investor. Process and timing The market should welcome the proposals of the consultation draft to simplify the impact of the outbound investment regime on transaction timetables. These include: > Abolition of road pass regime: the requirement in the current rules for the investor to (before entering into a binding agreement, submitting a binding offer or applying to the regulators in the host jurisdiction) submit a report to, and obtain a confirmation letter from, the NDRC for any outbound investment of US$300 million or more is proposed to be abolished. However, under the proposals, the NDRC would still have the power to take action against perceived undesirable competition among Chinese investors or disorderly market conduct by Chinese investors in the investment process; > Flexibility on timing and post-approval/filing changes: - The consultation draft proposes that NDRC approval or filing be completed before the investor implements the investment (such as by contributing resources or interests or providing finance or guarantees/security), whilst the payment of deposit, advisors fees and other pre-contractual expenditure does not constitute implementing the investment provided the expenditure had previously been filed with or approved by the NDRC. The proposed change allows flexibility in planning and may also assist PRC acquirers in their negotiation of the relevant provisions with sellers, as it relaxes the deadline under the China s new approach to regulation of outbound investment 4
current rules in which the NDRC approval or filing process must be completed before the signing of a binding agreement (unless the investment agreements expressly provide for this process to be a condition of their effectiveness). We would expect that the mere signing of documentation would not constitute implementation of the investment until closing of the relevant investment / financing arrangements has occurred. - Under the consultation draft, the validity of an issued approval or completed filing is extended to 2 years, allowing investors more time to close transactions without the need to re-submit their applications. Under the current rules the validity period is 1 year (or 2 years in the case of construction projects). - In the current rules, if any change occurs to the size of the investment target, key terms, investing entity or shareholding structure after the deal is approved/filed, the investor must resubmit the NDRC application. The consultation draft proposes that only material changes to the key terms and scale of the investment (and other matters specified in the NDRC approval or filing notice) require re-submission of the application. On the investing entity, the consultation draft proposes that only changes to the number of investing entities, their investing percentage and the identity of their actual controller should require re-submission of the application. These changes may allow investors more flexibility to vary an approved investment in accordance with unforeseen circumstances. > Submissions facilitated: the consultation draft proposes that the application should be made by the PRC entity directly with the relevant level of NDRC. Under the current rules, if any PRC entity other than a central state owned enterprise makes an outbound investment of US$300 million or more, the application must first be made with local NDRC and local NDRC then makes a further application with central NDRC after its review. Overall assessment The consultation draft reflects a more standardised approach to be taken by NDRC in regulating outbound investments, irrespective of structure. A wellcapitalised offshore purchaser, even one that is required to comply with the NDRC rules, may still have the advantage of being able to deploy funds quickly in a transaction without the need to complete foreign exchange registration to remit the purchase price from the PRC (a process which may, under the government s cautious approach to foreign exchange management, cause substantial delay). The real impact on the market may depend on the additional transparency and certainty that is expected to result from the changes to the approval and filing process (such as the promised list of sensitive sectors and the flexibility to make post-approval and post-filing changes). On these, it is hoped that the authorities would take a pragmatic and commercial approach. China s new approach to regulation of outbound investment 5
Reference Administrative Rules for Outbound Investments by Enterprises (Draft for Comments) ( 企业境外投资管理办法 ( 征求意见稿 ), National Development and Reform Commission ( NDRC ), 3 November 2017 Contacts For further information please contact: Fang Jian Partner (+86) 21 2891 1858 jian.fang@linklaters.com Simon Meng Partner (+86) 21 2891 1828 simon.meng@linklaters.com Richard Gu Senior Consultant (+86) 21 2891 1839 richard.gu@linklaters.com John Xu Partner (+86) 21 2891 1809 john.xu@linklaters.com Colette Pan Managing Associate (+86) 21 2891 1814 Author: Bryan Chan This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2017 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com. This firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are regulated by the Law Society of England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. colette.pan@linklaters.com Linklaters LLP Linklaters LLP Shanghai Office 29th Floor Mirae Asset Tower 166 Lu Jia Zui Ring Road Shanghai 200120 People's Republic of China Telephone (+86) 21 2891 1888 Facsimile (+86) 21 2891 1818 Linklaters.com China s new approach to regulation of outbound investment 6