Generally, an outbound investment by a Chinese enterprise must be approved by the competent national authorities or their local bodies before it can be closed.
The primary authorities that investors must notify are the National Development and Reform Commission (NDRC), the Ministry of Commerce of the People’s Republic of China (MOFCOM), and the State Administration of Foreign Exchange (SAFE).
THE NATIONAL DEVELOPMENT AND REFORM COMMISSION
The current NDRC regulatory framework for outbound investments is mainly a “record filing system”, which means that only a simplified consent is necessary.
Definitive approval is only required in exceptional cases and is granted after an in-depth review. The NDRC reviews outbound investments to assess, for example, whether the investment target helps to foster the Chinese economy as laid down in the “Chinese 2025” plan and the “belt and road” initiatives.
The regulatory framework applicable to Chinese outbound investments was substantially amended by the Measures for the Administration of Overseas Investment of Enterprises, which have the overall aim of encouraging outbound investments.
Two major changes relevant to private equity sellers were introduced by the Measures when they came into effect last year.
1: Removal of the Requirement for a Project Information Report to be Submitted Before a Binding Offer Can be Made
Prior to the Measures, in M&A or bidding projects where the investment by the Chinese investor amounted to US$300 million or more, the Chinese investor was required to submit an additional project information report to the NDRC before starting any substantive work, such as signing a binding agreement or the proposal of a binding offer.
In cases where there were several Chinese investors bidding for a project valued at US$300 million or more, the investors had to wait for pre-approval in the form of a confirmation letter before submitting a binding offer, and only one investor could be sent this letter
Two major changes relevant to private equity sellers were introduced by the Measures.
Since the Measures came into effect, this requirement has become obsolete. Instead, in auction processes with a transaction value of more than US$300 million, Chinese investors no longer have to wait for a confirmation letter before submitting a binding offer, and more than one Chinese investor can submit a binding offer, giving the seller the opportunity to choose its preferred bidder amongst several Chinese investors. This is obviously a huge improvement from a price competition perspective.
2: Moving the Requirement to Get Approval or a Filing Notice from Pre-Signing to Pre-Closing.
Prior to the Measures, obtaining a record filing notice letter was a signing condition for outbound investments. A Chinese investor could not sign the sales and purchase agreement on the outbound investment before filing the transaction and receiving the relevant record filing notice letter.
Under the Measures, Chinese investors now only need to obtain the record filing notice letter before closing. This change should speed up the signing process when dealing with Chinese investors, aligning the regulatory process in China with the standard European and US closing requirements of obtaining merger clearance and clearance for foreign investment control. Although parties may now reach signing somewhat quicker, transaction security may have decreased. As a result, it is advisable for the seller to consult with a experienced advisor early in the process to assess potential closing obstacles.
THE MINISTRY OF COMMERCE OF THE PEOPLE’S REPUBLIC OF CHINA The MOFCOM
regulatory framework for outbound investments is also mainly a “record filing” system. The purpose of any review undertaken by MOFCOM is primarily to assess if the establishment of overseas entities is carried out in compliance with the procedures applicable to outbound investments.
The application documents required for the record filing with NDRC and MOFCOM are quite similar.
After both the NDRC and MOFCOM record filings have been completed, the investor must contact SAFE qualified banks for foreign exchange registration and fund remittance.
THE STATE ADMINISTRATION OF FOREIGN EXCHANGE
The regulatory framework for outbound investments provides that SAFE-qualified banks in China deal directly with the foreign exchange registration of outbound investment and remitting outbound funds, while SAFE indirectly supervises these activities. However, since a rule change in November 2016, any foreign exchange registration and remittance with an overseas fund transfer of over US$500 million requires permission from SAFE before it can be dealt with by qualified banks. In addition, the local SAFE authority now interviews the relevant Chinese investors to assess the authenticity and compliance of the outbound investment target.
SAFE has moved to centre stage from its previous indirect supervision function since the capital control measures were intensified in 2016.
STATE-OWNED ENTERPRISES AND LISTED COMPANIES
There are specific regulatory requirements that apply to State-Owned Enterprises (SOEs) and listed companies, which are the two main players in the outbound investment market.
The State-Owned Assets Supervision and Administration Commission of the State Council (SASAC)
Under the SASAC Rules, a central SOE, or its subsidiary, that intends to purchase or merge with an overseas listed company or to otherwise make any major overseas investments, must report the intended transaction to the SASAC for filing or approval. This must be completed before starting the record filing or approval process with the NDRC.
The SASAC has released a list of industry categories in which SOEs are not allowed to invest. It is also worth noting that SOEs must not invest in businesses outside their sector.
The China Securities Regulatory Commission (CSRC) and Stock Exchanges
CSRC approval is only required for an overseas investment by a Chinese-listed company if the outbound investment constitutes a “material asset restructuring” of the listed company. Cash transactions that do not constitute a material asset restructuring of listed companies account for the majority of outbound investment for Chinese-listed companies.
Under the relevant rules of the Shanghai and Shenzhen Stock Exchanges, if a listed company purchases assets that fulfil criteria requiring a disclosure of the transaction, either a board meeting or a shareholders’ meeting must be held to review and approve the intended transaction.
Transaction security may have decreased.
In this situation, an announcement must be released in a timely manner, briefly describing the basic conditions of the transaction, with information on the deal structure, the counterparty, the target, the main terms of the transaction agreement, the purpose of the acquisition, and the impact on the company. Listed companies generally do not need to suspend trading or accept exchange inquiries.