In a long-awaited action, China’s National Development and ReformCommission (NDRC) has issued new rules relaxing constraints on Chinese enterprises’ outbound investments. The NDRC,
on April 10, 2014, promulgated the so-called “Measures for the Administration of Approval and
Filing of Outbound Investment Projects,” which took effect as of May 8, 2014.With the release of
the Measures, which comes on the heels of several other actions by Chinese agencies,1 China has
opened the door to outbound investmentmore widely than ever.
China is already the third-largest outbound direct investment country after the United States and
Japan. Based on data fromChina’sMinistry of Commerce (MOFCOM), outbound direct investment
other than fromthe financial sector surpassed US$90 billion in 2013 and nearly reached US$20
billion in the first quarter of 2014. Many expect 2014 will be a groundbreaking year for Chinese
Tomitigate regulatory challenges, both Chinese enterprises and their foreign partners should
familiarize themselves with the nuances of the recently announced Measures. Careful
consideration of its procedures and requirements, outlined below, will help ensure that outbound
deals are closed as efficiently as possible.
The Measures: Approval and Filing Thresholds
The Measures apply to any legal person registered inmainland China (Chinese enterprises),
including state-owned enterprises (SOEs), private enterprises and foreign invested enterprises
(FIEs). Although FIEs are not expresslymentioned in the Measures, MOFCOM’s Administrative
Measures for Overseas Investments in 2004 stipulates that outbound investments by FIEs (as legal
entities registered in China) require MOFCOM’s approval.While FIEs should fall under the scope of
the Measures , we note that it is very rare for a foreign investor to utilize an FIE in China to
manage a Chinese outbound investment. It goes without saying that timing is a significant element of an outbound transaction. Chinese
investors have long complained about the time-consuming approval process for their overseas
projects. Perhaps unsurprisingly, a number of deals have fallen apart due to a foreign seller’s
concerns about the process, which can delay a deal for an indeterminate period.
Fortunately, the Measures lift the approval requirements for deals valued at less than US$1 billion,
though with some exceptions. Most outbound investments will still be required to file with NDRC
or its provincial branches.
Deals that Require the NDRC’s Approval
The following outbound deals require the NDRC’s approval:
1. If the Chinese investment (including cash, securities, in kind, intellectual property rights or
technology, equity, creditor’s right and interests, as well as guarantees) reaches US$1
billion or more.
2. If the Chinese investment reaches US$300 million or more and the proposed deal is an
M&A or competitive bid sale.
3. Any investment of less than US$2 billion involving sensitive countries and regions or
Regarding proposed deals that reach the amount of US$300 million or above and are related to
M&A or a competitive bid sale, Chinese enterprisesmust submit a project information report to
the NDRC before starting substantive work. The NDRC will then issue a confirmation letter within
seven working days if the deal is in compliance with outbound investment policies. If the proposed
deal falls into this category, foreign partners need to know whether such a confirmation letter has
been obtained in order to avoid rejection of portions of the project information report. However,
the confirmation letter will not exempt the proposed deal fromthe required approval or filing
The approval authority is concentrated in the NDRC at the central governmental level with the
intent to simplify the approval procedure. Yet, thismay increase the concern fromforeign partners
and government agencies, like FIRB in Australia and CFIUS in the US, about sovereign interests.
The State Council of the PRC, rather than the NDRC, has the final say for any deal of US$2 billion or
more if it involves sensitive countries and regions or sensitive industries.
“Sensitive countries and regions” are defined as countries and regions with which China does not
have an established diplomatic relationship, are sanctioned by the United Nations, or are deemed
to be in political chaos. How to interpret “sensitive industries,” as defined by NDRC and MOFCOM,
may provemore of a challenge for deal approval seekers. “Sensitive industries” seems to include
basic telecommunications, cross-border water resource development and utilization, large-scale
land development, electricmains, grids, news andmedia. Yet MOFCOMgave a different and Overseas Investments for public consultation on April 16, 2014, which states that “sensitive
industries” refers to industries which produce or develop products or technologies that are
restricted for export by the Chinese government, and involve the interests ofmore than a single
Deals that Only Need to be Filed
Except for the deals listed above, the following outbound transactions only need to be filed with
(but not approved by) the NDRC or its provincial branches:
1. Deals involving central SOEs that are under direct control by the State-Owned Assets
Supervision and Administration Commission (SASAC).
2. Deals involving local SOEs or private enterprises even if amounting to US$300 million or more
in value (but less than US$1 billion).
NDRC provincial branches will only oversee the filing of deals by local SOEs or private enterprises
below US$300 million, except for the scenarios discussed in the next section of this article.
Thus the responsibility for approval and filing is based on the nature of the Chinese enterprise, the
amount of investment by the enterprise, the destination, and the industry involved in the
proposed outbound deal. As such, foreign sellers, along with their advisors,must closely examine
the nature of its Chinese partner very early in the process. Note that some Chinese enterprises
may use their domestic or foreign subsidiary as a party in the transaction documents, though this
may not exempt themfromtheir approval or filing obligations under the Measures.
Foreign sellers should consider segregating or transferring the equity or assets related to sensitive
countries or regions, as well as to sensitive industries, in advance if the target buyer is fromChina
in order to avoid a higher level of approval or filing requirements.
Deals that Need Re-Approval and Re-Filing
Some aspects of a cross-border transaction will not be finalized until execution of the transaction
documents, or even after the closing. If the final transaction documents differ fromthe submitted
application documents in the following respects, re-approval or re-filing is required to be
submitted to the NDRC:
1. Project scale and key subject (nature or scope of work of the project).
2. The legal entity utilized by the Chinese investor/buyer and the shareholding structure.
3. The final amount of Chinese investment is 20 percentmore than the submitted amount in
initial application documents for approval or filing. Foreign partners need to pay close attention to the above items in their negotiations with their
Chinese counterparts. The project scale, such as the total value of assets/equity and total
investment,must be defined carefully, clearly and consistently. Changes to the shareholding
percentages could bring the approval process with the NDRC back to square one. This leaves less
flexibility to the parties when discussing the appointment of boardmembers and other provisions
in a shareholder agreement, articles of association and financing documents.
It is not clear whether an increase or decrease of partners in the proposed deal will trigger the reapproval
and re-filing procedure.
In order to avoid the final amount of the proposed deal exceeding 120 percent of the submitted
amount and triggering the re-approval process, it is assumed that Chinese investors, in the
approval application, are likely to increase the submitted amount by 30-50% more than what they
want to pay. Foreign sellers could benefit fromthat gap if they can persuade Chinese enterprises
to paymore through negotiations. In spite of this, itmay be challenging for Chinese enterprises to
estimate what they will pay for specific overseas projects or target companies due to a lack of
Another point that deserves attention is that NDRC branches at the provincial level will lose their
filing authority to the NDRC if any of the above elements change. The NDRC still needs to clarify
the procedures about the transfer of those deals fromapproval to filling, and vice versa.
Compared with its old and expired version, the Measures do not compress the period of time for
the approval. Subject to the documents submitted by the applicant, the NDRC needs 20 business
days tomake a decision or submit it to the State Council, if applicable. Additionally, the NDRC has
the discretion to offer an extension of ten business days. If appraisal is necessary, the NDRC can, at
NDRC’s expense, appoint qualified consulting parties to provide an appraisal report for the specific
China outbound investment project.
An appraisal report will be completed within 40 business days; therefore, the total time for
approval will range from20 to 70 business days. If NDRC approves the application, an approval
document will be issued to the Chinese enterprise. In the near term, it is hard to expect the
approval time to shrink to fewer than 20 business days, though itmay be possible in the long
term. If foreign partners want to get a better offer fromChinese enterprises, they need to consider
this timeframe before starting a public or private tender, or seeking buyers in other countries.
For deals that require filing, the NDRC will issue a filing notice to the Chinese enterprise within
seven business days after the completed filing documents are received. The provincial NDRC
branches are required to have the deal filed within the same period. In both approval and filing cases, the Chinese enterprises are vested with a right of administrative
review and administrative litigation if the relevant authorities disagree or refuse to file the
proposed deal for whatever reasons.
Documents Required for Approval and Filing
Aside fromthe project report, a template of which will be published by the NDRC later, the
Chinese enterprise is required to submit the following documents for approval:
1. The resolutionmade by the board of directors or the resolution on contribution (a contribution
of capital to an offshore company).
2. Documents reflecting the assets, operation and credit of Chinese enterprises and foreign
3. Letter of intent for financing.
4. The value of any contribution other than cash needs to be defined on the basis of the appraisal
value or fair value, which should be provided by qualified intermediaries such as accounting
and appraisal firms.
5. The executed letter of intent or framework agreement for the tender,merger or joint venture.
If the Chinese enterprises are SOEs, theymay face additional obstacles in determining the value of
the contribution fromChinese investors. The relevant procedures in connection with the stateowned
assets administration will be involved and time consuming. SASAC and its local branches
may have a louder voice on the value decision regardless of the value appraised by the
Foreign partners should be ready to share the assets, operation and credit information with
Chinese enterprises at the letter of intent stage. How detailed the informationmust bemay soon
be clarified by the NDRC in its implementation rules for the Measures.
The documents required for filing are to be defined by the NDRC separately.
Approval and Filing Criteria
When the NDRC reviews the documents for approval, dealsmeeting all the following criteria will
be given the green light:
1. Compliance with Chinese laws and regulations, industrial policies and outbound investment
2. Compliance with the principles ofmutual benefits and common development - not damaging
national sovereignty, national security or the public interest; not breaching the international treaties to which China is a signatory state or its obligations as amember of an international
3. Compliance with the relevant rules on capital account.
4. Having the corresponding investment capability.
Restrictions on the freemovement of capital across the Chinese border will be a long-standing
hurdle in Chinese outbound investment. Nomatter how government agencies ease or erase the
relevant approval or filing procedures, they are unlikely to significantly lift the controls on capital
account flows in the near term.
NDRC officials are very concerned about Chinese enterprises rushing blindly into outbound
investments. The number of failures by Chinese enterprises in their outbound investments reflects
a lack of experience and expertise. In negotiations with Chinese enterprises, foreign partners
should evaluate the counterparty’s performance. If the performance seems too far below
international standards, reasonable doubts about the outbound investment capabilitymay arise.
Except for capital account requirements, the NDRC and its provincial branches will apply similar
criteria to those deals required only to be filed.
It is exciting to see the Measures promulgated so soon after China’s new leadership took office
last year. Both Chinese enterprises and their foreign partners will have far more transparent and
predictable procedures for their proposed transactions. The Measures will, to some extent, speed
up the transaction process and save costs for related parties.With an expected boomin Chinese
outbound investment over the next five to ten years, the role of the Chinese governmentmay, as a
practical matter, be reduced, with Chinese enterprises having greater flexibility.
The Measures do not solve all the problems in connection with Chinese outbound investment.
Chinese enterprises still need tomake their own decisions on when to submit the documents for
approval or filing with the purpose ofminimizing impact on the proposed transaction.Moreover,
the implementation of the Measures and the “go abroad” policy need the cooperation of certain
other government authorities, such as MOFCOM, SAFE and SASAC, which are in the process of
drafting or revising the rules applicable to China outbound investment.