On 26 December 2017, China’s National Development and Reform Commission (“NDRC”) issued the Measures for the Administration of Overseas Investment of Enterprises (“New Measures”), which came into effect on 1 March 2018, and on the same day replaced the Measures for the Administration of Approval and Record-filing of Overseas Investment Projects issued by the NDRC in 2014 (“2014 Measures”).
In comparison with the 2014 Measures, the New Measures apply to more organizations and investment activities, strengthen the interim and ex post supervision by introducing reporting formalities, streamline compliance procedures by removing the pre-confirmation requirement and simplifying approval and record-filing procedures, and extend the deadline for completing formalities.
Importantly, the New Measures eliminate the need to acquire a confirmation letter, commonly known as a “road pass”, which was previously required for Chinese parities prior to making a binding offer with respect to certain types of overseas investment. The road pass requirement was often a source of concern for foreign vendors who were unsure whether the Chinese parties they were in discussion with would be qualified to make a binding bid or whether one Chinese party holding a road pass would preclude other Chinese bidders from obtaining one. This uncertainty has now been eliminated. The New Measures also provide that the satisfaction of approval or fulfilment of record-filing requirements should take place prior to project implementation rather than prior to an agreement becoming binding as was the case under the 2014 Measures. With this change, while completion risks may remain, the parties can be confident that a binding agreement that includes deal protection provisions, such as breakup fees, can be entered into prior to completing the NDRC procedures. Under the 2014 Measures, the agreement itself and all of the provisions therein would not be binding until the NDRC procedures had been complied with. This often put Chinese bidders at a disadvantage in competitive bidding situations.
For clarification purposes, the compliance regime under the New Measures does not affect the other parallel regime which also involves the approval, record-filing and reporting formalities in respect of Chinese overseas investments regulated and administered by the Ministry of Commerce and its local counterparts.
The following are some highlighted requirements in relation to a business’s compliance under the New Measures.
1. Who will be covered by the New Measures?
a. “Enterprise” here means a non-financial or financial enterprise of any type.
b. “Control” here means the direct or indirect holding of more than half of the voting rights of an enterprise, or having the capability of dominating the operation, finance, personnel, technology, and other major matters of the enterprise although not holding more than half of the voting rights.
2. What investments the New Measures apply to?
3. How to engage the NDRC?
Note: In order to standardize and streamline formalities, the New Measures provide that the NDRC shall issue standard forms in relation to the approval application, record-filing and reporting requirements. Such standard forms are available on the NDRC’s website from 9 February 2018.
4. What are sensitive projects?
Note: The NDRC has issued a catalogue of sensitive industries for the year 2018 as follows:
Research, production, and maintenance of weaponsand military equipment
- Exploitation or utilization of cross-border water resources
- News media
- Restricted industries, including real estate, hotel, cinema, entertainment, sports club, and establishment of overseas equity investment funds or platforms with no specific industrial projects
The inclusion of the establishment of offshore investment funds in the catalogue of sensitive industries is of some concern, and, depending on how applications for such projects are treated, may have an impact on available investment structuring options. Other sensitive industry sector items reflect the NDRC’s concern that too much overseas investment has been targeted at non-productive assets.
5. What are the deadline dates and channels for compliance activities?
The New Measures continue the trend of providing for online filing rather than over-the-counter filing at a local agency.