China’s National Development and Reform Commission recently issued the Administrative Measures for Ratification and Filing of Outbound Investment Projects, effective as of May 8, 2014 (the “NDRC Outbound Measures”).1 After issuing complementary draft measures at almost the same time, on September 6, 2014, the Ministry of Commerce issued the final version of the Administrative Measures for Overseas Investment (the “MOFCOM Outbound Measures”)2 to be effective as of October 6, 2014.3 The NDRC Outbound Measures and the MOFCOM Outbound Measures aim to reduce administrative oversight of outbound investments by delegating more approval and filing authority to these regulators’ local counterparts. While the effort is laudable, it remains tentative.
Outbound investments by Chinese companies are subject to approval or filing procedures with the NDRC (or its local offices) and MOFCOM (or its local offices) before the investment is made. The NDRC, which has jurisdiction to review all fixed-asset investments, focuses on, among other factors, whether a project is in line with the industrial policies of the state and whether the prospective investor has the investment capacity to carry out the project. In turn, MOFCOM has the power to review all cross-border enterprise-formation matters whether by greenfield investment, merger and acquisition, or otherwise. Under the NDRC Outbound Measures and the MOFCOM Outbound Measures, the filing process will take less time and be less burdensome.
China’s outbound investment regime has undergone several rounds of changes aiming to simplify the procedure and delegate power from central government authorities to provincial or municipal authorities. The government’s latest initiative commenced when the State Council issued the Notice Regarding Issuance of the Catalogue of Investment Projects Subject to Government Approval in November 2013.
Among other things, the 2013 Catalogue established principles to govern whether an outbound investment matter will be subject to an approval or filing with NDRC and MOFCOM, and whether the review will be conducted by central-level authority or local authority. More outbound investments became subject to local filing procedures under the 2013 Catalogue, a change welcomed by the market as local filing procedures are typically more expeditious. The NDRC Outbound Measures and the MOFCOM Outbound Measures extend these principles by establishing specific details.
New Approval and Filing Regime
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Although the terms “sensitive countries (regions)” and “sensitive industries” are used in the NDRC Outbound Measures and the MOFCOM Outbound Measures, the definitions of these terms in the two regulations are slightly different.
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The most significant change introduced by the NDRC Outbound Measures and the MOFCOM Outbound Measures is the replacement of a pre-approval regime with a pre-filing regime for outbound investments (other than outbound investments in sensitive countries, regions or industries) less than $1 billion, regardless of whether the outbound investment is made in a resource or non-resource sector, with foreign currency self-owned or purchased by the Chinese investor, or for the purpose of establishing a non-PRC special purpose company or otherwise.
The positive impacts of these liberalizing changes are expected to include:
- Making Chinese investors already disposed to outbound opportunities more open to execute them in response to the reduced complexities and timelines.
- Bringing heretofore domestically focused businesses that do not generate foreign exchange into the fold of companies disposed to outbound opportunities by virtue of eliminating as a factor in the review/approval process whether the needed foreign exchange is self-owned.
- Boosting the appetite for investments in resource sectors which previously required approvals from NDRC and MOFCOM.
Although the NDRC Outbound Measures and the MOFCOM Outbound Measures are the latest in a series of changes aiming to simplify and encourage China’s “Going Out” strategy, the new measures retain the long-held principle that any and all outbound investments by Chinese companies must be subject to at least some level of prior review by the Chinese authorities.
- The NDRC Outbound Measures retain the requirement that the Chinese government authorities whose involvement will typically be necessary to complete an outbound investment (e.g., foreign exchange, customs, entry-exit administration, taxation, etc.) cannot facilitate the investment until the relevant NDRC filing or approval has been completed.
- The NDRC Outbound Measures clarify an existing restriction that Chinese financial institutions cannot grant a loan for an outbound investment (the main funding source for Chinese investors) until the relevant NDRC filing or approval has been completed.
- The MOFCOM Outbound Measures continue to provide that failure to comply with the MOFCOM Outbound Measures will cause the Chinese investor to be ineligible for various government support programs (covering such things as financing, customs, etc.) for three years.
- The NDRC Outbound Measures retain the requirement that a Chinese acquiror must submit a project information report and obtain a confirmation letter from the NDRC (popularly known as a “Road Pass”) before undertaking any “substantive work” (which includes making a binding offer or signing a binding acquisition agreement) in connection with any outbound Chinese investment of $300 million or more.
- The NDRC is required to make its determination whether to issue the Road Pass within seven business days following its receipt and acceptance of the project information report.
- Given the dispute surrounding one recent failure by a company to obtain the required Road Pass, it is logical to expect that this requirement will be more aggressively enforced in the future.5
- The NDRC Outbound Measures retain the requirement that if an outbound investment will entail a long preparation period or require significant upfront expenses, a Chinese investor must conduct a pre-filing or seek an approval from the NDRC even prior to seeking a Road Pass (if required) and fulfilling the pre-filing or pre-approval in respect of the outbound investment.
- The NDRC Outbound Measures and the MOFCOM Outbound Measures have established timelines for the different stages of the filing and/or approval process. The chart below outlines the time frames within which MOFCOM and NDRC must take action under their pre-filing and approval processes. (To simplify the chart, we assume that the outbound investment is made by a centrally-managed state owned enterprise and is not subject to the approval by the State Council).
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It is well known among M&A practitioners that, other things being equal, the Road Pass and pre-approval requirements have put Chinese acquirors at a material disadvantage in competitive M&A bidding situations. Although the changes to be ushered in by the NDRC Outbound Measures and the MOFCOM Outbound Measures will ameliorate this disadvantage to some degree, the streamlined review/approval periods still mandated by the new measures may prove as ephemeral in practice as the specified review periods that apply to MOFCOM’s M&A anti-monopoly review process.8
The streamlined approval and filing procedures of the NDRC Outbound Measures and the MOFCOM Outbound Measures will provide additional impetus to China’s already robust outbound investment. But while the changes are welcome, it remains to be seen whether their execution will yield a substantial improvement.