Chinese outbound investments are under stringent regulatory review even in China, resulting in uncertainty, delay, and frustration to the investor and target alike. This also handicaps Chinese companies in competitive bidding processes, where foreign targets might opt for a lower non- Chinese bid that is not subject to such regulatory approval to reduce closing associated risks. Even in the absence of any competing bidders, foreign targets have come to demand high reverse break fees, payable should the Chinese investor fail to complete the transaction for a variety of reasons, including the inability to obtain approval from its own government.
With more experience and confidence gained over the years, and in line with the wish to establish a more open and market economy, this regulatory process is gradually becoming simpler and more certain. The Measures for the Administration of Approval and Filing of Outbound Investment Projects (Decree No.9), issued by the National Development and Reform Commission of China (NDRC), is a significant step towards this end.
It took effect on May 8, 2014, and replaced the previous regime outlined in the Interim Measures for the Administration of Examination and Approval of Outbound Investment Projects. Decree No.9 applies to all types of outbound investments undertaken by Chinese corporations (Investors), whether directly or through related vehicles registered inside or outside of China.
Decree No.9 significantly increases the investment threshold for which NDRC approval is required to US$1-billion or more, or where an investment is made in a sensitive jurisdiction or sector. Investments valuing US$2-billion or more in a sensitive jurisdiction or sector will require the approval of the State Council. A jurisdiction is considered “sensitive” if it does not have diplomatic relations with China or it is under international sanctions, war and civil strife. Sensitive sectors include basic telecom operations, trans-boundary water resources development and utilization, large- scale land development, trunk transmission lines, power grids and news media.
In its approval process, the NDRC will consider whether the outbound investment meets the following criteria:
- Whether or not the investment complies with Chinese laws, regulations, industrial policies, outbound investment policies and foreign exchange policies.
- Whether or not the investment complies with the principles of “mutual benefit” and development and will not jeopardize national sovereignty, security and public interest, and will not violate international treaties.
- Whether or not the Investor has the appropriate capacity to make the investment.
Outbound investments that do not require approval by the NDRC or the State Council will still need to complete a filing process either at the NDRC or one of its provincial branches. The former applies where the Investor is owned by the central government or where the value of the investment is no less than US$300-million, regardless of the ownership of the Investor; the latter applies to all other investments.
In its dealings with its foreign counterparty, the Investor is required to obtain an approval certificate or filing notification issued by the NDRC, depending on the criteria described above, prior to entering into any legally binding agreement. Alternatively, it could also set a condition in the executed document that it is valid only after the required approval document or filing notification is issued by the NDRC.
To bring its own approval process in line with that under Decree No.9, the Ministry of Commerce (MOC), which is another Chinese regulatory authority for outbound investments, has also started the process of revising its Measures for the Administration of Outbound Investment (2009), including releasing a draft of the revision for public comment. According to this draft, MOC approval is required only for outbound investments in sensitive jurisdictions and sensitive sectors. The definition of “sensitive” is, however, slightly different than the definition under Decree No. 9 and includes sectors using products or technologies the export of which is restricted and sectors involving interests of several countries. The final revised version of this MOC decree has not been promulgated as at the date of this article.
By removing the Chinese regulatory process from outbound investments under US$1-billion in non-sensitive sectors, Decree No.9 and the proposed MOC revision would reduce significant and state-related uncertainty and risk to most of the investments undertaken by Chinese enterprises in Canada, based on experience to date. One would expect less impact on the very large investments undertaken by the major state-owned enterprises as it is unlikely for them to be launched without the blessing of or a strong positive signal from the state in the first place.