A. General Devolution to Lower Levels
China's Ministry of Commerce (MOFCOM) has continued their trend of further delegating approval competency to lower governmental levels. This delegation of approval competency to local authorities will greatly accelerate the approval process for foreign invested projects.
MOFCOM issued, on March 5 the Notice on Improving the Examination and Approval over the Foreign Investment (the “Notice”) which simplifies the approval process through the following means:
1. In the Notice, MOFCOM delegates its approval competency under certain conditions:
FIEs falling within encouraged sectors (regardless of investment amount) which were previously approved at the central MOFCOM level can now be approved by MOFCOM counterparts at the provincial level, vice-provincial city level (1), or national economic development zone level. It is important to note that the usual threshold of USD 100,000,000 total investment does not apply to encouraged sector projects. Accordingly, the basic policy is that encouraged projects can be approved locally except for some specific exceptions such as central government reliant projects (2) or FIEs governed by specific rules or industrial policies.
A basic rule has always been for amendments to FIEs to be approved by the original approval authority. The Notice changes this by allowing FIEs originally approved by MOFCOM to have subsequent commercial changes approved by MOFCOM’s local counterparts except for capital increases which require National Development and Reform Commission approvals or share transfers which result in a transfer of the controlling interest to the foreign shareholder.
The Notice also largely devolves approval competency for mergers and acquisitions of domestic companies by foreign investors and FIEs to local authorities. Projects falling within encouraged or permitted sectors can be approved locally if the transaction amount is below USD 100,000,000. Local approval can also be obtained in restricted categories if the transaction amount does not exceed USD 50,000,000. It is important to note that in respect of acquisitions the Notice states that competency shall be determined by reference to the transaction amount not total investment. However, it is important to note that this devolution of authority does not waive approval requirements in respect of the Chinese Securities Regulatory Commission (CSRC) or the state-owned assets supervision and management authorities. Accordingly, in many sensitive cases central level approvals will still be required. Similarly, strategic investments in listed companies will still need MOFCOM level approval.
Mark Schaub, Feng Xin, Duncan Hwang of King & Wood's Foreign Direct Investment Practice
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