China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

Chinese outbound investment has grown rapidly in the last few years, particularly in the energy, mining, banking, IT and creative industries. On August 18, 2009 China Petroleum & Chemical Corporation (Sinopec) announced the USD 7.2 billion acquisition of the Swiss Addax Petroleum Corporation. This was the largest international acquisition by a Chinese company to date. Additionally, CNPC has made several large international acquisitions - for example, in May, 2009, CNPC acquired a 45% stake in Singapore Petroleum for USD 1.2 billion while companies such as China Minmetals, China Nonferrous Metals, Baosteel, and ICBC have also made significant outbound investments recently. With the increasing internationalization of Chinese companies, commercial disputes are almost inevitable. In our experience, when dealing with international arbitration and litigation proceedings, we see Chinese companies employing a number of different strategies:

By King & Wood's Cross Border Dispute Resolution team

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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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The Chinese legislature created a hybrid from the different approaches adopted by civil and common law jurisdictions through the Copyright Law of the People's Republic of China (the “Copyright Law") and the Regulations on the Implementation of the Copyright Law of the People’s Republic of China (the“Implementation Regulations"), and produced the twin concepts of “legal entity work” and “occupational work” for assigning rights to works made in the course of an employment relationship. For example, a book written by a group of employees organized by an entertainment company for celebrating the company's anniversary would likely be considered “legal entity work”, but a piece of music composed by a composer employee (not for specific purposes) is “occupational work”, because in the former case, supervision of the company would be involved but the latter case it would not.

Being able to draw a clear line between “legal entity work” and “occupational work” is crucial during a due diligence investigation in terms of copyrighted materials in employment relationships- ascertaining an accurate chain of title from the author turns out to be a thorny issue. Though these two types of works are seemingly similar, the attribution of the copyright ownership between a legal entity employer and an employee is critical. Though the determination of “legal entity work” and “occupational work” can be extremely confusing, neither the legislatures nor judicial organs have ever promulgated any guidance. Thus far, only the National Copyright Administration of the People’s Republic of China (the “NCA") has expressed its viewpoints on this matter in the circular “Reply to the Liaoning Tieling Mediate Court Regarding How to Determine Legal Entity Work and Occupational Work” (the “NCA Circular”), which however does not have judicial binding force.
 

Wang Rui, Partner, International Trade

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Stellar Megaunion Corporation ("SMC") was in serious debt, as it could barely repay its liabilities. New World China Land ("NWCL"), which was seeking an opportunity to go public, proposed to acquire SMC as a shell company which has no assets, but is publicly listed. To achieve this goal, NWCL conducted several rounds of negotiations with SMC's creditors to settle SMC's debts and clear the roadblocks for the acquisition. However, the parties were unable to make much progress in the negotiations due to the large number of SMC's creditors involved. As SMC needed to solve its debt crisis as soon as possible and its negotiations with NWCL were deadlocked, the company decided to reorganize to completely release itself from the heavy debt burdens in a short period time.

SMC's Reorganization
A. Reorganization initiated by SMC's creditors
As SMC failed to repay it debts due, a third party creditor petitioned the proper Intermediate People's Court (the "Court") to reorganize SMC. The Court accepted the petition on March 11, 2008 ([2008] Yusanzhongbozi No.1).

B. Confirmation of Creditors' Rights
According to the proposed reorganization plan the administrator of SMC (the "Administrator") submitted to the Court and the first SMC creditors' meeting, 70 creditors filed claims and the total value of confirmed claims was nearly RMB 2.5 billion. [continue reading to find out the outcome]
 

Liu Yanling, Partner and head of King & Wood's Bankruptcy, Restructuring & Insolvency Practice.

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After the Qualified Domestic Institutional Investor scheme (QDII) was implemented in April of 2006 to help relieve pressure on the RMB by promoting capital outflows and Chinese companies in various industries in the private sector were encouraged to go abroad, China’s outbound investment totaled approximately $20 billion in 2007.

In the first half of 2008, overseas investment of Chinese companies has more than doubled from last year. This year, Chinese outbound investment has already reached 16 billion euros (nearly $23 billion) according to Bloomberg.

Correspondingly, we have seen an increasing number of our domestic Chinese clients invest abroad for both market seeking and resource seeking opportunities. We expect this trend to accelerate in the coming years as outbound rules continue to be relaxed and domestic companies shift their strategies to compete globally.

This trend, coupled with close working relationships with a significant number of American companies and law firms have lead King & Wood to establish its New York office opening September 9th, 2008. As a firm with an extensive client list in the banking industry, our location on Madison Avenue will serve as serve as a local presence for many of our American clients and also provide international support for our clients at home. Since 2001, King & Wood has made a series of international moves such as San Francisco, Hong Kong, Tokyo and most recently with our Sydney Strategic Alliance at the end of 2007.

For years we have seen U.S. and European law firms expand into China. As the global clout of Chinese companies grows, we will see continue to see Chinese law firms expand with them. 

Duncan Hwang, Foreign Lawyer, FDI

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2008 is destined to be an extraordinary year for global cross-border M&A. King & Wood, as a leading law firm deeply rooted in this activity in China, has noticed the following trends in the second half of 2007 and the first half of 2008...

By Wang Junfeng, Partner 

Edward Jing, King & Wood’s Securities Group

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Last month, Mr. Martin Lipton, of Wachtell, Lipton, Rosen & Katz, honored King & Wood with a speech on the implications of the “poison pill” in legal practice.  Mr. Lipton is noted for his innovative "rights plan", a series of defensive measures taken by the board of a target company in a hostile takeover.  The “rights plan” is meant to ward off hostile offers that substantially underestimate the value of the target's shares.  The rights plan was later referred to as the "poison pill" by Wall Street bankers whose attempts at hostile takeover below fair value were frequently frustrated by the "rights plan."


Mr. Lipton's speech inspired me to ponder the question of how defensive measures work in China's corporate governance.  I then googled the word "poison pill" and "company" in Chinese, but found no instances of companies utilizing the poison pill within China.  So why is there no poison pill in China?
 

By   Li Wenbo   King & Wood’s International Trade Group

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