By Wang Kaiding, Huang Mengting and Tang Xinran King & Wood Mallesons’ Corporate & Securities group
On 26 December 2017, the National Development and Reform Commission (“NDRC”) issued the Administrative Measures for Enterprise Outbound Investment (“Regulation No. 11”) which will come into force on 1 March 2018.
Regulation No. 11 contains six chapters and 66 articles. Compared to the 2014 Administrative Measures for the Verification and Record-filing on Outbound Investment Projects (“Regulation No. 9”), there are several significant changes. The change of the regulation’s title indicates that monitoring of outbound investments will no longer be limited to pre-transaction “verification” and “record-filing”, but will also cover the periods during and after transactions.
For a summary of pre-transaction administrative measures required under Regulation No. 11, please refer to the end of this article.
Key points to note about Regulation No. 11 are:
“Road-pass” regime eliminated, time costs reduced, and more deal certainty
Article 10 of Regulation No. 9 states that:
“When undertaking outbound acquisitions or bidding projects with total investment exceeding USD300 million (inclusive), Chinese investors shall submit a project information report to NDRC before carrying out any substantive work.”
This article drew great market attention. Dubbed the “road-pass”, it meant Chinese investors involved in outbound bidding transactions exceeding USD300 million (inclusive), had to obtain confirmation letter from the NDRC before making a binding offer.
Regulation No. 11 eliminates the “road-pass” regime, which evidences NDRC’s intention to “further streamline administration and delegate power”.
Covered transactions expanded
1.Outbound investments are categorized into two types: those conducted directly by domestic investors; or through overseas enterprises controlled by domestic investors.
Regulation No. 9 applies to outbound investments conducted by domestic investors (i.e. domestic legal persons) or through their overseas enterprises or institutions if a domestic investor provided financing or guarantees.
According to Article 2 of Regulation No. 11, the scope of application of Regulation No. 11 covers outbound investments conducted directly by domestic investors (i.e. domestic enterprises) or through controlled overseas enterprises.
2.Outbound investments conducted directly by domestic investors
Article 2 of Regulation No. 11 does not elaborate on outbound investments conducted “directly by domestic investors” or “through controlled overseas enterprises”.
Based on Article 14 of Regulation No. 11, outbound investments conducted “directly by domestic investors” refers to outbound investments relating to which domestic investors directly invest assets, interests or provide financing or a guarantee. The definition covers outbound investments conducted by domestic investors as the investing entity, or through their overseas enterprises (regardless of whether or not the domestic investor controls the overseas enterprise) with financing or a guarantee provided by a domestic investor.
3.Outbound investments conducted through overseas enterprises controlled by domestic investors
Under Regulation No. 11, outbound investments conducted “through controlled overseas enterprises” refers to outbound investments conducted by overseas enterprises controlled by domestic investors in which the domestic investors do not directly invest assets, interests or provide financing or a guarantee.
Domestic investors conducting outbound investments through their overseas enterprises are not governed by Regulation No. 9 unless they have provided cross-border financing or guarantees. In practice, many investors used this loophole to avoid the verification and record-filing procedures required by Regulation No. 9. Outbound investments conducted by domestic natural persons are not governed by Regulation No. 9 either.
All outbound investments conducted by domestic investors through their controlled overseas enterprises (regardless of whether the domestic enterprise provides cross-border financing or guarantees or not) will now fall within the scope of Regulation No. 11. In addition, under Article 63 of Regulation No. 11, outbound investments conducted by domestic natural persons through their controlled overseas enterprises are also covered by Regulation No. 11, although Regulation No. 11 still does not apply to outbound investments conducted directly by domestic natural persons.
The wider coverage of Regulation No. 11 will not substantially increase compliance costs for domestic investors. With respect to domestic enterprises and domestic natural persons who conduct outbound investments through their controlled overseas enterprises (domestic investors do not directly invest assets, interests or provide financing or a guarantee):
- Sensitive projects will be subject to a verification procedure.
- For non-sensitive projects:
- if the total investment amount from Chinese parties exceeds USD 300 million (inclusive), investors shall submit a “situation report for a non-sensitive project with a large amount” to NDRC before the project is implemented through an online system. Verification and record-filing procedures are not required;
- if the total investment amount from Chinese parties is less than USD300 million, then no pre-transaction verification, record-filing or reporting is required.
- Outbound investments made by financial enterprises are also regulated by NDRC
Regulation No. 9 did not explicitly exclude financial enterprises, but, in practice, some market players were unclear about whether it applied to outbound investments made by domestic financial enterprises.
Under Regulation No. 11, NDRC has specified that Regulation No. 11 applies to outbound investments made by domestic financial enterprises.
Sensitive projects clarified, focusing on national interests and security
“Sensitive projects” under Regulation No. 11 include projects involving sensitive countries, regions or industries.
1.Sensitive countries and regions
Regulation No. 11 defines “sensitive countries and regions” as including countries and regions:
- without diplomatic relations with China;
- experiencing war or internal strife;
- where investment by enterprise is restricted by international treaties, or agreements China concluded or acceded to.
- other sensitive countries and regions.
With respect to the newly-added category “other sensitive countries and regions”, investors may consult with NDRC through the procedure stated in Article 15 of Regulation No. 11.
Regulation No. 11 defines “sensitive industries” as including:
- research on, manufacture and repair of weaponry;
- cross-border water resources development and utilization;
- news media;
- industries to be restricted from outbound investments according to laws, regulations and relevant macro-control policies.
A Sensitive Industry Directory will be released by NDRC separately.
3.Outbound Investment Guidelines
On 4 August 2017, the State Council promulgated the Guidelines on Further Guiding and Regulating the Directions of outbound Investments (“Guidelines”), formulated by NDRC, Ministry of Commerce, People’s Bank of China and the Ministry of Foreign Affairs. The Guidelines divides outbound investments into “encouraged,” “restricted” and “prohibited” categories.
Outbound investments that jeopardize (or may jeopardize) national interests and security are prohibited under the Guidelines. These include (a) outbound investments in relation to unauthorized export of Chinese military core technology and products; (b) outbound investments utilizing technologies, crafts, and products which are banned for export; (c) outbound investments in the gambling and pornography industries; (d) outbound investments prohibited by the international treaties China concluded or acceded to, and (e) other outbound investments that jeopardize or may jeopardize national interest or national security.
Under Article 5 of Regulation No. 11, outbound investments may not violate Chinese law and regulations or jeopardize national security or interests. Therefore, we understand that the category of prohibited outbound investments specified by the Guidelines should be regarded as outbound investments that violate Chinese laws and regulations.
Outbound investments which are inconsistent with foreign policies regarding peaceful development, mutually beneficial strategies and macro-control are restricted under the Guidelines. These include (a) outbound investments in any sensitive country and region without diplomatic relations with China, experiencing war or strife, or where investment by enterprise is restricted by international treaties, or agreements China concluded or acceded to; (b) outbound investments in the real estate, hotel, cinema, entertainment and sport club industries; (c) formation of equity investment funds or investment platforms without specific industrial projects; (d) outbound investments that utilize obsolete manufacturing equipment which cannot satisfy the technology standard of the destination country; or (e) outbound investments in violation of the destination country’s environment, energy efficiency and security standards.
The Guidelines specify that verification of relevant authorities is required for outbound investments falling under categories (a) to (c).
We understand that outbound investments under category (a) above are to sensitive countries and regions, while outbound investments under categories (b) and (c) are to sensitive industries, all of which are subject to verification under Regulation No. 11. Outbound investments under categories (d) and (e) are not subject to verification but will be closely supervised by authorities.
Verification and record-filing as an implementation condition– to comply with international practices and market conditions
Under Regulation No. 9, verification approval documents or record-filing notices issued by NDRC were a condition for transaction agreements to become effective.
In the international market, government approval is usually a condition for closing but does not affect a contract’s validity. In reality, many cross-border M&A’s conducted by domestic enterprises also regard government approvals as closing conditions. Therefore, there is a gap between Regulation No. 9 and market practice.
Under Regulation No. 11, domestic investors are required to obtain verification approval documents or record-filing notice prior to the “implementation” of a project. Prior to “implementation” means prior to when a domestic investor or its controlled overseas enterprise invests assets or interests into, or provides financing or guarantees for a project.
Explicitly stating circumstances and procedures where ‘change’ applications are required
Under Regulation No. 11, circumstances that require a ‘change’ application include:
(1) Any change to the number of investors;
(2) Any material change to the investment destination;
(3) Any material change to main content and scale;
(4) Any change to the amount of a Chinese party’s investment, equal to or greater than 20% (compared to the verified and filed amount) or of more than USD 100 million (inclusive);
(5) Other circumstances where substantial changes are needed with respect to verification approval documents or record-filing notices.
Strengthening interim and ex post supervision
Articles 43, 44 and 45 of Regulation No. 11 provide mechanisms for reporting material adverse conditions, project completion, and inquiry and reports about material matters.
Under Article 44 (for projects subject to verification and record-filling requirement), the investor shall file a completion status report through the online system within 20 working days after the completion of a project (for example, after construction project completed, target shares or assets transaction closed, or investment amount paid).
Regulation by NDRC is no longer limited to pre-transaction regulation, with reporting and regulation mechanisms added for during the deal and after its closing. It is worth stressing that under Regulation No. 11, investors are only required to provide information to the authorities – not to perform verification and record-filing procedures.
The above changes to administrative measures demonstrate the clear direction of the reform — to streamline administration and delegate power, combine liberation with regulation, and improve services. The outcome will be a more transparent and predictable outbound investment administrative system.
In conclusion, we have summarized the pre-transaction administrative measures required under Regulation No. 11 for different types of outbound investment:
 Issued by NDRC in April 2014 and as amended in December 2014 (境外投资项目核准和备案管理办法)
 Excluding preliminary expenses for verification and record-filing in accordance with Article 17 of the Measures