China outbound investment – recent trends in law and practice

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The main trend in PRC governmental approvals of overseas investments by China enterprises will be a gradual loosening of control, but there is likely to be a tightening of macro administration over enterprises under the central government, and over specific assets and the countries where investments are made. Certain jurisdictions are also clearly beefing up their oversight of investments by PRC state-owned enterprises (SOEs) in sensitive industries and assets. PRC state-owned and private investors are more sophisticated at deal execution and improving their abilities in complex cross-border transactions.

Regulatory approvals

The fact that Chinese outbound regulatory approvals are uncertain in the length of approval time and approval outcome has a big negative impact on the execution of complex cross-border transactions by PRC investors. But looking at some recent large transactions, it seems the relevant Chinese approval authorities were willing to adapt to developments of the market and take relatively practical approaches to expedite the review and approval process of outbound investments. For example, in its takeover of Canada-listed Talisman, Tianqi Lithium managed to secure all of the relevant PRC government approvals before executing the scheme implementation deed.

熊进 Xiong Jin
熊进 Xiong Jin

The other interesting phenomenon is that many overseas subsidiaries established by mainland Chinese companies take the view, when reinvesting abroad, that as long as the acquisition funds are completely paid abroad, without security provided by the parent in China, they do not need to be concerned with any PRC regulatory approval issue. But according to the regulations, any overseas reinvestment by these offshore subsidiaries still requires the approval of the National Development and Reform Commission (NDRC). Furthermore, if finance is sought from the overseas branches of Chinese financial institutions, those financers will generally require that all the Chinese outbound regulatory approvals be included as one of the drawn down conditions.

The central government is aware of the issues associated with the existing approval regime and has taken measures to gradually decentralise it. However, previous reforms mainly took the form of delegating approval authority to lower levels, without substantive changes to the scope of approval matters or the method of administration.

To implement the State Council’s new policy of “simplifying government and delegating authority”, the NDRC is considering further simplifying the administration of offshore investment, exploring the implementation of an administration method mainly relying on the recordal system, and it may greatly shrink the scope of items subject to approval. The focus of NDRC review will also move away from transaction risks to macro policy. According to recent media reports, in the 16 overseas investment projects recently approved by the NDRC, compliance with industrial policy and national security, as opposed to actual business operations, formed the main basis of review.

Despite the differences in foreign investment review mechanisms of different countries, they do have principles in common. For example, approvals for transactions involving sensitive assets and sectors that impact national security – such as the military and government communications – may be difficult to secure. Project approvals by target countries involving such industries as energy resources, agriculture, foodstuffs, etc. may also be more stringent, and even if an approval is granted it may be subject to conditions.

Australia. Tony Abbott, the new prime minister, publicly stated during his election campaign that he did not trust foreign SOEs investing in Australian assets. The new government has indicated it will not abolish current policy provisions requiring approval from the Foreign Investment Review Board of investments by foreign SOEs (with the exception of designated countries), regardless of amounts involved. The new government is about to strengthen approval requirements relating to agriculture and land, including greatly reducing the amount of investment in agricultural land by foreign enterprises that requires review, and implementing a new land registration system to strengthen oversight of foreign land owners.

The US. The US and China have a complex relationship that involves both co-operation and antagonism. Chinese enterprises should recognise that acquisitions in the US could encounter resistance, but such obstacles can be overcome. Recently, Shuanghui’s acquisition of Smithfield was questioned because of its potential effect on US food supply security, due to Smithfield’s relatively large share of the US pork processing and live pig markets. Shuanghui undertook to keep Smithfield’s management, brands and personnel unchanged and to operate Smithfield independently through an overseas subsidiary. Ultimately it gained the trust of the Committee on Foreign Investment in the US and the transaction was approved.

Canada. In June, Canada adopted amendments to the Investment Canada Act, expanding the definition of “state-owned enterprise” and placing restrictions on foreign SOEs having a controlling interest in Canadian oil sand enterprises. Like other target countries, Canada places great importance on national security reviews. PRC enterprises can design successful transactions through meticulous preparation, but they must recognise baseline national interests that are off limits.

Sophisticated deal making skills

Following rapid development in recent years, the transaction structures and execution skills of PRC outbound investors are increasingly aligned with those of mature foreign markets, and this is particularly evident in large and complex cross-border transactions.

For example, an increasing number of PRC enterprises are using consortium structures to undertake overseas acquisitions, allowing industry investors, engineering procurement and construction contractors, and financial investors to select, invest in and operate overseas projects by taking advantage of each other’s strengths.

Noticeably, PRC acquisitions have been increasingly hostile, with several attempts on major public targets globally. One such deal is the (failed) acquisition by Chinese private equity group Cathay Fortune of the Australian Securities Exchange-listed DML (Discovery Metals Limited). Frustrated by the “no engaging” approach taken by the DML board and failure to reach a consensus with the board on due diligence process, Cathay launched a hostile takeover bid, but ended up with allowing the bid to lapse due to concerns over the true financial and technical prospects of DML.

Finance arrangements for offshore acquisitions by PRC enterprises are increasingly sophisticated and diversified, no longer constrained to their own funds and bank loans. More PRC-listed companies involved in offshore acquisitions are turning to private placements of additional shares in China to raise funds. Complex cross-border equity swaps are also progressively being tried as an alternative.

Xiong Jin is a partner at King & Wood Mallesons in Beijing. He can be contacted on +86 10 5878 5158 or by email at [email protected]