Domestic oversight of foreign acquisitions by listed companies

In 2016, direct foreign non-finance investment by Chinese enterprises reached US$170 billion, with listed companies becoming the central force in foreign acquisitions. However, as compared to other enterprises, listed companies face more complex approval procedures for their foreign acquisitions.

State-owned asset authority approval. If a listed company is a state-owned enterprise (SOE), it first needs to secure the approval of the state-owned asset authority in accordance with the Law on the State-Owned Assets of Enterprises and the Interim Regulations for the Oversight of the State-Owned Assets of Enterprises.

Project approval. Pursuant to the Administrative Measures for the Approval and Recordal of Offshore Investment Projects (Orders No. 9 and 20 of the National Development and Reform Commission [NDRC]), offshore investment projects in sensitive countries and regions, and in sensitive industries, as well as offshore investment projects in which the Chinese party’s investment totals at least US$2 billion, are subject to the NDRC’s approval. Offshore investment projects other than those mentioned above are subject to administration by way of recordal. Of those, projects with an investment by the Chinese party of at least US$300 million, implemented by an enterprise under the administration of the central government or a local enterprise, are subject to recordal by the NDRC. Others are subject to recordal by the investment authority of the provincial-level government.

In practice, once the acquisition plan has been deliberated on and approved by the shareholders’ general meeting, the listed company is required to apply to the NDRC for recordal of its offshore investment project through the national online offshore investment project recordal management system.

Commerce authority approval. Pursuant to the Administrative Measures for Offshore Investment (Order No. 3 of 2014 of the Ministry of Commerce [MOFCOM]), if the offshore investment of an enterprise involves a sensitive country or region, or a sensitive industry, it is subject to administration by way of approval. Other offshore investments are subject to administration by way of recordal. For offshore investments subject to recordal, an enterprise under the central government is required to carry out recordal with MOFCOM, whereas a local enterprise is required to carry out recordal with the provincial-level commerce authority where it is located.

In practical operation, a listed company first makes a submission to the municipal level commerce authority of the place where it is located, whereupon the latter than makes a submission to the provincial-level commerce authority to carry out recordal of the enterprise’s offshore investment.

Business operator concentration review. Pursuant to the Anti-Monopoly Law and the Provisions of the State Council on the Thresholds for Business Operator Concentration Filings, if the acquisition of a listed company reaches either of the following thresholds, a filing is to be made with, and an approval opinion not prohibiting the concentration secured from, MOFCOM: (1) if the total global turnover during the preceding fiscal year of all business operators involved in the concentration exceeds RMB10 billion (US$1.46 billion) in total, and domestic turnover for the preceding fiscal year of at least two of those business operators exceeds RMB400 million; or (2) the total domestic turnover during the preceding fiscal year of all of the business operators involved in the concentration exceeds RMB2 billion, and the domestic turnover during the preceding fiscal year of at least two of those business operators exceeds RMB400 million.

A listed company is required to fill in or edit the filing documents through the Business Operator Concentration Anti-Monopoly Review Filing Form client terminal filing software, and submit the same directly at a window at the MOFCOM administrative affairs service centre.

CSRC review. Pursuant to the Administrative Measures for Material Asset Restructurings of Listed Companies (amended in 2016), the Administrative Measures for the Acquisition of Listed Companies (amended in 2014) and the Implementing Rules for Private Offerings of Shares by Listed Companies (amended in 2017), offerings of shares to purchase assets, material asset restructurings that constitute backdoor listings, and private offerings of shares are subject to CSRC approval. Additionally, pursuant to the Working Plan for Administrative Permissions and Joint Approvals of Acquisitions and Restructurings of Listed Companies, following approval by the shareholders’ general meeting, a listed company may simultaneously submit applications for administrative permissions for an acquisition or restructuring to the CSRC and relevant ministerial-level authorities (the NDRC and MOFCOM) for their joint review and separate decisions on approval.

Foreign exchange registration. Pursuant to the Notice on Further Simplifying and Improving the Policies for Exchange Control in Connection with Direct Investment, issued by the State Administration of Foreign Exchange, once a listed company has secured approval or recordal form the NDRC, MOFCOM or CSRC, it may carry out foreign exchange registration in connection with direct foreign investment directly with a bank. Furthermore, a listed company needs to perform its obligation of disclosing information relating to its foreign acquisition in accordance with the listing rules of the stock exchange, the system for the administration of information disclosures, the guidelines for information disclosures, the memorandum on information disclosure, etc.

The policies applicable to foreign acquisitions are scattered among the rules and regulations of various ministerial-level authorities, and there is as yet no top-level law or regulation that provides sound regulation and administration of foreign acquisitions. Oversight addressing the foreign acquisitions of listed companies also lacks dedicated requirements and exemption rules, and foreign acquisitions in China still face review procedures tied up in red tape.

However, the majority of the overseas acquisitions in which listed companies are involved are market-based transactions, meaning time is of the essence. Particularly in acquisitions by offer, there are competing offers, so timing is more pressing than in negotiated acquisitions. Some asset sellers will set a deadline for payment of a deposit or making a payment in a transaction that involves bids. However, overseas acquisitions by listed companies require the approvals of, or filings with, numerous authorities. The time required for approval is long and there are also uncertainties, making it difficult to meet the foreign transaction counterparty’s deadline for payment of the consideration and requirement for certainty in the subsequent steps of the transaction, placing Chinese listed companies at a disadvantage in international competition.