Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Foreign Investment

GLOBAL STATISTICAL UPDATE – XBMA Quarterly Review for Second Quarter 2018

Editors’ Note: The XBMA Review is published on a quarterly basis in order to facilitate a deeper understanding of trends and developments. In order to facilitate meaningful comparisons, the XBMA Review has utilized generally consistent metrics and sources of data since inception. We welcome feedback and suggestions for improving the XBMA Review or for interpreting the data.

Executive Summary/Highlights:

  • The global M&A environment continued to show historic strength in 2018, as global deal volume reached nearly US$1.3 trillion for the second quarter and US$2.5 trillion for the first half of the year.
  • Global M&A activity has enjoyed a steady climb over the last several quarters and has increased sharply since Q3 2017, with global deal volume exceeding US$1.0 trillion in each of the ensuing three quarters. Q1 and Q2 2018 were two of the most active quarters for global M&A ever.
  • Cross-border transactions have continued to comprise a significant portion of global deal volume, accounting for 41% of overall M&A in Q2 2018. Cross-border M&A activity has already exceeded US$1.0 trillion for the first half of 2018.
  • In emerging markets, inbound M&A volume into the BRIC countries reached US$63 billion in aggregate in Q2 2018. Most notably, the volume of inbound M&A activity increased significantly in China and India during Q2 2018 as compared to prior quarters.
  • Q2 was highlighted by a number of headline-grabbing mega-deals across sectors, including T‑Mobile’s combination with Sprint. The volume of transactions with values of more than US$500 million is on pace to increase approximately 65% in 2018 compared to 2017.
  • The blistering pace of global M&A activity in 2018 continues to be driven by the impact and the anticipation of disruptive technologies across industries, and in the media and entertainment, telecommunications and healthcare sectors, in particular.

Click here to see the Review.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CHINESE UPDATE – The Future of Automotive JVs under the New Policy of Opening Up the Automotive Industry in China

Contributed by: Adam Li (Li Qi), Jun He Law Offices (Shanghai)

Editors’ Note: Contributed by Adam Li, a partner at JunHe and a member of XBMA’s Legal Roundtable. Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies. This article was authored by Mr. Michael Weng, and Mr. Daniel He, both partners at JunHe. Mr. Weng has broad experience dealing with complicated foreign direct investment and cross-border M&A transactions, and Mr. He is specialized in merger and acquisition projects, joint venture transactions, and strategic investment projects in various industries.

Summary

There are numerous examples of Automotive JVs that have been operating successfully and profitably in China for more than a decade. With the imminent removal of the shareholding cap on foreign investment in automotive manufacturing, there will be opportunities for Chinese and foreign parties to alter their equity holdings, including being able to buy out the JV partner or exit in part or completely. It is our assessment that Chinese and foreign parties are unlikely to immediately implement any major changes. Rather, we expect them to maintain the status quo for a considerable period of time, until larger commercial incentives trigger a withdrawal of one of the joint venture partners.

 

Main Article

At the recent Boao Forum for Asia Annual Conference 2018, the Chinese President Mr. Xi Jinping announced that “China will remain unchanged in its adherence to reforming and opening up, and will continue to launch new major measures to pursue further opening up.”  Since then, both the National Development and Reform Commission (“NDRC”) and the Ministry of Industry and Information Technology in their respective Answers to Reporters’ Questions have committed to gradually opening up automotive manufacturing to foreign investment before 2022 by removing the shareholding limit for foreign investors and also the restriction on foreign investors being allowed to invest in no more than two automotive joint ventures. The reforms and their implications for the future are of great relevance to the many long-standing, active Sino-foreign automotive joint ventures (“Automotive JVs”). In this article, we will discuss several possible development paths for Automotive JVs, and some of the issues arising from the reforms.

 

I.       Possible Development Paths for Automotive JVs

 

1.   Chinese Partner Acquires All or Part of the Equity Held by Foreign Investor

Thanks to the massive growth in demand in the Chinese automotive market, many of the Automotive JVs have been highly profitable. The Chinese partners of those Automotive JVs have primarily been very large central or local state-owned enterprises (“SOEs”) with solid foundations and extensive connections, enabling them to make a vital contribution to Automotive JVs’ swift localization and expansion within the Chinese market. It may be that these Chinese partners will hope to acquire the equity interest held by their Automotive JV foreign partners in order to further strengthen their control within the Automotive JV and to improve their profit earnings. However, Automotive JVs are still largely reliant upon their foreign partners for business resources including branding, new ideas, technology and equipment, and the auto groups to which the foreign partners belong are unlikely to willingly give up the substantial revenue and profits generated by the Automotive JVs. Hence, it will likely prove difficult, at least in the short run, for the Chinese partners of any successful Automotive JV to disrupt the structural balance by acquiring all or part of their foreign partner’s equity.

However, for an Automotive JV that is struggling and not profitable, it is possible that the Chinese partner may be able to acquire their foreign partner’s equity. Indeed, it may well be that a foreign partner in such unsuccessful Automotive JV has already been contemplating an exit. The gradual removal of restrictions on foreign investment in automotive manufacturing presents the opportunity for foreign partners to leave an unsuccessful Automotive JV and set up their own entity. However, before making such a decision, a foreign partner should first make a full assessment of its ability to operate the business independently.  Success in the Chinese market requires not only branding, technology and management expertise, but also access to and control of sales channels and an in-depth understanding of local consumers and markets.

 

2.  Foreign Partner Acquires All or Part of the Equity Held by Chinese Partner

Removing the shareholding cap of foreign investments in automotive manufacturing has eliminated the legal barrier preventing foreign partners from acquiring the equity held by their Chinese partners, but is of course dependent upon the willingness of both sides to pursue this option. It seems highly unlikely that a Chinese partner would be inclined to relinquish its equity interest in a profitable Automotive JV. Moreover, from a strategic perspective, a Chinese partner aiming to build up its own brands may use the leverage of its involvement in an Automotive JV, which brings with it indirect support in the expansion and influence of the Chinese partner’s own independent brands, by having access to the Automotive JV’s upgraded products and technologies, and skills development. In addition, with only very limited licenses to manufacture traditional fuel vehicles, it is highly unlikely that any newly established automotive manufacturer would be able to attain the necessary regulatory approval. Ultimately, the Chinese partner is highly unlikely to hand over control of the Automotive JV with the required manufacturing license. For an under-performing Automotive JV, while the acquisition of a Chinese partner’s equity may not bring immediate financial benefits, the foreign partner could use the existing manufacturing approval, production lines and personnel to start production right away. Provided the acquisition price of the Chinese partner’s equity is reasonable, this could be an effective shortcut for a foreign brand seeking to obtain production capacity and operate independently.

 

3.  Maintain the Status Quo

After the NDRC released its information on easing restrictions on foreign investment in automotive manufacturing, some of the foreign partners of existing Automotive JVs were quick to confirm their intention to continue to support the development of their respective current joint ventures in China. It is our assessment that both the Chinese and foreign parties should take a pragmatic approach to the new policy and, at least in the short-term, focus on maintaining the current structure. It seems unlikely — at least until the expiry of the operation term of the existing joint venture contract — that the Chinese and foreign parties of most of Automotive JVs automakers will initiate a change in the balance of ownership by seeking to acquire all or part of the equity held by their partner.

 

II.      Key Factors Influencing the Possible Development Path

Once the shareholding limits for foreign investors in automotive manufacturing have been phased out, a variety of factors will determine whether foreign automakers choose to remain with their Chinese partners or to make their own way. Some of the key factors for consideration are listed below.

 

1.  Continuing Product Upgrade

At present, many of the Automotive JVs’ products are based upon foreign brands’ original overseas car models. The production of core components, such as vehicle engines and gearboxes, is primarily based upon foreign partner’s technology. Therefore, the prosperity of the Chinese automobile market driven by the Automotive JVs is essentially attributable to foreign automakers’ products. The continuing survival and success of Automotive JVs is at least in part dependent upon foreign partners providing access to upgraded products and technologies. The growing sophistication of Chinese consumers and the emergence of local automotive brands builders means that Automotive JVs are facing an ever more demanding and competitive market. Only those Automotive JVs that continuously innovate will survive. The removal of the shareholder cap means that a foreign automaker with strong product R&D and upgrade capabilities and whose Chinese partners lack product input capabilities may be able to use their relative strength to persuade their Chinese partner to transfer some of their equity. If a foreign automaker is able to obtain continuing regulatory approval to manufacture on their own (as mentioned above, the possibility of obtaining new licenses is very slim), it may be possible for the foreign automaker to set aside the existing Automotive JV in order to establish a separate company, manufacturing and selling their own automobiles in a wholly-owned company.

 

2.  The Trend toward New Energy Vehicles

The growth in purchases of traditional fuel vehicles has slowed down in recent years. In the meantime, sales of new energy vehicles are increasing, attributable at least to some extent to Chinese government efforts to promote these upgraded, clean energy automobiles. Nowadays the vast majority of Automotive JVs’ production is traditional fuel vehicles. However, this is likely to change, with declined growth in demand for fuel vehicles, the implementation of government policy incentives for new energy vehicles, and preemptive dominance of the new energy car market by the Chinese traditional and new automakers. Given that the first shareholding cap to be eliminated will be on new energy car manufacturers, in 2018, foreign automakers will need to decide how they intend to manufacture new energy vehicles in China, whether by taking advantage of a current Automotive JV to apply for cross-category production of new energy vehicles, or by establishing a new wholly-owned subsidiary to undertake this task. The Measures for the Parallel Administration of the Average Fuel Consumption and New Energy Vehicle Points of Passenger Vehicle Enterprises (“Points Administration Policy”) that have been implemented since April 1, 2018, require foreign automakers to take into account the impact on the production of fuel vehicles by the existing JV automaker in their overall production plans. Starting from 2019, according to the Points Administration Policy, there will be a points system under which Automotive JVs will be subject to production limits for fuel vehicles. When this limit is reached, they will be required to produce a certain proportion of new energy vehicles in order to be permitted to continue the production of fuel vehicles. Points will be accrued for the manufacture of new energy vehicles by Automotive JVs and additionally will be available for purchase, through an official platform, from third parties with surplus points. As it stands, the simplest way for foreign automakers to satisfy the new energy vehicle points requirements and to continue production of fuel vehicles is to maintain their current Automotive JV, while introducing new energy vehicle models.

 

Influences of the Tariff Cut

On May 22, 2018, the Customs Tariff Commission of the State Council issued an announcement stating that, effective from July 1, 2018, there will be a reduction of tariffs on imported vehicles and car parts. Tariff rates on vehicles will be reduced from their current levels of 20% and 25%, down to 15%. Even after the adjustment, tariffs will remain higher than in developed countries such as Europe, the United States and Japan. Moreover, the final price of imported cars will also be subject to VAT, consumption tax, dealer profits, and other factors. While the tariff cuts may initially have a short-term stimulating effect on sales of imported vehicles, their impact is not forecasted to be significant in the long run. In an environment where foreign investment restrictions are gradually being lifted, foreign automakers seeking to become more competitive will need to take into consideration the relative costs and factors – economic and non-economic – of establishing or acquiring a wholly-owned local automaker compared with the option of exporting vehicles to China under a lower tariff regime.

 

3.  Difficulties in Going Solo

One of the Chinese government’s original intentions in formulating the automotive joint venture policy was a “market-for-technology” strategy. In return for providing their technology, foreign automakers have gained Chinese market share through their partnerships with China’s central and local SOEs and large-scale private enterprises. In addition, the foreign automakers have obtained special support and benefits in aspects such as regulatory approvals, land acquisition and factory construction, fiscal subsidy and tax preferential treatment, and so on, without which their foreign automotive products might not even have been brought into China. If, after removal of the foreign shareholding cap, a foreign automaker chooses to operate completely independently and without the support of Chinese partners, there is no certainty that they will continue to enjoy such special benefits. Specifically, approvals for new energy vehicle manufacturing are currently on hold and there are unlikely to be many more licenses issued to manufacture traditional fuel vehicles. While it is anticipated that the approval process for new energy vehicles will recommence soon, it seems likely that entry thresholds will rise substantially. Against this background, it may be unwise for foreign automakers to abandon their current joint ventures and start over on their own. Building an automobile sales and after-sales network is a costly and time-consuming process, further complicated by the range of differing local business environments around China. Without Chinese partners to help navigate local markets, foreign automakers will likely face barriers to a quick set-up and roll out of sales and after-sales networks, particularly on dealing with the existing dealers of the JV Automakers and balancing their relationships and interests.

 

*     *     *     *     *

 

In the decades since Automotive JVs were first established, there have been numerous reforms to the legal environment as well as changes in the range of products offered, fluctuating market conditions, the introduction of new domestic brands, increases in labor and other production costs, a shifting international business environment, and the emergence of new energy cars. As is so often the case in China, the only constant is change itself.

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

CHINESE UPDATE – Significant Changes in Law Ease Controls Over FDI and M&A

Editors’ Note:  Contributed by Adam Li, a partner at JunHe, and by Fang He, a partner at JunHe’s Beijing headquarter; both are members of XBMA’s Legal Roundtable. Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies. Ms. He specializes in M&A and outbound investment from China. This article was authored by Daniel He (He, Kan), a partner based in JunHe’s Shanghai offices who specializes in mergers and acquisitions, foreign direct investment, general corporate law and regulatory compliance.

Highlights:

From October 1, 2016, a new FDI administration system will be launched in China.  Under the new system, MOFCOM approval will not be required for incorporation or acquisition of a foreign invested enterprise (“FIE”), unless its business is on the Nationwide Negative List released by the State Council.  This will increase efficiency for incorporation of and acquisitions involving FIEs, reduce the uncertainty inherent in interactions with Chinese government authorities, and ease the government’s control over FDI and M&A activities.

Main Article:

Significant Changes in FDI Laws

On September 3, 2016, the Standing Committee of the People’s Congress of the PRC amended the three major legislations on foreign direct investment (“FDI”) applied to FIEs, i.e. the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law, and Wholly Foreign Owned Enterprise Law (the “Amendments”). FIEs include Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign owned enterprises.  The Amendments will be effective from October 1, 2016, pending the release of the nationwide negative list on administration of foreign investment by the State Council (the “Nationwide Negative List”).

As contemplated by the Amendments, certain corporate matters of FIEs (such as incorporation, dissolution, capital increase/decrease, equity transfer, renewal of company term, etc., the “Relevant Corporate Matters”), the joint venture contract and articles of association (including the amendments thereto), will no longer require approval by the Ministry of Commerce of the PRC or its local counterparts (“MOFCOM”). Instead, a filing with MOFCOM will suffice, unless the business of the FIE falls under the Nationwide Negative List.  MOFCOM has issued draft regulations for soliciting comments, which address the filing requirements in greater detail.

For clarity, the Amendments have no impact on the approval of the Anti-Monopoly Bureau of the PRC Ministry of Commerce on the concentration of undertakings required under PRC Anti-Monopoly Law.

Background

  • Current FDI Legal Regime

Since the three major laws on FDI were first enacted in 1979, 1986 and 1988 respectively, the Relevant Corporate Matters of FIEs, including the joint venture contract and articles of association, have required approval from MOFCOM, regardless of substance of the matter.  In practice, MOFCOM would perform a substantial review of the terms of transaction documents, and sometime challenge the terms that appear unusual to them even if they are compliant with the relevant laws.  In some cases, local MOFCOM may even require the transaction documents to be prepared based on their standard simple form.  It would typically take 3-5 weeks to complete the MOFCOM approval process, and the process may even be prolonged if additional time is needed to address MOFCOM’s comments.

  • Pilot Reform in Free Trade Zones

The concept of “negative list” was first introduced into China’s legal system in 2013 when it was implemented into the Shanghai Free Trade Zone before the pilot program later expanded to three other free trade zones in Guangdong, Tianjin and Fujian.  Under the “negative list” based FDI administration system, most foreign invested companies would be allowed to set up in the same manner as domestic companies, unless listed in the “negative list”. This approach signifies a long leap for foreign investment administration in China, from having a requirement of obtaining government authorities’ approval on each foreign-invested project/entity to a procedure that applies equally to both domestic and foreign investors (unless the foreign investment is on the negative list).

One of the centerpieces of the reform is that, if the contemplated business is not on the negative list, MOFCOM approval will no longer be required, and a filing with MOFCOM will suffice.  The filing process only requires the submission of minimal documents and limited information – MOFCOM will not review transaction documents such as the joint venture contract, articles of association and share purchase agreement; and the filing can be completed in few days.  This increases efficiency for FIEs by saving them substantial time and effort, and reduces the uncertainty inherent in the interaction with Chinese government authorities.

The above negative list based FDI administration system was implemented on a pilot basis for a short term expiring on September 30, 2016 and only in four free trade zones.  With the Amendments and the Nationwide Negative List put in place, the benefits will be extended to the rest of China.

Eased Control over FDI and M&A

Generally, the Amendments convey a positive message to foreign investors: foreign investment is welcomed by China and the Chinese government is making progress to ease control over FDI and mergers and acquisitions (“M&A”) activities.  Essentially, the procedure and timeline for the Relevant Corporate Matters of an FIE and a domestic company will be the same.

With respect to M&A activities, in addition to the shorter timeline and simplified process discussed above, the main benefits arising from the reform under the Amendments include the following:

  1. Price Adjustment Mechanism – Where MOFCOM approval is required for a purchase agreement, as a matter of practice, in most cases, MOFCOM will not approve a purchase agreement with a price adjustment mechanism, or will indicate a fixed price on its approval letter regardless of the price adjustment mechanism provided in the purchase agreement. As a result, if a transaction contemplates cross border payment, the agency in charge of foreign exchange control, i.e. the State Administration of Foreign Exchange (“SAFE”), will only approve payment of the fixed price specified on the MOFCOM approval letter.  As MOFCOM approval is no longer required for purchase agreements, we expect that parties will have more liberty to agree on and adopt a price adjustment mechanism, something that is commonplace and desirable for most transactions.
  2. Enforcement of Certain Rights – Certain shareholder’s rights such as call option, put option, tag along, drag along and anti-dilution rights are commonly seen in transaction documents for an FIE, but they generally have enforcement difficulties because the equity transfer or issuance for exercising such rights is subject to MOFCOM approval. Said approval would be withheld if the parties cannot submit an equity transfer agreement, board resolutions and other documents required by MOFCOM. This means that it would be very difficult for a party to exercise such rights without the cooperation of the other party in signing and delivering the additional documents. Since MOFCOM approval is not required under the Amendments for the equity transfer or issuance, it would likely be much easier to enforce such rights by completing the MOFCOM filing process – a formality in nature and therefore will not have to be a closing condition.
  3. Method of Payment. In the context of M&A, although PRC law does not specify the form or method of payment, in practice, MOFCOM would usually require that the consideration be paid in cash.  Under the Amendments, the purchase agreement will not be subject to MOFCOM approval and it will therefore be possible for parties to agree on alternative forms of consideration, including non-cash payment.

Things to Expect

  1. Nationwide Negative List. The Nationwide Negative List has yet to be seen but we expect that it will be prepared based on the existing negative list that has been adopted by the four free trade zones.
  2. Other Agencies. It is uncertain how soon the other agencies (e.g. SAFE) will change their administration systems and practices to accommodate the changes contemplated under the Amendments.  It is also possible that it may take local provinces and cities (particularly those in remote areas) a longer time to follow this national reform, and there will have to be a transition period.
  3. M&A Rules. It remains to be seen if and to what extent the major legislation on cross boarder M&A, i.e. the Regulations on Mergers and Acquisitions of Domestic Enterprise by Foreign Investor, will be amended in light of the Amendments.  It is likely that MOFCOM approval will remain required for such acquisitions of domestic enterprise by foreign investor.
  4. Foreign Investment Law. At the beginning of 2015, a draft version of the Foreign Investment Law was released to the public for feedback.  The Foreign Investment Law, if enacted, will replace the above-mentioned three major legislations on foreign direct investment, and contemplates an overhaul of China’s FDI legal regime.  The negative list based FDI administration system is a part of the major reforms provided in the draft Foreign Investment Law, and has been implemented while the other intended reforms are still being debated.  Following the major progress under the Amendments, we anticipate that the legislation process for the Foreign Investment Law will be expedited.
The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

AUSTRALIAN UPDATE: Changes to Australia’s Foreign Investment Regime

Editor’s Note: This report is contributed by Philip Podzebenko, a member of XBMA’s legal roundtable. Mr Podzebenko is a member of Herbert Smith Freehills’ Corporate Group. It is based on research conducted by other Herbert Smith Freehills employees, Tony Damian, Partner, Malika Chandrasegaran, Senior Associate, and Gila Segall, Vacation Clerk, Sydney.

Highlights

  • A new foreign investment regulatory regime applies from 1 December 2015.
  • The ‘substantial interest’ threshold above foreign investors must notify Australia’s Foreign Investment Review Board (FIRB), has increased from 15% to 20%.
  • Specific rules now apply to foreign investments in the agricultural sector, following the introduction of the concepts of ‘agribusiness’ and ‘agricultural land’.
  • The rules applicable to investments by foreign governments, and real estate investments, have been clarified.
  • Tougher criminal penalties and a new set of civil penalties have been introduced for contraventions of the regime.
  • Foreign investors are now required to pay fees in relation to any FIRB application they make.

Main article

From the 1 December 2015, a new foreign investment regime came into force, marking a significant reform of Australia’s foreign investment legislative framework.

The new regime comprises of the Foreign Acquisitions and Takeovers Act 1975 (Cth), a new set of regulations, and the Register of Foreign Ownership of Agricultural Land Act 2015 (Cth).

The changes seek to ensure Australia’s national interest is maintained while also strengthening foreign investment in Australia.

Substantial interest threshold

Foreign persons who intend on acquiring a ‘substantial interest’ in an Australian entity (generally above $252 million) must notify the Foreign Investment Review Board (FIRB) and obtain approval for the acquisition.

Under the new regime, the substantial interest threshold has increased from 15% to 20%. This means that certain acquisitions which previously attracted the notification requirement may no longer do so.

Agricultural land and business

Regulatory scrutiny of foreign investment in the agricultural sector has increased under the new regime.

‘Agribusiness’

Direct private investments in an agribusiness attract a $55 million threshold (indexed annually). A higher threshold ($1094 million) applies for investors from countries who have free trade agreements with Australia, which comprises of the US, New Zealand and Chile.

An agribusiness is defined to include Australian entities or businesses which carry on certain primary production and downstream manufacturing businesses contained in the Australian and New Zealand Standard Industrial Classification Codes. These include meat, poultry, seafood, dairy, fruit and vegetable processing and sugar, grain and oil and fat manufacturing. At least 25% of the business’ revenue or assets must come from the carrying on of the prescribed businesses in order to meet the statutory definition.

Agricultural land

Agricultural land is defined as any land in Australia that is used, or could reasonably be used, for a primary production business.

Agricultural land is subject to a $15 million notification threshold and is assessed on a cumulative basis. Certain exceptions apply: investors from countries in free trade agreements with Australia (US, NZ and Chile) attract the $1094 million threshold, and investors from Singapore and Thailand are subject to a $50 million threshold only in relation to land used wholly or exclusively for a primary production business.

The new regime also establishes an agricultural land register which contains all information about foreign interests held in Australian agricultural land. While the register will not be publicly accessible, certain information will be made available to the public on a regular basis. Foreign investors with interests in Australian land must notify the register of their interest or any changes within 30 days.

Commercial land

Regulation of foreign investments in commercial land depends on whether the land is vacant or developed, and whether it constitutes sensitive commercial land.

All private foreign acquisitions of vacant commercial land require notification, regardless of the value of the investment. Acquisitions of $252 million or more in developed commercial land require notification, unless the interest relates to certain sensitive land, in which case a $55 million notification threshold applies.

Sensitive land is defined broadly, and may include land leased to the Commonwealth, land used for military or security purposes and land on which public infrastructure is located, such as an airport, or electricity networks or telecommunications.

A threshold of $1094 million for agreement country investors applies in relation to developed land regardless of whether it constitutes sensitive land. The relevant country investors includes Chilean, Chinese, Japanese, New Zealand, South Korean and United States investors.

Foreign government investors

Consistent with the previous regime, approval must be sought for most direct interests acquired in Australian land or business by a foreign government investor.

Under the new regime, a foreign government investor includes a foreign or separate government entity, as well as private entities in which a foreign or separate government entity holds a substantial interest (20%).

The regime also provides that all foreign government investors from the same country will be considered as associates, and their interests aggregated.

Penalties

The new regime introduces tougher criminal penalties and new civil penalties for both individuals and companies. Now, criminal penalties for individuals have increased to $135 000 (or 3 years imprisonment). The new civil penalties include fines of up to $45 000 for individuals. For both criminal and civil contraventions the penalty for corporations is 5 times that for an individual.

Penalties are in addition to other powers, including divestiture orders.

Fees

The new regime imposes a set of fees onto foreign investors for all foreign investment applications. These fees are indexed and are determined by the value and type of investment. The fee must be paid before the Treasurer will take any action in regards to the application.

Some examples of common application fees include:

  • Vacant commercial land – $10,000,
  • Non-vacant commercial land – $25,000,
  • Private acquisition of an interest in a mining or production tenement – $25,000,
  • Foreign government investor to acquire an interest in a mining, production or exploration tenement, or a 10% interest in a mining, production or exploration entity – $10,000,
  • Acquiring an interest in an Australian entity, including an agribusiness, where the consideration does not exceed $1 billion – $25,000,

Acquiring an interest in an Australian entity or business, including an agribusiness, where the consideration exceeds $1 billion – $100,000.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CHINESE UPDATE – PRC Authorities Tighten Review on Outbound Investment Transactions

Editors’ Note: Contributed by Ms. Fang He, a partner at JunHe and a member of XBMA’s Legal Roundtable. Ms. He has broad experience in cross-border M&A, private equity, trust and assets management. This article was authored by Ms. Fang He and Ms. Runze Li. Ms. Li is an associate at JunHe.

Highlights

  • Due to RMB depreciation and foreign exchange fluctuation, PRC authorities have tightened review on the truthfulness of outbound investment, for purposes of combating exchange arbitrage and underground private banks.
  • SAFE launched a new system to supervise individuals’ foreign exchange activities since January 1, 2016, and will list violative individuals on a “Supervised List”.
  • SAFE launched a series of special examinations to be conducted by banks in August, 2015, to enhance the management on the foreign exchange registration, fund wire-out, overseas loan under domestic guarantee and other aspects in connection with the outbound investment transactions.
  • Due to capital outflow pressure, certain local authorities even imposes stricter interpretation of law, and prohibit outbound investors from making investment by using registered capital.
  • Despite the tightened review and stricter local practice, we believe they will not hinder truthful outbound investments, although PRC authorities may take longer time for processing the case and may require more supporting documents.

Main Article

Due to RMB depreciation and foreign exchange fluctuations, authorities of People’s Republic of China (“PRC”) have tightened review on the truthfulness of outbound investment, for purposes of combating exchange arbitrage and illegal private banks.

This article covers four tightened sections: SAFE enhances oversight on individuals’ foreign exchange quota control; SAFE tightens review on truthfulness of outbound investment; SAFE tightens review on truthfulness of overseas loan under domestic guarantee, and; local authorities may impose stricter interpretation on the fund qualified for outbound investment.

  1. SAFE Enhances Oversight on Individual Foreign Exchange Quota Control

SAFE launched SAFE Notice to Furtherance Issues Concerning the Management of Individual Foreign Exchange Control (《国家外汇管理局关于进一步完善个人外汇管理有关问题的通知》) on December 25, 2015 (“SAFE Notice [2015] No.49”), which requires the bank to adopt a new system to supervise individuals’ foreign exchange activities (including purchase and settlement of foreign currencies) since January 1, 2016.

SAFE Notice [2015] No.49 prohibits individuals from purchasing/borrowing foreign exchange quota, splitting settlement, and taking other measures to circumvent the PRC foreign exchange quota control (i.e., 50,000 USD or equivalent per annum). Otherwise, SAFE may list the violative individual on a “Supervised List”. Specifically,

  • If an individual offers his/her foreign exchange quota to others for improper purpose, SAFE will issue (through relevant bank) a warning notice to such individual for his/her first violation. If such individual conducts a second violation, SAFE will list him/her on the “Supervised List”;
  • If an individual takes advantage of other’s foreign exchange quota in order to circumvent the quota control, SAFE will list him/her on the “Supervised List” at his/her first violation;
  • The term of supervision lasts for the rest of such year plus 2 additional years. During the term of supervision, if the supervised individual intends to purchase or settle any amount of foreign currency into RMB, he/she shall provide his/her identity card along with supporting documents proving truthfulness of the transaction to the bank for verification and review.

Despite the above, we understand that, an individual listed on the “Supervised List” is still able to purchase/settle foreign currency as long as satisfactory supporting documents are provided.

Currently an individual still cannot make outbound investment directly, but may do so through a company owned by him/her where the company should conduct outbound investment filing/approval procedures with National Department of Reform Commission (“NDRC”) and Ministry of Commerce (“MOFCOM”).

  1. SAFE Tightens Review on Truthfulness of Company Outbound Investment

To our knowledge, SAFE launched a special examination against the banks in August, 2015, and required the bank to strengthen document review on the source of fund and truthfulness of the transaction.

Recently, for an outbound investor who intends to purchase a large amount of foreign currency, the bank may inform such investor to discuss the usage of fund at SAFE at an arranged time.  This is a new and additional procedure which may prolong the timeline required to deal with PRC government for outbound investment.

  1. SAFE Tightens Review on Truthfulness of Overseas Loan under Domestic Guarantee

According to the 2014 version of Foreign Exchange Management Guidelines on Cross-Border Guarantee (《跨境担保外汇管理操作指引》), if a PRC company acts as a Guarantor for an overseas loan (i.e., both the Guarantee and the Creditor are foreign entities), the PRC Guarantor shall conduct guarantee registration with local SAFE within 15 business days after execution of the guarantee agreement. If the Guarantee defaults the repayment of loan, the PRC Guarantor may make the guaranteed payment at the bank by presenting the guarantee registration documents. In addition, the PRC Guarantor shall conduct external debt registration with local SAFE within 15 business days after the guaranteed payment.

To our knowledge, SAFE launched a special examination against the banks in August, 2015 to strengthen review on the claimed default and the guaranteed performance payment, i.e., the bank shall check whether the agreement clauses have any inclination for default, whether the PRC Guarantor has conducted external debt registration after guaranteed performance payment, whether the Guarantee has executed a new guarantee agreement with the PRC Guarantor, reasons for Guarantee’s default, flow of the loan, usage of the loan, etc.

  1. Local Authorities May Impose Stricter Interpretation on Fund Qualified for Outbound Investment

We noticed in our recent outbound investment practice that certain local authority even imposed stricter interpretation of law probably due to pressure of capital outflow. For example, one of our clients (a PRC company) intended to make outbound investment through the capital of a to-be-established subsidiary. But it was told by local MOFCOM that only profits were qualified source of fund, while the registered capital of a to-be-established subsidiary could not be used for outbound investment, which we have not heard of before.

Despite the tightened review and stricter local practice, we believe they will not hinder truthful outbound investments, although PRC authorities may take longer time for processing the case and may require more supporting documents.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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