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

Regulatory Matters

CHINA UPDATE – China is Taking Solid Steps to Open its Banking Sector

Editors’ Note: Chen Yun is a partner specializing in banking, finance and foreign exchange law. Wang Rong and Liang Yixuan also contributed to this article.

After the promulgation of the State Council’s Decision on Amending the Regulations of the People’s Republic of China (“PRC”) on the Administration of Foreign Funded  Banks (Consultation Paper) (the “Administrative Regulations Consultation Paper”) in late October 2018, the China Banking and Insurance Regulatory Commission (“CBIRC”) released the Decision on Amending the Implementation Rules of the Regulations of the PRC on the Administration of Foreign Funded Banks (Consultation Paper) (the “Implementation Rules Consultation Paper”, together with the Administrative Regulations Consultation Paper, the “Consultation Papers”) on 28 November 2018 to solicit public opinions.

The main purposes of amending these two legislations, which are of ultimate importance to the supervision of foreign funded banks (“FF Banks”) are to put into practice the country’s opening-up policies in the banking sector, to make law to implement the opening-up measures in the banking sector, which have been repeatedly referred to by senior government officials in various summits and public speeches, and to further liberalize the foreign investment in China’s banking sector.

The amendments made by the Consultation Papers focus on the following aspects:

  • Allowing foreign banks to maintain PRC branches (“FB Branches”) and locally incorporated banks in China (“FB LIBs”) at the same time
  • Lifting the restrictions on the conducting of the RMB business by FB Branches and FB LIBs
  • Broadening the business scope of FB Branches and FB LIBs
  • Relaxing the operating funds requirements for FB Branches

Ⅰ. Institutions Subject to the Regulation of the Consultation Papers

As early as 17 August 2018, CBIRC abolished the Administrative Measures on Equity Investment by Foreign Funded Financial Institutions in Chinese Funded Financial Institutions, and removed the 25% ceiling of foreign shareholding in a Chinese funded commercial bank by amending the Implementation Measures of the Administrative Licensing Items for Chinese Funded Commercial Banks.  It is also stipulated that a commercial bank will be regulated as the category of the bank as the one when and into which the foreign investment is made.

Therefore, foreign banks may set up from scratch joint-venture FB LIBs (“JV Banks”) or wholly foreign owned FB LIBs (“WFOBs”) regulated as FF Banks, or may otherwise become, by way of making investments into Chinese funded commercial banks, the shareholders of joint-venture banks with more than 25% foreign ownership or wholly foreign owned banks, which are converted from and regulated as Chinese funded commercial banks.

Notwithstanding the above, the institutions subject to the regulation of the Consultation Papers remain those regulated as FF Banks, namely WFOBs, JV Banks, FB Branches and PRC representative offices of foreign banks. As far as joint-venture banks or wholly foreign owned banks converted from and regulated as Chinese funded commercial banks as the result of the investment by foreign banks are concerned, the Consultation Papers do not apply.

Ⅱ. Allowing Foreign Banks to Maintain FB Branches and FB LIBs at the Same Time

One of the most appealing changes made by the Consultation Papers is that foreign banks would be allowed to maintain both FB LIBs (i.e. WFOBs and JV Banks regulated as FF Banks) and FB Branches) at the same time. As a result, foreign banks would no longer be forced to make a hard choice between local incorporation and keeping FB Branches.

Back in late 2006, when converting their FB Branches into WFOBs, foreign banks were allowed to retain an FB Branch to carry on their foreign exchange (“FX”) wholesale business for a certain period of time (i.e. a transition period), in order to facilitate the to-be-established WFOBs to meet the relevant regulatory indicators requirements and to facilitate the retained branch to phase out the outstanding FX wholesale business, only that such retained branch shall be closed upon the expiry of the transition period.

However, in the Implementation Rules of the Regulations of the PRC on the Administration of Foreign Funded Banks which was promulgated on 1 July 2015 and took effect on 1September of the same year, the relevant provisions on the retention of an FX wholesale business branch upon local incorporation of foreign banks were deleted, thus made such approach no longer workable.  In practice, CBIRC (then the China Banking Regulatory Commission) also rejected the application from any foreign bank for retaining an FX wholesale business branch when converting its FB Branches into a WFOB.

This policy change directly led to the delay in the local incorporation process of some foreign banks since, without the FX wholesale business branch retained, their to-be-established WFOBs may not meet the specific regulatory indicators requirements.

Now, the change made by the Consultation Papers allowing foreign banks to maintain both FB LIBs and FB Branches (although the Consultation Papers require that in such circumstances, the FB Branches would only be allowed to conduct the wholesale business, with a substantial breakthrough being that such wholesale business covers not only FX business but also RMB business) at the same time would make it easier for foreign banks to enter into the China market.

It is worth mentioning that the Consultation Papers also set out prohibitions or restrictions on the independence and the risk isolation mechanism of the management, personnel, business, information and related party transactions of FB LIBs and FB Branches.

Ⅲ. Lifting the Restrictions on the Conducting of the RMB Business

With regard to the RMB business, the following material changes are made by the Consultation Papers:

  • The “waiting period” (i.e. a period of time for which an FB LIB or an FB Branch shall open business before applying for conducting the RMB business) for the RMB business of FB LIBs and FB Branches is cancelled;
  • The minimum amount required for FB Branches to accept the fixed term deposit from Chinese citizens is lowered from RMB 1 million to RMB 0.5 million;
  • FB LIBs or FB Branches are allowed to conduct the preparatory work for the RMB business simultaneously with that for setting up FB LIBs or FB Branches, and to submit the application for the opening of the RMB business simultaneously with that for the business opening of FB LIBs and FB Branches. Thus, the RMB business may be opened Day One when FB LIBs and FB Branches open their businesses; and
  • In the case of multiple FB Branches, the managing FB Branch may authorize other FB Branches to conduct the RMB business as long as the managing FB Branch itself has obtained the RMB business license.

Ⅳ. Broadening the Business Scope

The Administrative Regulations Consultation Paper includes “acting as the issuance agent, payment agent and/or underwriter of Chinese government bonds” into the business scope of FB LIBs and FB Branches. Thus, the business scope of an FB LIB is substantially the same as that of a Chinese funded commercial bank.

In addition, the Implementation Measures Consultation Paper restates that the following types of business of FB LIBs and FB Branches are subject to the afterwards reporting requirement only, which was provided in the Circular on the Conducting of Certain Businesses by Foreign Funded Banks (the “Circular”) issued by the General Office of CBIRC on March 10, 2017 and now documented into a regulation by CBIRC: (1) acting as the issuance agent, payment agent and underwriter of Chinese government bonds; (2) providing custody, escrow and guardianship services; (3) providing consultancy services such as financial advisory services; (4) providing overseas wealth management services for and on behalf of the clients; and (5) such other businesses as CBIRC may deem to be subject to the afterwards reporting requirement.

Furthermore, the Implementation Measures Consultation Paper restates the regulations of the Circular allowing the intra-group cooperation (namely, allowing FB LIBs and FB Branches to cooperate with their parent bank groups to provide comprehensive financial services to Chinese enterprises in offshore bond issuance, listing, acquisition, financing and the like by taking the advantages of their global service networks.

Ⅴ. Relaxing the Operating Funds Requirements for FB Branches

In respect of the operating funds requirements of FB Branches, the Consultation Papers have made the following adjustments as well:

Ⅵ. Other Changes and Our Observations

Apart from the above significant changes, the Consultation Papers also make certain changes in the areas such as the outsourcing activities conducted by FB LIBs and FB Braches and their termination and liquidation.

Although the Consultation Papers are subject to the solicitation of public opinions before finalization, one can be assured that China is on the track of more opening-ups in its banking sector.

With abundant experience of assisting foreign funded financial institutions in setting up their PRC presences, carrying on their business in compliance with the law, exploring new business boundaries and seeking business cooperation, King & Wood Mallesons is right here standing by to hold your hands crossing the jungle!

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.

DUTCH UPDATE – Shareholders’ Rights Directive implementation bill now before Parliament

Editor’s Note: Leo Groothuis advises clients on public M&A and on a wide variety of other domestic and cross-border transactions, as well as take-over defenses and shareholder activism. Geert Raaijmakers specializes in corporate governance, corporate structuring and joint ventures and on pension fund governance.  Maarten Buma and Suzanne Rutten specialize in corporate law. 

Shareholders’ Rights Directive implementation bill now before Parliament

On 16 October 2018, the bill for the implementation in Dutch law of the revised Shareholders’ Rights Directive (EU 2017/828) was submitted to the lower house of the Dutch parliament (Tweede Kamer). In this newsletter, we will describe the changes in the bill compared to the earlier consultation version published on 27 February 2018, which was the subject of our newsletter dated 9 March 2018.

RENUMERATION POLICY

The consultation version of the bill contained a new provision on the remuneration policy of listed companies. This gave rise to confusion, because the Dutch Civil Code (“DCC”) already contains a provision on the subject. Under the bill as submitted to Parliament, it has now been clarified that listed companies will be subject only to the new provision, which will become section 2:135a(5) DCC. This sets out the information that must be given in the company’s remuneration policy, some of which is already required. New items of information that will be required include:

  • an explanation of the way in which the policy contributes to the company’s business strategy, long-term interests and sustainability;
  • an explanation of the decision-making process followed for the policy’s determination, review and implementation; and
  • in the event that the policy is revised, a description and explanation of how it takes into account the votes and views of shareholders on the policy and remuneration reports since the most recent vote on the policy by the general meeting of shareholders.

In the case of the remuneration report it has likewise been clarified that listed companies will be subject only to the new section 2:135b DCC, which sets out a number of new requirements in addition to existing ones. It should be noted, however, that pursuant to section 2:135b the current requirements in sections 2:383c-e DCC will continue to apply. One of the new items of information that will be required is an explanation of how the total remuneration complies with the remuneration policy and how it contributes to the company’s long-term performance. All information must be given in respect of each individual management board member.

TRANSACTIONS WITH RELATED PARTIES

The bill introduces the term “material transactions” (unlike the consultation version, which referred to “significant transactions”) and sets out a definition in which price sensitivity is taken as the point of departure. A transaction will be material if it meets both of the following two criteria:

  1. the information about the transaction constitutes inside information under the Market Abuse Regulation (Regulation (EU) 596/2014); and
  2. the transaction is concluded between the company and a related party (as defined under the International Accounting Standards). Related parties in any event include:
    • one or more shareholders who individually or collectively represent at least 10% of the company’s issued share capital (“stichting administratiekantoor” foundations and foundations holding preference shares can fall within this category);
    • members of the company’s management board; and
    • members of the company’s supervisory board.

A provision has been added prohibiting a management board member or supervisory board member from participating in the decision making on a related party transaction in which that board member is involved. Lastly, the period over which non-material transactions with the same related party must be aggregated, potentially resulting in an obligation to disclose those transactions, has been changed from 12 months to “the same financial year”.

TRANSPARENCY REGARDING LONG-TERM SHAREHOLDER ENGAGEMENT

The definition of “asset manager” has been amended to clarify that it refers to those providing asset management services to institutional investors. The term “proxy advisor” has been replaced with “voting advisor” (stemadviseur), as this is more in line with the terminology commonly used in the Netherlands, including in the Dutch Corporate Governance Code. In addition the obligation on the part of institutional investors and asset managers to disclose and explain “the most significant votes”, and the possibility of excluding “insignificant votes” in this regard, have been elaborated upon.

The proposed reporting requirements overlap with those imposed under other EU directives and regulations, such as the AIFM, UCITS and MiFID II directives. The explanatory memorandum to the bill clarifies that it will be sufficient if asset managers include the relevant information in their other reports or include references to such information (for example using hyperlinks), provided it is made clear to the relevant institutional investors where the information can be found.

NEXT STEPS

The deadline for the implementation of the Directive in national law is 10 June 2019. It is possible that the bill will be amended as it makes its way through Parliament. We will of course keep you updated on any significant amendments and on the entry into effect of the new legislation. It is also worth mentioning that both the government and the Corporate Governance Code Monitoring Committee are of the opinion that, in connection with the implementation of the Directive, the section of the Code relating to shareholders should be re-examined; we will likewise inform you of any developments on that front.

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 – 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 – NDRC New Regulation Simplifies its Approval/Filing Procedures over Outbound Investment Projects

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. Yi Wang, and Ms. Fang He, both partners at JunHe. Fang is also a member of XBMA’s Legal Roundtable.  Mr. Wang has broad experience in capital markets and private equity, and Ms. He is specialized in cross-border M&A, private equity, trust and assets management.

Highlights

  • NDRC launches new regulations, which indicates further relaxation measures on PRC outbound investment.
  • The controversial “road-pass” requirement has been removed.
  • The NDRC approval and filing requirement has been changed from a condition for effectiveness of the acquisition contract to a condition for closing.

Main Article

On December 26, 2017, the National Development and Reform Commission (“NDRC”) formally promulgated the Administrative Measures for Outbound Investment by Enterprises (“Order No. 11” or the “New Measures”) in lieu of the Administrative Measures for the Verification and Approval and Record-Filing of Outbound Investment Projects promulgated in April 2014 (as amended in December 2014) (“Order No. 9” or the “Old Measures”).  Order No. 11 will come into effect on March 1, 2018.  It largely adopted the provisions of the Administrative Measures for Outbound Investment by Enterprises (Draft for Comments) promulgated by the NDRC on November 3, 2017.

Compared with Order No. 9, Order No. 11 is less regulated in NDRC’s reviews of outbound investment, and has simplified the process and requirements of review. Overall, it will be conducive to outbound investment projects.

In the New Measures, the major simplified procedures include:

1. The “confirmation letter” is no longer required.

The Old Measures provided that the investor of an outbound investment or bidding project with the investment amount reaching or exceeding USD 300 million was required to submit a project information report to and obtain a confirmation letter (also known as “Road-Pass”) from the NDRC. This provision has been removed in the New Measures.  This simplification removal is one of the most welcome signals for market players in the area.  In China’s outbound investment practices, what troubled and concerned overseas sellers the most has been whether the Chinese investors had obtained and when they would obtain the confirmation letters from the NDRC, because the Chinese investor could not submit a binding offer to the overseas seller or sign a binding contract until the confirmation letter was obtained.  The abolishment of confirmation letters will undoubtedly increase the flexibility of Chinese bidders in overseas investment bidding.

2. The verification and approval by or record-filing with the NDRC has changed from a condition for the contract to take effect to a condition precedent to closing.

The Old Measures provided that prior to signing any final and legally binding document with an external party, the Chinese investor should obtain the verification and approval document or the record-filing notice issued by the NDRC; alternatively, the investor could specify in the document signed that it should come into effect on the condition that the verification and approval document or the record-filing notice issued by the NDRC was obtained. It was relatively difficult to meet this requirement in practice.  Sellers are unwilling to accept that provisions on break-up fee, security deposit, and many other seller protection mechanisms ultimately would not take effect until NDRS approves it, so in some projects it was stipulated in the contract that the NDRC’s verification and approval document or record-filing notice was only a condition for closing of the transaction.  However, this is certainly not in line with Order No. 9, and its validity was questionable.  In the New Measures, amendments have been made to only require that Chinese investors shall obtain the verification and approval document or the record-filing notice prior to the implementation of the project (i.e., the actual payment of funds to overseas sellers or the actual investment of funds in overseas projects), which reflects and meets the practical needs of the parties.

3. Making applications via the NDRC’s local counterpart is no longer required, and direct online applications are encouraged.

The Old Measures required investors to submit applications via the NDRC’s local counterpart, which was unnecessary in practice and delayed the review and approval process. The New Measures have removed this requirement and encourage direct online applications.  Previously, although the local counterpart of the NDRC provided great support, some clients had experienced delays before their applications were successfully submitted to the NDRC via its local counterpart.  Now making applications directly to the NDRC is indeed more simplified and takes less time, which will accelerate the response by Chinese investors in overseas bidding procedures.

4. Less time is needed for project assessment.

The New Measures slightly adjusted the time limit for project assessment. As for most projects, the time limit for assessment is reduced from 40 working days to 30 working days, while it can be extended to 60 working days for major projects if it is appropriate.

In general, the New Measures as compared with the old ones have optimized and simplified the NDRC review and filing procedures for outbound investment projects. To a certain extent, they can improve the transparency of the Chinese government’s regulations over outbound investments and reduce the confusion and worries of overseas sellers over the approvals by the Chinese government, so it should be good news for Chinese outbound investment.

 

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.

AUSTRIA UPDATE – Legislative Changes Affecting Private and Public M&A – New Delisting Rules

Editors’ Note: Christian Herbst is a partner of Schönherr and a member of XBMA’s Legal Roundtable. He is one of the leading Austrian specialists in cross-border M&A, takeovers and joint ventures, representing mostly foreign clients with respect to investments in Austria and Central Eastern Europe.

Executive Summary: Recent legislative measures affecting private and public M&A include: Effective November 2017, the scope of the Austrian merger control regime will be broadened. Effective January 3, 2018, public M&A will be affected by a change in takeover procedures as well as new delisting rules allowing voluntary de-listings from the Vienna Stock Exchange in connection with public offers or re-listings at other EU Stock Exchanges. Additionally, in implementing the Fourth EU Anti-Money Laundering Directive, the establishment of a Beneficial Ownership Register will require companies to notify the Register of their ultimate beneficial owners during H1 2018.

Scope of Austrian merger control regime broadened 

For transactions which are implemented on or after 1 November 2017, an entirely new additional notification threshold will apply in the Austrian merger control regime. The new threshold is built on a combination of turnover, transaction value and the target being active in Austria and will in particular capture foreign companies which are active on the Austrian market from abroad, in particular online companies: 

For merger control purposes a notifiable concentration will now also apply, if cumulatively the combined worldwide turnover of the undertakings concerned exceeds EUR 300m, the combined Austrian turnover exceeds EUR 15m, the value of the concentration (purchase price plus liabilities taken over) exceeds EUR 200m and the target undertaking has significant activity in Austria (e.g. site in Austria or in the digital context, e.g. monthly active users with Austrian nexus). 

Minimum acceptance period for public offers extended

Under a 2017 Amendment Act to the Austrian Takeover Act, effective 3 January 2018, the following will apply. 

The minimum acceptance period which a bidder must allow in a public offer will be increased from two weeks to four weeks. The maximum initial offer period, however, will stay at ten weeks. Also, no change applies to the statutory 3 months additional offer period following the expiration of the initial offer period of a public offer.

The reason for the change of the minimum offer period to four weeks is to allow the target board a more reasonable period to react to public offers, including calling a shareholders meeting seeking shareholder approval for defensive measures. 

New voluntary delisting rules as of 3 January 2018 

Currently, Austrian law only allows a delisting of listed companies by squeeze out of minorities once a shareholder reaches a 90 percent participation threshold in a target. As of 2018, an additional voluntary delisting regime will apply in addition to the delisting by squeeze out.

Delisting by Squeeze Out: 

Listing stops if the listing requirements are no longer met. One key requirement is that at least 10,000 shares or a nominal value of EUR 750,000 must be held by the public (free float) (Section 66(7), Stock Exchange Act). 

A bidder can de-list a target by acquiring target shares by public offer or on or off market purchases so that fewer than 10,000 of them are held by the public and then initiate the squeeze out of the minorities under the Shareholder Exclusion Act. Upon completion of the squeeze out, the target company is delisted. 

Delisting under the voluntary delisting scheme of the Stock Exchange Act and Takeover Act: 

August 2017 amendments of the Stock Exchange Act, Stock Corporation Act and Takeover Act will allow for a voluntary delisting from the Vienna Stock Exchange as of 3 January 2018. The Takeover Act will provide new rules for public offers to achieve a voluntary delisting under Section 38 (new as amended) Austrian Stock Exchange Act in connection with or unrelated to a corporate restructuring like change of legal form, split or demerger. Takeover offers in this context will be subject to additional minimum pricing rules. 

Under the new rules, a withdrawal of the listing at the VSE may be requested provided that (i) the financial instruments have been listed for a minimum of three years and (ii) adequate investor protection is secured. 

A delisting complying with adequate investor protection requires the following: First, a resolution of the shareholders meeting of the listed company with a 75% majority or a notarized joint request by stockholders controlling at least 75% of the voting capital of the listed company must be secured. Subsequently, a full public offer aimed at a delisting and supervised by the Austrian Takeover Commission needs to be launched. Such full public offer can be launched independently from or in the context of a corporate reorganization, such as a change of the statutes including change of legal form, merger, transformation or split of the target company. 

In case of an offer aimed at a delisting, the following minimum pricing rules must be complied with: The price offered in a public takeover launched to delist must not be lower than (i) the weighted average price of the last six month, (ii) the highest price agreed or paid for target shares by the bidder or parties acting in concert with the bidder, in the 12 months before notification of the offer and (iii) the average price of the last 5 trading days before announcement of the intention to launch a delisting offer. If that price is apparently below the actual (market) value of the target company, an adequate offer price (based on a company valuation) must be fixed by the Austrian Takeover Commission. 

No public offer is required for a delisting from the VSE in case the target company relists or stays listed (in case of a dual listing) at an EEA Exchange providing similar protection measures as the VSE; a case in point is the RHI/Magnesita merger as resolved in August 2017 where RHI will be delisted from the VSE and relisted in London.   

Beneficial Ownership Disclosure 

The Beneficial Ownership Register will implement the Fourth EU Anti Money Laundering Directive and require Austrian companies to take reasonable measures to determine the identity and subsequently notify the Register of defined beneficial owners by 1 June 2018 at the latest. The beneficial ownership test includes (i) a natural person holding directly more than 25% of the shares in an Austrian company; and/or (ii) more than 25% of the shares in an Austrian company are held by another legal entity which is directly or indirectly controlled by a natural person; control in this respect is indicated by directly or indirectly holding 50% of the shares; and/or (iii) a natural person directly or indirectly holding more than 25% of the voting rights of the Austrian company. 

The purpose of the new law is for all EU countries to store beneficial ownership information to combat money laundering and terrorism but also to allow governmental authorities and defined others to conduct customer due diligence.

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.

Subscribe to Newsletter

Enter your Email

Preview Newsletter