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)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • 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

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.

U.S. / U.K. UPDATE: Corporate Governance — the New Paradigm

Editor’s Note: This article was authored by Martin Lipton and Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz.

Main Article:

This week witnessed two very significant developments in the new paradigm for corporate governance, one in the U.S. and one in the U.K. Both will have cross-border impact. Both have the purpose of promoting investment to achieve sustainable long-term investment and growth.

In the U.K., government proposals for corporate governance reform center on (1) better aligning executive pay with performance and with explaining, if not actually improving, worker wages by publicizing and focusing the attention of corporate directors on the ratio of average worker wages to executive compensation, and (2) improving governance by emphasizing that Section 172 of the Company Law, a constituency statute, provides that directors owe fiduciary duties not just to shareholders, but to customers, suppliers, workers and the community and economy. There is a provision for worker-board engagement by a designated independent director, a formal worker advisory council or a director from the workforce. The report directly relates improving stakeholder governance to mitigating inequality in the U.K. society.

In the U.S., Vanguard sent a letter to the boards and CEOs of all of the corporations in the Vanguard portfolios worldwide setting forth its views on governance, engagement and stewardship. It also issued its 2017 investment stewardship report. The report sets forth Vanguard’s policy for dealing with activist pressure and contains illustrations of how Vanguard dealt with several actual activist campaigns. (See our memo on the Vanguard letter.)

The U.K. government report and the Vanguard letter and report, together with the effort by the World Economic Forum to promote acceptance of The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth issued last year by its International Business Council, gives hope that they will spark additional efforts that together will alleviate the pressure, by asset managers for short-term performance and by activist hedge funds for quick gains from financial engineering, against long-term investment in R&D; capex and reinvestment in the business; building strong employee relations, employment stability and employee training; and sustainability and good corporate citizenship.

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.

Promoting Long-Term Value Creation – The Launch of the Investor Stewardship Group (ISG) and ISG’s Framework for U.S. Stewardship and Governance

Editors’ Note: This article was co-authored by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles and Sara J. Lewis of Wachtell, Lipton, Rosen & Katz.


Executive Summary/Highlights:

A long-running, two-year effort by the senior corporate governance heads of major U.S. investors to develop the first stewardship code for the U.S. market culminated today in the launch of the Investor Stewardship Group (ISG) and ISG’s associated Framework for U.S. Stewardship and Governance. Investor co-founders and signatories include U.S. Asset Managers (BlackRock; MFS; State Street Global Advisors; TIAA Investments; T. Rowe Price; Vanguard; ValueAct Capital; Wellington Management); U.S. Asset Owners (CalSTRS; Florida State Board of Administration (SBA); Washington State Investment Board); and non-U.S. Asset Owners/Managers (GIC Private Limited (Singapore’s Sovereign Wealth Fund); Legal and General Investment Management; MN Netherlands; PGGM; Royal Bank of Canada (Asset Management)).

Focused explicitly on combating short-termism, providing a “framework for promoting long-term value creation for U.S. companies and the broader U.S. economy” and promoting “responsible” engagement, the principles are designed to be independent of proxy advisory firm guidelines and may help disintermediate the proxy advisory firms, traditional activist hedge funds and short-term pressures from dictating corporate governance and corporate strategy.

Importantly, the ISG Framework would operate to hold investors, and not just public companies, to a higher standard, rejecting the scorched-earth activist pressure tactics to which public companies have often been subject, and instead requiring investors to “address and attempt to resolve differences with companies in a constructive and pragmatic manner.” In addition, the ISG Framework emphasizes that asset managers and owners are responsible to their ultimate long-term beneficiaries, especially the millions of individual investors whose retirement and long-term savings are held by these funds, and that proxy voting and engagement guidelines of investors should be designed to protect the interests of these long-term clients and beneficiaries. While the ISG Framework is not intended to be prescriptive or comprehensive in nature, with companies and investors being free to apply it in a manner they deem appropriate, it is intended to provide guidance and clarity as to the expectations that an increasingly large number of investors will have not only of public companies, but also of each other.

Click here to read the full article.

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 — China Adopted Cybersecurity Law

Editors’ Note: Contributed by Fang He, a partner at JunHe’s Beijing headquarters, and by Adam Li, a partner at JunHe’s Shanghai office; both are members of XBMA’s Legal Roundtable. Ms. He specializes in M&A, foreign direct investment and outbound investment from China. Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies. This article was authored by Ms. Dong Xiao, a partner in JunHe’s Beijing headquarters who specializes in the areas of foreign direct investment, mergers and acquisitions, Internet, high-tech, and data privacy and information law.  Associates, Mr. Cai Kemeng and Ms. Guo Jinghe helped with this article.

Highlights:

After deliberations over more than a year’s time, the Standing Committee of the National People’s Congress (“NPC Standing Committee”) finally adopted the Cyber Security Law (“CSL”) on November 7, 2016.  The CSL is the first omnibus law in China governing cyber security issues and has incorporated a number of new legal concepts and requirements that may impact companies with business operations in China.

Main Article

Below we will briefly introduce the CLS in terms of its background, applicable scope and legislative purpose, major requirements, and potential practical impact.

Introduction

Background

This legislation includes provisions relating to information and technology security. Meanwhile, as China has not enacted a unified data protection law, the CSL also incorporates several provisions related to the protection of personal information, which is also an issue of wide concern.

Application Scope and Purpose

The CSL applies to the construction, operation, maintenance and use of networks as well as the supervision and administration of cyber security within the territory of the PRC. “Networks” include networks and systems that are composed of computers and other information terminals and the relevant facilities and used for purposes of collecting, storing, transmitting, exchanging and processing information in accordance with certain rules and procedures (Article 76).  “Network operators”, an important subject of legal obligations under the CSL, is broadly defined as “owners and administrator of networks and network service providers (Article 76)”.

The CSL provides for “safeguarding the national cyberspace sovereignty” as a fundamental principle, and, for that purpose, includes provisions on, inter alia, the strategy, plan and promotion of cyber security, network operation security, network information security, and alarm and emergency response systems.

Responsible Authority

The national cyberspace administration authority, namely the Cyberspace Administration of China (“CAC”), is responsible for the coordination of cyber security protection activities and the relevant supervision and administration activities on a national level.  It further provides that the Ministry of Industry and Information Technology, the Ministry of Public Security and other relevant government departments shall be responsible for the protection and supervision of cyber security within their respective authorities.

Transition Period

The CSL will become effective on June 1, 2017.  Therefore, nearly a half year is provided as a transition period before its implementation.

Major Legal Requirements

Strengthened Network Operation Security Obligations

The CSL provides various security protection obligations for network operators, including, inter alia:

  • the compliance with a series of requirements of tiered cyber protection systems (Article 21);
  • the verification of users’ real identity (an obligation for certain network operators) (Article 24);
  • the formulation of cyber security emergency response plans (Article 25); and
  • the assistance and support necessary to investigative authorities where necessary for protecting national security and investigating crimes (Article 28).

In addition, network products and service providers shall inform users about and report to the relevant authorities any known security defects and bugs, and furthermore shall provide constant security maintenance services for their products and services, not install malware with their products, and clearly inform users and obtain their consent if their products or services collect users’ information (Article 22).

Key network facilities and special products used for protecting network security shall comply with the relevant national standards and compulsory certification requirements, and may only be offered for sale after being certified by the qualified security certification organization or passing the relevant security tests (Article 23).

It is notable that some requirements for network operators, such as retention of user logs for at least six months (Article 21) and regulations on the publication of cyber security information regarding system loopholes, computer viruses, cyber-attacks, cyber invasions, etc. (Article 26), are prescribed for the first time under PRC laws.

Heightened Protection of Critical Information Infrastructure

The CSL, for the first time under PRC law, clearly imposes a series of heighted security obligations for operators of critical information infrastructure (“CII”), including:

  • internal organization, training, data backup and emergency response requirements (Article 34);
  • storage of personal information and other important data must in principle be secured within the PRC territory (Article 37);
  • procurement of network products and services which may affect national security shall pass the security inspection of the relevant authorities (Article 35); and
  • conducting annual assessments of cyber security risks and reporting the result of those assessments and improvement measures to the relevant authority (Article 38).

Protection of Personal Information

The CSL reiterates the obligations of network operators regarding the protection of personal information which appear across existing laws and regulations, including the mandate to observe the principle of lawfulness, necessity and appropriateness in the collection and use of personal information and to observe “the notification and consent requirements” (Article 41), to use personal information only for the purpose agreed upon by the relevant individual (Article 41), to adopt security protection measures for personal information (Article 42), and to protect the individual’s right to access and correct personal information (Article 43).  In addition, the CSL also incorporates some new rules on personal information protection, including data breach notification requirements (Article 42), and data anonymization as an exception for notification and consent requirements (Article 42), and the individual’s right to request the network operators make corrections to or delete their personal information in case the information is wrong or used beyond the agreed purpose (Article 43).

Practical Impacts

The CSL is the first law in the PRC specially focused on cyber security matters. When the CSL takes effect on June 1, 2017, internet companies and other industries in China will be subject to stricter and more comprehensive obligations and face more severe punishments for violations.  As an omnibus law on cyber security issues, many provisions of the CSL are still very general and abstract, and the detailed requirements for implementation and enforcement depend on subsequent and more specific implementation regulations as well as the opinion of the relevant authorities. We may expect that the relevant regulatory authorities may promulgate a series of implementation regulations to clarify certain requirements under the CSL, such as the regulations on tiered cyber security protection systems, the specific scope and protection measures of CII, the protection of minors on networks, the mandatory security certification and the test requirements for key network devices and special cyber security products, national security review on the network products and services procured by CII operators, etc.  For example, as for the protection of minors on the internet, the CAC published a draft of Regulations on Protection of Minors Online for public comment last month.

Nearly half a year remains before the formal implementation of the CSL and companies may use this transition period to improve their understanding of the potential impacts of the CSL on their business.  In particular, if companies are deemed operators of CII, the CSL may have a significant impact on its network security framework, procurement of security products, and data storage. Companies may consider whether they need to adjust their business and operation practices in these aforementioned aspects and enhance their cyber security protections so as to ensure fully compliance with the CSL.  Given the specific implementation of the requirements in the CSL are not entirely clear, companies will also need to closely follow any subsequently released regulations and opinions of the relevant governmental authorities.

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 – Limitations on Overseas Direct Investment, A First Step of Temporary Capital Controls?

Editors’ Note: Contributed by Adam Li, a partner at JunHe, and 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 Natasha Xie, a partner based in JunHe’s Shanghai offices who specializes in foreign direct investment, M&A, banking and finance.

Main Article:

During this sensitive time when capital control measures are about to come out, through an interview of officials of the State Administration of Foreign Exchange (“SAFE”), the Xinhua News Agency on December 8 revealed the details and direction of policy on the recent tightening of overseas direct investment (“ODI“).  The effects on ODI from the tightening of policy restrictions, starting from several months past and up to present, are rapidly magnifying.

At the opening of the news interview, it was stated that cross-border capital flows were generally stable, and according to monitoring, there was no finding that desire for foreign exchange purchases by enterprises or individuals would surge sharply; however, it was pointed out that a large number of ODI projects have already been placed under scrutiny of various departments (i.e., NDRC, MOFCOM, PBOC, and SAFE).  During the interview, SAFE officials pointed out that four categories are considered abnormal circumstances of ODI behavior: (1) newly established enterprises without substance of business carry out overseas investment; (2) the scale of overseas investment is far greater than the registered capital of the domestic parent company, and the operational status as reflected by financial statements of the parent company is not comparable to support the scale of overseas investment; (3) no correlation exists between the main business of the domestic parent company and the overseas investment project; (4) the RMB used for investment obtains from an abnormal source, being suspect of illegally transferring assets for Chinese individuals and illegal operation of underground money exchange.  Having such a wide range for the definitional scope of abnormal behavior is really rare.  From the perspective of SAFE, only enterprises with the capability and qualification can make overseas direct investment, while pooling of funds by individual investors for conducting overseas direct investment does not conform to the so-called “authenticity and compliance” principle.

In addition, this interview once again mentioned the ways of foreign exchange payment violations by individuals, that is by way of split where the annual remittance quotas of other individuals are used in performing fund remittances; as well as the possible consequences of such violations, that is these individuals might be put on an “Attention Name List,” and have their annual remittance quotas for the next two years canceled, and where circumstances are serious, be put on file for punishment.

Our Interpretation: Except for ODIs conducted by enterprises possessing ample financial strength and where the ODI is closely related with the main business of such enterprises, other types of ODI would basically be stopped.  In addition, there is a large possibility that the next step of SAFE will be to take further steps in regulatory and enforcement measures regarding overseas investment by individuals.

 

境外直接投资受限——临时资本管制的第一步?

在这样一个资本管制措施呼之欲出的敏感时刻,新华社于12月8日对国家外汇管理局(“外管局”)有关负责人的新闻专访透露了近期有关境外直接投资(“ODI”)收紧的细节以及政策走向。从几个月前就开始的口径收紧到目前的明令限制,境外直接投资受到的影响正在急剧放大。

新闻专访开篇就称跨境资金流动总体相对稳定,根据监测没有发现企业和个人购汇意愿激增,但随之指出大量境外直接投资项目已经置于各部门(发展改革委、商务部、人民银行、外汇局)的重点审查之下。外管局负责人在专访中指出了四类被认为存在异常情况的境外直接投资行为:(1)刚成立的没有实体业务的企业开展境外投资;(2)境外投资规模远大于境内母公司注册资本,母公司企业财务报表反映的经营状况难以支撑其境外投资的规模;(3)境外投资项目与境内母公司主营业务不存在相关性;(4)用于投资的人民币来源异常,涉嫌为个人向境外非法转移资产和地下钱庄非法经营。上述对异常行为的界定范围之广殊为罕见。在外管局看来,只有有能力和有条件的企业才可以开展境外直接投资,而汇集个人投资者的资金进行境外投资不符合所谓“真实合规”的原则。

此外,该篇专访又再次提到个人对外付汇的违规方式,即通过分拆方式,利用他人的年度用汇额度进行资金汇出,以及此种违规行为的可能后果,即个人可能被列入“关注名单”,取消其之后两年内的便利化购汇额度,情节严重的可以立案处罚。

我们的解读:除非是具备充足资金实力的实体企业进行与其主营业务密切相关的境外直接投资,其他类型的境外直接投资基本上会被叫停。此外,对个人的海外投资,外管局下一步有比较大的可能采取进一步的监管手段和执法措施。

 

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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