The New Measures comprise 66 articles in six chapters, including general provisions, guidance and services for overseas investment, approval and filing of overseas investment, supervision of overseas investment, legal liabilities, and supplementary provisions. The New Measures are mainly built on the 2014 Measures, and aim to improve oversight, safeguard national security and support the healthy development of overseas investments.
The principal changes introduced by the New Measures, compared to the 2014 Measures, include:
1. Expanded scope of application
1.1 More organizations are covered
The 2014 Measures only apply to overseas investments made by domestic legal persons1 while the New Measures cover all domestic organizations and certain overseas organizations as follows:
- Domestic enterprises2 – this expands the scope beyond legal persons, such as companies, to include partnerships and sole proprietorships
- Domestic non-enterprise organizations, such as public institutions and social organizations
- Overseas, Hong Kong, Macao, and Taiwanese enterprises controlled by domestic enterprises
- Overseas, Hong Kong, Macao, and Taiwanese enterprises controlled by domestic natural persons3
1.2 More investment activities are listed
Investment activities listed under the 2014 Measures, which include new establishments, mergers and acquisitions, share purchases, capital increases, and capital injections, are quite vague and limited. The New Measures are intended to expand and clearly define the scope of investment activities covered by the measures by listing eight typical types of activity, by way of non-exhaustive illustration to aid interpretation of the New Measures:
- Acquiring rights and interests in overseas land, such as ownership and land use rights
- Acquiring rights and interests in overseas natural resources, such as exploration and exploitation concessions
- Acquiring rights and interests in overseas infrastructure, such as ownership and operation and management rights
- Acquiring rights and interests in overseas enterprises or assets, such as ownership and operation and management rights
- Constructing, rebuilding, or expanding overseas fixed assets
- Establishing new overseas enterprises or injecting capital into existing overseas enterprises
- Establishing new overseas equity investment funds or investing in existing ones
- Controlling overseas enterprises or assets through contractual or trust arrangements
1.3 Expanded NDRC engagement
Under the New Measures, depending on the nature of an overseas project, the relevant overseas investment may be one of three types of engagement with the NDRC: approval, filing or reporting, the latter being a new feature of the New Measures compared to the 2014 Measures. According to the New Measures:
- The approval procedure only applies to projects involving sensitive countries, regions,4 or industries5 (Sensitive Projects) directly conducted by domestic investors or conducted through their controlled overseas enterprises.
- Overseas investment projects other than Sensitive Projects (Non-Sensitive Projects) directly conducted by domestic investors, regardless of the amount of total investment from domestic investors, are only required to be filed with the NDRC or its local counterparts.
- For Non-Sensitive Projects conducted by domestic investors through their controlled overseas enterprises, if the total investment exceeds $300 million, the investor must report certain information regarding the project to the NDRC by prescribed form.
2. Supervision methods streamlined
2.1 Pre-confirmation letter is no longer required
The 2014 Measures require that, for an overseas acquisition or project bid by a domestic investor of $300 million or above, a pre-confirmation letter issued by the NDRC be obtained by the domestic investor before commencing any substantive work. The possible time required for this procedure, between the signing of a letter of intent and submission of final bidding documents, could have an adverse effect on the competitiveness or feasibility of the domestic investor’s acquisition timetable or bid.
The New Measurers have removed the pre-confirmation requirement. This should bring greater certainty to the timeline for overseas investments, greatly reduce time costs and help domestic investors to prepare better for overseas investment activities during the initial stages, especially for those involving competitive bids.
2.2 Deadline to complete relevant formalities is extended
The New Measures allow domestic investors to complete relevant approval, filing or reporting procedures “before the implementation of the project.” Although there is no further guidance on interpretation of this phrase in the New Measures, this provision would appear to allow investors to complete such procedures before the closing of a project rather than “before the transaction agreement takes effect” as required by the 2014 Measures, that is, when the binding agreement became effective (on signing). This is more in line with international market practice. While the New Measures potentially allow for the earlier execution of transaction documents, it is clearly imperative that where NDRC approval or filing is required, obtaining relevant approval/filing certificates from the NDRC is specified as one of the conditions precedent to closing.
2.3 Procedures for relevant formalities are simplified
Under the New Measures, a management and service online platform for overseas investments (Online Platform) will be established by the NDRC for domestic investors to directly submit approval/filing applications or information report forms to the NDRC or local counterpart. Besides being used for the review of applications, it is intended that the Online Platform will allow closer monitoring of the approval process and it is hoped approval, filing and reporting procedures through the Online Platform will be more efficient than the review process under the 2014 Measures, which were generally time-consuming and convoluted.
2.4 Increased ongoing supervision
Under the New Measures, supervision by the NDRC is no longer limited to the project pre-closing period; the domestic investor must submit a project completion report form within 20 working days after the completion (closing) of the project. In addition to completing approval, filing and reporting formalities, domestic investors are obliged to report to the NDRC or local counterpart all material matters during the life of the relevant overseas projects. For example, if the investor incurs material losses in the course of its overseas investment, the investor must, within five working days of becoming aware of such loss, submit details of the relevant development through the Online Platform. The NDRC may also proactively request an investor to submit a written report in relation to any specified matters that the NDRC deems material relating to a given overseas project.
The NDRC’s enforcement powers will be enhanced under the New Measures by provisions that authorize the NDRC to maintain and publish a “blacklist” of domestic investors who have been found to have violated the New Measures in relation to overseas investment activities. Certain parts of such information, which will include details of the entity, the violation and the sanction, may also be shared with other governmental authorities for further scrutiny and possible additional disciplinary action.
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This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein. As a non-PRC law firm, we cannot express any legal opinion concerning the interpretation or application of PRC law.
Client Alert 2018-010