1. The Catalogue – defining sensitive industries

Under the Administrative Measures, overseas investments must either obtain approval from, or complete filing with, the NDRC or its local counterparts. Projects involving sensitive countries, regions, or industries that are conducted by Chinese investors directly or through their controlled overseas enterprises shall be subject to the NDRC’s approval procedure.  

While “sensitive countries and regions” are defined under the Administrative Measures¹, “sensitive industries” are now clearly listed in the Catalogue as follows:

• Research into, or the production or maintenance of, weapons of war
• The exploitation or utilization of cross-border water resources 
• News media 
• The industries listed as “restricted” under the Directive Opinion on Further Guiding and Regulating Overseas Investment jointly issued by the NDRC, the Ministry of Commerce, the Ministry of Foreign Affairs and the People’s Bank of China  on August 4, 2017 and promulgated by the State Council, which include:
  • Real estate
  • Hotels
  • Cinemas
  • Entertainment
  • Sports clubs
  • Offshore equity funds or investment vehicles without a specific industrial project to invest

The Administrative Measures expressly cover indirect investments as well, by providing that any offshore enterprise that is controlled by PRC entities or individuals will also be subject to NDRC approval when investing in sensitive industries offshore (regardless of whether the investment is funded by PRC-sourced funds). Chinese investing enterprises will no longer be able to avoid such approval procedure through the establishment of intermediate holding companies or separate investment vehicles. 

In addition, the term “entertainment” is not specifically defined in the Catalogue and could be subject to broad interpretation in practice. Going forward, Chinese investors (including offshore companies controlled by PRC investors) may need to verify if the potential target company is involved in any entertainment business (films, TV series, video games, live shows, etc.), and if so, the necessity to obtain NDRC approval should be carefully evaluated.

2. Standard Forms – more comprehensive disclosure requirements 

Compared with the standard forms provided under the 2014 Measures, the Standard Forms expand and more specifically set forth the application and disclosure requirements. 
According to the Standard Forms, an equity structure chart tracing up to the ultimate controller of the investing entity shall be provided:

• If the investing entity is a company, it should disclose the top five largest shareholders by shareholding ratio, and any other shareholders holding 10 percent or more of the investing entity’s equity. 
• If the investing entity is a partnership, it should disclose any general partners and the top five limited partners. 
• The ultimate controller shall be disclosed, up to individuals or the State-owned Assets Supervision and Administration (SASAC) or its local counterpart. 
• If there is no ultimate controlling shareholder of the investing entity, it should disclose the largest shareholder and the ultimate controlling persons of such largest shareholder, up to individuals or SASAC. 
• If control is achieved through contractual arrangement (including management contracts), trusts or other methods (such as nominee shareholding arrangements), disclosure shall also include any indirect controllers and their methods of control. 

In addition to the ultimate controller information, the investing entity shall also disclose details, or provide originals or copies (as required), of, among others, the business operations (e.g., main operational and financial indicators such as assets, debt, revenue and profit for the past two years), any legally binding investment agreement or similar document, supporting documents to prove the legitimacy of the source of funds used in the investment,  internal approval documents (e.g., board resolutions) regarding the overseas investment, information about intermediate entities (if the investment is made through an offshore entity controlled by a Chinese individual or enterprise), the background to the transaction, investment and financing plans, key terms of the transaction, the size of the transaction, and the risks of the transaction and measures to mitigate such risks. 

As the Standard Forms impose more comprehensive and stricter documentation requirements for NDRC approval or filing of overseas investments, it is expected that Chinese enterprises will need more time to prepare these application documents. Certain new disclosure requirements, such as the need to submit a definitive and binding investment agreement, may result in increased deal costs and uncertainty. It is suggested that all market players in the PRC overseas investment market carefully review the applicable Standard Forms and take caution of the new disclosure requirements. 

1. According to the Administrative Measures, “sensitive countries and regions” includes (1) a country or region without diplomatic relations with China; (2) a country or region in war or civil disturbance; (3) a country or region in which enterprises are restricted from investment under any international treaty or agreement, among others, concluded or acceded to by China; or (4) any other sensitive country or region.
   
   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.