15 May 2009
Introduction and Background
The Ministry of Commerce of the People's Republic of China ("MOFCOM") released a new regulation relating to overseas investment by Chinese enterprises, the 'Administrative Measures for Overseas Investment' (the "Measures") on 16 March 2009 which became effective on 1 May 2009. The stated purpose of the Measures is to promote and regulate overseas investment by Chinese enterprises. The Measures create three categories of review for overseas investment based on the size of the proposed investment, with varying approval processes and documentation requirements for each category.
The Measures replace the previous MOFCOM regulation on outbound investment ('the Provisions on the Review and Approval of Overseas Investment to Establish Enterprises', released on 1 October 2004 (the "2004 Regulation")). This Client Alert highlights key issues in the Measures of interest to both Chinese enterprises considering such overseas investment and their proposed investment targets.
Under the current regulatory structure, overseas investment requires the approval of MOFCOM and the National Development and Reform Commission ("NDRC"). As compared to the 2004 Regulation, the Measures delegate more power to MOFCOM's provincial branches and significantly speed up the application process for certain small investments. The Measures also set out increased documentation requirements and enhance MOFCOM's role in the approval process for larger investments. Some commentators have noted that NDRC may soon amend its regulation on overseas investment so as to be more consistent with the Measures.
MOFCOM's primary focus in reviewing applications for overseas investment is the potential impact on China's bilateral relationship, national economic security and competition. The Measures state that an application will be rejected if the proposed overseas investment may endanger Chinese sovereignty, security and public interest; violate any Chinese laws and regulations; impair relations between China and other countries (or regions); breach any international treaty to which China is a party; or involve the export of any technology or goods which are prohibited. In reviewing an application, MOFCOM will not evaluate the economic and technical feasibility of a proposed investment, which will be the responsibility of the applicant.
The Measures create three tracks for review of proposed investments. The approval process and documentation requirements vary among the three categories.
National Level MOFCOM Approval
MOFCOM approval at the national level is required for overseas investment projects:
- in countries without diplomatic relations with China;
- in specific countries or regions (the list of these countries and regions has not yet been published);
- involving investment by a Chinese party of USD 100 million or more;
- involving interests in multiple countries (or regions); or
- involving the establishment of Special Purpose Vehicles ("SPVs"1).
Review of applications that meet any of the above criteria shall conclude within 30 working days of submission of complete application documentation. In its review, MOFCOM is required to solicit the opinion of the Chinese Embassy in the target country as to the security conditions in the target country and any impact the proposed investment might have on bilateral political and economic relations. The Chinese Embassy must provide its opinion within 10 working days from receipt of the request. MOFCOM is also required to solicit the opinion of relevant domestic commercial chambers when reviewing an overseas investment relating to the development of mineral resources. Such consultation time is not included in the time limitations set out above and may prolong the process.
Provincial Level MOFCOM Approval
MOFCOM's provincial departments are responsible for reviewing overseas investment projects:
- involving investment by a Chinese party of USD 10 million or more, but less than USD 100 million;
- in the energy or mineral industries; or
- that need to attract other Chinese investors.
Approval of Small Overseas Investments
Review of proposed overseas investments of less than USD 10 million (which do not fall into any of the other categories above) should be completed within three working days. MOFCOM will review applications from enterprises directly controlled by central government and the provincial departments will review applications from local enterprises.
Applications for all investments (other than small investments of less than USD 10 million), must include the following materials:
- an application (including the overseas enterprise's name, registered capital, amount of investment, business scope, operation period, explanation to the source of invested funds, specific content of investment, shareholding structure, investment environment analysis and evaluation, and the statement that the proposed overseas investment does not meet any of the rejection criteria);
- copies of business licenses of the domestic enterprises;
- articles of association and relevant agreements or contracts of the overseas enterprises;
- approval or filing documents issued by relevant authorities;
- Preliminary Report on Overseas Merger and Acquisition in respect of the overseas investment by means of merger and acquisition; and
- other documents as required by competent authorities.
For small overseas investments, the Chinese investors only need to file a printed Application Form through MOFCOM's 'Management System for Overseas Investment'.
When a proposed investment is approved, MOFCOM or its local department will issue a written approval decision with a certificate. The investment must be made within two years or the approval certificate will automatically lapse.
If an overseas investment is not approved, MOFCOM or the provincial authority shall notify the applicant in writing and explain the reasons for rejection at which time the applicant may apply for reconsideration or bring a lawsuit in the court to challenge the rejection decision.
MOFCOM estimates that after the Measures come into effect, 85% of applications will be handled by provincial departments and that most overseas investments could obtain approval within three working days. It is anticipated that changes implemented through the Measures will speed up the approval process and encourage overseas investment by smaller companies that may previously have found the approval process burdensome. Large investments, however, and investments in the fields of finance (to which the Measures are not applicable), energy and mineral resources as well as the establishment of SPVs will still be strictly controlled by the central government authorities. Applications for these types of investments will require additional documentation, possibly lengthening the approval process.
Overseas investment is also subject to approval or filing requirements with other authorities such as NDRC, the State Administration of Foreign Exchange and the State-owned Assets Supervision and Administration Commission. Investors may still face additional or overlapping requirements with other administrative regulations. It is also unclear how any proposed changes to NDRC regulation could interact with the Measures.
As with any new regulatory scheme, the full impact of the Measures will only be understood as the Measures are tested and as the application process is fully implemented.
1. Special Purpose Vehicles refer to those overseas enterprises directly or indirectly controlled by domestic companies for the purpose of listing their domestic interest on overseas stock markets.
For more information, please contact:
Patrick Wong (
Mark Uhrynuk (
Yanni Song (
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