On April 8, 2014, the National Development and Reform Commission (“NDRC”), a ministry-level authority under the State Council responsible for the administration of domestic investment in China and outbound investment out of China, issued Administrative Measures for the Verification and Approval and Filing of Outbound Investment Projects (“2014 Outbound Investment Measures”), replacing the Interim Measures for the Administration of Verification and Approval of Outbound Investment Projects promulgated in October 2004 (“Interim Outbound Investment Measures”).

The 2014 Outbound Investment Measures, which took effect on May 8, 2014, simplify the approval process for investments outside of China by Chinese investors. The measures reduce the scope of verification and approval requirement and provide specific timelines for each step in the application process. Consequently, it should be easier for Chinese companies to obtain authorization to enter into outbound investment projects.

NDRC authorization is a pre-requisite for the approvals required from the Ministry of Commerce (“MOFCOM”). NDRC’s 2014 Outbound Investment Measures likely will necessitate a change of MOFCOM’s regulatory measures on outbound investment. We also note that, on Jan. 24, 2014, the State Administration of Foreign Exchange (“SAFE”) released its Notice Concerning Further Improvement and Adjustment of the Administrative Policies on Foreign Exchange under Capital Accounts. These new SAFE rules took effect on Feb. 10, 2014 and are intended to facilitate the process for obtaining foreign exchange to fund outbound investment. 

No classification of projects for particular purpose
The Interim Outbound Investment Measures divided outbound investment projects into two categories according to their purpose: (i) projects for the purpose of exploring and exploiting crude oil, mines, and other resources (“Projects for Resources Development”) and (ii) projects for other purposes (“Other Projects”). Depending on the amount of the investment, the level of approval authority would be different, ranging from provincial NDRC to the State Council. Generally speaking, the Interim Outbound Investment Measures imposed stricter requirements on Other Projects. 

Under the 2014 Outbound Investment Measures, the division of projects according to their investment purpose is abolished and all outbound investment projects are treated equally.

Verification and approval vs. filing
Under the Interim Outbound Investment Measures, only projects invested by enterprises managed by the central government¹ could be exempted from verification and approval requirement and eligible for the simpler alternative filing process.

The 2014 Outbound Investment Measures expand eligibility for alternative filing procedures beyond companies managed by the central government. They provide that:

• A project with a total amount of Chinese investment² of USD 1 billion or more should be verified and approved by NDRC;
• A project that involves sensitive countries and regions³ or sensitive industries⁴ should be verified and approved by NDRC, regardless of the total amount of Chinese investment;
• A project that (i) involves sensitive countries and regions or sensitive industries, and (ii) has a total amount of Chinese investment of USD 2 billion or more should be reviewed by NDRC and then verified and approved by the State Council; and
• A project other than those mentioned above need only be filed with NDRC or its provincial counterparts (depending on the total investment amount and whether the investment is made by enterprises managed by the central government). 

The details are as follows:

Timelines
The Interim Outbound Investment Measures provided timelines for some approval steps, but those timelines did not cover the entire process. For example, the Interim Outbound Investment Measures did not specify within how many days the NDRC had to seek relevant authorities’ opinions when the project involved sensitive countries or regions. The absence of mandatory times for response allowed NDRC to exercise discretion, and delay the approval process. Some companies had to wait a long time to get the final result.

The 2014 Outbound Investment Measures provide timelines for each approval step. For example, NDRC must consult relevant authorities within three working days if the project involves sensitive countries or regions, and NDRC must complete the verification within 20 working days after receipt of the application documents. The timeline for reviewing the filing application is even shorter. NDRC needs to issue the filing result within seven working days after its receipt of the filing application. Such definite timelines should help reduce uncertainty and shorten the entire period needed for approval or filing.

Preliminary reporting requirement

Project Information Report
The 2014 Outbound Investment Measures provide that a Chinese company must submit the Project Information Report to NDRC before it initiates any substantive work, if the contemplated project is an acquisition or bidding project with a total Chinese investment of more than USD 300 million. NDRC should issue a confirmation letter within seven working days of its receipt of such Project Information Report. Without a confirmation letter, the company is not allowed to carry out any substantive work; otherwise, it will be subject to administrative penalties. Under the 2014 Outbound Investment Measures, “substantive work” refers to (i) signing a binding agreement, or submitting binding quotations and submitting applications to a foreign government, if it is an acquisition project, or (ii) formally submitting bidding documents, if it is a bidding project.

The Interim Outbound Investment Measures had similar requirements. However, there was no concept of “substantive work,” which implied that Chinese investors were not allowed to engage in any activities before obtaining the confirmation letter. In addition, the threshold for the reporting requirement under the Interim Outbound Investment Measure was USD 100 million⁵. The 2014 Outbound Investment Measures significantly increase the threshold to USD 300 million and thus exempt many projects from such reporting requirements. 

However, the reporting requirements, while allowing NDRC to be informed of the planned projects as soon as possible, impose additional burdens on Chinese investors and also cause more uncertainties. Under the 2014 Outbound Investment Measures, it seemed that all acquisition and bidding projects that exceeded the threshold investment amount should be reported, regardless of whether they were subject to a filing requirement or a verification and approval requirement. In addition, according to a notice released by NDRC in 2009, the confirmation letter issued by NDRC for the Project Information Report was a pre-condition for the application for the verification and approval or the filing. Therefore, it appeared that the government had the discretion to veto a project even before the application for verification and approval or filing was submitted. 

Practical implications
The Project Information Report is devised to prevent Chinese companies from unreasonably increasing the acquisition or bidding price in winning an acquisition or bidding project. However, it is widely viewed by foreign governments as the Chinese’s government’s intervention in the free market. 

A recent example involved RDA Microelectronics Inc. (“RDA”), a fabless semiconductor company listed on NASDAQ. In September 2013, Shanghai Pudong Science and Technology Investment Co., Ltd. (“SPSTI”), a company registered in Shanghai, made a tender offer to take RDA private at the total price of USD 745 million. Later in the same year, Unisplendour Corporation Limited (“UNIS”), a company registered in Beijing, also made a tender offer to privatize RDA with a higher price of USD 910 million in total. The shareholders of RDA accepted UNIS’ tender offer and approved the acquisition agreement with UNIS in December 2013. SPSTI had reported this project to NDRC and obtained the confirmation letter, while UNIS so far has not obtained the confirmation letter. It is unclear whether, without NDRC’s confirmation letter, UNIS can move forward with the acquisition. It is reported that if the acquisition by UNIS is vetoed by NDRC, RDA may face class action litigation by shareholders in United States. Under its agreement, UNIS may also be liable to compensate RDA in the amount of RMB 450 million.

Pre-filing or post-filing

The 2014 Outbound Investment Measures provide that:

• Without obtaining the approval document or the filing notice, a company cannot apply to other relevant government authorities for the outbound investment project; and
• Before entering into any binding investment agreement, the company must get the approval document or the filing notice, or at least the effectiveness of the agreement should be expressly conditioned on the grant of the approval document or the filing notice.

Therefore, the filing, although it requires fewer documents and a shorter review period, may have the same practical effect as a verification and approval requirement rather than a true post-filing process which only notifies the government after the investment is made. With the power to turn down a filed application, the government still appears to have the discretion to veto any project, even if it is only required to be filed with NDRC under the 2014 Outbound Investment Measures. It remains to be seen how NDRC will exercise this discretion.

MOFCOM Measures on Outbound Investment
In addition to NDRC, MOFCOM issued Administration Measures on Outbound Investment in 2009 (“MOFCOM Measures”), which provide that all outbound investment projects are subject to MOFCOM or its provincial counterparts’ verification and approval.

With the promulgation of the 2014 Outbound Investment Measures, in April 2014, MOFCOM released an amended version of the MOFCOM Measures for public comments (“Draft MOFCOM Measures”). The Draft MOFCOM Measures are intended to develop a new regulatory mechanism for outbound investment consistent with the 2014 Outbound Investment Measures. 

Unlike NDRC’s relatively conservative approach, MOFCOM takes further steps in liberalizing regulatory measures. Under the Draft MOFCOM Measures, the verification and approval requirement is applicable only to projects involving sensitive countries/regions or sensitive industries, and all other projects need only be filed with the government, regardless of the total investment amount. In addition, a reporting requirement similar to the Project Information Report is abolished in the Draft MOFCOM Measures.

However, before the Draft MOFCOM Measures are formally issued, it is not clear in what form these liberalized measures will be adopted.

FOOTNOTES
1 According to the Interim Measures for the Supervision and Administration of Outbound Investment of Central Enterprises, “enterprises managed by the central government” refers to enterprises directly owned and managed by the State-owned Assets Supervision and Administration Commission (“SASAC”), which are the biggest state-owned companies in China.
2 According to the 2014 Outbound Investment Measures, “Chinese investment” refers to any cash, kind, intellectual property or other benefits contributed by Chinese investors.
3 According to the 2014 Outbound Investment Measures, “sensitive countries and regions” include (i) countries with no diplomatic relations with China, (ii) countries subject to international sanctions, and (iii) countries and regions affected by wars, civil strife, etc.
4 According to the 2014 Outbound Investment Measures, “sensitive industries” include (i) basic telecommunications operations, (ii) cross-border development and utilization of water resources, (iii) large-scale land development, (iv) main power transmission lines and power grids, and (v) news media, etc.
5 The Interim Outbound Investment Measures do not provide such threshold, which was later specified in a notice issued by NDRC in 2011 for the implementation of such measures.