Outbound unbound?

The simplicity and speed of verification, together with the level of government involved will vary widely under the Mofcom Measures depending on the nature of the target, the size of the investment and the profile of the PRC investor. Routine small outbound investments can be applied for online without submitting supporting documents, and can get verification within three days. For investments that are not eligible for online verification, the handling periods after acceptance of application are stated in the Mofcom Measures as 15 or 25 working days (not including certain outside consultation), depending on the level of government involved.

Under the Mofcom Measure, it is easier to predict the likely speed of verification obtainable by different types of PRC investors for different types of projects. This will enable potential foreign sellers and joint-venture participants to select their preferred investors based on such predictions. The investor's profile, which affects both the selection of procedure and the level of governmental review, is divided into two categories: central enterprise and local enterprise. “Central enterprise” refers to less than 150 state-owned enterprises under the supervision of the State-owned Assets Supervision and Administration Commission of the State Council (Sasac). “Local enterprise” is most often used to refer to state-owned enterprises that are not on this list and are supervised by local governments. But, as used in the Mofcom Measures, the phrase's intended meaning, which has been confirmed orally by Mofcom officials, includes all PRC enterprises that are not central enterprises. China's sovereign wealth fund company, China Investment Corporation, which is under the direct supervision of the State Council (rather than Sasac), despite being covered by the legal definition of “enterprise”, is not intended to be covered by the Mofcom Measures, nor are the financial institutions under the direct supervision of the Ministry of Finance. The Mofcom Measures also omit express mention of individual PRC resident investors.

Investments not meeting either of the two sets of tests listed below are eligible for online verification. Mofcom will handle applicants that are central enterprises, while the Ministry's authorised provincial-level departments will handle those that are local enterprises.

A local enterprise seeking verification of an investment that meets any of the following tests cannot do so online, but only by submitting full documentation for review by the provincial-level department authorised by Mofcom (if the investment does not meet any of the tests for national-level review summarised further below):

• An investment above US$10 million (but lower than US$100 million);

• An investment in the energy sector or the mining sector. (Mofcom can be expected to issue guidelines to provincial-level departments on criteria for approving, rejecting and making central reports on such investments, as part of national-level policies towards these sensitive industries); or

• An investment that is promoted through zhaoshang (招商) inside the PRC. (This phrase, which typically describes the publicity and related efforts of PRC development zones and industrial parks to attract investment into their projects, appears to refer to foreign projects that engage in similar publicity and solicitations conducted inside the PRC).

A central enterprise can obtain verification online of an investment meeting the above tests but, in respect of an investment meeting any of the following tests, both a central and a local enterprise can only do so by submitting full documentation for review by Mofcom itself:

• An investment of US$100 million or more;

• An investment involving multiple countries or regions;

• An investment in a country without diplomatic relations with the PRC, or in a “to be determined” country or region; or

• An investment involving incorporation of a “special purpose company for purpose of external [red-chip] share listing”. (The need for national-level approval of all investments in this type of company indicates that potential investors in them will continue to endure the uncertainty and delay in obtaining related verifications from Mofcom, although some investors may benefit from the Mofcom Measures' omission of other forms of fund-raising, which are covered by Safe's requirements on special purpose companies).

These thresholds are a substantial change from the 2004 Mofcom Rules, which subjected all investments to full review, by Mofcom itself if the investor was a central enterprise, and by a provincial-level department if the investor was a local enterprise and if the location of investment was in one of 135 countries contained in a published list. The above thresholds will apply equally to investments in Hong Kong, Macau and (although it will presumably be included in the above list “to be determined”) Taiwan, which will all join other jurisdictions in being covered by unified treatment under the Mofcom Measures. Previously, Hong Kong and Macau were covered by separate rules, while investments in Taiwan were not contemplated by any promulgated rules.

These changes indicate Mofcom's intention to reduce the breadth of transactions subject to full review at the local level and even more so at the central level, thereby enabling more careful scrutiny and consideration of large and sensitive transactions. Importantly for the PRC's sensitive and globally important balance of payments with the United States, which had not been included in the previous list of 135 destinations approvable at the provincial level, future PRC outbound investments into the US will be subject to the same criteria for determining the level and method of review and verification (unless the US is later included in the “to be determined” list).

Procedures

For online verification, the applicant is required to use a Mofcom-prescribed application form, and is not required to provide any supporting documents, while the verification procedure would not require any consultation with a PRC embassy or consulate, or (although this is less clear) any domestic chamber of commerce or industry association.

Where online verification is not available, the verification application must be supported by:

• an application letter, setting out the details of the external target company, including the name, capital structure, investment amount and business scope;

• a copy of the applicant's business licence;

• the articles of association of the external target company;

• relevant investment contracts;

• copies of documents evidencing the verification by or filing with “relevant PRC government department(s)” (the NDRC and Safe or their respective lower-level bureau);

• a prescribed form of preliminary report for external mergers and acquisitions; and

• other documents (if any) that are required by Mofcom or its provincial-level designated department.

Opinion(s) from the commercial section of the PRC embassy or consulate in the country where an applied-for investment is to be located may be requested by Mofcom for projects in the above-listed zhaoshang or US$10 million-plus categories, and must be requested by Mofcom for the other above-listed projects. For an overseas mineral prospecting or mining project, opinions from a related domestic PRC chamber of commerce or industry association must also be obtained.

For joint outbound investment by more than one PRC enterprise, the one making the largest investment is required to apply for verification. For a later transfer between joint investors of an outbound investment interest, it is the transferee's responsibility to apply.

Planning & Drafting

Careful planning and drafting of bidding procedures and contracts will be necessary in order to enable PRC enterprises to participate in any time-sensitive or competitive foreign bidding process.

Issuance of verification before an outbound investment agreement can become effective is expressly required in the Mofcom Measures. Presumably this change will not prevent continuation of the common practice of a potential PRC investor earlier signing a contract that creates an investment obligation, subject to the condition of obtaining Mofcom verification and completing other PRC governmental procedures, while also creating certain ancillary obligations that may not be subject to this condition. Some of these ancillary conditions may relate to preliminary expenses, for which Safe permits conversion and remittance of funds equalling up to 15% of the value of the proposed investment, in advance of obtaining Mofcom verification of the full investment (but after obtaining NDRC verification).

In the event of “change(s) in items of the original outbound investment application,” verification change procedures must be applied for with the original verification authorities. This requirement, which omits any indication of a de minimus exception, appears to be more troublesome to transaction parties, and to require more careful document drafting, than the NDRC's Rules, which require re-verification only in the event of significant changes to the essential elements of a verified outbound investment, such as the project scale, location, main products, investors, shareholding structure or a 20% increase in the original investment amount.

Trends

Mofcom, along with many other PRC government departments, is increasing its use of standardised online procedures for domestic- and foreign-related procedures, resulting in greater speed, more availability of data to high-level policy-makers, and less risk of lower-level officials arbitrarily exercising discretion. Large or sensitive outbound investments are the focus of most provisions of the Mofcom Measures; however, the extension of online procedures to smaller and more routine outbound investments is likely to have the broadest impact. This is good news for a variety of private and public stakeholders, including potential foreign sellers and joint-venture participants, and also foreign governments and international institutions.