Legal Article in Lexis Nexis November 2009 Co-author: Chen Aiwa

1. F 律商中国法律透视
专题 Features
Chinese Outbound Investment:
Navigating the Regulatory Framework and Preventing Risks
Laure Deron / Aiwa Chen Gide Loyrette Nouel
China's economy has definitely matured and the past few
years have seen a growing trend of Chinese companies
joining the international stage as foreign investors.
In the midst of the current economic • The Measures on Overseas Investment the Export-Import Bank of China has the final
downturn many opportunities have emerged Management by the MOFCOM (16 March decision regarding the granting of any loans.
for investors, with a sharp drop in the price 2009) which is designed to provide support Meanwhile, local governments have
of overseas assets. For Chinese companies, to the investing candidates, by delegating the also enacted similar measures with a view to
it is a "going out" time. However, along with approval authority to its provincial branches encouraging domestic enterprises to "go global".
this enthusiasm, another key element for and streamlining the approval process.
the success of an outbound investment is a • The SAFE Regulations on Foreign Know the Rules Abroad
reasonable dose of prudence and awareness Exchanges Administration in Relation to Direct
to ensure that no major obstacles arise either Overseas Investment by Domestic Entities For Chinese companies which are
at home or in your destination country. (Hui Fa [2009] No. 30) which further simplify profitable and expanding, investing abroad
the procedures (i.e. the review of sources of is an exciting prospect. But, as always
Know Your Rules at Home investment funding and remittance of the when swimming in new waters, caution
funds now only requires a filing submission, should be exercised as language barriers,
Under the current Chinese legal framework, as opposed to a prior approval), expand the cultural differences and an unfamiliar legal
Chinese companies which contemplate an opportunities to use foreign currency funding for environment may turn your venture abroad
outbound investment must secure a set of investment overseas, and implement financial into a nightmare. There are ways around the
regulatory approvals beforehand. This is done support for overseas direct investments. obstacles, though, and a reasonable amount
by submitting their project to the following • A set of Measures on Foreign Economic of preparation and sensible judgement will
administrations: the National Development and Technical Cooperation Funds (Cai Qi better ensure success. Set out below are a few
and Reform Commission (“NDRC”), the [2005] No. 255 and Cai Qi [2009] No. 95) recommendations to avoid the most typical
Ministry of Commerce (“MOFCOM”), the which were jointly issued by the MOFCOM mistakes, gathered during the course of our
State Administration of Foreign Exchange and the Ministry of Finance ("MOF"). time as legal advisors for Chinese enterprises
(“SAFE”), and, if the would-be investor is They provide financial support to domestic on overseas M&A projects:
a State-owned enterprise, the State-Owned enterprises investing abroad, including partial Prepare for your arrival
Assets Supervision and Administration reimbursement of legal counsel, financial Once the investment scheme is carried
Commission ("SASAC"). These precautionary advisor, technical investigation and feasibility out, your resources will be focused on reacting
procedures whereby the government will study study fees, insurance fees for mining resources to the myriad of urgent problems of daily
the merits of an investment project abroad, shipped back to China and patent registration management, with very little time for analysis
though burdensome and time-consuming, fees, as well as subsidise loans obtained and planning. So, use the time before investing
are designed to protect Chinese businesses from domestic banks in order to finance the to study the business and legal environment
from venturing unconsciously into the risks of operation of projects abroad. in which you are about to land. Find out about
investing overseas. • NDRC and the Export-Import Bank of the tax, corporate governance, contractual,
Recently, the Chinese government has China jointly set up credit support mechanisms labour, environmental and IP applicable
implemented a series of measures to encourage granting preferential loans to encourage five rules and the local constraints on foreign
domestic enterprises to dive into international types of overseas investments. While the investment and exchange. Also, consider your
waters. These are: NDRC has the authority to approve a project, exit options: in certain countries, winding-up
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2. F 律商中国法律透视
专题 Features
an unsuccessful company can be a long and prepared separately, which in turn makes Think long-term, and communicate
cumbersome process. their enforcement more difficult. Also, we accordingly
For an outbound acquisition, study the would warn against a do-it-yourself approach Model your investment structure and
target carefully by conducting a thorough due- that substitutes the application of self-taught attitude according to your plans in the long-
diligence. As this step is common practice in legal practice for a professional adviser. term. Your first approach of the country is a
many western countries, both the seller and Relying solely on information gathered on crucial moment, and the first impression you
the management of the target will normally the internet or at some local administration make on the local players will determine your
accept to share information about the company is risky as the information supplied may market position, legal protection and reputation
with you, so you should take advantage. This be incomplete or outdated. Even the best for many years to come.
cautious approach will help you to become formulated and codified laws come with a Communicate regularly with your local
acquainted with the legal standing, compliance, practical interpretation which is uneasy to contacts so that they have a clear understanding
material defects of the target and strengthen find for non-professionals. of what your strategy is. During the preliminary
your bargaining power during the negotiations Your lawyer is there to help, and can only negotiations, explain to them about your
while at the same time allowing you to make do so efficiently if he knows what you want and constraints at home to ensure that they do not
well informed decisions once you are in charge where you are going. Explain your expectations wrongly attribute delays to a lack of goodwill
of the local company. and provide a comprehensive picture, both in on your part due to their unawareness of the
Do not neglect the transaction scheme terms of the transaction itself and of the future Chinese regulations on overseas investments.
Many Chinese enterprises with only a business model. Keep your lawyer involved Understand and respect your local partners
recent experience in cross-border investments so that he knows how the situation unfolds as well as their negotiating practice. Western
tend to overlook the transaction or investment and can track the issues. This will help keep or African negotiators will usually not expect
framework while they investigate the target the costs low by identifying and avoiding a contract to be re-discussed, once finalised
company and market. problems early, create a cooperative climate for and signed. This can be to your advantage
However, proper structuring - or, in some negotiations and ensure quality and consistency as a comprehensive set of warranties in a
cases, restructuring - at the time of the investment in the legal documentation. partnership agreement, coupled with efficient
can be instrumental in laying the foundations Prevention works better than remedy judicial enforcement of such contractual
for good business operations and tax planning. Even successful investments face provisions, offers serious guarantee against
Similarly, achieving the optimum financing problems. In our experience, it is a common future disappointment. Reassure the personnel
scheme will require that you explore all tax, mistake for young Chinese international of the target as to what your business
foreign exchange and operational aspects investors to wait until a problem has orientation and direction will be after you take
beforehand. Examine all investment options materialised to take action. They often incur over. Managing the company will be easier
with your professional advisors, and compare significant costs in order to remedy a situation in the long run if the local management team
the various schemes for shaping the transaction in which anticipation would have saved much trusts you and is willing to come forward with
with a view to maximizing your profits and time and energy. information on the status of the company and
minimising the legal and financial risks. Anticipation involves proactive, timely the on-going issues, as well as support your
Secure proper legal advice communication with the local teams, and business decisions.
The local laws will determine your discussing the options with the professional
rights and influence your daily decisions advisors at early stages of the investment to Conclusion
for many years to come, so you should identify potential risks.
know them in order to avoid unpleasant When in Rome, do as the Romans do Chinese enterprises which opt for
surprises. Reliable, comprehensive, tailor- Adapt to the business ways of your "going out" with their business interests
made legal advice that really fits your needs host country. It is important that your local will encounter ample opportunities and
and situation can only be provided by a partners know what to expect from you. also inevitably face challenges. But fortune
professional counsel, so it is advisable to This will prove valuable in the long-term, favours the brave and so they should take their
hire a lawyer early in the process. both in managing the enterprise and in chance and go for attractive opportunities.
As we found out, Chinese in-house teams dealing with overseas competitors. However, The deciding factors will be how well they
are sometimes reluctant to work hand-in-hand always remember that an easy-going learn from their mistakes and use the full
with their outside consultants, a combination approach towards corporate and business extent of legal tools available in China and
of cost-saving considerations and distrust rules, especially in the case of individual abroad to secure their investments. By doing
resulting in last-minute instructions for enterprises, will prove a recipe for fiasco if this, Chinese investors will gradually refine
a limited scope of assignment. This will exported. Make sure that while you adapt to and improve their investment strategies
almost always result in inconsistencies local expectations, your standards of adhering and develop an acute sense of international
in the contractual documentation, as the to the applicable legal rules both at home and competition and investment practice that just
master and the ancillary agreements are abroad remain high. stand the tests of time for years to come. LN
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