From the beginning of 1980s, Chinese enterprises have been searching for ways to effect outbound investment. But with thirty years practice under their belts, we may see more and more impressive and globally important outbound investments by Chinese enterprises. Ever since the international financial crisis started at the end of 2008, Chinese enterprises, especially private enterprises, have stepped up their M&A activities but there are still challenges. Companies looking to invest outbound for the first time, have the benefit of being able to learn from the experiences of more seasoned investors.
Outbound investment involves dealing with tremendous laws and regulations, such as the laws of corporations, securities, banking, accounting, anti-trust, employment, and foreign exchanges. On top of this, investors also need to comply with the special rules in host countries in the fields of IP, contracts, accounting, taxation, and social insurance, among others. Therefore, Chinese enterprises looking to make outbound investment must ensure they comply with the laws of host countries where the investment is to be made and the international commercial usages as well. The enterprises must also be kept informed of the frequent changes to the legal and regulatory environments in host countries, be well aware of the procedures associated with the signing of legal documents, disclosures, and approvals in the investment target regions, and keep the entire investment in compliance with the local relevant regulations.
A successful outbound investor must work out practical solutions to all the problems they may encounter during the investment. Such problems may include: employment law issues, investment plans, tax planning, due diligence, environment protection and IP issues. Below, we list some guidelines that should be kept in mind when working out solutions to these commonly-encountered problems.
1. Employment issues should be thoroughly addressed. It is necessary to carefully scrutinize the laws of the host countries concerning employment, labor protection and insurance, labor unions and labor welfare. Investors should have an overall perception of possible labor risks in the outbound investment to avoid thorny employment disputes and the commercial risks that these may present.
2. Every country has promulgated laws to review foreign investment to prevent monopolies and ensure security of their national economy and industries. When Chinese enterprises invest in developed countries with developed, mature legal systems and established systems to protect the rights of local industry, those enterprises should ensure that their investment complies with the equity portion limits and exchange controls for foreign investors in certain prohibited and restricted industries while paying attention to any anti-trust problems. Anti-trust scrutinizing may drag those enterprises into more strict and harsh legal review procedures, prolonging the investment process and wasting investment costs.
3. Chinese enterprises must also comply with local regulations concerning information disclosure. False statements or failures to disclose often leads to disasters.
4. Investors should also pay close attention to tax planning from the beginning of their outbound investments. Taxation policies differ in different countries and from company type to company type; a resident enterprise and a non-resident enterprise may be subject to differing rate of company tax. Therefore, to avoid double taxation or tax evasion, investors should carefully pay enough attention to tax planning when drafting investment structures.
5. When setting up joint venture companies with local partners from host countries, Chinese enterprises should be aware that local partners may wish to conceal potentially damaging information from the Chinese enterprise so as to extract more beneficial cooperation conditions. In these circumstances, exhaustive due diligence is necessary for Chinese enterprises to ensure that they are familiar with every aspect of their partner’s business and the project itself.
6. Chinese enterprises also face investment competition risks. In instances where Chinese enterprises violate the laws of the host country, their potential rivals may collect evidence of such infringements and bring them to the attention of the authorities of host countries to prevent the investment of Chinese enterprises.
7. Western developed countries not only have very strict laws and regulations relating to environmental protection, but the penalties for violating such laws and regulations are also very harsh. Chinese enterprises, especially manufacturing enterprises, may not be familiar with various environmental protection procedures and should ensure they comply with all the relevant rules during outbound investment.
8. Outbound investments will also touch upon intellectual property problems such as IP administration, protection, integration, among others. Legal disputes can easily arise from IP agreements concerning right limits or restrictions, protective periods and compensation.
Author: Henry HONG, partner
Guantao Law Firm
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