Foreign Investment ReviewMergers, national interest & national security in 26 jurisdictions worldwideContributing editor: Oliver Borgers

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Foreign Investment Review 2012

Contributing editor Oliver Borgers McCarthy Tétrault LLP

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CONTENTS

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LawBusinessResearch

PREFACE

4 Getting the Deal Through – Foreign Investment Review 2012

Getting the Deal Through is delighted to publish the first edition of Foreign Investment Review, a new

volume in our series of annual reports, which provide international analysis in key areas of law and

policy for corporate counsel, cross-border legal practitioners and clients.

Following the format adopted throughout the series, the same key questions are answered by leading

practitioners in each of the 26 jurisdictions featured.

Every effort has been made to ensure that matters of concern to readers are covered. However,

specific legal advice should always be sought from experienced local advisers. Getting the Deal

Through publications are updated annually in print. Please ensure you are referring to the latest print

edition or to the online version at www.GettingTheDealThrough.com.

Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume,

who were chosen for their recognised expertise. We would also like to extend special thanks to

contributing editor Oliver Borgers of McCarthy Tétrault LLP for his assistance in devising and editing

this volume.

Getting the Deal Through

London

April 2012

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Latham & Watkins China

ChinaKenneth Chan

Latham & Watkins

Law and policy

1 What, in general terms, are your government’s policies and practices

regarding oversight and review of foreign investment?

All foreign investments in the People’s Republic of China require some form of government approval or screening. Each merger or acquisition undertaken by a foreign investor in China is considered a foreign investment. (Hence, the term ‘foreign investment’, as used in our response, will include mergers and acquisitions).

China seeks to manage the inflow of foreign investment into the country by directing it to industry sectors the government wishes to further develop with the help of foreign capital, advanced technolo-gies and management expertise. This is implemented by classifying different industry sectors into four categories: ‘encouraged’, ‘permit-ted’, ‘restricted’ and ‘prohibited’. Foreign investment in an encour-aged industry sector may be eligible for government support in the form of a lower enterprise income tax rate, a tax holiday or duty free importation of production equipment, among other things. Foreign investment in a restricted sector is usually subject to some form of foreign ownership restriction (which could either mean that a PRC partner is required or that the foreign investor in a joint venture cannot be the dominant partner) or is required to be approved at a higher level of government.

In addition to compliance with the above-mentioned industrial policy and other foreign investment considerations (such as diplo-matic relations), a proposed foreign merger or acquisition will also be reviewed from the antimonopoly and national security perspectives if the relevant requirements are met. A foreign merger or acquisition will be subject to an antimonopoly review if it involves the concentra-tion of operators in a market in China and has the potential of result-ing in an elimination or reduction of competition in that market. Foreign mergers or acquisitions subject to national security review are broadly defined to include the acquisition of enterprises in the defence and auxiliary industries, enterprises close by key or sensitive military facilities or enterprises that impact on defence security; and the acquisition of important agricultural products, natural resources, infrastructural facilities or transportation services, key technologies or heavy equipment production, which may result in the foreign investor or investors acquiring actual control of the target.

All cross-border financing, payments and remittances, and all currency conversions in China, are subject to government oversight. A stricter level of oversight applies to cross-border payments and remittances of a capital nature and the use and conversion of foreign funds of a capital nature.

2 What are the main laws that directly or indirectly regulate acquisitions

and investments by foreign nationals on the basis of the national

interest?

The main PRC laws and regulations in these areas are:• theForeignInvestmentIndustrialGuidanceCatalogue(revisedin

2011) and other industry-based regulations, which prescribes the entry thresholds and restrictions applicable to foreign investment in different industry sectors;

• thePRCLawonChinese-ForeignEquityJointVentures(revisedin 2001), the PRC Law on Chinese-Foreign CooperativeJointVentures(revisedin2000)andthePRCLawonWholly Foreign-owned Enterprises (revised in 2000) and their respec-tive Implementing Rules or Regulations, the Interim Provisions on Certain Questions Concerning the Establishment of Foreign InvestedJointStockCompanies(1995)andotherregulations,which prescribe the different forms of business vehicles within China that are available for use by a foreign investor (any foreign investment will result in a foreign ownership stake in one such business vehicle);

• theSeveralProvisionsonChangesinEquityInterestofInves-torsinForeign-InvestedEnterprises(1997),whichgovernstheacquisition by a foreign investor of a stake in an existing foreign-invested enterprise in China;

• theProvisionsonMergersandAcquisitionsofDomesticEnter-prisesbyForeignInvestors(revisedin2009),whichgovernsthemerger and acquisition by a foreign investor of any non-publicly listed entity in China other than through the acquisition of a stake in an existing foreign-invested enterprise in China;

• theMeasures for theAdministrationofTakeoversofListedCompanies (2008)and theMeasures for theAdministrationofForeignInvestors’StrategicInvestmentinListedCompanies(2005),whichgovernsthemergerandacquisitionbyaforeigninvestor of a publicly listed company in China;

• theInterimProvisionsonUtilisationbyState-ownedEnterprisesofForeignInvestmentforRestructuring(1998),theNoticeonMattersConcerningtheTransferofState-ownedPropertyRights(2006) and various state-owned assets related regulations, which prescribe safeguards for, and govern the approval of, the disposal of state-owned assets to foreign entities;

• the PRCAnti-monopolyLaw (2007), theMeasures for Fil-ingofConcentrationofOperators (2009), theMeasures forExaminationofConcentrationofOperators(2009)andotherantimonopoly-related regulations, which govern the review of any concentration of business operators resulting from a foreign investment;

• theCircularontheEstablishmentofaSystemforSecurityReviewofAcquisitionofPRCDomesticEnterprisesbyForeignInvestors

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(2011)andtheProvisionsfortheImplementationoftheSystemforSecurityReviewofAcquisitionofDomesticEnterprisesbyForeign Investors (2011), which govern the review of any merger and acquisition by a foreign investor of a PRC entity that may have an impact on the security of China; and

• theRegulationsonForeignExchangeAdministration(revisedin2008) and various foreign exchange-related regulations, which regulate the foreign exchange funding, remittance, payment and conversion of all foreign investments in China.

3 Outline the scope of application of these laws, including what kinds of

investments or transactions are caught. Are minority interests caught?

Are there specific sectors over which the authorities have a power to

oversee and prevent foreign investment or sectors that are the subject

of special scrutiny?

The scope of application of these laws and regulations are partly outlined in questions 1 and 2.

The above laws and regulations cover mergers and acquisitions by foreign investors by way of an equity deal or an asset deal and cover the disposal of both state-owned equities and state-owned assets.Lawsandregulationsprovidingforoversightfromtheforeign

investment or state-owned assets protection perspective would apply irrespective of the foreign ownership percentage involved. In the case of antimonopoly review, a certain level of control by the foreign investor will be required in order to trigger the review process. The acquisition by a foreign investor of a minority stake in a PRC com-pany, which gives it important veto rights within such company, will generally be regarded as giving the foreign investor sufficient control forthepurposeofsuchareview.Likewise,anelementofcontrolbythe foreign acquirer is required in the case of national security review (except where the acquisition has a national defence dimension) but the review process will only be triggered if there is a possibility that the foreign investor may acquire actual control of the PRC target.UnderChina’sforeigninvestmentpolicy,foreigninvestorsare

prohibited from investing in defence-related industries, the mining of certain rare minerals, news agencies, media and publishing, com-pulsory education, industries employing certain Chinese traditional processing techniques, etc. Foreign investments into ‘restrictive’ industry sectors and certain ‘permitted’ or ‘encouraged’ industry sec-tors will also require special scrutiny from the foreign ownership or control perspective. By way of example, Chinese majority ownership is required in the securities, basic telecommunications, power grid, municipal rail transportation and publication printing sectors, and 100 per cent foreign ownership is not permitted in the risk explora-tion of oil and gas, local railway operation, air traffic control equip-ment production, higher education and accounting services.

4 How is a foreign investor or foreign investment defined in the

applicable law?

The general rule is that if an investor is not a PRC national or (in the case of a non-natural person) is not established in China, such an investor will be considered a foreign investor and investment made by such an investor in China will be regarded as foreign investment.

An exception to this general rule is that investors from Hong Kong,MacauandTaiwan(whichareregardedbyChinaasinsepara-ble parts of China) are, for the time being, treated as foreign investors for all practical purposes under China’s foreign investment policy.

In deciding the nationality of a foreign investor, regard will be

given to its nationality or place of incorporation or establishment irrespective of the ultimate source of ownership. Thus, a Hong Kong company making an investment into China will be regarded as a Hong Kong investor even though its ultimate parent company is incorporatedintheUnitedStates.

5 Are there special rules for investments made by foreign state-owned

enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an

SOE or SWF defined?

PRC foreign investment laws and regulations do not distinguish sov-ereign investors from non-sovereign investors and as a result there arenodefinitionsforSOEsorSWFsforinboundforeigninvestmentpurposes.

The government nature of such foreign investors will, however, be relevant in the review and approval process for investments made by such foreign sovereign investors, particularly from the diplomatic relations and national security review perspectives. For such pur-poses, as a practical matter, regard will be given to the nationality of the ultimate foreign parent rather than the nationality of the immedi-ate foreign business vehicle that holds the investment in China.

6 Which officials or bodies are the competent authorities to review

mergers or acquisitions on national interest grounds?

The competent authorities are:• inthecaseofforeigninvestmentapproval(aseachacquisitionormergerbyforeigninvestorisaforeigninvestment),theNationalDevelopmentandReformCommission(theNDRC)(or,inthecase of certain specialised sectors, the ministry in charge of the industry sector in question), which will approve the foreign investmentproject,andtheMinistryofCommerce(MOFCOM),which will approve the documentation for the foreign investment project (or their respective local counterparts);

• inthecaseofapprovaloftheacquisitionofstate-ownedequityorassetsbyaforeigninvestor,theState-ownedAssetsSuper-visoryandAdministrationCommission (SASAC)or its localcounterpart;

• inthecaseofantimonopolyreview,MOFCOMinconsultationwiththeNDRCortherelevantministry;and

• inthecaseofnationalsecurityreview,theJointMinisterialCon-ferenceco-ledbytheNDRCandMOFCOMandadministeredbyMOFCOM,andcomprisingotherministriesrelevanttotheindustry sector(s) in question.

In the case of a merger or acquisition involving state-owned assets and requiring antimonopoly and national security reviews, all of the above-mentioned authorities will be involved in the approval process.Wherethecompetentauthority’sjurisdictionallimitisexceeded

orinotherappropriatecases,themattermaybereferredtotheStateCouncil for a decision.

7 Notwithstanding the above-mentioned laws and policies, how much

discretion do the authorities have to approve or reject transactions on

national interest grounds?

Each of the approval or reviewing authorities mentioned in question 6 has broad discretionary powers, which are not defined in the rel-evant laws and regulations, to approve or reject a foreign investment or acquisition. This is particularly so in the case of a national security

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review as the regulatory regime is relatively new and the regulatory framework that has been established is largely of a skeletal nature. Brief reasons will typically be given by the relevant authority for the rejection of an application for foreign investment approval or a refusal to give clearance to an antimonopoly filing.

China has adopted a policy for attracting foreign investment since1978andlocalgovernmentscompeteamongthemselvesforforeign investment. Hence, except where there is a genuine national security or antimonopoly concern, the rejection of an application for foreign investment that is supported by the PRC partner or target in question and that otherwise meets the normal legal and policy requirements is not common. However, where a particular indus-try sector has an excess capacity problem or other abnormal condi-tions, there can be temporary policy adjustments that may result in applications for foreign investment in that sector being put on hold for a significant period of time or even rejected, despite meeting the normal approval criteria.Whilenostatisticsareavailable,weunderstandthatclearance

has been given for the great majority of antimonopoly filings.The national security review process has only been formalised

recently and the scope of such a review is still not precisely defined and is capable of very broad application. However, it is at least clear that aggregate minority foreign shareholdings with no possibility of having ‘actual control’ in an industry sector considered to be eco-nomically, socially or technologically sensitive from the national security perspective will not trigger the review process.

Procedure

8 What jurisdictional thresholds on governmental actions trigger a review

or application of the law? Is filing mandatory?

The size of a foreign investment project and the industry sector in question will determine the level of government (ie, central, provin-cial, municipal or county) at which the requisite oversight will be exercised. Foreign investment in certain sectors, such as banking, securities and insurance, will always be approved at the central gov-ernment level irrespective of the size of the investment or merger or acquisition project in question. The size of the transaction is deter-mined by the total investment amount of the foreign invested vehicle resulting from that foreign investment. ‘Total investment amount’ refers to the aggregate amount of equity and debt capital that is required to bring the foreign investment project in question to frui-tion.Jurisdictionallimits(intermsoftotalinvestmentamount)forthe central and provincial governments are established nationally while the jurisdictional limits of municipal and county governments are set by the provincial government in question.Very broadly speaking, a foreign invested project in an ‘encouraged’ or ‘permitted’ sector will have to be approved at the ministry level if it has a size of atleastUS$300millionandattheStateCouncillevelifitisofatleastUS$500million.Thejurisdictionallimitsforprojectsina‘restrictive’sectoraresetatthesignificantlylowerlevelsofUS$50millionandUS$100million,respectively.

The antimonopoly review process will not be triggered unless both of the following threshold requirements are met:• atleasttwoofthepartiesinvolvedinthe‘concentrationofopera-

tors’ have an annual turnover in China in excess of 400 million renminbi each; and

• the parties involved in the ‘concentration of operators’ hasa combined annual turnover in China in excess of 2 billion renminbi or a combined annual global turnover in excess of 10 billion renminbi.

There is no monetary threshold requirement in the national security review as the focus is on ‘actual control’. Obviously, other things being equal, the larger the foreign investment in question, the more significant it will likely be from the national security perspective. (The scope of a national security review is covered in question 1.)Wheretheapplicablejurisdictionalthresholdforapprovalata

higher level of government is triggered, approval must be obtained fromthatlevelofgovernment.Wheretheapplicablejurisdictionalthreshold for a particular review process is triggered, a filing for the relevant review is mandatory.

9 What is the procedure for obtaining national interest clearance of

transactions and other investments?

The procedures and authorities involved will be covered in question 11.

The initial national security filing is required to be made by way of completion of a standard form. In other cases, the application documents are not required to be submitted in any standard form although the regulations in question will prescribe the information that an application needs to cover.Nofilingfeeisrequiredinapplyingforanyforeigninvestment

approval or antimonopoly or national security review.

10 Which party is responsible for securing approval?

In the case of a foreign investment approval, all the investors in the foreign invested vehicle resulting from the foreign investment or merger or acquisition in question are theoretically responsible for obtaining the requisite approval. However, in the case of a brown-field project, the PRC target of a foreign investment or merger or acquisition will have control of the application process. In the case of a greenfield joint venture company, the PRC joint venture partner will generally have control of the application process.

In the case of an antimonopoly review, if the concentration of operators is implemented by way of a merger, all of the parties par-ticipating in the concentration of operators shall make a joint filing. In other cases, the party acquiring control or a decisive influence shall be responsible for making the filing and obtaining the requisite clearance.

In the case of a national security review, the foreign investor or investors in question shall be responsible for making the filing and obtaining clearance.

11 How long does the review process take? What factors determine the

timelines for clearance? Are there any exemptions, or any expedited or

‘fast-track’ options?

For a foreign investment approval, where the approval of the for-eign investment project and approval of the documentation lie with different authorities, the approval for the project will have to be obtained before the approval for the documentation can be given. Each approval authority involved is required to make its decision within 20 working days of its receipt of the application and all requi-sitesupportingdocuments.Whereapprovalisrequiredtobesubmit-ted at the provincial level, reviewed by the municipal and provincial governments for final decision by the central government level, each level of government involved would theoretically have 20 working days to complete its respective task.

An antimonopoly review will involve the following process and timing:• MOFCOM’sAntimonopolyBureauwillhave30daystoreview

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Getting the Deal Through – Foreign investment Review 2012

a filing after such filing has been vetted for its completeness and formally accepted for further processing. If no real antimonopoly concerns are identified, clearance will be given after this Phase I review; and

• ifrealantimonopolyconcerns(ie,thereisariskthatthecon-centration of operators in question may result in an elimina-tion or reduction of competition) have been identified during Phase I of the review, the investigation will enter Phase II when more detailed information will be required to be submitted and theAntimonopolyBureauwillthenhave90daystoconsultfur-ther with other related parties (such as trade associations, com-petitors, suppliers and customers) and come to a decision. This 90-dayreviewperiodcanbeextendedbyupto60daysiftheAntimonopoly Bureau considers it necessary.

The national security process and timing are as follows:• afterafilinghasbeenvettedforitscompletenessandformallyaccepted for further processing,MOFCOMshall determinewithin15workingdayswhethertheproposedtransactionfallswithin the scope of activities requiring national security review;

• unless theproposedtransaction isdeterminednot torequirenationalsecurityreview,thefilingwillbesubmittedtotheJointMinisterialConference,whichwillhave30workingdaystocon-duct a general review and come to a decision; and

• ifclearanceisnotgivenafterthegeneralreviewprocess,theJointMinisterialConferencewillhaveafurther60workingdaystoconductaspecialreviewandcometoadecision.WheretheJointMinisterialConferencesubmitsthematterforadecisionbytheStateCouncil,notimelimitwillapply.

Whiletheauthoritieswillgenerallytrytocometoadecisionwithinthe time limit prescribed by applicable laws and regulations, in many cases, the requisite decision is given after expiry of such time limit.

12 Must the review be completed before the parties can close the

transaction? Are there penalties if the parties implement the

transaction before clearance is obtained?

Any antimonopoly or national security filing made must be reviewed and cleared before the underlying foreign investment can be approved byMOFCOM.Thepartiestotheproposedtransactionmaynotclose the transaction until all antimonopoly and national security filings (if applicable) have been made and cleared and foreign invest-ment approval has been obtained for the transaction.

If the parties to a transaction proceed to close the transaction without first obtaining all requisite clearances and approval, they would have committed a regulatory breach, which would mar their compliance record in China. In addition, if any clearance or approval is ultimately not given, they will likely be required to reverse the transaction or take other effective measures to eliminate the adverse impact on competition or national security that may have resulted from the closing of the transaction.

13 Can formal or informal guidance from the authorities be obtained prior

to a filing being made? Do the authorities expect pre-filing dialogue or

meetings?

It is possible to seek the formal or informal guidance of the approval or reviewing authority in question on the need for foreign invest-mentapprovalorantimonopolyornationalsecurityclearance.Mostauthorities would expect the foreign investor to have a degree of familiarity with the legal requirements and procedures so that the

meetingcanbeefficientlyconducted.Suchmeetingswiththeregula-tor should, however, be used with care as the official view expressed in such a meeting tends to be overcautious and may not be what the foreign investor had hoped to obtain.Whilethenationalsecurityreviewprocessisquitenewandthe

relevant practice has yet to fully develop, it is expected that the above comments would generally apply.

14 When are government relations, public affairs or lobbying specialists

made use of to support the review of a transaction by the authorities?

Are there any other lawful informal procedures to facilitate or expedite

clearance?

It is not common practice for a foreign investor to engage govern-ment relations, public affairs or lobbying specialists to assist in the approvalorreviewprocess.Goodrelationswiththeapprovalorreviewing authority in question are always helpful in clarifying expectations and avoiding miscommunication and unnecessary efforts.Mostprofessionaladvisersspecialisinginsuchworkwouldhave useful relations with such authorities.

The filing party or party applying for approval and their pro-fessional advisers can also help expedite matters by keeping the approval authority informed prior to submission of the application for approval, or in the case of a review, by providing relevant and sufficient information, developing valid arguments and quoting use-fulprecedentsinsimilarprocessesintheEUortheUStosupportitscase in the filing.

15 What post-closing powers do the authorities have to review, challenge

or unwind a transaction that was not otherwise subject to review?

If a transaction is not subject to antimonopoly or national secu-rity review and the requisite foreign investment approval has been obtained, there is no legal basis to revoke the approval given or reverse or unwind a closed transaction. The position can be differ-ent if important facts, information or documents have been withheld from the approval or reviewing authority and approval or clearance would not have been given (or would not have been given without attaching conditions) if such missing facts, information or documents had been provided to such authority in the first place.

Substantive assessment

16 What is the substantive test for clearance and on whom is the onus

for showing the transaction does or does not satisfy the test?

The substantive tests are:• inthecaseofaforeigninvestmentapproval,compliancewiththe

relevant industrial policy and other foreign investment consid-erations, such as diplomatic relations, viability of the proposed project and environmental issues;

• inthecaseofanantimonopolyreview,whethertheproposedconcentration of operators in question will eliminate or reduce competition in the relevant market in China; and

• inthecaseofanationalsecurityreview,whethertheproposedforeign merger or acquisition in question will have an impact on national defence, national economic stability, the orderliness ofsociallife,ortheR&Dcapabilityforkeytechnologiesandwhether such impact will, in turn, have a bearing on national security.

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The onus is on the applicant for approval or filing party to make the case.

17 To what extent will the authorities consult or cooperate with officials in

other countries during the substantive assessment?

While thePRCantimonopolyregulatoroftendrawsonthepastdecisions and views of their counterparts in other countries in con-sidering and deciding on a filing, it would rarely consult a foreign regulator on the substantive assessment of a specific case. However, in the case of a high-profile or very large global merger and acquisi-tion involving antimonopoly filings in multiple jurisdictions, it is pos-sible that the PRC regulator may communicate or even coordinate with its counterparts in the relevant major jurisdictions, such as the EUortheUS,onthesubstantiveassessmentofthefiling.

As the PRC foreign investment process and national security review process are quite different from equivalent processes in other jurisdictions, and in light of the sensitive nature of national security review, it is not expected that the PRC regulator will consult or coor-dinate with its foreign counterparts in considering and deciding on the substantive review of specific cases.

18 What other parties may become involved in the review process? What

rights and standing do complainants have?

The relevant trade or industry associations, and the relevant com-petitors, suppliers and customers of the PRC target, will likely be consulted by the regulator in the Phase II investigation in an anti-monopoly review. They may also be consulted in a national secu-rity review and, to a much lesser extent, in the foreign investment approval process.Whilesuchtradeorindustryassociationandindividualcompeti-

tors, suppliers and customers are not entitled to be heard by the regu-lator during the approval or review process, they may nonetheless make submissions to the regulator on a voluntary basis.

19 What powers do the authorities have to prohibit or otherwise interfere

with a transaction?

Asindicatedinquestion7,attheapprovalorreviewstage,theregula-tor has broad discretionary power to withhold approval or clearance.

After approval or clearance has been granted, the regulator will have only limited powers to revoke such approval or clearance or

reverse or unwind a closed transaction as described in questions 12 and15.

20 Is it possible to remedy or avoid the authorities’ objections to a

transaction, for example, by giving undertakings?

In practice, a foreign investment approval authority may require the transaction submitted for approval to be amended in specific aspects before it will give its approval.

The laws and regulations relating to antimonopoly review allow the reviewing authority to give conditional clearance. In such a sce-nario, the regulator will set out conditions that the filing party is required to satisfy within a stated period of time before formal clear-ancewillbegiven.Suchconditionscanincludepositiveandnegativeundertakings by the filing party.

The possibility of obtaining a conditional national security clear-ance is unclear at this point as the regulatory regime for national security review is still underdeveloped.

21 Can a negative decision be challenged?

In theory, the applicant for foreign investment approval or the filing party in an antimonopoly or national security review may apply for an administrative review of the rejection decision of the regulator in question and, if the desired result is not achieved, bring an admin-istrative law suit against the relevant regulator. As any approval or clearance decision would be based on a whole host of policy deci-sions (some of which can be rather sensitive), the likelihood of an administrative court accepting the application and deciding in favour of the applicant would be very low, especially in the case of a national security review where the decision has been made jointly by several ministries.

22 What safeguards are in place to protect confidential information from

being disseminated and what are the consequences if confidentiality

is breached?

The respective laws and regulations relating to antimonopoly review and national security review contain specific provisions requiring the handling officials to keep confidential information and documents submittedbythefilingparty.Whilethereisnosimilarprovisioninforeign investment laws and regulations, laws and regulations con-cerning civil servants offer some protection in this regard.

Kenneth Chan kenneth.chan@lw.com Lucy Lu Linda Zheng

18th floor, One Exchange Square Tel: +852 2912 2500

8 Connaught Place Fax: +852 2912 2600

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Recent cases

23 Discuss in detail up to three recent cases that reflect how the

foregoing laws and policies were applied and the outcome, including,

where possible, examples of rejections.

Foreign investment approvals and rejections are not officially reported. Based on media reports, approval has been withheld by MOFCOMfortheproposedUS$375millionacquisitionbyCarlyleofan85percentstakeinXuzhouConstructionMachineryScience&TechnologyCompany(Xugong)in2005.Aftermuchnegotia-tions, various revised proposals involving a lower ownership percent-age for Carlyle were reported to have been proposed by the parties in 2006and2007butwereultimatelyrejectedbythegovernment.Thereason for the disapproval of the proposed transaction was widely believedtobelinkedtotheimportanceofXugong,asChina’slarg-

est heavy equipment manufacturer, to the national economy and its impact on China’s national security.

Only rejections and conditional approvals given during Phase II of an antimonopoly review will be publicised by the government. The only publicised case where clearance was known not to have beengivenistheproposedUS$2.4billionacquisitionbyAtlanticIndustries (a Coca-Cola wholly owned subsidiary) of a 100 per cent stakeinChinaHuiyuanJuiceGroupLtd.AccordingtotherejectionnoticeissuedbyMOFCOM,ithasofferedtoclearthetransactionon certain conditions but the conditions imposed were not accepted by Atlantic Industries within the required time limit and clearance was therefore not granted.

As the national review regulatory regime is quite new, only becomingeffectiveon3March2011,thereisasyetnoreportedcase of rejection.

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Hong KongMichael Liu, Simon Berry and Eva Tam

Latham & Watkins

Law and policy

1 What, in general terms, are your government’s policies and practices

regarding oversight and review of foreign investment?

The Hong Kong government encourages foreign investment, which plays an important part in building Hong Kong as an international financial centre. It supports a free market economy and adopts a low interference policy. There is no investment approval procedure directed specifically towards foreign investors.

According to the Index of Economic Freedom 2012, Hong Kong’seconomyscored89.9percent,makingitthefreesteconomyintheworld.Withtheexceptionofbroadcastingindustry(discussedbelow), there are no restrictions on foreign investment.

Factors that have been identified as the most important in attract-ing foreign investment to Hong Kong include:• ruleoflawandprotectionofpropertyrights;• freeflowofinformation;• lowtaxationandasimpletaxsystem;• acorruption-freegovernment;• absenceofexchangecontrol;and• effectivecommunication,transportandotherinfrastructure.

2 What are the main laws that directly or indirectly regulate acquisitions

and investments by foreign nationals on the basis of the national

interest?

As mentioned, Hong Kong does not subject foreign investments per se to special regulatory regimes or requirements. However, on the basis of public interest, there are restrictions on voting control by non-Hong Kong residents and corporations in the broadcasting sec-tor. The Hong Kong government considers that such restrictions are justified as the media has an extensive reach and the potential to influencealargeproportionofthepopulation.SuchrestrictionsaresetoutintheBroadcastingOrdinance(Cap.562)(theBO)andtheTelecommunications Ordinance (Cap. 106) (the TO).

It is worth mentioning, by way of passing, that although not spe-cifically targeting foreign investors, certain business sectors are sub-ject to restrictions (legal or otherwise) that could affect investment. An example would be the operation of stock and futures markets.

The stability of the stock market is extremely important to Hong Kong.Thetwoexchanges,namely,theStockExchangeofHongKongLimited(theStockExchange)andtheFuturesExchangeofHongKongLimitedarecurrentlyownedandoperatedbyHongKongExchangesandClearingLimited(HKEx)whosesharesarelistedontheStockExchange.Pursuanttosection61oftheSecuritiesandFuturesOrdinance(Cap.571),nopersoncanbeorbecomea

minority controller (that is, a person who, either alone or with any associated person(s), is entitled to exercise, or control the exercise of,5percentormoreofthevotingpoweratanygeneralmeet-ingofHKEx),exceptwiththeapprovalinwritingoftheSecuritiesand Futures Commission after consultation with the financial secre-tary of Hong Kong. Other than the Hong Kong government, which currentlyholdsa5.88percentshareholdinginHKExthroughtheExchangeFund,theSecuritiesandFuturesCommissionhasgrantedapproval to eight entities to be minority controllers of HKEx on the basis that the shares were held by them in custody for their clients.

3 Outline the scope of application of these laws, including what kinds of

investments or transactions are caught. Are minority interests caught?

Are there specific sectors over which the authorities have a power to

oversee and prevent foreign investment or sectors that are the subject

of special scrutiny?

As mentioned, there are restrictions on foreign ownership in the broadcasting sector that would affect the initial application by a tel-evision broadcasting service licensee or sound broadcasting service licensee (as the case may be) with foreign ownership as well as sub-sequent investment in such licensees by foreign investors.

Television broadcastingPursuant to the BO, an ‘unqualified voting controller’ (that is, a vot-ing controller who is not ordinarily resident in Hong Kong) shall not, without the prior written consent of the Broadcasting Authority, hold or acquire thresholds of:• 2percentormorebutlessthan6percent;• 6percentormorebutnotmorethan10percent;or• morethan10percent

in aggregate of the total voting control of a domestic free television programme service licensee.

In addition, where the total voting control exercised by unquali-fiedvotingcontrollerswouldexceed,inaggregate,49percentofthe total voting control exercised in a poll of any general meeting of the licensee, the votes cast by these controllers shall be attenuated in accordance with a formula set out in the BO. A domestic free television programme service licensee must not be a subsidiary of a corporation.‘Votingcontroller’meansapersonwhoeitheraloneorwithoth-

ers directly or indirectly has the ability to control the exercise of the right to vote attaching to one or more voting shares of a licensee, or exercise control of another voting controller. Persons taken to exer-cise control of a corporate include a director or principal officer of thecorporation,abeneficialownerofmorethan15percentofthe

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votingsharesinthecorporation,avotingcontrollerofmorethan15per cent of the voting shares in the corporation and a person who has the power (through constitutional documents or other instrument) to ensure that the affairs of the corporation are conducted in accord-ance with his or her wishes.

There are no equivalent restrictions on voting control by non-residents for domestic pay television programme service licensees or non-domestic television programme service licensees.

Both a domestic free television programme service licensee and a domestic pay television programme service licensee have to be ‘ordi-narily resident in Hong Kong’ within the meaning of the BO.

Sound broadcastingPursuant to the TO, the aggregate of the voting shares in a sound broadcasting licensee in which ‘unqualified persons’ (that is, per-sons not ordinarily resident in Hong Kong) have, directly or indi-rectly,anyright,titleorinterest,mustnotexceed49percentofthetotal number of voting shares in the licensee. The licensee must be a Hong Kong incorporated company and must not be a subsidiary of a corporation.

Cross mediaFurther, to minimise conflicts of interest and build-up of any monop-oly of the media and editorial uniformity, there are restrictions on cross-media ownership control. In essence, no ‘disqualified person’ shall exercise control of a domestic free or a domestic pay television programme service licensee, or a sound broadcasting licensee except with the prior approval of the chief executive in Council.

For television broadcasting, a ‘disqualified person’ is defined in the BO to mean:• alicenseeundertheBO(exceptthatanon-domesticlicenseeis

not a disqualified person in relation to a domestic pay licence);• anadvertisingagency;• asoundbroadcastinglicensee;• aproprietorofanewspaperprintedorproducedinHongKong;• apersonwhoexercisescontroloverthecategoriesmentionedin

the above points; and• anassociateofanyoftheabove-mentionedcategoriesofpersons.

For sound broadcasting, a ‘disqualified person’ is defined in the TO to mean:• anadvertisingagent;• apersonwhointhecourseofbusinesssuppliesmaterial for

broadcasting by a licensee;• alicenseeundertheTO;• apersonwhointhecourseofbusinesstransmitssoundortelevi-

sion material, whether in or outside Hong Kong;• adomesticfreeoradomesticpaytelevisionlicensee,oranassoci-

ate of such licensees; and• apersonwhoexercisescontrolofacorporationthatisaperson

referred to in the above categories of persons.

4 How is a foreign investor or foreign investment defined in the

applicable law?

Foreign investors are not defined in the applicable laws of Hong Kong.Sofarasthetelevisionandsoundbroadcastingsectorsareconcerned, the Hong Kong government adopts the residency test. Broadly, a person is resident in Hong Kong if:• inthecaseofanindividual,heorsheisforthetimebeingordi-

narily resident in Hong Kong and has been resident for a con-

tinuous period of not less than seven years; or• inthecaseofacorporation: • each of the directors (if more than two, each of a majority of

them) who actively participates in the direction or manage-ment of the company is for the time being ordinarily resident in Hong Kong and has been so resident for a continuous period of not less than seven years; and

• the control and management of the corporation is bona fide exercised in Hong Kong.

5 Are there special rules for investments made by foreign state-owned

enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an

SOE or SWF defined?

Nospecialrulesaremadefortheseentitiesorfunds.

6 Which officials or bodies are the competent authorities to review

mergers or acquisitions on national interest grounds?

The chief executive in Council, on recommendations by the Broadcasting Authority, is responsible for granting the television and sound broadcasting service licences on such conditions as he or she thinks fit.

The Broadcasting Authority is responsible for reviewing trans-actions in relation to holding by ‘unqualified voting controllers’ or ‘unqualifiedpersons’mentionedinquestion3above.

7 Notwithstanding the above-mentioned laws and policies, how much

discretion do the authorities have to approve or reject transactions on

national interest grounds?

Notapplicable.

Procedure

8 What jurisdictional thresholds on governmental actions trigger a review

or application of the law? Is filing mandatory?

Pleaseseequestion3.

9 What is the procedure for obtaining national interest clearance of

transactions and other investments?

For initial application for a domestic free television service licence, the applicant is required to submit a prescribed application form with the Broadcasting Authority with information on, among other things:• detailsofthecorporateandshareholdingstructure;• detailsoftheshareholdersoftheapplicant,thevotingrights

attached to the shares in the applicant and any shareholders’ agreement;

• the organisational or management structure and details ofmanagement;

• detailsofwhatdecisionsaretobetakenattheshareholders’leveland the board level; and

• detailsofdisqualifiedpersonsandunqualifiedvotingcontrollers.

An applicant for a sound broadcasting licence has to file a prescribed application form with the Broadcasting Authority containing similar information as outlined above.

For acquisition of shareholding interest in a television broad-casting service licensee by an unqualified voting controller, the prior

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written approval of the Broadcasting Authority is only required if the thresholdsmentionedinquestion3arepassed.

10 Which party is responsible for securing approval?

Legally,boththetargetandtheinvestorhavetheresponsibilitytosecure the relevant approval. However, in practice, it is usually the target that seeks to obtain such approval.

11 How long does the review process take? What factors determine the

timelines for clearance? Are there any exemptions, or any expedited or

‘fast-track’ options?

The processing time varies by case and depends on how adequate the documents submitted are. For the initial application for licence, it generally takes about four months from the receipt of all required documents and clarifications from the applicant.

12 Must the review be completed before the parties can close the

transaction? Are there penalties if the parties implement the

transaction before clearance is obtained?

Yes. If a transaction is completed in contravention of the BO, the Broadcasting Authority may impose such restrictions as:• anytransferofthevotingshareisvoid;• novotingrightcanbeexercisedinrespectofthevotingshare;• nofurthervotingshareshallbeissuedinrightofthevotingshare

or under any offer made to the holder of it; and• exceptinaliquidation,nopaymentshallbemadeofanyamount

due from the licensee on the voting share, whether in respect of capital or otherwise.

Whereavotingshareissubjecttotherestrictioninthefirstpoint,anagreement to transfer the share is void. A person who contravenes the relevant restrictions provisions of the BO commits an offence and isliabletoafineofHK$1millionandimprisonmentoftwoyears.

If a transaction is completed in contravention of the restrictions on ‘unqualified persons’ under the TO, the Broadcasting Authority may direct that the voting rights of the relevant shares should not be exercised, or that the relevant shares be transferred to a person who is not an unqualified person. A person who breaches those relevant provisions of the TO commits an offence and is liable to a fine of HK$100,000plusadailyfineofHK$2,000.Alicenseewhoknow-ingly allows voting rights to be exercised at any general meeting in contravention of Broadcasting Authority’s direction, commits an offenceandisliabletoafineofHK$100,000.

13 Can formal or informal guidance from the authorities be obtained prior

to a filing being made? Do the authorities expect pre-filing dialogue or

meetings?

Yes. Regulators in Hong Kong generally welcome advanced notice of proposed changes and seeking of informal guidance. However, such informal guidance will not bind the regulators who need to review the formal application with all necessary information submit-ted before giving formal guidance.

14 When are government relations, public affairs or lobbying specialists

made use of to support the review of a transaction by the authorities?

Are there any other lawful informal procedures to facilitate or expedite

clearance?

Please see question 18.

15 What post-closing powers do the authorities have to review, challenge

or unwind a transaction that was not otherwise subject to review?

WhiletheBOandTOdonotspecificallyprovideforsuchpost- closing powers, the Broadcasting Authority and the Telecommunica-tions Authority have the power to investigate and obtain information on breaches or potential breaches of those Ordinances.

Further, the Chief Executive in Council or the Broadcasting Authority may, if it is considered to be in the public interest to do so, alter a licence at any time during its period of validity after the licen-see has been given a reasonable opportunity to make representations.

Substantive assessment

16 What is the substantive test for clearance and on whom is the onus

for showing the transaction does or does not satisfy the test?

The Ordinances do not specify the criteria for clearance but factors to be taken into account for granting approval for television and sound broadcasting service licences generally include:• whether the applicant andpersons exercising control of the

applicant are fit and proper persons;• whethertheapplicantandpersonsexercisingcontrolsatisfythe

residence requirement;• applicants’financialsoundnessandcommitment;• processmanagerialandtechnicalexpertise;• variety,quantityandqualityofprogrammestobeprovided;• benefitstothelocalbroadcastingindustry,audienceandcom-

munity as a whole; and• qualitycontrolandcompliance.

For granting approval to holdings by unqualified voting controllers, the Broadcasting Authority would further consider such factors, inter alia, as:• thefinancialabilityofandcommitmentbythecontrollers;• thebenefitsfromthecontrollerstothelicensee;• thecontrollers’long-termcommitmenttoHongKongandassur-

ance that the licensee would provide a service catering for the needs of the Hong Kong community;

• thecontrolandmanagementofthelicenseewouldcontinuetobe bona fide exercised in Hong Kong; and

• the freedomofexpressionandeditorial independenceof thelicensee would be upheld.

17 To what extent will the authorities consult or cooperate with officials in

other countries during the substantive assessment?

Notapplicable.

18 What other parties may become involved in the review process? What

rights and standing do complainants have?

For an initial application for a television or sound broadcasting ser-vice licence, the Broadcasting Authority will publish a public notice inviting interested members of the public to make representations on the application within a specified period.

Hong Kong Latham & Watkins

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For licence extension or renewal, the Broadcasting Authority will also collect public opinions through public hearings and opinion sur-veys. Focus group discussions may also be arranged to obtain more in-depth views.

19 What powers do the authorities have to prohibit or otherwise interfere

with a transaction?

Please see question 12.

20 Is it possible to remedy or avoid the authorities’ objections to a

transaction, for example, by giving undertakings?

This depends on the specifics of the transaction. As an alternative to undertakings it is not uncommon for the licensee’s licence to be subject to conditions to address any concerns that the Broadcasting Authority or Telecommunications Authority may have.

21 Can a negative decision be challenged?

Yes, a public body’s negative administrative decision (for exam-ple, the refusal of the chief executive in Council, the Broadcasting Authority and/or the Telecommunications Authority to grant or renew a licence to an applicant) can be challenged by a party affected by that decision by way of judicial review proceedings commenced in the High Court of Hong Kong.Judicialreviewisaformofcourtproceedinginwhichajudge

reviews the lawfulness of a decision or action made by a public body. Judicialreviewisnotconcernedwithwhetherthepublicbodyhas

made the ‘right’ or ‘wrong’ decision, but whether the correct legal basis has been applied by the public body in reaching its administra-tive decision.

22 What safeguards are in place to protect confidential information from

being disseminated and what are the consequences if confidentiality

is breached?

Subjecttocertainexceptions,allinformationsubmittedinapplica-tion will be treated in confidence in accordance with the BO and TO, and will only be used for the processing of application and for the performance of other functions of the Broadcasting Authority and the Telecommunications Authority. In addition, for personal data relating to individuals, the Broadcasting Authority and the Telecom-munications Authority are bound by and have to comply with the provisionsofthePersonalData(Privacy)Ordinance.

However, the Broadcasting Authority may disclose confidential information submitted in the following circumstances:(i) with a view to the institution of or otherwise for the purposes of

any criminal proceedings or related investigation in Hong Kong;(ii) in connection with civil proceedings to which the Broadcasting

Authority is a party;(iii) that facilitate the Broadcasting Authority or the Telecommunica-

tions Authority investigating or determining a complaint that a licensee is engaging in conduct that contravenes a provision of BO, TO or the Broadcasting Authority Ordinance; or

(iv) in which the Broadcasting Authority considers it is in the public interest to disclose.

Michael Liu michael.liu@lw.com Simon Berry simon.berry@lw.com Eva Tam eva.tam@lw.com

18th floor, One Exchange Square Tel: +852 2912 2500

8 Connaught Place, Central Fax: +852 2912 2600

Hong Kong www.lw.com

The Communications Authority Ordinance (the CAO) was passed by the Legislative Council on 30 June 2011 but, at the time of writing, its effective date is yet to be announced (tentatively in April 2012). Pursuant to the CAO, the Broadcasting Authority and the Telecommunications Authority will be merged into a unified regulator, the Communications Authority, in regulating the broadcasting and telecommunications sectors. Upon its establishment, the Communications Authority would continue to enforce the existing provisions of BO and TO and administer all matters currently under the purview of the Broadcasting Authority and the Telecommunications Authority. The CAO does not deal with the differences in the existing regulatory regimes under the BO and TO. It is currently planned that a comprehensive review of the existing regulatory regimes will be carried out following the establishment of the Communications Authority.

Pending the above review to rationalise the BO and TO, no substantive changes would be made to the existing regulatory and licensing arrangements for broadcasting. It remains the Hong Kong government’s established policy to promote the sustainable development of the local broadcasting industry and encourage competition and investment as well as the adoption of innovative technologies by the industry, with a view to leading to the provision of more quality programmes to the public. There would still be restrictions on holding, acquiring or exercising voting control of a domestic free television programme service licensee and sound broadcasting licensee by ‘unqualified voting controllers’ or ‘unqualified persons’ (as the case may be) to ensure that such services remain firmly rooted in the hands of persons ordinarily resident in Hong Kong who are more likely to have the best interests of Hong Kong in mind.

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In respect of proposed disclosure of information under (iii) or (iv), the Broadcasting Authority will give the person supplying the informa-tion in confidence a reasonable opportunity to make representations before disclosure.

Further, for applications of grant of licence, the applicants are required to submit, at the time of submission of the application form, a completed prescribed form of notice for publication by the BroadcastingAuthorityintheGazetteforpublicconsultation.Thenotice would contain such information as corporate structure and details of shareholdings (including details of unqualified voting con-trollers or unqualified persons) of the applicant, evidence of finan-cial soundness, managerial and technical expertise, quality control and compliance, other programming and technical information, and information on benefits to local industry, audience and the commu-nity as a whole.

Recent cases

23 Discuss in detail up to three recent cases that reflect how the

foregoing laws and policies were applied and the outcome, including,

where possible, examples of rejections.

In2007,theBroadcastingAuthorityapprovedanapplicationmadebyAsiaTelevisionLimited(ATV)forchangesinitsshareholdingstructureinvolvingunqualifiedvotingcontrollers.ATVwasbothadomestic free and non-domestic television programme service licen-see. The then proposed change involved the introduction of new shareholdersincludingChinaLightGroupLimited(CLG).CLG(anditsdirectandindirectholdingcompanies,namely,GuoanElstrongLimited,CITICGuoanGroupandCITICGroup)wouldacquiremorethan2percentofthetotalvotingcontrolofATVandwereunqualifiedvotingcontrollers.InconsideringATV’sapplication,theBroadcasting Authority assessed each of the criteria set out in ques-tion 16 above as follows:• CITIC’sGroup’sinvestmentinATVwouldproviderobustfinan-cialsupporttoATV;

• ATVcouldleverageonthestrengthsandresourcesoftheCITICGroupthroughitsprogrammeandfilmlibraryresources,aswellasitscableTVnetwork,whichspannedsevenprovincesinMain-land China. This would in turn benefit the broadcasting scene in terms of viewers’ choice and competition in the broadcasting industry;

• theunqualifiedvotingcontrollershadsubmittedundertakingsto the Broadcasting Authority that they would make long-term commitments to provide a service catering for the needs of the Hong Kong community. There were also provisions in the BO andconditions inATV’s licencedesigned to ensure thepro-grammes of the licensee adequately cater to the interest and taste of the local audience;

• basedonthesubmissionofATVandtheundertakingsoftheunqualified voting controllers, the Broadcasting Authority was satis-fiedthatthecontrolandmanagementofATVwouldcontinuetobebona fide exercised in Hong Kong; and

• theunqualifiedvotingcontrollershadsubmittedundertakingstothe effect that the freedom of expression and editorial independence ofATVwouldbeupheld.

In2009and2010,theBroadcastingAuthorityreceivedthreesepa-rate applications for the grant of domestic free television programme servicelicencebyCityTelecom(HK)Limited,FantasticTelevisionLimitedandHKTelevisionandEntertainmentCompanyLimited(HKTVE).TheBroadcastingAuthorityhadconductedapubliccon-sultation inviting the public to express their views on these applica-tions.InthecaseofHKTVE,HKTVEwouldbeheldmorethan15per cent by four intermediate holding companies that were wholly ownedbyPCCWLimited.Thesefourintermediateholdingcom-panieswereunqualifiedvotingcontrollerswhilePCCWitselfwasa qualified voting controller. The Broadcasting Authority had duly considered the views collected in the public consultation and had submitted a summary of views received to the Chief Executive in Councilforconsideration.ATVhassoughtajudicialreviewofthedecision of the Broadcasting Authority to make recommendations in respect of these new applications. The court refused to grant leave for review on the ground that the Broadcasting Authority was only exer-cising a statutory duty (not a statutory discretion) to make recom-mendations. The recommendations per se do not have the effect of grantinganewlicence.UntiltheChiefExecutiveinCouncilmakesadecision,ATVcannotbesaidtobeaggrieved.Atthetimeofwriting,the Hong Kong government is still processing these new applications and the outcome is yet to be announced.

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