Agile shareholding structures, compliance to drive AI globalisation

As compliance and regulatory frameworks for AI technology become increasingly refined across key jurisdictions, and with continuing geopolitical rivalry in the technology sector, the global expansion of AI enterprises has evolved from a straightforward commercial decision into a complex calculus involving legal, policy and geopolitical risk.

AI enterprises venturing abroad must address two pressing questions:

1. 1. How to devise a strategic corporate shareholding structure that underpins subsequent capital-raising and business expansion; and
   2. How to build a compliance governance mechanism that responds effectively to regulatory concerns while remaining agile enough to keep pace with the business amid rapidly shifting regulatory stances and exacting compliance demands.

This article addresses both issues, examining shareholding structure design and regulatory compliance strategies for AI enterprises in the current dynamics.

Shareholding structure design

Most AI enterprises pursue overseas expansion either through a red-chip structure or outbound direct investment by an onshore Chinese entity to establish subsidiaries abroad.

Under a red-chip structure, an offshore holding company is established as the vehicle for overseas financing, listing and other capital markets transactions, holding onshore assets and interests through one or more layers of special purpose vehicles.

This structure suits AI enterprises that aim to strategically integrate domestic and international resources, optimise their global footprint, and position themselves favourably for accessing international capital markets.

But red-chip structures have come under considerably tighter regulatory scrutiny lately, with authorities applying a more detailed, granular lens.

At the China Securities Regulatory Commission’s pre-listing filing stage for Hong Kong-bound IPOs, a growing number of red-chip-structured applicants have received regulatory queries, with some required to unwind the structure before proceeding.

Industry observations suggest that the regulator has not adopted an outright ban on red-chip structures. Instead, it is substantively assessing whether the structures are necessary and reasonable, and whether they have been deployed to shift onshore assets abroad or evade domestic oversight.

The implication is clear: the red-chip structure remains within the bounds of compliance but its rationale, commercial substance and compliance perimeter must be thoroughly demonstrated and carefully crafted from the earliest planning stage.

Alternatively, AI enterprises can use an onshore corporate vehicle to raise capital and, upon completion of the joint-stock reform, pursue an A-share and/or H-share listing. Overseas expansion is effected through outbound direct investment by the onshore entity and the incorporation of subsidiaries abroad.

Due to the straightforward structure, benefits including a clear route to listing and accessible policy support hold significant appeal for AI enterprises with defined plans for A-share and/or H-share listings, state-owned shareholders, or ambitions to bring in government guidance funds and industrial funds.

Beyond the two outlined approaches, in practice there exist other bespoke global shareholding structures tailored to AI enterprises that should be holistically designed through a comprehensive assessment of the company’s capital market plans, operational footprint, shareholder composition, and other relevant factors.

Compliance

Ahead of any overseas push, AI enterprises should ground their efforts in the substance of their business, systematically identifying every essential operating licence and permit, and securing them in compliance with legal requirements.

Key examples include filings for large models and algorithms used in generative AI services, among others. Only with these foundational licences in place can the business proceed on a compliant footing.

Data compliance must also be woven into every stage of an AI enterprise’s business lifecycle.

At the development and training stage, the key concern is the legality of data sources and clarity of IP ownership. When services are deployed externally, enterprises should prudently evaluate the available compliance routes for cross-border data flows, the adequacy of user notice and consent frameworks, and the data security capabilities of overseas recipients. Overlooking these issues risks derailing the global expansion.

In addition, wherever cross-border technology flows are involved, AI enterprises must make a thorough, end-to-end assessment of compliance with China’s technology import and export rules, and export control framework as a core part of their overseas readiness.

If the relevant technology is classified as restricted for export under China’s Catalogue of Technologies Prohibited and Restricted from Export, AI enterprises must apply for and secure a technology export licence from the commerce authorities before transferring such technology overseas.

Only by integrating regulatory licensing, data governance and technology export controls into a unified compliance framework for overseas expansion can AI enterprises build a robust and workable compliance defence – and avoid penalties, or worse, disruption to their business.

Recommendations

As compliance policies, regulatory approaches and the AI sector iterate in rapid parallel, AI enterprises confront an ever more intricate set of variables with global expansion.

In executing globalisation strategy, they must keep both shareholding structure and compliance arrangements under constant review, striking a sustainable equilibrium between commercial velocity and regulatory prudence.

The non-negotiable floor for any overseas pathway remains strict adherence to the laws and regulations in force. This means that building a globalisation strategy demands close and continuous collaboration with specialist legal counsel.

Through thorough case-by-case analysis, AI enterprises can tailor a robust globalisation plan that satisfies both regulatory requirements and commercial objectives.

This is the only route to steady, long-term growth amid shifting and uncertain global dynamics.

Clara Liu is a partner at Han Kun Law Offices. She can be contacted by phone at +86 10 8516 4158 and by email at xiayi.liu@hankunlaw.com
Zhao Chenchen is an associate at Han Kun Law Offices. She can be contacted by phone at +86 10 8524 9482 and by email at chenchen.zhao@hankunlaw.com