Provisions in the new PRC Enterprise Insolvency Law regarding restructuring, debtor-in-possession financing and other related procedures provide opportunities for foreign involvement in crisis financing in China, including the reorganization of entities in crisis. However, the implementation of these provisions is fraught with difficulty.
Under current Chinese law, a foreign investor who wishes to be involved in crisis financing in China has to be aware of several issues, such as property ownership restrictions, foreign investment approvals and anti-monopoly assessments.
Partner
Simmons & Simmons
According to the Direction of Foreign Investment Regulations recently published by the State Council, there are still four categories of foreign investment: encouraged, permitted, restricted and prohibited. Individual industries may also impose strict requirements on the qualifications or investment ability of foreign investors.
A foreign investor wishing to acquire a Chinese entity must have prior approval from the Ministry of Commerce, regardless of whether it is an asset or a share acquisition. With regard to direct investments, the legal basis for approvals are the PRC Company Law and the PRC Sino-foreign Joint Venture Law. There are also regulations governing how foreign and Chinese investors acting jointly should acquire Chinese entities, such as general principles under the Acquisition of Chinese Entities by Foreign Investors Regulations (Regulation 10), and specific regulations in relation to acquisition of listed companies and of entities in specific industries.
The foreign investor should be aware of possible monopolistic behaviour resulting from the acquisition. Since the implementation of the PRC Anti-Monopoly Law, the main legal basis against monopolistic behaviour is the State Council Application for Approval by Parties Acting in Concert Regulations.
The effect of scrutiny and approvals
Under the PRC Enterprise Insolvency Law, a debtor or insolvency practitioner must, within six months of the People’s Court approving the restructuring of the debtor, submit a draft restructuring plan to the court and a creditors’ meeting. The restructuring plan is the most important legal document in the restructuring process. It is, essentially, an agreement between various interested parties in relation to the issues which may arise under a restructuring of the debtor’s liabilities. In practice, the court requires the plan to be as detailed and practical as possible.
If the debtor or insolvency practitioner fails to submit the draft restructuring plan in time, the court can order the termination of the restructuring, and declare the debtor insolvent.
In practice, it takes a long time to obtain the approvals necessary for foreign investment in the restructuring of a company under a restructuring plan. Gaining approval from the Ministry of Commerce alone may take two to three months. If industry-specific approvals are also needed, the whole process may well take more than the six months allowed for the submission of the restructuring plan. In addition, the uncertainty of the approval process also has adverse effects.
Although the debtor cannot control the time it takes for a foreign investor to obtain the required approvals, it can adopt certain measures to alleviate the problem. Firstly, before the restructuring plan is drawn up, the debtor should openly communicate with the approval departments concerned, to ascertain the viability of the proposed restructuring. Secondly, even though the proposer of the plan does not normally require great detail regarding the foreign investor, sufficient detail should be included to enable the court to approve it.
If a foreign investor already has a presence in China, it may consider using one of its existing entities as the restructuring vehicle. However, although the existing foreign enterprise is established and exists according to Chinese law, this will not exempt it from the approval requirements which are generally applicable to foreign investment.
Investment in a restructured listed company
A foreign investor wishing to invest in a listed company must comply with special regulations. In particular, when it comes to investing in a listed company which is being restructured, there are specific issues concerning obtaining investment approvals.
Article 6 of the Strategic Investment by Foreign Investors in Listed Companies Regulations states that a foreign investor investing in a restructured listed company must satisfy the following conditions:
- It must be a legal person or other entity which is legally constituted and managed, with sound finances, good reputation and credit history, and solid management experience;
- Ut or its parent company must have foreign assets of no less than US$100 million, or it must manage foreign assets of a value of no less than US$500 million;
- It must have a sound management and internal control system; and
- It and its parent company must not, within the past three years, have had any significant sanction imposed on them by any regulatory authority (whether in China or abroad).
In addition to satisfying the above conditions, a foreign investor investing in a listed company must obtain the approval of the Ministry of Commence and/or the regulatory body of the relevant industry, as well as the approval of the China Securities Regulatory Commission. Such complex approval procedures have deterred a lot of potential foreign investors in listed companies which are being restructured, to the extent that there has not been a single case of a foreign investor having successfully invested in a listed company which is being restructured.
A major reason for this is the strict criteria required for a listing in China, which have made listed status a rare resource (or what is known as a “shell resource”). The use of listed “shell” companies has rendered the insolvency restructuring of a listed company a mere theoretical discussion. In reality, it is rare to see a restructuring truly reviving and continuing the business of a listed company. Mostly, what is achieved is an asset reorganization in which entirely new assets are injected into the “shell”, even if the restructured listed company has, in essence, changed beyond recognition.
Davis Wang is a partner at Simmons & Simmons. For enquiries relating to restructuring, please contact him on +852 2868 1131 or by email at davis.wang@simmons-simmons.com
