Leapmotor’s rare move shows scrutiny on data compliance pays off

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Leapmotor allays US, PRC regulatory concerns in rare move before Hong Kong IPO
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Chinese electric vehicle maker Leapmotor Technology’s rare move to engage legal advisers on PRC data security and US export laws in its successful IPO points to a growing need to scrutinise compliance in these areas.

Leapmotor’s listing in September was one of the most significant transactions of the year on the HKEX, raising HKD6.3 billion (USD800 million) and selling shares at HKD48 apiece, priced at the bottom of the expected range.

Kevin Duan
Kevin Duan

Han Kun Law Offices advised on PRC data security law, while Pillsbury focused on US export law.

Engaging legal advisers on PRC data security law has been increasing since February in several Hong Kong prospectuses, but only Leapmotor’s listing succeeded.

Kevin Duan, the leading partner for Han Kun in the Leapmotor deal, raised the necessity of taking such a position nowadays as data compliance counsel provides customised plans in the early stages of the transaction, in line with the legislative trend, and can respond efficiently to possible emergencies in the whole listing process.

“[The listing committee] will also require companies to notify it of the legislative developments that are not yet in force, but are expected to have an impact on the company’s business,” said Duan.

“In addition, the listing committee has been closely tracking relevant legislative, enforcement and judicial developments, and will require the company to provide clarification and explanation in a timely manner when, for example, legislation and enforcement events relevant to the company’s business make an impact, all of which would otherwise affect the overall progress of the listing.”

In this transaction, Han Kun mainly advised on the Personal Information Protection Law, Data Security Law, and Several Provisions on the Management of Automobile Data Security (for Trial Implementation).

Previously, the firm would also provide advice on data security when acting as PRC counsel for companies such as Tencent Music, KE Holdings and NIO on their overseas listings.

According to Duan, to cope with the growing number of data-related regulations in recent years, there is “an increasing need to have a PRC data security law adviser” for companies holding large amounts of important data before going public.

Apart from generally applicable data compliance regulations, it is important to consider data requirements in specific industries, such as the automotive, autonomous driving, finance and healthcare sectors, he said.

China issued Measures for Data Export Security Assessment on 1 September, which provides a framework for regulating outbound data transfers. Duan suggested that regulators should further clarify the declaration method and declaration materials required.

“Companies in different industries and business types have various characteristics in terms of outbound data transfers, which may not be compatible with the typical peer-to-peer data transfer model as the regulatory declaration system has envisaged.”

He added that “for scenarios such as the transfer of employee data overseas, which are frequent, necessary and have a low likelihood of impacting national security, a targeted design in terms of the need for a declaration and the declaration process will also be positive in reducing the burden on regulators and improving the efficiency of reviews.”

As for Leapmotor engaging a legal adviser on the US Export Control Act in this transaction, it was in response to the inclusion of Dahua Technology, which owns 33% of Leapmotor, on the US Entity List in 2019, and the existence of leasing, purchasing, supply and sales relationships between its subsidiaries and Leapmotor.

Dahua Technology is a major shareholder of Leapmotor with a 33% stake, so the company being blacklisted on the US Entity List could raise concerns among potential investors.

The US Entity List, which is issued by the Bureau of Industry and Security (BIS), publishes the names of certain foreign persons – including businesses, research institutions, government and private organisations, individuals, and other types of legal persons – that are subject to specific licensing requirements for the export, re-export and/or transfer (in-country) of specified items.

Those on the list are subject to the Export Administration Regulations (EAR) where a foreign company is required to hold a US export licence. Imports from third countries that contain more than 25% of the value of US-controlled items are also subject to the EAR.

Pillsbury stated in the prospectus that as the EAR would not be extended to individuals or companies not on the list, meaning Leapmotor and subsidiaries of Dahua Technology would not be subject to scrutiny by the BIS.

The regulatory concerns are significant especially amid the long-running trade standoff between China and the US, involving company audits, data security and tariffs.

Clifford Chance acted as counsel on Hong Kong and US laws, while Grandway Law Offices acted as the PRC legal counsel to Leapmotor.

For the joint sponsors and underwriters, JP Morgan, CICC, Citigroup Global Markets and CCB International Capital, Simpson Thacher advised on Hong Kong and US law, while Jingtian & Gongcheng advised on PRC law.

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