From a strike soon after Shougang invested in a mine in Peru to the frustration of Chinalco’s attempted acquisition of a stake in Rio Tinto, the road to overseas investment by PRC mining companies has been bumpy. One of the major bumps is legal risk. To ensure the success of their investments, PRC mining companies should prepare for the rain before striding out of the door.
Domestic considerations
Managing Partner
V&T Law Firm
Before going global, a PRC mining company should first understand China’s policies and laws on investment abroad. China, for example, exercises controls over foreign exchange, and accordingly the first issue that a Chinese company encounters when venturing overseas is how to remit funds abroad.
To do so, it must carry out specified foreign exchange registration procedures for direct foreign investment with the local foreign exchange control authority, and apply for a foreign exchange registration certificate from that authority. It must then carry out the procedures for the outward remittance of funds in connection with a direct foreign investment with a designated foreign exchange bank on the strength of the approval document of the competent direct foreign investment authority and the foreign exchange registration certificate for direct foreign investment.
Aside from foreign exchange, the PRC has now issued support policies that encourage companies to go global. Companies should understand and take full advantage of these policies.
Familiarity with the host country
Lawyer
V&T Law Firm
First, the industrial policy of the host country should be understood. Many countries have regulations attracting or restricting investment in mining resources by foreign investors. Before going global, a PRC mining company should conduct due diligence and gain an understanding of the situation. First, the attitude of the host country towards the mining sector in which the enterprise intends to invest needs to be understood. Does it permit, encourage, restrict or prohibit investment? If the host country permits or encourages this, the approval procedures that it requires need to be understood, and the relevant documents need to be prepared.
Second, the host country’s labour laws and cultural practices need to be taken fully into account. The labour question is a major issue, but is one that is often ignored by Chinese companies. Many countries impose severe penalties for the violation of labour laws. For example, the global retailer Wal-Mart was once fined US$78 million for violating the labour laws of the state of Pennsylvania in the US by compelling employees to do unpaid overtime. Some Chinese companies have suffered severe delays and major losses due to ignoring the provisions of local labour laws.
A Chinese company should also take sufficient account of the cultural practices of the host country. For example, relatively long leave and high overtime pay are one of the characteristics of employment law and practice in many western countries, and in Islamic countries, setting aside long periods of time for religious activities each year is a cultural tradition.
However, many companies that invested in overseas markets early on failed to attach sufficient weight to local employment laws and cultural practices, resulting in delays and other adverse consequences.
Third, the regulations of the host country on environmental protection should be respected. Violating these regulations may lead to a heavy fine and even closure of the company. With a view to regulating the behaviour of Chinese companies going global and helping them to avoid the risks of violating environmental regulations in host countries, the Chinese Academy for Environmental Planning and the Global Environmental Institute have prepared environmental protection guidelines for overseas investment and aid projects.
The guidelines require that all overseas projects that are completed or under construction be equipped with necessary environmental protection facilities, such as those for sewage and refuse disposal. The guidelines also require that Chinese companies involved in overseas investment and aid projects evaluate the environmental impact of their projects and compensate for the ecological damage caused. With a view to giving companies more insights into international investment, for the last three years the Ministry of Commerce has organized the compilation of guidelines for foreign investment cooperation countries and regions.
The latest 2011 version, in particular, not only provides up-to-date data, policies and regulations, but also summarizes the policies and regulations on issues such as environmental protection, land use and labour issues in host countries and regions, and how to minimize risk.
Fourth, infringement of intellectual property should be avoided. Instigating intellectual property litigation to attack competitors has become one of the rules of the game in international business. The quantity of intellectual property rights, particularly patents, owned around the world by individuals and companies from the US and other developed countries is relatively large, making investors from other countries easy targets for intellectual property infringement cases. Chinese mining companies should establish their intellectual property strategies and legal teams as soon as possible and, when investing overseas, should engage local patent agencies or lawyers to search relevant patents and issue search reports so as to avoid infringement disputes.
Fifth, a rational transaction structure needs to be designed. The success of the transaction structure is key to the success of a foreign investment. When investing abroad, Chinese mining companies usually use one of two transaction types, namely equity acquisition or asset acquisition. Each of these has its advantages and disadvantages.
An investor should assess the lawfulness, feasibility, taxation and time required for the implementation of both structures. In comparison to an asset acquisition, the risks of an equity acquisition can be greater and the payback period longer, but the tax burden can be lighter and the approval procedures involved fewer. Which transaction type to use should be determined based on such factors as the investment objective. Going global is, for Chinese mining companies, a complex undertaking that involves multifaceted legal relationships.
Wang Jihong is the managing partner of V&T Law Firm. She practises in the field of infrastructure development. Gao Lei is a lawyer at V&T Law Firm
