"The Path of Chinese Enterprises Going Global: Full Path of Investment and Financing" is written by a professional team of lawyers from Zhong Lun Law Firm. It is a practical guide on overseas investment and financing for Chinese enterprises. This book provides a comprehensive analysis of the various challenges and legal key points faced by Chinese enterprises in the process of overseas investment and financing, covering implementation strategies for the entire process of going global, including path design, terms negotiation, financing and loans, operational compliance, exit mechanisms, etc. It also highlights key concerns for special entities such as listed companies, state-owned enterprises, and cross-border e-commerce, aiming to provide all-round support and guidance for the international development of Chinese enterprises.
Core Viewpoints
- Chinese enterprises face numerous challenges when going global. They need to pay attention to legal risks, plan ahead, and establish a sound compliance management system to ensure the sustainable development of overseas business.
- Different modes of going global have their own advantages and disadvantages. Enterprises should choose the appropriate path based on their own situation, and pay attention to terms design, negotiation points, and risk prevention and control in the process of investment and mergers and acquisitions.
- Cross-border financing and operational compliance are key links for enterprises going global. They must comply with relevant domestic and foreign laws and regulations, actively respond to regulatory requirements, and ensure the safety of funds and legal compliance of business.
- Reasonable planning of exit mechanisms is crucial for enterprises. Assets can be realized and risks avoided through various means, ensuring the maximization of enterprise interests.
Challenges and Coping Strategies for Chinese Enterprises Going Global
1. Legal Risks
- Diverse types of risks: including geopolitical risks, group management structure risks, tax risks, intellectual property risks, overseas employment risks, anti-corruption and anti-money laundering compliance risks, etc. For example, geopolitical factors may lead to trade controls, economic sanctions, supply chain risks, and national security reviews; imperfect group management structures may cause overseas subsidiaries to lose control; tax non-compliance may bring high costs; intellectual property infringement may face lawsuits and compensation; irregular overseas employment may trigger labor disputes; anti-corruption and anti-money laundering violations will face severe penalties.
- Coping strategies: Enterprises should strengthen legal risk assessment, conduct due diligence in advance, understand the legal policies and business environment of the target country; establish a sound internal compliance management system, clarify departmental responsibilities, and strengthen risk prevention and control; hire professional legal advisors to ensure compliance with laws and regulations in investment, mergers and acquisitions, and operational management, and properly handle legal issues.
2. Choice of Going Global Mode
- Export and supplier cooperation: Advantages include fast market entry and low capital requirements, and local suppliers can be leveraged to expand overseas markets; disadvantages are the possible inability to control core resources, strong dependence, and risks such as contract disputes, supply chain management, and customs import and export compliance in international trade.
- Investment and self-construction: Allows independent choice of investment and operation strategies, but market entry is slower, facing unfamiliarity with local markets and rules, decision-making and control risks, and may encounter geopolitical impacts, market access difficulties, losses due to unfamiliarity with local rules, and risks of being deemed to circumvent investment rules.
- Overseas mergers and acquisitions: Enables rapid entry into overseas markets by leveraging existing technology, business, brand, etc., but there are challenges in business integration and effective control of the target company. Due to geopolitical and FDI review systems, legal work needs to be done in advance to resolve legal and compliance issues.
3. Cross-border Financing
- Financing methods and key points: Enterprises can finance through QDLP, share issuance for asset purchase, joint investors, domestic guarantee for overseas loans, bond issuance, etc. For example, QDLP has advantages such as simple approval procedures and flexible quota management, but attention should be paid to policy differences and practical issues in different regions; share issuance for asset purchase can reduce asset-liability ratio but faces long review periods; joint investors can solve financing difficulties but must ensure control and pay attention to declaration of business concentration; domestic guarantee for overseas loans is common but requires attention to guarantee registration and performance registration requirements; bond issuance needs to consider issuance location, rating, cost, etc., and overseas bond issuance faces review registration and foreign exchange management requirements.
- Strict compliance requirements: Enterprises must comply with relevant domestic and foreign laws and regulations, such as the "Administrative Measures for Fixed Asset Loans", "Administrative Measures for Enterprise Medium and Long-term Foreign Debt Review and Registration", etc., handle NDRC foreign debt review and registration, SAFE foreign debt contract registration, etc., to ensure legal and compliant financing activities and avoid violation risks.
Implementation Strategies for Overseas Investment and Mergers and Acquisitions
1. Coping with Policy Risks
- Types and impacts of risks: Policy risks run through the entire process of investment and M&A transactions, including regulatory policy change risks in the target company's industry, government approval failure or violation risks involved in the transaction, international economic and political relationship risks, etc. For example, changes in industry regulatory policies may affect company operation and development, government approval failure will lead to transaction failure, and changes in international economic and political relations may affect the realization of investment objectives.
- Coping measures: Investors should be well prepared at all stages of the transaction, fully understand the legal regulatory requirements and policy orientation of the target company's industry in the early stage, sort out the government approval process involved in the transaction, clarify the responsibilities and risk sharing of all parties; in the drafting and negotiation stage of transaction documents, reasonably set terms to cope with government approval and policy change risks, such as linking government approval to contract effectiveness or payment and delivery, agreeing on major adverse event clauses, etc.; closely monitor approval progress and policy changes after signing and before delivery, and adjust transaction plans in time; continue to pay attention to policy dynamics after delivery, do a good job in post-investment management, and ensure that enterprise operation complies with policy requirements.
2. Operation of M&A Funds
- Purpose and function: M&A funds provide financial support for cross-border M&A, optimizing transaction structure and efficiency. They can grant asset management institutions decision-making power and economic interests, reduce risks and achieve benefit sharing through professional management; incentivize the management of the acquirer, rationalize the relationship between their work results and remuneration; accommodate mezzanine investors, increase capital structure flexibility, and reduce debt pressure and costs.
- Structure design and considerations: In terms of structure design, it is necessary to consider whether Hong Kong licensed companies are involved, and if so, tax and compliance factors must be considered; limited partnerships can be established in Hong Kong or the Cayman Islands, and there are differences in legal environment, investor preferences, registration fees, annual maintenance fees, fund managers, governing law, regulatory agencies, anti-money laundering functions, etc.; attention should also be paid to tax considerations, such as different tax rates, capital gains tax, and distribution tax in Hong Kong and the Cayman Islands, which have different tax impacts on fund sponsors and investors; in addition, commonly used structures such as guarantees and keepwell agreements play an important role in risk management and credit enhancement, but attention should be paid to relevant legal requirements and practical issues.
3. Equity Acquisition Agreement Terms
- Analysis of key terms: The terms for signing parties of the agreement need to verify the subject information, pay attention to signing procedures and the economic strength of the counterparty; in definition clauses, the definition of terms such as statements, disclosure, force majeure, final deadline, etc. has a significant impact on the rights and obligations of all parties and should be carefully reviewed; equity sale and purchase clauses should clarify the seller's guarantee of equity ownership and the timing of rights transfer, and consider the buyer's dividend rights and the tax impact of the seller's related operations; conditions precedent clauses specify the conditions for delivery, and the content, deadline, responsible party, consequences, etc. should be clarified to avoid circular conditions; transaction price clauses involve payment form, currency, deposit, balance, etc., and both parties should negotiate based on their own interests; representation and warranty clauses require the seller to disclose information to ensure the buyer's rights and interests, and both parties should pay attention to the scope, duration, and claim methods of warranties; liability limitation clauses limit the seller's compensation liability, and the amount, duration, and scope of claimable matters should be clarified; indemnity clauses are the seller's commitment to compensate the buyer for losses in specific matters, and both parties should pay attention to the scope of indemnity and the dominant right of defense.
- Negotiation points and considerations: In the negotiation process, both parties should strive for favorable terms based on their own interests and risk tolerance. At the same time, attention should be paid to the interrelation and impact between clauses to ensure the overall rationality and enforceability of the agreement. In addition, the laws and regulations, business practices, and specific circumstances of the target company's country or region should be fully considered to avoid transaction risks caused by unreasonable or illegal clauses.
Overseas Operational Compliance and Exit Mechanisms
1. Key Points of Operational Compliance
- Wide scope of compliance: Overseas operations of enterprises involve multiple compliance areas such as anti-corruption and anti-bribery, economic sanctions, export controls, anti-money laundering, multilateral financial institution sanctions, health and safety, labor employment, environmental protection, tax management, intellectual property, customs and foreign exchange management, etc. For example, in anti-corruption, it is necessary to comply with relevant regulations of the US, UK, and host countries to prevent bribery and corruption risks; in economic sanctions, attention should be paid to the US primary and secondary sanctions system to avoid transactions with sanctioned entities; in export controls, ensure that exported items comply with regulations and obtain necessary licenses; in labor employment, comply with the laws and regulations of the host country and protect the rights and interests of workers.
- Establishment of compliance management system: Enterprises should establish a sound overseas compliance management system, including building a compliance management organizational structure, system framework, operating mechanism, and safeguard measures, identifying, assessing, and controlling compliance risks, formulating country-specific compliance risk control guidelines, and integrating compliance obligations into positions and processes; at the same time, actively respond to overseas regulatory investigations, avoid the "ostrich policy" and the misconception of complete cooperation, seek professional legal support, and defend, negotiate, and bargain according to law and reason.
2. Choice of Exit Mechanisms
- Common exit clauses and variants: Common exit arrangements include sale to third parties (such as through drag-along and tag-along clauses), sale to partners (such as through put and call option clauses, including variants such as Russian Roulette and Texas Shoot-Out), and dissolution of the company (according to company law provisions of different countries and regions). For example, drag-along rights give majority shareholders the right to force minority shareholders to sell shares, tag-along rights ensure minority shareholders have the opportunity to sell shares at the same price; Russian Roulette and Texas Shoot-Out variants provide different exit solutions in cases of different shareholding ratios and deadlocks, but may be considered invalid in some countries and regions due to shareholder protection and other factors.
- Applicable arrangements for different exit situations: According to different exit reasons, such as reaching a specified term or milestone, major partner personnel changes, operational difficulties, major environmental changes (force majeure), etc., enterprises can choose applicable exit clauses. For example, in the real estate development industry, after achieving goals, joint venture companies can be exited through drag-along and tag-along clauses; enterprises based on key personnel cooperation should consider lock-up periods and equity handling in case of key personnel fault or change; in case of operational difficulties, call or put options can be exercised according to financial status or deadlock definition, or greater benefits can be sought through contractual arrangements before legal remedies; in case of force majeure, financial investors can trigger put option clauses, and joint venture parties can also consider dissolving the company.
Key Concerns for Special Entities Going Global
1. Overseas Acquisition by Listed Companies
- Legal structure design: The legal structure of overseas acquisitions by listed companies is diverse, including direct or full cash acquisition of target companies through overseas SPVs, targeted issuance of shares to raise funds before acquiring target companies, major shareholders/PE M&A funds acquiring target companies first and then listed companies acquiring target companies through private placement and its extended schemes (such as major shareholders or PE M&A funds and listed companies simultaneously acquiring part of the equity of overseas companies, and subsequently injecting the remaining equity of overseas companies into listed companies), cross-border share swaps (direct and indirect methods), etc. Different structures have their own advantages and disadvantages. For example, full cash acquisition can shorten approval time and enjoy tax incentives but requires strong financial strength; targeted issuance of shares to raise funds can avoid pressure on existing funds but increases review process and time costs; major shareholders/PE M&A funds acquiring first can lock in the target and shorten transaction time but face financial strength requirements and subsequent related party transaction issues; cross-border share swaps can avoid cash payment pressure and tax costs but the acquirer and target company need to go through relevant review procedures, and the equity ratio will be diluted.
- Case analysis and inspiration: Through cases such as Sino Medical's cash acquisition of US eLum, J Company's acquisition of Brazil's S Company, and G Company, the application of different acquisition structures in practice is demonstrated. When designing the legal structure of overseas acquisitions, enterprises should adhere to the principles of legality and purposefulness, combine their own and the target company's actual situation and interests, and, with the assistance of professional legal advisors, comprehensively consider financing type, transaction cost, legal risk, and other factors to choose or design the most suitable transaction structure to achieve the lowest legal risk and transaction cost.
2. Overseas Investment by State-owned Enterprises
- Regulatory framework and process: Overseas investment by state-owned enterprises must follow the conventional regulatory regime for overseas direct investment, involving the NDRC, MOFCOM, and foreign exchange management departments. The NDRC regulates overseas investment projects according to the "Administrative Measures for Overseas Investment by Enterprises", including approval for sensitive projects and filing for non-sensitive projects; MOFCOM regulates according to the "Administrative Measures for Overseas Investment", with projects in sensitive countries and regions and sensitive industries requiring approval, and other projects requiring filing; the foreign exchange management department implements indirect regulation through banks, and enterprises handle foreign exchange registration and fund remittance procedures after completing NDRC and MOFCOM procedures. At the same time, overseas investment by state-owned enterprises must also comply with their own regulatory requirements, such as the "Administrative Measures for Supervision and Management of Overseas Investment by Central Enterprises" issued by the SASAC, including pre-negative list system, non-main business investment review, annual overseas investment plan preparation, supervision and information reporting system during and after the event, post-evaluation, regular audits, etc.
- Regulation of overseas state-owned property rights: Regulation of overseas state-owned property rights includes property holding and disposal. For property holding, central enterprises and their subsidiaries at all levels should apply to SASAC for property registration under certain circumstances. If, due to the laws of the investment destination country, overseas state-owned property rights need to be held by individuals on behalf, it should be decided or approved by the central enterprise and relevant procedures should be handled. For property disposal, changes in state-owned property rights should be decided or approved by the central enterprise, relevant transactions should be evaluated or appraised (except for special circumstances), pricing should be reasonable and determined by various factors, transaction methods can be selected from multiple intended transferees, and if conditions permit, public solicitation or listing transactions should be conducted. However, transfer of overseas state-owned property rights is not mandatory to enter the market, and in practice, transactions can be conducted in various ways.
3. Cross-border Export E-commerce
- Structure building and operation mode: The structure of cross-border export e-commerce includes multiple entities, such as the main company, production company, sales company, domestic operation service company, Hong Kong subsidiary (overseas sales entity), store account company, overseas subsidiary (overseas store company), etc. Each entity has different functions, income sources, and cost expenses. Structure building needs to consider various factors, such as the domestic production entity should choose the appropriate procurement method according to the procurement invoice situation to achieve financial and tax compliance, and can utilize local industrial support policies; the store account company is used to build a store matrix but faces the risk of violating platform rules, so reasonable layout and measures should be taken to ensure compliance, such as clarifying the functions of the account company, choosing the appropriate registration location, signing relevant agreements, strengthening information control, and integrating acquisitions when appropriate; the overseas sales entity generally chooses a Hong Kong subsidiary, which has advantages such as being an overseas investment platform, a capital bridge, and flexible structure, and can undertake multiple functions and enjoy tax incentives. The sales and logistics modes of cross-border export e-commerce include traditional foreign trade mode, direct mail mode, and overseas warehouse mode. Each mode differs in business flow, logistics flow, capital flow, and capital channels. Enterprises should choose the appropriate mode according to their development stage and needs, and pay attention to the risks of each mode, such as tax risks in direct mail mode and freight forwarding-related risks in overseas warehouse mode.
- Compliance risks and coping: Cross-border e-commerce enterprises face compliance risks in customs, taxation, intellectual property, advertising and marketing, product certification and consumer protection, data protection/privacy, trade, and other aspects. Customs supervision mode
