Pris, värdering och kliniska milstolpar är det som först brukar synas utåt, men bakom kulisserna kräver en säkrad affär också flera godkännanden. NDRC registrerar eller godkänner själva investeringen, handelsministeriet MOFCOM sköter sin egen registrering, och valutamyndigheten SAFE frigör valutan över gränsen genom banker med delegerat ansvar. Ett bolag som inte planerar för det kan förlora både tid och förhandlingsläge.
Sedan den 1 juli har ett nytt lager tillkommit: förordning 837 om utgående investeringar, undertecknad av premiärminister Li Qiang. Den ersätter inte de tre myndigheterna. Den lyfter tillsynen till statsrådsnivå och låter övervakningen ske genom hela investeringens livscykel i stället för ett enda godkännande på förhand. Exportkontroll och datastyrning har skrivits in i reglerna, vid sidan av en nationell säkerhetsgranskning för affärer som kan beröra kinesiska säkerhetsintressen, med påföljder som inbegriper tvångsavyttring. Eftersom datastyrning ingår är en naturlig fråga för ett life science-bolag vad det betyder för att dela data över gränserna i en granskning hos EMA eller FDA, något Gu återkommer till nedan. Tillämpningsreglerna är ännu på utkaststadiet och ute på remiss sedan i augusti.
Varifrån pengarna kommer
Frågan uppstår så snart den kinesiska parten är källan till kapitalet: ett förvärv, en nyemission som tecknas från Kina, eller ett samriskbolag som finansieras därifrån. I sådana affärer har den synliga friktionen vanligen legat i mottagarlandets säkerhetsprövning, ofta granskningen hos Committee on Foreign Investment in the United States (CFIUS) när målbolaget har verksamhet i USA eller NIH-finansierad teknik. Nu har Kina lagt till ett eget lager på utflödessidan, så en affär med en kinesisk finansiär kan leda till granskning i båda ändar. Förordningen tar sikte på säkerhet och strategi snarare än på att blockera kapital, men för en europeisk motpart kan den praktiska följden bli fler kontroller, mer pappersarbete och möjligen längre ledtider.
Q&A med Aaron Gu
Hur bör då ett biotechbolag tänka kring allt detta i praktiken? BioStock talade med Aaron Gu, partner vid Han Kun Law Offices, ofta anlitad som rådgivare om lagförslag till den kinesiska läkemedelsmyndigheten NMPA och som ägnat sin karriär åt skärningspunkten mellan kinesiskt kapital och global life science.
Aaron, the chain runs through NDRC, MOFCOM and SAFE. In practice, what decides whether the money actually moves: the formal sign-offs, or the delegated bank handling the currency step? And following up on that, do we see varying interpretations of the rules depending on which region or bank you deal with?
– Under the current ODI framework, the entire process involves multiple authorities and other relevant parties. The completion of NDRC and MOFCOM approval or filing is a prerequisite for the ODI to proceed. On the other hand, the bank’s responsibility is to review the authenticity and compliance of the underlying transaction, to ensure that the money moves strictly within the scope of what has been approved by the competent authorities. Banks should also process the transfer in accordance with the foreign exchange rules administered by SAFE.
– In short, the formal sign-offs from the authorities will determine whether the money moves in such ODI; and the bank, in accordance with the applicable laws, will review and bear the responsibilities of review and supervision delegated thereto.
The overarching regulation is active, but the NDRC implementation rules remain in draft. Should European companies expect a strict interpretation, or can they get an advance ruling exempting standard life science deals?
– The response may vary depending on the actual structure of the deal. For example, a customary license-in/out transaction is not subject to the Provisions on Outbound Investment of the State Council (“Order 837”), since it most likely does not fall within the scope of an “outbound investment”. An equity deal (including a NewCo transaction and a merger deal), however, may fall within the scope since an outbound investment may be conducted in such a deal.
– Notwithstanding the foregoing, different procedures will apply depending on the “sensitivity” of the target and the deal, and most life science deals will likely not constitute a “sensitive” deal or project, therefore such deal will be subject to a filing regime rather than a prior approval. To conclude the above, we understand there will not be substantive obstacles deriving from such new Order 837 in proceeding with transactions.
– Furthermore, we understand that there is no mechanism of or similar to an “advance ruling for exemption”. We recommend that companies may maintain frequent communication with the competent authorities and consult Chinese legal counsel as needed when the company is in the process of a life science transaction that may be subject to the rules above for further evaluation. And we also look forward to seeing whether future legislation may provide further clarification on the above procedures, the characterization of the relevant arrangements, and their implications for actual transactions.
Article 22 introduces strict rules around data sovereignty. To a European board, this might look like Beijing wanting to build a wall around its clinical data. In a life science partnership, where sharing data freely across borders for EMA or FDA reviews is the whole point, how do you contractually solve this bottleneck?
– Article 22 applies only to one specific scenario, that is, when a Chinese party within an outbound investment is involved in litigation or arbitration, or is subject to an investigation by foreign judicial or law enforcement authorities in connection therewith, and is required to provide evidence or relevant materials abroad. Under this scenario, such parties shall still be subject to and obey the effective laws within China, including personal information protection, export controls and other laws and regulations. We understand that this should be self-evident even in the absence of this provision, and that the provision is not intended to impose additional restrictions on the ruling or to create a wall or barrier in connection therewith.
– On this basis, this provision will not impose additional restrictions on data sharing in connection with a life sciences partnership beyond those applicable under the previous framework. The parties may continue to follow the customary contractual terms and conditions as they have done previously.
The new rules carry severe penalties for non-compliance, including forced divestiture. From a European company’s perspective, what happens if their Chinese anchor investor is suddenly forced by Beijing to divest their stake, and how can you protect the target company from that fallout?
– The forced divestiture applies to conduct expressly identified as unlawful, including investment in prohibited projects, failure to complete required ODI approval or filing procedures, fraudulent applications and refusal to rectify non-compliance, and violations of outbound investment security review requirements.
– From the target company’s perspective, if the parties knowingly proceed with the foregoing conduct, it would be a risk knowingly assumed by both parties. To address the risk of unilateral non-compliance by the investor, the target may consider requiring the investor to give appropriate representations or covenants, backed by corresponding indemnification obligations or other consequences at the contractual level.
Capital already sitting outside the mainland, in a Hong Kong subsidiary, say, used to be the way around the SAFE bottleneck. Now that the rules reach indirect structures, does an offshore pool still shorten the timeline?
– Funds flowing out of mainland China for investment purposes have consistently been subject to a series of compliance obligations and the supervision of NDRC, MOFCOM and SAFE. In practice, if the transaction is structured in accordance with the laws and regulations in effect, we understand that no substantial obstacle arises, which means the SAFE registration has never been a bottleneck. Notwithstanding the foregoing, we understand the regulations are to be further clarified or refined as to the application of rules under Order 837 to the indirect investment.
Escrow and reverse break fees assume the money can at least reach an account outside China. When the problem is that capital cannot leave the mainland, do those tools really protect the foreign party?
– Order 837 does not impose any additional obligations on the remittance of funds in respect of genuine and compliant projects that have completed the applicable filing, approval, and other procedures. So, there is no such fundamental obstacle as “capital cannot leave the mainland”.
– In practice, the ODI process generally proceeds as usual, and investors may continue to remit funds offshore in the ordinary course. Accordingly, contractual mechanisms such as escrow arrangements and reverse break fees remain viable.
A currency registration can lapse partway through a deal and hold up a payment that was otherwise ready. How does a European company tell an ordinary renewal apart from one left to lapse as leverage?
– In practice, we have rarely encountered situations in which a transaction party uses the currency registration or fund remittance process as negotiating leverage, since cross-border transaction agreements typically stipulate clear legal consequences for breach of payment obligations, including monetary compensation and other liabilities for breach. Therefore, if a paying party deliberately delays a payment that is otherwise ready to be made, it would gain no negotiating advantage and would instead expose itself to liability for breach.
– Also, both parties usually engage qualified legal counsel and complete the transaction in good faith. The agreement will most likely include clear financial terms, obligations to maintain the validity of registrations and indemnification for breach of such covenants. To the good faith and interests of both parties, the mentioned arrangement can be prevented at the contractual level.
Given this inherent completion risk created by capital controls, does it mean European biotechs have to accept a risk premium, effectively a lower valuation, to offset the administrative uncertainty the Chinese investor brings to the table?
– Not necessarily. Regulatory uncertainty does not automatically mean that a European biotech must accept a lower valuation. Where the European seller has sufficient negotiating leverage, it may instead seek a higher purchase price from the Chinese buyer to compensate for the additional execution risk and potential delay associated with the applicable regulatory processes.
– Whether such a premium is achievable will depend on the seller’s bargaining position, the availability of alternative buyers and the Chinese buyer’s funding and regulatory preparedness. A price premium can provide economic compensation for assuming that risk, but should be complemented by appropriate contractual protections addressing the timetable and consequences of a failure to close. As noted above, Order 837 itself does not impose additional obligations on outward remittance; the practical uncertainty instead relates to the time and conditions required for the Chinese investor to complete the applicable approval or filing procedures. Where the European company has less leverage, it may instead need to accept terms, including valuation, that reflect this uncertainty. As the implementing rules are further clarified, this uncertainty, and its effect on negotiating dynamics, may diminish over time.
You often represent Chinese investors in cross-border deals. What specific preparations do you advise them to make before signing a contract to ensure that the regulatory approvals don’t delay the timeline?
– We understand that the key to managing the timeline of regulatory approvals lies in thorough preparation before signing. In this respect, we usually advise Chinese investors to focus on two aspects of work.
– First, engaging in preliminary communication with the competent authorities in advance. Before signing the transactional documents, investors may communicate with the competent authorities, such as NDRC and MOFCOM, on the basic circumstances of the project, so as to identify and resolve any issues that may affect the timeline at an early stage.
– Second, involving sophisticated and local external legal counsel. Professional legal counsel with extensive cross-border transaction experience can design a reasonable timetable in which the approval milestones are duly incorporated into the closing arrangements, so as to ensure the smooth progress of the project.
You have taken deals through more than one tightening cycle in Beijing. When the rules shift under a signed deal, what separates the parties who get their money out from those who do not?
– Although the regulatory framework has been amended several times, there remains a practical route for remitting funds out of China. Whether funds can leave mainland China depends on whether the project can complete the ODI process. Once the filings or approvals are obtained and the foreign exchange registration is completed with the bank, the outward remittance of funds is typically only a matter of time.
You have spent your career navigating the intersection of Chinese capital and global life science. Looking at the European biotech executives you sit across from today, what is the one misconception about Chinese outbound investment that they urgently need to unlearn?
– We understand that Order 837 is not intended to create substantive obstacles or to prohibit the outflow of funds. Instead, its purpose is to achieve more effective regulation by updating the approval and filing requirements.
– In practice, the filing and approval of outbound investment are reviewed on a case-by-case basis according to the specific circumstances of each project. Differences in the industry, investment destination, transaction scale and commercial substance of a project result in varying degrees of difficulty in obtaining the relevant approvals or completing the relevant filings.
– European companies may engage Chinese legal counsel at an early stage of a project to assess feasibility, design a more suitable transaction structure based on the specific circumstances of the project, and maintain necessary communication with the regulatory authorities, so as to identify a realistic and viable path for the project.
Taking a step back from the administrative hurdles, you have watched this ecosystem evolve for years. Despite the new checkpoints and security reviews, how do you see the strategic role of Chinese capital in the Nordic and European biotech sector evolving over the next few years?
– It is difficult to offer a definitive judgment on how things will evolve in the coming years, but some general trends can be observed.
– The interest of Chinese investors and companies in the Nordic and European biotech sector persists, and collaboration between the two sides will continue to strengthen. For example, in terms of life science NewCo-structured deals, we see a growing number of companies are willing to choose Europe as the location for their NewCos. In such structures, Chinese companies typically collaborate with European companies, hospitals and research facilities through the NewCo in research and development and commercialization of their pipelines and products rather than merely providing capital.
