September Edition 2019

16 17 Israeli companies need to consider possible ramifications of Chinese backing, especially if operating in fields with national security and data privacy implications, including cybersecurity, energy and mobility, “Companies operating in such domains may find their ability to do business with certain American partners, especially government entities diminished if they have Chinese backers, ” former U.S. ambassador to Israel, Daniel Shapiro said in a recent interview with financial newspaper Calcalist. In addition to potential tension in the relationship with the U.S., there are vital regulatory issues. “With the current overseas direct investment (ODI) policies in place in China, an investment / M&A deal that involves foreign currency investment outside China requires regulatory approval. Moreover, the various sectors have been categorized based on whether the Chinese government wishes to encourage, allow or prohibit them,” points out Maor. For example, “investments by a Chinese company in an Israeli semiconductor or advanced manufacturing company is considered and encouraged and therefore there is a high probability that it will be approved and in a relatively short time.” Jeremy Bressman, a Tel Aviv lawyer at Kobre & Kim, experts in cross-border litigation, confirms: “The Chinese government welcomes foreign investors, but only in certain industries and sectors, and at the end of June 2019, China’s National Development and Reform Commission (“NDRC”) and Ministry of Commerce (“MOFCOM”) announced they would publish an index of recommended industries where foreign investment is encouraged, as well as publishing two “negative lists” of industries in which foreign investment is either prohibited or restricted. In particular, China seeks investment in the logistics industry, and in particular hi-tech solutions to the distribution of products in rural areas, the cryogenic distribution of fresh produce, and the spread of technical services across China.” One potential complication relates to funding investments. “Many Chinese companies and investors do not have the ability today to transfer funds outside of China and while it is possible to receive the applicable regulatory approvals in China, in our experience this process can last a very long time and is an issue of many months and not weeks,” says Weintraub. “When an Israeli company is negotiating an investment from a Chinese investor, it is critical to get an understanding as to where is the source of funds and the regulatory hurdles, if any, required to obtain such funds.” China has a published index of recommended industries Chinese role infrastructure projects bring more challenges Where there is cross-border M&A or investment, it is also important to be clear about goals. “Israeli companies tend to be interested in selling to the Chinese market and even granting license rights to the Chinese market but Chinesecompanieson theother handareoften looking tobuy the technology outright and transfer to China which can often lead to a disconnect in the negotiation,” adds Weintraub. The sensitive issue around technology is particularly striking with regards to the participation of Chinese companies in massive infrastructure projects in Israel. As part of its Belt Road Initiative, Chinese construction is focused on transportation infrastructure, including ports, tunnels and railway lines, raising the risk of surveillance and social/political influence. China Communications Construction Company and subsidiaries, such as China Harbour Engineering Company, are involved in the expansion of Ashdod port and Shanghai International Port Group is involved in the partial construction and 25-year operation of a new container terminal at the Haifa port.Ashdod port is near Israel’s national electricity company and refineries, while Haifa is a frequent port of call for the U.S. Sixth Fleet and serves as the base for Israel’s submarines. “This has raised substantial concerns in Washington, and the U.S. has been urging Israel to establish CFIUS-like laws to impose higher scrutiny on China investments. Given the importance the U.S. in Israel’s national security, it is difficult to tell if Israel will do so in the next few years,” added Shim. Other infrastructure projects in which Chinese companies are involved include the construction and operation of the Tel Aviv Light Rail; the July acquisition by a consortium including China Harbor of the Alon Tavor electricity power plant; the excavation and construction of the Carmel Tunnels; the excavation of the tunnels on the Akko-Karmiel train line; and the not-yet-approved Eilat-Ashdod train construction project, also known as the “Red-Med” railway.