Definition of (M&A)

 

Mergers and acquisitions (M&A) has become a mundane expression, used daily in the media. In order to operate successfully in a global economy , corporations have become transnational and have to perform at a multinational level. To achieve such expansion, corporations acquire other companies or merge with them. These large corporations are publicly owned, listed on stock exchanges or alternative markets around the world, and engage in M&A activities that are thoroughly regulated by governments to protect the shareholders of target companies.

 

Guide for Mergers & Acquistions in China

 

Oct. 6 – In 2003, the Chinese government first laid down in a single piece of M&A legislation the relevant principles, procedures and requirements allowing foreign investors to acquire Chinese limited companies. The most recent version, the “Rules on Acquisition and Merger of Domestic Enterprises by Foreign Investors (M&A Rules),” was promulgated in 2006 and revised in 2009.

 

These regulations provide investors with a basic framework and guidance on carrying out M&A activities in China, while giving the government ample discretion to examine and approve M&A activities that would potentially impact national and economic security.

 

Due to the recentness of China’s exposure to M&As, M&A culture in China is still in its infancy and the Chinese government is careful in weighing the benefits against the risks of acquisition of enterprises in China by foreign enterprises, especially in key sectors.

 

Acquisition of equity and assets requires the approval from the local Ministry of Commerce (MOFCOM) branch and registration with the local Administrative Bureau of Industry of Commerce.

 

In addition to anti-monopoly provisions, China reserves the right to review foreign acquisitions of Chinese companies and assets from a national economic and security perspective.

 

MOFCOM approval at the central level is required in the following M&A situations:

 

(1)  The Foreign-Invested Enterprise (FIE) formed after the M&A is under a category or industry sector designated for MOFCOM examination and approval

(2)  A company, enterprise or natural person in China acts through a company it legitimately established or controls outside of China, to merge with or acquire a domestic company with which the company, enterprise or natural person is affiliated

(3)  M&A of a domestic enterprise by foreign investors whereby:

 

    ● Foreign investors obtain a controlling stake in key industries, or

    ● Safety factors exist that are likely to impact the economic security of the State, or

    ● Foreign investors obtain the actual right of control over a domestic enterprise that owns well-known trademark or China’s time-honored brands

 

Below, we examine the provisions with which foreign investors who wish to carry out M&As in China have to comply.

 

The M&A Rules apply only to the merger and acquisition of domestic firms, and foreign investors seeking to acquire firms in China that already enjoy FIE status must adhere to a different set of regulations.

 

Matters concerning the reporting and approval of all changes in the equity structure of an FIE are governed by the Several Provisions on Changes in Equity Interest of Investors in Foreign-Invested Enterprises (“FIE Equity Interest Change Provisions”), published by the Ministry of Foreign Trade and Economic Cooperation in 1997. Matters not addressed by these provisions are handled “with reference” to the M&A Rules.

 

Applicability

 

The M&A Rules apply when a foreign investor:

 

(1)  Equity acquisitions:

    ● Purchases equity interests of a shareholder of a domestic non-foreign invested enterprises (i.e., domestic enterprises)

    ● Subscribes to the capital increase of a domestic enterprise

 

(2)  Asset acquisitions:

● Establishes a foreign-invested enterprise, through which it purchases and operates the assets of a domestic enterprise

● Purchases assets of a domestic enterprise, and uses such assets to establish a foreign-invested enterprise to operate the assets

 

Basic Principles For Conducting M&A Transactions

 

(1) Protection of State-owned Assets

 

The New M&A Regulations emphasize the basic principle that a M&A transaction conducted by foreign investors must not lead to the loss of State-owned assets, and that if that transaction involves the transfer of State-owned assets or a change of State-owned control of a PRC listed company, then relevant regulations governing the administration of State-owned assets must be observed.

 

(2) Safeguarding of Economic Security

 

Another new basic principle being introduced by the M&A Regulations is the requirement to report to MOFCOM where：

 

● a proposed M&A transaction will result in foreign investors acquiring actual control of, or will involve, important or priority industries, and the economic security of the State will or may thereby be jeopardized; or

● a proposed M&A transaction will result in foreign investors owning famous or well known PRC trademarks, or result in the transfer of actual control of PRC domestic enterprises which have a very old and established reputation.

 

If no report is made by the relevant parties in the above situations, MOFCOM may, jointly with other PRC government departments, require the relevant parties to terminate the M&A transaction or to adopt and implement effective measures (such as the transfer of shares or assets) in order to eliminate the adverse impact on the economic security of the State. Hence, MOFCOM and other government departments may stop a M&A transaction involving the transfer of famous or well known PRC trademarks, or well known and established PRC domestic enterprises in sensitive industries, by citing concerns over economic security.

 

Stipulations

 

According to the M&A Rules, M&A of domestic enterprises by foreign investors must comply with the Foreign Investment Industrial Guidance Catalog (“Catalog”). This means that mergers or acquisitions may not result in foreign investors:

 

(1) Creating a WFOE in the acquired enterprise in industries where no WFOE is allowed under the Catalog

(2) Becoming a controlling party or relatively controlling party in an acquired enterprise in industries which require the Chinese party to be controlling or relatively controlling

(3) Acquiring any enterprise engaged in industries where operation by foreign investors is prohibited or restricted

 

Approval and registration
 

The MOFCOM will announce its acceptance or rejection of the application within 30 days of receipt of the necessary application documents. In the case that the MOFCOM accepts the application, it will present a certificate of approval.

 

Upon receipt of the approval certificate from the MOFCOM, the foreign enterprise has 30 days to register the acquired domestic enterprise as an FIE with the SAIC or its local sub-branches.

 

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