China is one of the world´s leading economic powers today, and confidence in the world’s second-largest economy is still mounting as we can witness from the ever
increasing foreign direct investments
(FDI). It is foreseeable and predicted China soon will become the new frontier for capital investments. In fact, recently China is bolstering the strength of its capital market in a move to encourage M&A activity, in addition to the restructuring of listed companies.
As I already introduced the theme, today I am going to give some more details. It is necessary to stress that under Chinese law there does not exist an unique definition of “Mergers & Acquisitions”. A general definition is stated in Art. 173 of the Company Law (revised version 2006 available at: the following web-site:
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/company/the-company-law-of-the-peoples-republic-of-china.html
).
It is worth to report again the wording of Art 173 which states:
The merger of a company may be effected by way of
merger or consolidation
:
(a)
In the case of
merger
, a company absorbs any other company and the absorbed company is dissolved;
(b)
in the case of
consolidation
, two or more companies combine together for the establishment of a new one, and the existing ones are dissolved
However, the M&A Regulations 2006, in respect of the Company Law, give us a more precise definition of
mergers and acquisitions
, in fact art. 2 states that:
“mergers and acquisitions of a domestic enterprise by foreign investors shall mean”
-
Ø Purchase of an
equity interest
(
goumaiguquan
, 购买股权)
from shareholders of a domestic enterprise (not a FIE); -
Ø Subscribing to the
increase in the registered capital
(
rengouzengzi
, 认购增资) of a Domestic Enterprise; (the DE changes into a FIE);
Or
-
Ø Establishing a FIE which will acquire the
assets
(
zichan
, 资产)of a domestic enterprise and operate such assets;
Purchasing
assets
of a Domestic Enterprise and use such assets as investment to establish a FIE to operate such assets. Noteworthy the assets purchasing agreement shall be governed by the laws of China.
In particular the purchase of an equity interest by foreign investors may be operated directly or indirectly (either registered capital or shares) in a target company registered in China. In a
direct equity acquisition
, the foreign investor acquires equity in a domestic enterprise or a foreign-invested enterprise (FIE) from the existing Chinese or foreign equity holders pursuant to a share purchase agreement or from the target through a subscription for new equity. In an
indirect equity acquisition
, if the Chinese target company is an existing FIE, a foreign investor may acquire or increase control of the Chinese target company through the offshore purchase of some or all of a foreign party’s interest in the FIE. Such a transaction is invariably conducted offshore in the jurisdiction of the FIE’s existing foreign investor and generally does not attract Chinese legal implications, except in certain circumstances pursuant to the new antitrust review regime in China..
Not all provisions of the
M&A Regulations 2006 apply to a M&A transaction for equity interest in an existing foreign-invested enterprise, but the
Provisions for the Alteration of Investors’ Equity Interests in Foreign-invested Enterprises
(these provisions were promulgated by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce and entered into force on May 28, 1997,
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/foreign-investment/provisional-regulations-on-the-change-of-equity-interests-among-investors-in-foreign-investment-enterprises-1997.html
) shall first apply to these transactions. According to such Provisions, a direct equity interest acquisition/transfer in a foreign-invested enterprise requires the approval of the governmental authority for foreign investment which has originally approved the establishment of such foreign-invested enterprise.
Thus, substantially we have two main methods to acquire a Chinese Domestic Enterprise (equity and assets acquisitions), but thanks to the 2006 M&A Regulations now we can also structure a share swaps (where shares are used as consideration in these transactions), However, before to talk about it in detail, we must first consider other aspects such as the evaluation of the target company and the functioning of Chinese bourses. I hope this is enough for now to tickle your interest, so that next time you will follow me through other details.
– CRISTIANO RIZZI