Investing in China, in particular trough M&A transactions, is not only vital for those businesses that in this moment are struggling to survive in other parts of the world, but this also should contribute in fostering new initiatives in China to allocate abroad the new resources generated by other businesses in the Main Land. It is evident this is a circle, and it is necessary to favour inbound investments but also outbound investments if we wish to maintain the current trend, and to profit from our moves (i.e. companies moves) in allocating resources.
As already stressed in a previous comment, Mergers and Acquisitions (M&A) and Takeovers are attracting new investments in China, but sometimes foreign entrepreneurs do not have a clear idea of their functioning or about the way these transactions are regulated.
So, maybe before to take a more in depth look at these transactions, it is necessary to understand how mergers and acquisitions are defined in China, this should help our potential clients in getting a better idea on this topic also.
The term
“M&A”
(
binggou
,并购) refers generically to any combination of two or more business enterprises.
-
Ø A
merger (hebing
or
jianbing,
合并/兼并
)
is the legal combination of two discrete economic entities in which only one entity survives and assumes all the assets and liabilities of both entities. -
Ø In contrast, an
acquisition (shougou
收购
)
can be defined as the purchase by one economic entity of all or part of the
shares
(i.e.
equity interest
)
or
assets
of another economic entity.
However, it must be noted that under Chinese law there does not exist a concrete definition of “mergers and acquisitions”; a general definition is stated in the
Company Law
(art. 173):
“The merger of a company may be effected by way of
merger or consolidation
:
-
Ø
In the case of
merger
(
xishouhebing
, 吸收合并)
,
a company absorbs any other company and the absorbed company is dissolved;
-
Ø
In the case of
consolidation
(
xinshehebing
, 新设合并)
, two or more companies combine together for the establishment of a new one, and the existing ones are dissolved”.
It must be noted that the Company Law in China underwent a substantial revision in 2005, with the goal of facilitating the incorporation of a company and capital raising, to better protect the interest of minority shareholders, and to improve the corporate governance. Among other things, the revised Company Law (For those who are interesting in reading the Company Law (revised version) please click here,
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/company/the-company-law-of-the-peoples-republic-of-china.html
) removed the restraint on outbound investments which could be made by a company in which the aggregate amount of outbound investments shall not exceed 50% of the net assets of the company, making it more likely for companies to become the object of M&A and mobilizing the financial leverage of companies. At the same time, the revised Company Law streamlined generally the procedure of M&A, provided simplified solutions to dispose for existing claims and debts and improved the efficiency of M&A
Naturally, another basic piece of legislation to take into consideration is the so called 2006 M&A Regulations. The
2006 M&A
Regulations,
have been issued by six governmental agencies orchestrated by the Ministry of Commerce (MofCOM), and became effective on September 8, 2006. These agencies include: Ministry of Commerce (MofCOM), China Securities Regulatory Commission (CSRC), State Administration of Taxation (SAT), State Administration for Industry & Commerce (SAIC), State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) and State Administration of Foreign Exchange (SAFE). (2006 Regulations available at:
http://www.mondaq.com/x/43820/Workforce+Management/2006+MA+Rules+Regulations+On+Mergers+And+Acquisitions+Of+Domestic+Enterprises+By+Foreign+Investors+In+The+Peoples+Republic+Of+China+Part+1
These Regulations precisely regulate for this kind of transactions and they allow a more sophisticated way to enter the Chinese market through the so called “share swap”.
This is only the general framework, but it is necessary to begin from this point to have a solid basis before to go more in depth.
Our potential clients also need to know that these type of transactions can involve particular assets of the target company, but this is another theme which needs more time to be discussed. If any of our readers have any comments I will be plesed to read them.
In the next contribution I will try to expain further this interesting topic.
– CRISTIANO RIZZI