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Mergers and acquisitions (M&A) operations in China are today mainly carried out by multinational companies as a mean to pursue their expansion in China. Those past few years, M&A deals in China have become much larger. Indeed, they were distributed among spread across a wider range of industries such as energy, manufacturing, and services. China enacted the Measures on Mergers and Acquisitions of Chinese Enterprises by Foreign Investors in 2006. Then, forming an M&A regulatory regime, which has been revised by the competent authority in 2009.

1. Mergers

A merger can be carried out in two ways:  

  • Absorption merger: one or more enterprises merge into another enterprise with the latter being the surviving entity;  
  • Merger by new establishment: two or more enterprises merge to form a new entity. Then each of the original companies is dissolved in the operation.

Mergers between FIEs

Are mergers between FIEs in China subject to conditions?  

The merger shall comply with the Foreign Investment Catalogue and Interim Provisions on Guiding Foreign Investment Directions. 

The parties to the merger should enter into a merger agreement. Moreover, as provided by the Articles of Association of the FIEs, the shareholders shall consent to the merger. This consent must be given unanimously if a joint venture is involved in the merger.  

Who shall be notified of the merger?  

  • An FIE involved in a merger shall notify its creditors and announce the news publicly.  
  • The MOFCOM shall have the right to review such transaction, then the transaction shall be registered with the competent AIC.   
  • Registration with the relevant tax bureaus are also requested and may create limits to the use of merger operations. 

Mergers between FIEs and Domestic Enterprises

Is the procedure substantially different from the one for mergers between FIEs?  

The procedure and requirements are almost the same. Indeed, in mergers between FIEs and Domestic Enterprises, relevant approval/file with competent MOFCOM is required.  

Mergers of wholly state-invested enterprises are subject to the process of assets assessment and decision of State-owned Assets Supervision and Administration Commission (the “SASAC”). Furthermore, the mergers of the key wholly state-invested enterprises and wholly state-invested companies shall be subject to the assets’ assessment. As well as review by SASAC, and approval by the people’s government at the corresponding level.

B. Acquisitions  

Acquisition of an existing company in China can be carried out in two ways. Either by purchasing equity interests, or by purchasing assets of the target company. Foreign investors are restricted from acquiring any stake in a PRC entity engaging in a business listed in a “prohibited sector” by the Foreign Investment Catalogue.

Equity deal

What is an equity deal in a Chinese company?  

An equity deal in a Chinese company is the acquisition by an investor of a part or of the full capital of a company. As a result, every equity deal is subject to two principles:  

  • The equity deal is subject to Chinese law,  
  • If foreign investment laws apply, the constraints provided by those laws shall be applied.  

What is the procedure to purchase equity interests from a Domestic Company? 

  1. Evaluation and appraisal of the equity to be transferred.  
  2. Approvals from local government or specific ministries may be required depending on the value of the transaction and the nature of the industry.  
  3. File of the purchase of equity interests with the MOFCOM.   
  4. Registration with competent AIC for the issuance of a new Business License.  
  5. Payment to be made in China within 3 months following the issuance of the new Business License. It can also be prolonged in case of a specific situation. 

Asset deal 

What are the different options to carry out an asset deal?  

Chinese law provides two approaches for a foreign investor to acquire the assets of a Chinese company:  

  • Purchase the assets of the target domestic company through an existing FIE and operate the assets from the FIE, or  
  • Purchase the assets of the target company and contribute them in the capital of a newly-established FIE. But also if the company already exists, pursuant to a capital increase

What is the procedure to purchase assets? 

Similar to equity acquisition, the asset transfer price shall be based on an appraisal conducted by a qualified appraiser. Indeed, if the assets to be purchased are state-owned, the approval of the SASAC is required. As a result, whatever rules may apply, every asset deal is subject to two principles:  

  • The asset deal is subject to Chinese law,  
  • If foreign investment laws apply, the constraints provided by those laws shall be applied.

Asset deal or equity deal?  

What are the pros and cons of acquiring equity?  

Pros  

  • Acquiring an operational business: acquiring equity does not require numerous separate approvals of each individual asset. Indeed, the title of each asset lies within the corporation. The risk of renegotiation, or reapplying for new permits, lease, utilities, facilities and employment agreement is eliminated.

Cons  

  • Liabilities: buyers accept more risks by purchasing the company’s equity. In addition, it is more difficult to avoid existing unknown or undisclosed liabilities of the purchased business.
  • Higher levels of due diligence: equity deals may require more intensive due diligence and pre-deal restructuring.  

More questions:

What are the pros and cons of acquiring assets?

What are the possible restrictions for transfers of equity interests to non-shareholders in a domestic company?  

Are the debts and liabilities always transferred to the transferee?  

……

To know more, download our legal handbook related to M&A in China…

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