Merger and Aquisition in China.docx

1、Merger and Aquisition in ChinaGone are the days when foreign companies wishing to invest in China were limited to greenfield investments. They may now purchase operating Chinese businesses and may restructure their existing investments in China through mergers, spin-offs, and holding companies that

2、were impossible only a few years ago. These developments are not confined to foreign investors. Domestic Chinese companies are also merging and acquiring one another, and the more successful among them have begun to buy out foreign investors. The result of all of these developments is a rapidly expa

3、nding mergers-and-acquisitions (M&A) market in China.Chinas regulatory regime has long been hostile to M&A transactions. That regime is changing, however, both to accommodate these recent developments and to further stimulate foreign investment. Chinas World Trade Organization (WTO) accession will n

4、o doubt accelerate these changes. Nevertheless, the Chinese government will continue to have compelling political and economic reasons for maintaining controls in many economic sectors, and Chinas business and legal environments will continue to pose obstacles to M&A transactions.The legal framework

5、 for M&AA web of restrictions and governmental approval requirements applies to foreign-invested enterprises (FIEs) from establishment through dissolution. Many of the more onerous restrictions on FIEs, such as minimum export requirements and required utilization of advanced technology, are being li

6、fted in preparation for Chinas WTO entry. Though Chinese law is becoming more flexible, the forms of M&A transactions, and accompanying procedures, authorized under Chinese law still differ in important respects from those in other jurisdictions. The available options generally depend on the result

7、intended (acquisition, divestiture, or merger); whether the transaction involves other FIEs or domestic Chinese companies; and the extent to which the transaction takes place within Chinese regulatory jurisdiction. Transactions involving mergers or acquisitions with wholly domestic Chinese companies

8、 present their own problems and merit separate discussionOffshore transactionsThe most effective way for foreign investors to avoid Chinas burdensome regulatory environment when transferring or acquiring Chinese business assets is to keep the entire transaction offshore. If an investment in China is

9、 held through an offshore company, such as a Hong Kong or Cayman Islands holding company, a second offshore company can simply purchase the shares of the first company under the laws of the applicable foreign jurisdiction. The Chinese government generally does not purport to regulate such offshore t

10、ransactions and requires no PRC government approvals. If the offshore company owns an interest in an FIE in China, the consent of the Chinese joint-venture (JV) partner(s) is not generally required, unless the transaction requires amendments to the FIEs articles of association or joint-venture agree

11、ment. Figure 1 illustrates a typical transaction of this kind.Many foreign investors structure their holdings in China through intermediate offshore holding companies, often one for each FIE, precisely to permit this flexibility for subsequent transfers of their interests. By using multiple intermed

12、iate offshore holding companies for different FIEs, corporate groups can also readily accomplish many forms of intracorporate restructuring without becoming enmeshed in the Chinese regulatory system.Onshore-offshore transactionsIt is sometimes impossible to keep the deal entirely offshore, even when

13、 the purchaser is another foreign company. When the transaction involves the transfer of an equity interest or assets in China, or from offshore investment into China, Chinese government approvals and the various regulatory restrictions on foreign investments in China will apply. Sale of equity in a

14、n FIE to an offshore investor A foreign investor must sometimes sell an interest in an FIE directly to an offshore purchaser. This occurs, for example, when the seller holds its interest in the FIE without the benefit of an intervening offshore holding company. Even if an offshore holding company ho

15、lds the China investment, that company may have other assets or liabilities that the seller seeks (or is compelled by the purchaser) to retain, making it impractical to sell the holding company outright. In such cases, the only option may be to sell the onshore ownership interest in the FIE directly

16、 to an offshore buyer (see Figure 2). Such transfers, in which the foreign purchaser can simply buy the existing investors equity interest (expressed in terms of its registered capital), most often involve equity joint ventures (EJVs) or wholly foreign-owned enterprises (WFOEs). Transfer of an inter

17、est in a contractual joint venture (CJV) is possible but, because the parties rights and obligations in a CJV need not follow the proportion of their capital contributions, such a transfer generally requires more complex contractual restructuring. Because the purchaser in all of these transactions i

18、s offshore, the transfer is subject to the approval requirements of the EJV, CJV, or WFOE laws, as the case may be, and, for a JV, to the Chinese partys consent as well. Another common onshore-offshore transaction arises when a Chinese partner in a joint venture sells its interest. This may occur ei

19、ther when the Chinese partner simply wishes to exit the business or as the result of a falling out between the parties. The foreign investor may then have no choice but to purchase the Chinese partys equity. If the foreign investor thereby acquires 100 percent control, the JV becomes a WFOE. If, as

20、is sometimes the case, the business sector in question is regulated more strictly for WFOEs than for JVs, problems in obtaining the necessary regulatory approval may arise. Foreign investments in domestic companies limited by shares The 1994 Company Law authorized SOEs to organize themselves as join

21、t-stock companies and authorized direct foreign investment in those companies. The Provisional Regulations on Utilization of Foreign Investment to Reorganize State-Owned Enterprises, promulgated by the State Economic and Trade Commission (SETC) in September 1998, set out approval procedures for such

22、 investments. The regulations add SETC approval (local or national depending on the size of the investment) to the approvals already required for establishment of FIEs generally. The investment is also subject to general restrictions on foreign investment in specific economic sectors. If the transac

23、tion is approved and the foreign investor acquires 25 percent or more of the joint-stock companys equity, the company may be converted to an FIE. An acquisition of less than 25 percent will leave the foreign investor with a minority stake in a domestic Chinese company. Foreign companies have made se

24、veral highly publicized investments of this character, of which the Eastman Kodak Co. deal is the most well known. SOEs, however, typically have problems that make them unattractive investment targets-aging plant and equipment, heavy debt burdens, and redundant workforces. There are, moreover, only

25、limited protections for minority investors in Chinese corporations. As a result, foreign investors have been reluctant to pursue this form of investment. Nevertheless, Chinas desperate need to restructure and rejuvenate its SOEs continues to drive the government to experiment with new approaches to

26、attract direct foreign investment in SOEs. Local equity exchange centers have been established in Beijing, Shanghai, and in Shenzhen, Guangdong Province, in some cases for specialized, high-technology deals. These centers are to serve both as sources of information on available deals and as, in effe

27、ct, expediters for the government approval processes. Some localities have also begun experimenting with different approval processes for foreign investment in their jurisdictions. Shanghai, for example, does not apply the 1998 SETC Provisional Regulations but approves a broad range of transactions

28、through the Shanghai State Assets Management Office and the local office of the ministry in charge of the industry in question. To what extent these procedures will overcome foreign antipathy to investing in SOEs remains to be seen. Listed companies Foreign investors are currently authorized to buy

29、only one category of shares, known as B shares, in Chinese companies listed on Chinas two stock exchanges (in Shanghai and Shenzhen). China has suggested that it may eventually open the A-share market to foreign investors as well. China does not, in any event, permit hostile takeovers of public comp

30、anies through open-market purchases or tender offers without the consent of the China Securities Regulatory Commission. Private placements of unlisted state-owned shares in listed companies can generally only be made to other SOEs.Transactions within ChinaFIEs in China can either buy assets from exi

31、sting companies, or, by undergoing structural reorganization, invest directly in them. Asset sales to foreign investorsAsset sales are used in China, as elsewhere, when a buyer wishes to acquire a business but wants to avoid that businesss existing liabilities. Asset sales are particularly attractiv

32、e in China because of the unusual difficulties in identifying all of the liabilities of a target company. The foreign investor will generally be unable to hold the acquired assets directly. It will, therefore, either have to use an existing FIE or establish a new one. The establishment of a new FIE (with a Chinese partner if it is to be a JV) will be an onshore-offshore transaction, as discussed above. It will also be subject to applicable foreign-investment approval and qualification requirements. The actual asset purchase, however, will be an entirely onshore transaction between t