Rules on Merger and Acquisition of PRC Domestic Enterprises by Foreign Investors
The Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (2009 Amendments) (the “M&A Rules”), which took effect on June 22, 2009, sets forth the general regulatory framework for foreign investors’ mergers and acquisitions of PRC domestic enterprises, in order to promote investments in China by foreign investors.
Equity Acquisition and Assets Acquisition
There are two types of mergers and acquisitions by foreign investors under the M&A rules, i.e. equity acquisition and assets acquisition. Equity acquisition means acquisition of the shares of domestic enterprises in PRC or subscription to capital increase of domestic enterprises by foreign investors to make such domestic enterprises converted into foreign investment enterprises. Assets acquisition means incorporation of foreign investment enterprises by foreign investors to acquire and operate assets of domestic enterprises, or acquisition of assets of domestic enterprises by foreign investors and investment of such assets to establish foreign investment enterprises for operation of such assets.
In accordance with the M&A rules, foreign investors shall comply with the PRC laws and regulations on industry, land and environmental protection policies and investor qualifications. Pursuant to the M&A rules, merger and acquisition of domestic enterprises in industries, in which wholly foreign-owned operations by foreign investors are prohibited under the Catalogue on Industry Guidelines for Foreign Investment (《外商投資產業指導目錄》, the “Catalogue”), shall not result in foreign investors hold the entire equity of the enterprises. In other industries, in which the Catalogue require a Chinese party have the controlling shareholding, the controlling shareholding by a Chinese party shall continue after the merger and acquisition of enterprises in such industries. In addition, merger and acquisition of enterprises shall not result in operations by foreign investors in industries, in which the Catalogue prohibits foreign investors to operate.
Pursuant to the M&A rules, where the merger and acquisition will result in the establishment of foreign investment enterprise in an industry, which requires examination and approval by the Ministry of Commerce pursuant to applicable PRC laws and regulations, the provincial examination and approval authorities shall forward the application documents to the Ministry of Commerce, which shall decide on approval or non-approval. Under the M&A rules, where a domestic enterprise or natural person merges and acquires a domestic company with which the domestic enterprise or natural person has a related party relationship, in the name of an overseas company incorporated or controlled by the domestic enterprise or natural person, such merger and acquisition shall be subject to approval by the Ministry of Commerce.
Special Purpose Corporation
In practice, more and more PRC domestic enterprises or natural person make use of special purpose corporation (the “SPC”) incorporated overseas, which are directly or indirectly controlled by them, to materialize overseas listing of their interests in a domestic company actually held by the domestic enterprises or natural person.
The M&A Rules requires the overseas listing of a SPC to be subject to approval of the securities regulatory authorities of the PRC State Council. In addition, the SPC can only be listed in overseas jurisdictions which shall have a comprehensive legal and regulatory system and have entered into a memorandum of understanding concerning regulatory cooperation with the securities regulatory authorities of the PRC State Council.
The M&A rules also requires a domestic company with overseas listed interests to comply with several criteria, including (1) there shall be no existing or potential disputes concerning the property rights of the domestic enterprise; (2) the domestic enterprise shall have a complete business system and continuing operation viability; (3) the domestic enterprise shall have a proper corporate governance structure and internal management system; and (4) the domestic enterprise and its substantial shareholders shall have no record of serious violation of laws during the past three years.
The M&A Rules impose restrictions and governmental scrutiny on certain types of mergers and acquisitions by foreign investors in many aspects. We strongly suggest that foreign investors engage qualified legal advisors to give customized advice on their investments in China.