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Horwath Intertrust China
Shanghai 3903 Jin Mao Tower 88 Century Boulevard Pudong, Shanghai, PRC 200101
T: +86 21 5098 8686 F: +86 21 5049 1378
Beijing 4F, Scitech Plaza, 22 Jiangguomenwai Avenue, Beijing, PRC 100004
T: +86 10 6514 8686 F: +86 10 6512 1378
Hangzhou Unit E, 15F, Mingyang Building, No.18 Jiefang Road, Hangzhou, PRC 310009
T: +86 571 8604 8686 F: +86 571 8886 1378
HW Horwath Group Taiwan
12F, 369 FuHsing North Road, Taipei, Taiwan
T: +886 2 2718 8686 F: +886 2 2718 1378
Horwath Hong Kong Group
2001 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong
T: +852 2526 2191 F: +852 2810 0502
Horwath refers to Horwath International Association, a Swiss verein. Each member of the Association is a separate and independent legal entity.
1. Share swaps are officially allowed for foreign investors to acquire domestic enterprises
2. The setup and role of special-purpose vehicle clearly defined
3. Anti-monopoly inspection and protection of national economic security reiterated
The Chinese government recently issued a modified set of rules related to mergers and acquisitions (“M&A”) of Chinese domestic enterprises by foreign investors.
Effective from 8 September 2006, the Provisions on Acquisition and Mergers of Domestic Enterprises by Foreign Investors clarifies a wide variety of issues related to foreign investors’ acquisition of domestic enterprises. The Provisions aims to strengthen supervision over foreign investors’ domestic acquisition. Several new approvals and additional requirements are now applied to the acquisitions of domestic enterprises by foreign investors.
Highlights of the Provisions include the use of share swaps in foreign investors’ M&A of domestic enterprises, M&As through special-purpose vehicles, and anti- monopoly investigations.
1. Share swaps are officially allowed for foreign investors to acquire domestic enterprises
Chapter 4 clearly permits the use of share swaps in foreign investors’ M&A of domestic enterprises, and the nature, conditions, and declaration procedures of the share swaps are also explained. It is the first time China permits foreign investors to use equity shares in M&As that involve foreign enterprises. It is anticipated that this new provision will help to foster the development of Chinese enterprises in the international market. Previously, preference was given to cash payments in M&A deals involving foreign enterprises.
2. The setup and role of special-purpose vehicle clearly defined
The Provisions clarifies the setup regulations and the role of special-purpose vehicles. A special-purpose vehicle refers to an overseas enterprise directly established or indirectly held by a domestic resident legal person or a domestic resident natural person in China for the purpose of listing overseas the assets or rights and interests inside China. Article 42 of the Provisions states that
Increased supervision related to foreign investors' M&A of domestic enterprises in China
http://www.horwathintertrust.com.cn
Horwath refers to Horwath International Association, a Swiss verein. Each member of the Association is a separate and independent legal entity.
approval from the Ministry of Commerce (“MOC”) is needed to set up a special vehicle. Article 47 states that the domestic enterprise should submit to the MOC for approval facts of listing and the plan to repatriate the financed-fund within 30 days after the special-purpose vehicle or its overseas related company is listed overseas. If the domestic enterprise fails to meet this reporting obligation, the shareholding structure of the domestic company should be forced to restore to the original position prior to the M&A process.
The foreign exchange profit, dividend and capital gains by the special-purpose vehicle should be repatriated back to China within 6 months from the date of obtaining the profit. In addition, the Provisions requires that overseas profits of the special-purpose vehicle be repatriated back to China according to the fund repatriation plan set by the relevant administration of foreign exchange. Profits generated through financing can be repatriated by
(1) making loans to a domestic company;
(2) setting up a new foreign invested company in China; and
(3) acquiring a domestic company in China.
3. Anti-monopoly inspection and protection of national economic security reiterated
In regard to anti-monopoly issues, the Provisions emphasizes in Chapter 5 that M&A of domestic enterprises by foreign investors should obtain approval from the MOC and the State Administration of Industry and Commerce (“SAIC”), should the deal leads to excessive industry concentration, affects market competition or harms consumers’ interests. Yet, as far as anti-trust scrutiny criteria and exempt conditions are concerned, there is no substantial difference between the Provisions and the former Interim Provisions on Acquisition and Mergers of Domestic Enterprises by Foreign Investors that was released in 2003.
According to the Provisions, foreign M&As of domestic enterprises affecting industries of strategic importance, affecting or having the potential of affecting national economic security, or resulting in ownership transfers of well-established brand names in China should be declared with the MOC. If the deal is not declared and has or has the potential to seriously affect the national economic security, the MOC may demand the relevant parties to eliminate the impact on national economic security by terminating the action or taking other measures such as transfer of shares or assets.
