Types and targets of inbound M&A by foreign investors （外国投资者境内并购的类型及对象分析）

Inbound merger and acquisition (M&A) transactions can be divided into two main streams: equity acquisitions and assets acquisitions. The targets of M&A transactions include Chinese state-owned enterprises (SOEs), private enterprises and foreign-invested enterprises established in China.

Relevant laws and regulations involved include: Provisions on the Merger or Acquisition of Domestic Enterprises by Foreign Investors; Interim Measures for the Management of the Transfer of the State-owned Property Right of Enterprises and other relevant provisions of the state-owned assets transfer; Provisions for the Alteration of Investors’ Equities in Foreign-funded Enterprises; Notice of the Relevant Issues Concerning the Transfer of State-Owned Shares and Corporate Shares of Listed Companies to Foreign Investors; Administration of the Takeover of Listed Companies Procedures; Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, and other related provisions regarding the M&A of listed companies.

Equity or assets?

Equity acquisitions are in general the takeover of the target company’s assets, qualification licences, as well as debts and staff. This means that the acquirer can take over and make effective use of the company’s sales network, production equipment and personnel. However, the acquirer may also take over the target company’s unlisted debts, incidental debts, and other potential issues such as administrative penalties, in the process of equity acquisition. Extra attention is needed when dealing with these potential issues.

Assets acquisitions are when foreign investors, in setting up enterprises in China, acquire and make effective use of the necessary assets, debts, proprietary technology, marketing networks, etc., from the target companies, or set up a new venture with the necessary assets, debts, proprietary technology and marketing network acquired from the target companies. Although these types of assets acquisitions would require different handling procedures according to the needs of different assets, the risks involved in the takeover of unlisted debts, incidental debts, potential penalties and other potential issues would be very low.

State, private or foreign?

According to the Interim Measures for the Management of the Transfer of the State-owned Property Right of Enterprises, when the target company is an SOE, the evaluation of the state-owned assets to be transferred needs to be carried out by a state-owned agency that evaluates assets, and the price of the M&A transaction needs to be above 90% of the established value. This is to prevent the loss of state-owned assets when foreign investors acquire or merge with SOEs.In addition, the transfer and other M&A transactions need to be carried out in a public manner at the property exchange. Another thing to keep in mind is that, even if the transaction is not a direct acquisition of the equity of the SOE, but a private placement of the acquisition of the SOE, the interim measures need to be followed as long as there are risks of potential loss of state-owned assets, such as a decrease in the proportion of the shares of the SOEs owned by the original shareholders. With regard to whether this needs to be done publicly at the property exchange, consultation from the assets management committee or its authorized departments would be needed.

Provisions on the Merger or Acquisition of Domestic Enterprises by Foreign Investors need to be followed when private enterprises are merged and acquired. If the target company is a listed company, relevant compliance needs to be followed, as previously mebntioned. Some private enterprises may not have a compliant structure in managing their financials, and there could be risks of incidental debts, existing unlisted debts and other potential administrative penalties. Careful investigation would be needed in equity acquisitions to customize a more careful transfer of the equity.

Also, to prevent the monopoly practice of certain industries by foreign investors through inbound M&A transactions, as long as the conditions of “antitrust law” and the standards of the centrally declared business are met, foreign investors that wish to invest inbound need to declare to the Ministry of Commerce (MOFCOM). The M&A transaction can only be carried out after MOFCOM has approved the declaration.

In the cases reviewed by MOFCOM, rejected cases, or cases where changes are requested to alter the framework of the merger, are in the minority. Therefore, foreign investors need to proactively declare to protect their interests. Failure to do so will invoke penalties and cause damage to the international reputation of the foreign corporate.

Foreign-invested enterprises set up within China usually require strict examination and approval procedures. At the same time, these foreign-invested enterprises will generally learn from their foreign investors or take over some of their stricter management methods. Therefore, in comparison to other enterprises in China, their M&A transactions usually involve lower risks.

In equity M&A transactions, if foreign investors only acquire the equity of the domestically established foreign enterprise owned by foreign investors, then terms such as the price paid may not be bound by the State Administration of Foreign Exchange in China.

However, if the foreign investor wishes to acquire another domestically set up foreign-invested enterprise through its domestically set up company, and if the foreign investor is a natural person, and the domestically set up company is a wholly foreign-invested corporate, that wholly foreign-owned investment company cannot fully acquire another foreign-invested enterprise within China because the Company Law states that a natural person can only invest and establish a one-person limited liability company. Such a one-person company cannot invest or establish a new one-person limited liability company.