CHINA: An Introduction to Corporate/M&A (PRC Firms)

In 2023, China’s overall economic development was influenced by a complex situation, with an increase in unfavourable factors in the international political and economic environment. Simultaneously, domestic cyclical and structural contradictions overlapped, creating an environment akin to both turbulent winds and waves, as well as intricate undercurrents. Nevertheless, on the whole, China’s economy moved forward, with a phased pattern of initial lows, intermediate highs, and eventual stability. The M&A industry, influenced by the current macroeconomic conditions, remained at a relatively subdued level. Despite the ongoing overall positive trajectory in the economic situation, the economic downturn brought about a decline in enterprise valuations, undoubtedly presenting an optimal window of opportunity for potential acquirers to engage in mergers and acquisitions. In the uncertain market, observant acquirers could increase the certainty of M&A success through rapid strategic due diligence and leveraging the low valuation market conditions, and thus expand the second engine of enterprise development, and reshape the competitive landscape within the industry.

In 2023, the overall landscape of mergers and acquisitions in China generally took on the characteristics of a higher number of deals with smaller transaction amounts. Driven by the acquisitions in countries along The One Belt and One Road Initiative, outbound acquisitions have witnessed a substantial increase, while domestic M&A transaction amounts have notably declined. According to LSEG Data & Analytics, the total global M&A value involving enterprises in mainland China in 2023 amounted to USD307 billion, marking a 22.1% decrease compared to the previous year; while the number of disclosed transactions reached 5,237, reflecting a year-on-year increase of 4.4%. Attributed to a remarkable 91.9% year-on-year growth in acquisition transactions by enterprises from mainland China in countries along The One Belt and One Road Initiative, outbound acquisitions by enterprises from mainland China experienced a significant surge, reaching a total of USD24 billion. The total value of acquisitions of enterprises in mainland China by foreign companies remained nearly unchanged compared to the previous year, but domestic M&A transaction amounts witnessed a substantial decline of nearly 30%. From the point of view that data of the fourth quarter picks up slightly, there is an opportunity for the Chinese M&A market to steadily rebound in 2024. In view of the robust macroeconomic policies promoting the development of digital, green, and health consumption, the M&A prospects in these sectors are anticipated to be promising.

The top three industries for M&A activity involving enterprises in mainland China are the industrial sector, raw material industry and high-tech industry. Compared with the current foreign technology M&A market, China seems to be taking a completely different path. While overseas acquisitions focus on “soft” technology, such as the software industry, China is primarily about acquiring “hard” technology, especially in the semiconductor and electronic fields. The industry cycle and capital market cycle of hard technology in China are jointly promoting the market prosperity of hard technology M&A. Since the introduction of the Science and Technology Innovation Board on the Shanghai Stock Exchange around five years ago, the number of listed companies in the cutting-edge hard technology industry has expanded from around 200 to nearly 600. The increase in such listed companies has substantially increased the demand for mergers and acquisitions in their industries. In 2023, the M&A scale of A-share hard technology companies reached nearly CNY60 billion, bucking the trend with a year-on-year growth of 10%. In particular, the total value of semiconductor M&A amounted to around CNY30 billion, a six-fold increase compared to 2022, reaching one of the highest points in the past decade. In 2024, M&A in the field of hard technology will continue to be a magnet for domestic M&A.

The most influential recent legislative event in China’s M&A market is the revision of the Company Law. On 29 December 2023, the 7th Session of the Standing Committee of the 14th National People’s Congress passed the newly revised Company Law of the People’s Republic of China, which will come into effect on 1 July 2024. This is the first comprehensive overhaul of the Company Law since 2005, besides minor amendments in 2013 and 2018. As the basic law to regulate the operations of companies in mainland China, each modification of the Company Law is accompanied by adjustments to the business environment and market order, resulting in profound impacts on enterprises and society. This revision establishes joint and several liability of the acquirer for the transferor’s failure to make capital contribution within the prescribed time limit or the defective part of capital contribution, specifies the right of the acquirer to file a lawsuit for the change of register of members, and changes the requirement for approval by other shareholders for the external transfer of equity by limited liability company shareholders to a mere notification. The Squeeze Out clause is introduced for the purpose of improving transaction efficiency, adding two scenarios where merger transactions do not require shareholder resolutions but can be decided by the board of directors. Meanwhile, the acquirer shall also pay attention to the clauses of the revised Company Law, which strengthen and specify the responsibilities of shareholders, directors, supervisors and management personnel, including that the investor directors shall not engage or participate in any similar business to the company without exemption. It is believed that the revision of the Company Law will provide more clear, flexible and operable legal guidance for relevant market players and promote a healthy, orderly and efficient development of China’s M&A market.