Knowledge

FDI and M&A Overview – China

2022-09-05

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1.  Foreign Direct Investment (Greenfield Investment)

1.1. What are the principal laws and regulations applicable to FDI in China? Are there special rules for certain foreign investors, including state-owned enterprises (SOEs)?

The Foreign Investment Law of the People's Republic of China and the Regulation for Implementing the Foreign Investment Law of the People's Republic of China establish the basic framework of China's foreign investment legal system. It clarifies the management system of pre-establishment national treatment and the foreign investment negative list.

The organization form, organization structure, and activities of foreign-invested enterprises are subject to Company Law of the People's Republic of China (2018), Partnership Enterprise Law of the People's Republic of China (2006) and other laws; the same as those of domestic enterprises.

China implements policies to encourage and guide foreign investment. Foreign investment in industries under the Catalogue of Industries for Encouraging Foreign Investment (2020) can enjoy preferential policies in taxation and land utilization.

China's current laws and regulations applicable to foreign investment do not have special provisions for foreign investors that are SOEs.

1.2. Are there any governmental and regulatory approvals required for FDI? If so, please give brief details (such as trigger threshold, relevant authority, and timing requirements)?

The Ministry of Commerce and the National Development and Reform Commission (NDRC) are responsible for the filing or approval of foreign-invested enterprises (if applicable); the Administration for Market Regulation is responsible for the registration and change of foreign-invested enterprises and the establishment of foreign-invested partnerships; the Anti-Monopoly Bureau (under the Ministry of Commerce) is responsible for the review of concentration among business operators in M&A transactions (if applicable); foreign investment in special industries (e.g., financial institutions, aviation, etc.) also requires the approval of the relevant authorities.

 (a) Negative list review: In addition to the market access negative list prohibiting investment in certain industries, foreign investment is required to comply with the Special Administrative Measures (Negative List) for the Access of Foreign Investment .

 (b) National Security Review: According to the Security Review Measures for Foreign Investment, an investment affecting national security should be actively declared to the Office of the Working Mechanism of the NDRC before implementing the investment.

 (c) Information reporting system: According to Measures for the Reporting of Foreign Investment Information and Notice on Foreign Investment Information Reporting, foreign investors or foreign invested enterprises must submit annual reports to the competent commerce departments through the enterprise registration system and national enterprise credit information publicity system.

1.3. Are there any industry sector controls on foreign investment?

Restrictions on foreign investment in industries mainly fall into two negative lists. First, China has implemented a market access negative list that all enterprises are required to follow. Second, foreign investment should also comply with the regulation of Negative List for Foreign Investment Access.

 (a) According to the Market Access Negative List (2022) issued by the National Development and Reform Commission and the Ministry of Commerce, there are 6 prohibited items and 111 items requiring permission for access.

 (b) The Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), issued by the NDRC and the Ministry of Commerce, took effect from January 1, 2022. The negative list covers 31 sub-items under 12  major categories, including mining, manufacturing, electric power, heat, gas, and water generation and supply. The restrictions include prohibiting investment, permitting investment but restricting operation of the business, permitting investment with shareholding limits, etc. The Pilot Free Trade Zones have a single negative list, excluding "manufacturing" items and allowing for a more relaxed range of investment.

1.4. Are there any government free carry interest requirements for special industry sectors?

None. However, according to the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), foreign investment in certain  restricted industries has a proportional requirement for Chinese parties to hold shares.

1.5. Are there any localization requirements (e.g., minimum ratio of local employees, minimum ratio of local procurement) for FDI in China?

There is no local ratio requirement for foreign-invested enterprises.

According to Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), key personnel like the legal representatives in specific industries are required to be Chinese citizens (e.g., legal representatives of public air transport companies and general aviation companies).

1.6. Are there any exchange control restrictions in terms of remittance of capital, profits and dividends?

China implements strict foreign exchange control measures, and the RMB is not freely convertible. However, profits and dividends of foreign-invested enterprises that comply with the relevant foreign exchange management regulations can be converted into foreign currency and remitted out of China after paying corporate income tax and social security.

In general, foreign-invested enterprises are relatively free of restrictions in conducting transactions under the current account while still subject to strict control under the capital account.

The current account refers to domestic and foreign economic transactions including foreign trade balance, non-trade exchanges, and transfers. Capital account refers to the increase or decrease of assets and liabilities arising from the export and import of capital in the balance of payments, mainly in the categories of direct investment, securities investment, and cross-border lending.

1.7. What are the most common types of corporate legal entities established for FDI? For each type of corporate legal entity, please introduce the internal corporate governance structure. What types of corporate legal entities are recommended for partially or wholly foreign-owned corporate legal entities?

Foreign investors can set up limited liability companies and joint stock companies in China.

 (a) A limited liability company refers to an economic organization established with the capital of not more than 50 shareholders, each of whom bears limited liability to the company within the limit of individually subscribed capital contribution, and the company bears limited liability to the debts of the company with all its assets. The internal governance structure includes shareholders' meeting, the board of directors (or executive director), the board of supervisors (or supervisors), and the manager (not required).

 (b) A joint stock limited company refers to an economic organization whose entire registered capital consists of equal shares raised by the issue of shares (or equity warrants). Each shareholder is liable for the company to the extent of their subscribed shares and the company bears limited liability to the debts of the company with all its assets. The internal governance structure includes shareholders' meeting, board of directors, board of supervisors, managers, and senior managers.

1.8. What is the procedure of registration and incorporation of foreign-owned companies?

The registration of foreign-invested enterprises is handled by the Administration for Market Regulation, or the market regulatory departments of the local people's government authorized by the State Council.


Step 1: Determine whether a pre-approval process is required.

For the following different types of pre-approvals the corresponding authority is as follows:

Ÿ Project approval and record. Approval or record by the State Council and the National Development and Reform Commission.

Ÿ Negative list. If it belongs to a prohibited category, the investment is not allowed in China; if it belongs to the restricted list, then it should be approved by the Ministry of Commerce or Administration for Market Regulation.

Ÿ  Industry pre-approval item. Approval by industry competent authorities.

Ÿ  Other approval procedures include National Security Review and Anti-Monopoly Review.     

If no pre-approval procedure is involved, the following materials are submitted as required in Step 2.

Step 2: After completing the pre-process and obtaining the approval documents, the company shall submit the materials (please refer to 1.9) to the Enterprise Registration System of the Administration for Market Regulation (onsite or online) to apply for registration and obtain the business license.


Step 3: After obtaining the business license, an account may be opened according to the application form, the business license, the certificates of relevant personnel, and other documents certifying the opening of an account. Foreign exchange registration can be carried out after submitting the application form, copy of the business license, and approval documents. At the same time, sundry tasks include visiting the Public Security Bureau to carve the official seal, applying for invoices at the Tax Bureau, reporting information to the Ministry of Commerce and registering for social insurance.

1.9. What are the documents and materials that the foreign investors need to prepare for that purpose? Is notarization or certification required?

Required pre-approval procedures to relevant departments for approval or filing (project approval and filing; negative list; and pre-approval industry items).

The materials required to apply for a license in the Enterprise Registration System of the Administration for Market Regulation usually include:

 (a)     Application for establishment registration;

 (b)    Certificate of appointing or entrusting agent;

 (c)     Articles of Association;

 (d)    Qualification certificate of shareholder or identity certificate of the natural person;

 (e)     Employment certificate of senior executives;

  (f)     Legal representative's employment document and identity certificate;

 (g)    Residence certificate of the company;

 (h)    Power of attorney for service of legal documents;

  (i)     Initial report;

  (j)     Other documents.

Since China has not acceded to the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents (the Hague Convention), consular/embassy certification is required for foreign documents sent to China for use in accordance with international practice, unless there is a bilateral or multilateral agreement or a unilateral waiver of certification by a jurisdiction.

1.10. How long does it normally take to complete the entire registration and incorporation process?

The duration of the process depends on the type of enterprises and the requirements of the local Administration for Industry and Commerce.

For foreign direct investment without approval requirements, the process of setting up a general company can be carried out according to the Company Law, and the fastest time period is 7 working days.

For a foreign direct investment that needs to be approved, the application and approval period could be more than 32 working days.

2. M&A Laws and Regulations & Regulatory Approvals

2.1. What are the principal laws and regulations applicable to M&A transactions in relation to listed and private company in China? What are the major issues dealt with in such laws and regulations?

 (a) The Company Law contains provisions regulating deal structure, conditions of shareholder approval, etc.

 (b) Chapter 4 of the Securities Law of the People's Republic of China (2019) (Securities Law) contains legal provisions related to public M&A.  Specific provisions deal with acquisition methods and the regulatory framework of securities regulatory bodies and stock exchanges.

 (c) The Securities Law also contains specific provisions regarding tender offers. Article 67 and Article 68 of the Securities Law provide the following:

 (d) The tender offer should remain open as a period between 30 to 60 days.   

 (e) Within the period prescribed in the tender offer, the acquirer may not withdraw the tender offer. Any modification of the tender offer is announced in a timely manner with the specific modifications stated. The following modifications are however prohibited:

—   Lowering the acquisition price.

—   Reducing the number of shares to be acquired.

—   Shortening the acquisition period.

—   Other circumstances prescribed by China Securities Regulatory Commission.

  (f) Measures for the Administration of the Takeover of Listed Companies (2020) specifies the information disclosure obligations of investors and concerted parties applicable to a tender offer, takeover by agreement, and indirect takeover.

 (g) Measures for the Administration of the Takeover of Listed Companies (2020) stipulate regulatory role of China Securities Regulatory Commission  in supervising public M&A and related corporate actions.

 (h) In addition, the acquisition of domestic enterprises by foreign investors is subject to the provisions of Provisions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors.

2.2. Are there any foreign investment review required for foreign buyers in M&A? If so, please give brief details (such as trigger threshold, relevant authority and timing requirements).

Foreign Investment Law of the People's Republic of China and Measures for the Security Review of Foreign Investment establishes security screening for M&A by foreign investors of domestic enterprises. The scope of the review includes:

 (a)  National defence and security industries: investment in military industry, military support facilities, and other fields related to national defence and security, as well as investment in military facilities and surrounding areas;

 (b) Non-defence and security industries: investment in agricultural products related to national security, important energy and resources, major equipment manufacturing, infrastructure, important transportation services, important cultural products and services, information technology and Internet products and services, financial services, key technology, and other important areas.

The review body is the Office of the Working Mechanism under the leadership of the NDRC and the Ministry of Commerce.

The review is divided into three stages:

 (a)     Preliminary review stage: Decision on starting the security review within 15 working days;

 (b)    General review stage: Decision to shelve the review or proceed to the next stage within 30 working days;

 (c)     Special review stage: Period of 60 working days, which may be extended under special circumstances.

2.3. Are there any merger control required in M&A? If so, please give brief details (such as trigger threshold, relevant authority and timing requirements).

It depends. According to Article 26 of the Anti-Monopoly Law of the People's Republic of China (2022) (the Anti-Monopoly Law), business operators must declare in advance the concentration meeting the threshold prescribed by the State Council to the Anti-Monopoly Bureau.

According to Article 3 of Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators (2018), business operators must declare in advance to the Anti-Monopoly Bureau if the concentration meets any of the following thresholds:

 (a)     the worldwide business volume of all the business operators involved in the concentration exceeds 10 billion yuan in the last accounting year, and the business volume in China of at least two business operators among them exceeded 400 million yuan separately in the last accounting year;

 (b)    the business volume in China of all the business operators involved in the concentration exceeds 2 billion yuan in the last accounting year, and the business volume in China of at least two business operators among them exceeded 400 million yuan separately in the last accounting year.

In addition, according to Article 4 of Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators (2018), where a concentration of business operators does not reach the standards for declaration as prescribed in Article 3, but the fact and evidence collected according to the prescribed procedures show that this concentration of business operators has or may have the effect of eliminating or restricting competition, the Anti-Monopoly Bureau can decide to start an investigation.

According to the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators (2018), business operators must make a declaration to the Administration for Market Regulation if the concentration of business operators meets the threshold prescribed by the State Council.

The Administration for Market Regulation, within 30 days from the date of filing the case, conducts a preliminary examination of the concentration of business operators, decides whether to conduct further examination and notifies the business operators in writing.

The Administration for Market Regulation has an additional 90 day period from the date of the decision and written notification to the business operator to further investigate.

In case of special circumstances as stipulated in the Anti-Monopoly Law, the Administration for Market Regulation may extend the period of investigation by a maximum of 60 days.

2.4. Are there any other governmental and regulatory approvals required for foreign buyers in M&A? If so, please give brief details (such as trigger threshold, relevant authority and timing requirements)?

Mergers and acquisitions in some industries are subject to relevant legal provisions and regulatory approval, for example:

 (a) Agriculture, forestry, animal husbandry, and fishery —Ministry of Agriculture and Rural Affairs and National Forestry and Grassland Administration;

 (b) Mining industry — Ministry of Natural Resources, National Energy Administration, NDRC, etc.;

 (c) Manufacturing industry — National Health Commission, Administration for Market Regulation, and Ministry of Industry and Information Technology;

 (d) Transportation industry — Civil Aviation Administration, Railway Bureau, and Ministry of Industry and Information Technology;

 (e)  Broadcast industry — Information Office of the State Council and Cyberspace Administration.

M&A by foreign investors of domestic enterprises is subject to Provisions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors (2009) and must obtain the approval of relevant commercial departments.

3. M&A for Listed Companies

3.1. What are the principal methods of acquisition?

Tender offer, takeover by agreement, and indirect takeover.

3.2. In what circumstances (if any) is a mandatory bid obligation incurred?

According to Article 65 of the Securities Law, a tender offer becomes mandatory when an investor alone or jointly with others through agreements and other arrangements acquires 30% of the outstanding voting shares of a listed company through market purchases. If the investor wishes to purchase more shares, the law requires commencing a tender offer to all the shareholders of the listed company for acquiring all or part of the shares of the listed company.

3.3. Is there a minimum price at which the offer must be made?

According to Article 35 of Measures for the Administration of the Takeover of Listed Companies (2014), the offered price in the tender offer for the same kind of shares can’t be lower than the highest price at which the purchaser obtained the said kind of shares within 6 months before commencing the announcement for launching the tender offer.

3.4. How can the function of the board of directors of the target impact a proposed acquisition?

According to Article 32 of Measures for the Administration of the Takeover of Listed Companies (2014), the board of directors of the target company shall investigate the eligibility, credit standing, and takeover aims of the purchaser, analyze the conditions of the tender offer, make a recommendation on whether the shareholders should accept the tender offer, and hire an independent financial advisor to provide a professional opinion. The board of directors of the target company shall, within 20 days after the purchaser releases the tender offer report, publish the report of the board of directors of the target company and the professional opinion of the independent financial advisor.

3.5. What key documentation is needed in the acquisition?

The tender offer is accompanied by following key documents:

 (a) Tender offer report (purchaser prepares);

 (b) Report of the board of directors of the target company (target company prepares);

 (c)  Professional opinion of the independent financial advisor (target company prepares);

 (d)  Takeover agreement;

 (e)  Other documents (e.g., resolutions of the board of directors, shareholders' meeting, or shareholders, financial statements and inventory of properties provided by the target company).

The following key documents are part of a takeover by agreement:

 (a)  Takeover agreement;

 (b)  Report on the takeover of the listed company (purchaser prepares);

 (c) Professional financial advisor opinions and legal opinions issued by M&A counsel (target company prepares);

 (d) If a foreign investor acquires a listed company, the purchaser’s financial advisor should prepare a report that the purchaser meets the conditions for the transaction and has the ability to take over listed companies. The report should be accompanied by statements of the purchaser on accepting the judicial and arbitral jurisdiction of China.

3.6. Do acquisition documents require pre-approval by any regulatory body prior to publication?

Takeover notices are voluntary and do not require regulatory approval. Acquisitions and related corporate actions of the listed company involving  national industrial policies, industry access, state-owned share transfer, and other matters are implemented after obtaining the approval of the relevant government departments.

4. M&A for Private Companies

4.1. Are there any special rules in relation to the transferring of a business (compare with the simple share or asset acquisition)?

None.

4.2. Do labor unit, works councils, and other stakeholders (other than the vendors of the target) play a role in M&A?

For foreign-invested enterprises and other private acquirers, M&A transactions do not need to be considered and approved by the trade union. However, the trade union and staff representatives should be informed and have their views and suggestions heard during the formulation process of any major proposed action that directly affects the immediate interests of workers.

4.3. What are the principal minority shareholder rights given by law?

 (a)  Dissident shareholders have the right to claim for share repurchase;

 (b) Right to information;

 (c) The shareholders of a joint stock limited company holding more than 10 percent of the company's shares individually or in aggregate have the right to convene an extraordinary general meeting of shareholders;

 (d)  Limited liability company shareholders have the right of first refusal;

 (e) Minority shareholders can apply to a court to initiate a statutory derivative action on behalf of the company if a director has breached one of their duties;

  (f)  Any shareholders of a joint stock limited company holding 10% or more of all the shareholder’s voting rights of a company individually or in aggregate have the right to apply to the court to dissolve the company.

Authors:

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Disclaimer:                                

This article was written by the lawyer of DeHeng Law Offices. It represents only the opinions of the authors and should not in any way be considered as formal legal opinions or advice given by  DeHeng Law Offices or its lawyers. If any part of these articles is reproduced or quoted, please indicate the source. 

Relevant Lawyer

  • Wei (David) CHEN

    Partner

    Tel:+86 10 5268 2888

    E-mail:davidweichen@dehenglaw.com

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