Knowledge

FDI and M&A Overview – M&A in China

2022-09-30


1. M&A Laws and Regulations & Regulatory Approvals


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?


  1. The Company Law contains provisions regulating deal structure, conditions of shareholder approval, etc.

  2. 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.

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

  4. The tender offer should remain open as a period between 30 to 60 days.

  5. 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.

  6. 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.

  7. 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.

  8. 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.


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:


  1. 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;

  2. 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:


  1. Preliminary review stage: Decision on starting the security review within 15 working days;

  2. General review stage: Decision to shelve the review or proceed to the next stage within 30 working days;

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


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:


  1. 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;

  2. 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.


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:


  1. Agriculture, forestry, animal husbandry, and fishery — Ministry of Agriculture and Rural Affairs and National Forestry and Grassland Administration;

  2. Mining industry — Ministry of Natural Resources, National Energy Administration, NDRC, etc.;

  3. Manufacturing industry — National Health Commission, Administration for Market Regulation, and Ministry of Industry and Information Technology;

  4. Transportation industry — Civil Aviation Administration, Railway Bureau, and Ministry of Industry and Information Technology;

  5. 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.


2. M&A for Listed Companies


What are the principal methods of acquisition?


Tender offer, takeover by agreement, and indirect takeover.


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.


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.


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.


What key documentation is needed in the acquisition?


The tender offer is accompanied by following key documents:

  1. Tender offer report (purchaser prepares);

  2. Report of the board of directors of the target company (target company prepares);

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

  4. Takeover agreement;

  5. 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:

  1. Takeover agreement;

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

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

  4. 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.


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.


3. M&A for Private Companies


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

None.


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.


What are the principal minority shareholder rights given by law?


  1. Dissident shareholders have the right to claim for share repurchase;

  2. Right to information;

  3. 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;

  4. Limited liability company shareholders have the right of first refusal;

  5. 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;

  6. 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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