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China mergers and acquisitions law- legal framework

Time:2014-03-13 Hit:882

China mergers and acquisitions law- legal framework

          M&A and Takeovers have recently resulted in the preferred method to establish a presence in China. Though China has made considerable advances in the last several years in trying to develop a coherent and predictable regulatory framework for M&A and

Takeovers, its Legal framework is extremely vast, complex, and fragmented. Therefore, In order to grow along with the Chinese market through these transactions, it is necessary to hire a team of lawyers familiar with this framework able to suggest the right move, in fact without a disciplined acquisition process, it is easy to waste time, money and resources on chasing the wrong targets. China has made evident progress to bring its merger control regime more in line with prevailing international standards;

It is obvious that an ever-increasing number of foreign companies are establishing a presence in China or expanding their business here because China is simply too big to ignore. But much of this growth also can be attributed to the introduction of the M&A Regulations 2006.' These new Regulations have made the process of entering the Chinese market much easier than it was before. However, before we take a more in-depth look at these regulations, it is necessary to understand how mergers and acquisitions are defined in China:

          The term `M&A' refers generically to any combination of two or more business enterprises.

          A merger is the legal combination of two discrete economic entities in which only one entity survives and assumes all the assets and liabilities of both entities:

- The opposite of a merger is a division, and this legal action should also be considered as part of the tern merger and acquisition.

On contrast, an acquisition can be defined as the purchase by one economic entity of all or part of the shares or assets of another economic entity.

However, it must be noted that under Chinese law there does not exist a concrete definition of "mergers and acquisitions’ general definition is stated in the Company Law.

The merger of a company may be affected by way of merger or consolidation.

- In the case of a merger, a company absorbs any other company and the absorbed company is dissolved;

- In the case of a consolidation, two or more companies combine together for the establishment of a new one and the existing ones are dissolved.

The Company Law in China underwent a substantial revision in 2005, with the goal of facilitating the incorporation of a company and capital raising, to better protect the interest of minority shareholders, and to improve corporate governance. Among other things, the revised Company Law removed the restraint on outbound investments which could be made by a company in which the aggregate amount of outbound investments shall not exceed 50% of the net assets of the company.' making it more likely for companies to become the object of M&A and mobilizing the financial leverage of companies. At the same time, the revised Company law streamlined generally the procedure of M&A, provided simplified solutions to dispose of existing claims and debts and improved the efficiency of M&A. It is interesting to note how the Chinese legislator has changed one of the provisions of the Company law to facilitate these transactions: Article 184 of the Company Law 2004 Version was formulated in this way: 'The companies concerned shall notify their creditors within ten days as of the date when the merger resolutions of the companies are taken and announced in the newspaper pets at (east three times within 30 days. Creditors have the right to demand the companies to clear their debts or provide corresponding guarantees within 30 days after the notifications received or within 90 days as of the date of the first announcement in cases in which notifications have not been received without clearing debts or providing guarantee, the merger may not be carried out"; this provision was replaced by article 174 of the Company law 2005 Revision: 'The companies concerned shall, within ten days as of making the derision of merger, notify the creditors and make a public announcement on a newspaper within 30 days. The creditors may, within 30 days as of the receipt of the notice or within 45 days as of the issuance of the public announcement, if it fails to receive a notice, require the company to clear off its debts or to provide corresponding guarantees. - Meanwhile, Article 175 was added that mandated that when companies merge, the surviving company or the newly established company to the claims and debts of each party to the merger. The M&A Regulations, in respect of the Company Law, give us a more precise definition of mergers and acquisitions. Article 2 states that:

Mergers and acquisitions of a domestic enterprise by foreign investors shall mean,

- Purchase of an equity interest from shareholders of a domestic enterprise (not an F.I.E.);

- Subscribing to the increase in the registered capital of a Domestic Enterprise; (the D.E. changes into an F.I.E.);

- Establishing an F.I.E. which will acquire the assets of a domestic enterprise and operate such assets:

- Purchasing assets of a Domestic Enterprise and use such assets as Investment to establish an F.I.E. to operate such assets. Noteworthy the assets purchasing agreement shall be governed by the laws of China.


          For an asset acquisition, the offshore acquirer would either set up a subsidiary in China as the acquisition vehicle, or act as the acquisition vehicle itself and, upon acquisition of the assets of the Chinese enterprise, infuse the assets acquired from the Chinese enterprise into a subsidiary incorporated onshore with such assets as its key operating assets.

          This lack of uniformity can cause confusion for foreign investors; so it is vital that the legal team that you use to facilitate your M&A activities has a strong grasp of the various laws that create a broader Chinese understanding of M&A. However, at this point, it should be stressed that the recent M&A Regulations 2006 have done a good job of updating a new legal framework for M&A transactions that seems to respond well to the needs of foreign investors. A wise investor would also watch in the future for further adjustment by Chinese authorities in regards to M&A because the whole point of these new regulations is to attract the foreign investments needed to sustain and foster the Chinese economy. But with the more precise requirements and rules the current framework offers, it is easier than ever to invest in China, or to buy a D.E. in order to establish a presence in China. So now M&A represents not only a valid alternative to less efficient forms of establishing a presence in China like J.V.s. but it also is a new form of investment.

          The M&A Regulations 2006 (Regulations on Acquisition of Domestic Enterprises by foreign investors took effect on September 8. 2008. The M&A Regulations 2006 expanded on and superseded the provisional Regulations on Acquisition of Domestic Enterprise by Foreign investors which were promulgated in April 2003 (2003 Regulations). These regulations clearly represent a great step forward in the development of regulating acquisitions of P.R.C. domestic enterprises by a foreign investor.

          It is necessary to stress that according to Article 12 of M&A Regulations 2006 if foreign investors obtain an actual controlling equity interest through merger with or acquisition of a domestic enterprise, and such merger involves any critical or key industry, or affects or may affect the security of national economy, or causes transfer of actual control over the domestic enterprise who possesses a resound trademark or China's time-honoured brand, then the parties to the merger shall report their transaction to the Ministry of Commerce. Where the parties fail to make an application and their merger or acquisition activities have or may have a significant impact on the economic security of the State. MOFCOM may, together with the relevant authorities, require the parties to terminate such transactions or transfer relevant equity interests, assets or use other effective methods to eliminate such impact on the economic security of the State."

The 2006 M&A Regulation for the first time addressed the issue of national economic security,' which had been raised over the M&A cases involving foreign investment.

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