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M&A in China

M&A in China


1. Introduction

Statistic released by the Ministry of Commerce (“MOFCOM”) stated that by the end of 2008, the total amount invested in 2008 was US$ 92.395billion, 23.58 % more than in 2007. China’s accession to the World Trade Organisation has unleashed unprecedented foreign investment.

Over the past few years, multinational manufacturers have expanded production within China, aiming to streamline costs, increase profit margins and expand into one of the world’s fastest growing consumer markets. The classic route for foreign investors was to establish an equity joint venture, a co-operative joint venture or a wholly foreign owned enterprise.

Instead of launching start-ups, many foreign investors are now considering acquisitions, while traditional joint ventures are increasingly rejected in favour of majority shareholdings, if not full ownership. As well as low labour costs, foreign investors are placing greater emphasis on goodwill, supply of raw materials and the distribution networks, all of which enable them to lift market share more quickly.

However, there have always been legal issues for foreign investors to overcome. China was lack of systematic law on mergers and acquisitions and there were limited provisions in Chinese company law, contract law, administrative regulations and notices to facilitate the establishment of Sino-foreign activities within China.

Now, the legal climate has changed. Certain M&A-related regulations, including the Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (effective January 2003), the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (effective September 2006) and the Provisional Regulations on Transfer of State Ownership of Chinese Enterprises (effective February 2004), are all now in place. These rules increase disclosure, transparency and certainty in the M&A regulatory regime and seek to ensure that state assets are not sold or transferred at below what the PRC Government regards as their proper value. They make it possible for mergers and acquisitions to be structured with more certainty. These regulations provide foreign investors with broader opportunities to acquire shares in State-owned enterprises and domestic enterprises and to acquire legal person shares of listed companies. On the other hand, the PRC government strengthens the control of mergers and acquisitions activities in particular, activities in relation to special purpose vehicles.

2. PRC Government Policy

Current PRC government policies indicate strong support for the mergers and acquisitions market. The PRC Government policies enhance the privatisation of the State-owned sector, one of the examples is the recent announcement of the restructuring of State assets of 117 State-owned enterprises totalling RMB 22.7 billion through M&A in Changchun, the capital of northeast China’s Jilin province.

3. World Trade Organisation (“WTO”)

China’s integration into the world economy has already accelerated upon China’s entry into WTO. To meet the challenges of being a member country of WTO, China is readjusting its foreign investment policies, shifting the emphasis from traditional joint and cooperative ventures to transnational purchases.


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