II. Common Types of Mergers and Acquisitions in China
1. Direct Equity Acquisition
A foreign investor may directly purchase all or part of the non-listed equity interest of a target company from one or more of the existing investors. Alternatively, the foreign investor can subscribe for increased capital of a target company.
Direct acquisitions are subject to the approval of the Chinese authorities. This type of acquisition tends to be more preferred for PRC State vendors since this type of acquisition will assist them to divest themselves out of the liabilities as well as the assets of the enterprise.
2. Indirect Acquisitions
A foreign investor can acquire or increase control a target company by purchasing some or all of the offshore shares held by the target company’s foreign parent(s). However, this type of acquisition is only available if the PRC target company has foreign investors’ equity.
As the transaction can be completed entirely offshore, it does not require approval of the PRC authorities. Also, from a PRC regulatory point of view, it is not necessary to obtain consent from any other shareholders of the PRC target company or from the board of directors of the PRC target company.
3. Asset Acquisition
A foreign investor can use a newly established foreign-funded enterprise or an existing foreign-funded enterprise as an acquiring vehicle to purchase directly some or all of the business and assets of a target company. A definite advantage of asset acquisitions is that a foreign investor can select its preferred assets and businesses of the target company. All the existing obligations, liabilities or restrictions of the target company will therefore remain with the target company.
The foreign investor is required to establish a registered office/agent in China in the form of a foreign-funded enterprise to acquire and operate domestic assets. Separate approvals from the PRC authorities are required for a foreign-funded enterprise which is established for the purpose of acquiring the assets of the PRC target company.
4. Acquisition of Corporation with State-owned Interests
Interests in State-owned enterprises in China can be acquired by direct equity acquisition or by the asset acquisition as mentioned above. Certain special regulations govern acquisitions of State-owned interests, in particular the State-owned Enterprise Restructuring Regulations (effective from 1 January 2003) and the Provisional Regulations on Transfer of State ownership of Chinese Enterprises (effective from 1 February 2004), together with the Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (effective from 12 April 2003), are all now in place.