(F) Payment of Consideration
Article 16 of the M&A Rules provides that the purchaser must pay the vendor the whole amount of consideration within three (3) months after issuance of the business licence to the newly established foreign-funded enterprise after the equity-based takeover or asset-based takeover. However, an extension may be granted subject to approval, so that 60% is payable within six (6) months after issuance of the business licence, and the remaining balance of the consideration is payable within one year.
In the case of the foreign investor subscribes for the increased capital in an equity-based takeover, at least 20% of the newly increased registered capital shall be paid when the domestic company applies for a business licence for a newly established foreign-funded enterprise. The time to pay the other newly increased registered capital shall be in line with the company law, the laws on foreign investments and the Regulation on the Administration of Company Registration.
(G) Registered Capital Share
According to Article 18 of the M&A Rules, in the case of an equity-based takeover, the registered capital of the newly established foreign-funded enterprise shall be the same as that of the original domestic company. On the other hand, if a foreign investor subscribing for the increased portion of registered capital of the newly established foreign-funded enterprise, the registered capital of the foreign-funded enterprise will be the sum of the registered capital of the domestic company and the newly subscribed capital by the foreign investor. The relative ownership percentages between the foreign investor and the existing shareholders of the domestic company are determined on the basis of the assessed value of the assets of the domestic company.
(H) Ratios Between Registered Capital And Total Investment
Article 19 of the M&A Rules also set out the upper limits of the total investments to the foreign-funded enterprises after takeovers. Unless otherwise stated, the upper limits shall be determined according to the following rates:
- if registered capital is US$2.1 million or less, the total amount of investment shall not exceed 10/7 of registered capital;
- if registered capital is more US$2.1 million and less than US$5 million (including US$5 million), the total amount of investment shall not exceed two times of the registered capital;
- if registered capital is more than US$5 million but less than US$12 million (including US$12 million), the total amount of investment shall not exceed 2.5 times of the registered capital; and
- if registered capital is more than US$12 million, the total amount of investment shall not exceed three times of the registered capital.
(I) Application, Examination and Approval Procedures
For both an equity-based takeover and asset-based takeover, a foreign investor shall submit the following documents in accordance with the laws, regulations and rules on the establishment of a foreign-funded enterprise to the to the authorities for approval:
- shareholders’ resolutions of the domestic company for passing the equity-based takeover or a resolution of the person or authority who is entitled to the right of the assets of the domestic company for the consent of the sale of assets;
- an application for the establishment of the foreign-funded enterprise;
- an contract and the articles of association of the foreign-funded enterprise to be established after takeover;
- an agreement on the foreign investor’s acquisition of equities of shareholders of the domestic company or on the foreign investor’s subscription of the capital increase of the domestic company or an asset agreement signed by the foreign-funded enterprise to be established or the foreign investor and the domestic company;
- for equity-based takeover, the previous year financial audit report of the domestic company;
- the notarised and certified documents of the identity, registration and credit standing of the foreign investor;
- for asset-based takeover, the notice of the takeover and the announcement to the creditors of the domestic company and the statement of non-rejections raised by the creditors in respect of the takeover;
- for equity-based takeover, the duplicates of the business licence of the domestic company; and for asset-based takeover, the articles of association and duplicates of the business licence of the domestic company;
- the proposal of the arrangement of employees in the domestic company; and
- the documents as referred in Articles 13, 14 and 15 of the M&A Rules.
If the business scope, scale, land-use right of a foreign-funded enterprise established after takeover are subject to the licence of the relevant government departments, the relevant licencing documents shall be submitted along with the documents as listed above.
The decision for approval or disapproval of the takeover shall be made within 30 days after the approval authority receives the whole set of documents as required.
Article 51 of the M&A Rules set out an anti-competition framework relating to foreign investment.
If any of the following situations is present in a proposed acquisition of a domestic company, the foreign investor should file a report with the MOFCOM and SAIC:
- turnover of any party to the takeover in the China market exceeds RMB 1.5 billion in the current year;
- the foreign investor has cumulatively acquired more than 10 domestic enterprises in related industries;
- the China market share of any party to the takeover has reached 20%; or
- The takeover will result in the China market share of any party reaching 25%.
The aforesaid party includes the connected enterprise of the foreign investor.
If a transaction does not involve any of the above four sets of circumstances, it may still be subject to anti-competition review. If MOFCOM or SAIC believes that a transaction may result in excessive market concentration, harm to legitimate competition or damage to consumer interests, they have the discretion to call hearings involving relevant departments, institutions, enterprises and other interested parties, and may disapprove the transaction on the basis of such hearings.
(K) Equity-payment-based Merger and Acquisition
The PRC government regulates a new type of merger and acquisition that shall be done by an overseas listed company or a Special-purpose Vehicle (“SPV”). The “equity-payment-based takeover of a domestic enterprise by a foreign investor” means that the shareholders of an overseas company purchase the equities or the increased capital of a domestic company by paying the equities of the overseas company it holds, or that an overseas company purchases the equities or the increased capital of a domestic company by paying its increased shares.
a. According to Article 29 of the M&A Rules, the equities of the domestic and overseas company involved in the equity-based takeover of a domestic company by a foreign investor shall meet the following conditions:
- the shares are lawfully held by the shareholders and may be transferred in accordance with the law;
- there is no dispute over their ownership, they are not held in pledge and they are not subject to any other limit of right;
- the equities of an overseas company shall be listed publicly in an overseas lawful securities exchange market (excluding the over-counter exchange market); and
- the transaction price of the equities of the overseas company in the recent 1 year remains stable.
The Items (iii) and (iv) are inapplicable to SPVs.
b. According to Article 39 of the M&A Rules, SPV refers to an overseas company which a domestic company or natural person directly or indirectly controls for the purpose of making its actual domestic company equities get listed abroad.
According to Article 41 of the M&A Rules, the domestic company with its equities listed abroad shall satisfy the following conditions:
- its property right is clear. There is no dispute or potential dispute over its property right;
- it has a complete business system and a good sustainable operation capacity;
- it has a sound corporate governance structure and internal management system; and
- the company and its main shareholders have no record of serious violation of any law or regulation in recent 3 years.
According to Article 44 and Article 32 of the M&A Rules, where a SPV intends to take over a domestic company by equities, the domestic company shall apply for the approval by the MOFCOM and submit not only the documents as required in Chapter III of the M&A Rules, but also the following documents:
- A statement of the changes of equities and important changes of assets of the domestic company within the recent 1 year;
- A takeover consultant’s report;
- The business opening certifications or identity certification documents of the relevant domestic and overseas companies and their shareholders;
- Descriptions about the equities held by the shareholders of the overseas company, and the name list of the shareholders who hold 5 % or more of the equities of the overseas company;
- The articles of association of the overseas company and a description about the guaranties it provides to outsiders; and
- The recent annual financial statements upon audit and a report on the stock dealings of the overseas company in the recent half year.
- The approval documents and certificate for the investor to run an enterprise abroad at the time of establishment of the special-purpose company;
- The foreign exchange register form for the overseas investments of the special-purpose company;
- The identity certification documents or the business opening certification and articles of association of the final controller of the special-purpose company;
- The business plan on the overseas listing of the special-purpose company; and
- The assessment report made by the takeover consultant on the price of the stocks to be issued by the special-purpose company to get listed abroad in the future.
And if the parties concerned makes an overseas company, which holds the equities of a special-purpose company, serve as a subject to get listed abroad, the domestic company shall, apart from the aforesaid documents, submit the following documents:
- The business opening certification and the articles of association of the overseas company; and
- The arrangement of the special-purpose company and the overseas company for the transaction of the equities of the domestic company taken over, as well as the detailed descriptions of the method to convert the equities to money.
According to Article 45 of the M&A Rules, the approval certificate issued by the MOFCOM for the SPV’s merger and acquisition only extends 1 year, which means that the SPV shall complete the listing overseas within one year; otherwise, the domestic entity’s equity structure will resume to the state prior to the equity-based takeover. Therefore, since the implementation of this new M&A Rules, seldom red-chip listings were successful.