PRC Regulation of Mergers by Foreign Investors – Summary of Key Points
-- Summary provided by Squire, Sanders & Dempsey
For the first time, exchange of share is allowed in merging with a domestic company (DC), with these requirements:
; A foreign investor company (FI) must list in an overseas public stock market with an
established securities exchange system.
; Stock price must have been stable the preceding one-year period.
; Target must retain a PRC-registered agent, who must issue a due diligence report
regarding the FI.
; Transaction must be completed in roughly six months in the following steps:
1. MOFCOM approval.
2. Registration at SAIC, SAFE, etc.
3. Approval and registration with CSRC to acquire shares in the FI.
4. If DC completes approval and registration within six months of new business
license issuance, MOFCOM reissues a long-term approval certificate. DC
amends licenses; if it fails to, approval certificate becomes void.
Many PRC entities establish offshore companies to acquire DCs using “roundtrip investments.”
China seeks control to prevent outbound capital flow and evasion of laws. Regulation starts with MOFCOM approval. Parties cannot evade this through investment by foreign-invested enterprises (FIEs) or otherwise. This applies to PRC-controlled offshore companies (PCOCs) establishing FIEs in China to acquire DCs.
If a DC is acquired by a PCOC and thus becomes an FIE, it may not enjoy benefits such as tax incentives, unless the DC’s registered capital level increases and the PCOC subscribes to purchase equity exceeding 25 percent of the increased capital.
If PCOC and DC are commonly controlled, they must explain how the purchase price constitutes fair market value. They cannot evade this through shares held by nominees, trusts or otherwise.
When a PCOC acquires a DC to list overseas (i.e. special purpose company or SPC) through share exchange, the requirement that shares of a listed company be used is waived if these steps
; SPC is approved by CSRC as well as SAFE.
; MOFCOM (not local counterpart) issues approval and certificate valid for one year after
issuance of DC business license.
; DC registers at SAIC, SAFE, etc.
; SPC completes listing process within one year.
; SPC reports, within 30 days of listing, to MOFCOM and SAFE its plan to transfer
income back to China. Once approved, MOFCOM reissues a long-term approval
certificate, and DC amends licenses accordingly. If DC fails to list or plan is not
approved within one year, certificate is automatically voided.
Although the Antitrust Law has not yet been adopted, the regulations require antitrust examinations for all M&A. Investors must report to SAIC and MOFCOM if:
; A party gains PRC revenue exceeding RMB1.5 billion.
; More than 10 PRC companies in related industries are acquired within a year.
; A party’s market share exceeds 20 percent in Chinese market.
; Acquisition results in a party with market share exceeding 25 percent in Chinese market.
Even if none of these conditions is met, MOFCOM or SAIC can require parties to submit a report. Within 90 days MOFCOM/SAIC holds a hearing with relevant agencies and enterprises to decide whether to approve.
AR Article 53 regulates overseas deals. It requires parties report to MOFCOM/SAIC before
publishing overseas M&A plans, or submission to relevant foreign agencies, if specified conditions exist.
National Economic Security Examination
AR requires a report to MOFCOM if a transaction will result in transfer of control of a DC owning famous trademarks, Chinese trade names, important industries or factors that could affect PRC’s economic security. If parties fail to report the transaction could affect PRC’s economic
security, MOFCOM may cancel the transaction.