Private Acquisitions by Foreign Investors in China: Is the Party Finally Over?
March 31, 2003 | BY
clpstaff &clp articles &New rules for the acquisition of domestic firms by foreign investors have recently been issued, and constitute one of the most important legislative developments affecting foreign parties in China this year.
By Peter A. Neumann Faegre & Benson, Shanghai
It is fair to say that WTO accession has brought greater transparency with respect to China's traditionally opaque administrative regulations and practices. While greater transparency arguably leads to greater predictability and accountability for administrative agencies, it presents a Faustian bargain when it provides an occasion for greater restrictions on business. Once the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions1 (外国投资者并购境内企业暂行规定) (the Foreign M&A Provisions or the Provisions) are effective (on April 12 2003), many foreign investors in China may yearn for the days of ambiguous readings of the law and the accompanying flexibility to which they had grown accustomed. In discussing some noteworthy aspects of the Foreign M&A Provisions and exploring their implications for foreign investors in China, we come across a number of problematic issues. Such problems raise the question of whether the Provisions were rushed out as the final regulatory effort of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) before it became the new Ministry of Commerce (MOC).2
Recent Business Trends
By various anecdotal accounts there continues to be a flood of medium and small foreign manufacturers moving capacity to mainland China. This trend, driven by both a need to cut costs as well as the relocation of major customers' operations to China, will likely continue for years. Given the limited protection for intellectual property rights in China, as well as a strategic need to control established and reliable supply chains, a growing number of manufacturers have been opting to enter China by means of acquisition. High quality, privately owned or privately controlled Chinese suppliers have become a popular target.
The Regulatory Status Quo Prior to the Foreign M&A Procedures
Recent corporate acquisition activity has occurred within (and occasionally outside of) a more or less workable, if immature, legal and regulatory structure for M&A in China. This emerging framework is built on the PRC Company Law (中华人民共和国公司法) as well as the existing legal regime for foreign investment.3
Prior to the Foreign M&A Provisions, however, private acquisitions of non-listed domestic companies were addressed unsystematically, with FIE laws and state asset-related regulations being the main bodies of legal and regulatory authority. Nonetheless, for many years there was a fairly convenient breakdown in terms of acquisition
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