The New M&A Law: Issues in Scope and Applicability
June 02, 2003 | BY
clpstaff &clp articles &The newly effective Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (外国投资者并购境内企业暂行规定)…
The newly effective Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (外国投资者并购境内企业暂行规定) (the Provisions, see China Law and Practice, 17(3), April 2003, pp. 27-39 for a full translation) have attracted considerable attention as a milestone in legislation regarding foreign direct investment (FDI) in China. Since promulgation of the Provisions, we've seen ongoing debates regarding their impact on FDI and the implications for China's regulation of acquisitions of foreign-invested companies' shares and assets. Naturally, the recurring questions focus on the Provisions' scope of coverage and their benchmark antitrust clauses.
The Scope of an Acquisition: Equity vs. Assets
Article 2 of the Provisions sets the tone for the scope of the legislation. It categorizes foreign investors' acquisition deals into one of two types: equity acquisitions and asset acquisitions. According to the article, where an equity acquisition is concerned, the target entity shall be an enterprise other than a foreign-invested enterprise (FIE). Such target entity is called a "domestic company". In the case of an asset acquisition, Article 2 uses "domestic enterprise" to describe a target entity. Neither Article 2 nor any other clause of the Provisions clarifies whether the use of these two different terms is intentional, and if so why they have been used.
The imprecise use of "domestic company" and "domestic enterprise" has caused confusion. In order to clarify the issue, the authors made an enquiry with the Treaty and Law Department of the PRC Ministry of Commerce (the MOC, the successor of the PRC Ministry of Foreign Trade and Economic Cooperation, MOFTEC). The answer we obtained is that these different terms "domestic company" and "domestic enterprise" are used intentionally by MOFTEC. In an asset acquisition, "domestic enterprises" include all domestic entities, both FIEs and non-FIEs. As such, the Provisions have put foreign investors' acquisitions of all domestic enterprises under their application.
However, in equity acquisitions, only those deals targeting domestic non-FIEs are subject to the Provisions. This is also made clear by Article 24 of the Provisions, which provides that equity acquisition of FIEs shall be subject to current laws and administrative regulations and the Changes in the Equity Interests of Shareholders of Foreign-invested Enterprises Several Provisions (the 1997 Regulations).
Asset Acquisitions and FIEs
Article 2 provides for two types of asset acquisition. In the first, a foreign investor sets up an FIE and has the FIE purchase, and then operate, the assets of a domestic enterprise. The question here is whether only a scenario in which the foreign investor sets up a new FIE as the vehicle mainly for the asset acquisition is allowed, or whether it can also be interpreted to cover asset purchases by any FIE, regardless of (i) when and for what purpose the FIE is set up, and (ii) whether the assets to be purchased are substantive or not. A literal interpretation of Article 2 does not completely rule out the second scenario. If the MOC or its local counterparts hold this view in their interpretation of the Provisions, then in practice the Provisions will have a fairly broad application over asset acquisitions. They will apply to any asset purchase by any FIE, and even to a foreign company's inter-group restructuring of its China businesses and assets.
Equity Acquisitions and Antitrust Issues
As analyzed above, in general, the Provisions will not apply to equity acquisitions targeting FIEs. However, the story does not end here, because Article 24 provides that any matters not covered by such laws and regulations (mainly referring to the 1997 Regulations) shall be handled with reference to these Provisions. This gives rise to the question of whether equity acquisitions that target FIEs will be subject to antitrust review and approval by the MOC, although their application and approval procedures are to be conducted according to the 1997 Regulations. The Treaty and Law Department of the MOC has not given us an unqualified answer to this question, but it also does not rule out the possibility
Implementing Rules:
The Next Interpretive Step
New regulations in China are usually drafted in general terms, and later the relevant authorities issue interpretative and implementing rules to fill in the gaps and loopholes. It is almost certain that the MOC will promulgate rules addressing the questions discussed in this article. But it is difficult to say when such rules may be issued. Antitrust regulation is a fundamental issue in overall market regulation and the adoption of a comprehensive body of rules and regulations goes beyond the power of the MOC and needs the cooperation of other competent authorities.
By Kenneth Lu & George Xu, Fangda Partners, Shanghai
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