The New M&A Law: Issues in Scope and Applicability

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.