Procedures for Acquisition of State-owned Equity by Foreign Investors

Where the target is a state-owned company, the acquisition must be approved by the board meeting of the target or, if there is no such board meeting, the general manager's working committee. Where the target is a company that has a state-owned equity interest, the acquisition must be approved by both the board meeting and the shareholder's meeting. In particular, if the target is a limited liability company, unanimous consent is required from all shareholders of the target for an acquisition of any shareholding in the company by a foreign investor.

In addition to the above, as a special requirement for acquisitions of state-owned equity, the holder of the state-owned equity interest should consult with a staff representative conference of the target company. However, it is not clear to what extent the opinion of such a staff representative conference would have a practical effect.

In many cases, when acquiring equity from their Chinese counterparts, foreign investors are granted an option to purchase some percentage of equity in the target at an agreed time. All terms and conditions relating to such an option will also appear on the transaction documents submitted to corporate authorities. According to current regulations, it remains uncertain as to whether the parties will be released from undergoing separate procedures for the transfer of such equity in future if the corporate authorities approve the transaction in general.

SASAC Approval

The State-owned Assets Supervisory & Administrative Commission (SASAC) and its local branches are in charge of the administration of state-owned assets in China. All acquisitions of state-owned assets are subject to SASAC approval. Currently, if the acquisition involves state-owned equity in any listed company or company the shareholding of which is directly held by the SASAC, such an acquisition should be approved by the SASAC. Otherwise, the relevant local branch of SASAC only is required to approve the acquisition.

The SASAC reviews an acquisition from many perspectives. One of the most important documents that the SASAC looks into is the valuation report of the acquired equity. According to PRC regulations, whenever any state-owned equity or assets change hands, a statutory valuation is required. According to a regulation jointly enacted by the SASAC and the Ministry of Finance on December 31 2003, if the price of any state-owned equity is lower than 90% of the value in the valuation report, the transaction should be suspended and consent from the SASAC or its relevant branch is required. This is a deviation from the earlier practice under which the SASAC only confirms the valuation report but does not opine on the price of the transaction.

MOC Approvals

Approvals from the Ministry of Commerce (MOFCOM) are required in respect of (a) compliance with the Foreign Investment Industrial Guidance Catalogue (the Catalogue) and (b) the establishment of a foreign-invested enterprise as a result of the acquisition. These approvals are given in different stages. The approval for compliance with the Catalogue is an upfront condition for an acquisition. Usually, a proposed acquisition will be submitted for MOFCOM's review of such compliance when it is submitted to the SASAC for its approval, although no regulation expressly stipulates this (except in the case of an acquisition of equity in a listed company). As to the approval for the establishment of the foreign-invested company, it is noteworthy that such approval is required regardless of whether the foreign investor's share in such enterprise will exceed 25% or not.

In addition, according to existing regulations, foreign investors are required to file an antitrust report with MOFCOM and the State Administration of Industry and Commerce in some circumstances. Although the criterion of an antitrust test is quite ambiguous and MOFCOM does not appear to review such filing, it is always prudent that a foreign investor file a report as required so as to avoid any uncertainty.

Other Procedures

CSRC Scrutiny. When acquiring state-owned equity in listed companies, a foreign investor is required to report to the China Securities Regulatory Commission (CSRC). Further, if the shareholdings controlled by a foreign investor will exceed 30% of the total shareholdings in the target as a result of the acquisition, the investor should apply for a waiver of the tender offer from the CSRC if it does not propose to give such an offer.

SAFE Approval. The current regulations allow a foreign investor to use shares or RMB assets owned by it as the consideration for acquisition of any state-owned assets. However, such consideration should be approved by SAFE.

Approval from Authorities in Charge of Industry. According to current regulations, where the acquisition concerns licences from other public authorities, such acquisition should be submitted for approval from the relevant government authorities. Separately, where the target is a financial institution, an approval from the CBRC is required.