Ministry of Commerce approves M&A share swaps

September 02, 2006 | BY

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From September 8 2006, share swaps will be allowed instead of cash payment when foreign companies merge with or acquire PRC companies, according to the…

From September 8 2006, share swaps will be allowed instead of cash payment when foreign companies merge with or acquire PRC companies, according to the Provisions for the Acquisition of Domestic Enterprises by Foreign Investors(关于外国投资者并购境内企业的规定), jointly issued by the Ministry of Commerce (MOFCOM), the China Securities Regulatory Commission and four other government agencies.

The new regulations provide procedures on share swaps and detail how foreign companies can pay in the form of stock, cash or a combination of both when merging with or purchasing a domestic company. Wang Zhile, director of the Research Centre on Transnational Corporations affiliated to MOFCOM, says the regulations are in line with internationally-accepted practices and clarifies many points on mergers involving foreign-invested companies in China.

Also addressed in the provisions is the issue of monopolistic practices, which specifies which mergers require approval from government agencies. For example, companies must get approval for a potential merger when the foreign investor has a sales volume of Rmb1.5 billion (US$188 million) or more in the Chinese market. A foreign investment that alters the control of a prominent Chinese brand or a firm with more than 2,000 staff would also require approval.

The regulations come following delays in approvals and the failure of several high-profile M&A deals in China. Most notably, the US$375 million bid by US private equity firm Carlyle, for an 85% stake in state-owned Xugong, a leading heavy machinery manufacturer, has been awaiting approval for 10 months.

Senior government officials in Beijing have held an unprecedented meeting to decide whether to approve the controversial Xugong deal that is said to "threaten [China's] economic security", according to Hu Jingyan, head of MOFCOM's trade and services department. Haiwen & Partners is advising Xugong and Latham & Watkins is acting for the Carlyle Group on the deal.

Another deal involving $US3 billion-plus bids from consortiums led by Citigroup and Société Générale for the heavily-indebted Guangdong Development Bank has been awaiting approval for more than a year. Shearman & Sterling is representing Société Générale and King & Wood is advising Guangdong Development Bank.

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