China's New Foreign-funded M&A Provisions: Greater Legal Protection or Legalized Protectionism?

The Provisions add extra regulation by installing a more transparent and tightly controlled administration system and imposing additional requirements for foreign exchange registration.

China's latest merger and acquisition (M&A) rules have already generated much concern among foreign investors desiring to acquire Domestic Companies. The regulations come at a time when several high profile and controversial M&A deals hang in the balance. Will the new rules create new obstacles for foreign-funded M&As or will they provide better procedures for acquiring domestic enterprises?

Please wait...

By Peter A. Neumann and Tony Zhang*, Faegre & Benson, Shanghai

During the past 12 months until June 30 2006, over 250 Chinese enterprises worth more than US$14 billion have been acquired by foreign purchasers.1 China's regulatory structure for foreign-funded mergers and acquisitions (M&A) is struggling to keep up with the emerging market for cross-border corporate control. The Provisions on Acquisitions of Domestic Enterprises by Foreign Investors (New Provisions) issued by six central government authorities2 on August 8 2006 became effective on September 8, replacing the Tentative Provisions on Acquisitions of Domestic Enterprises by Foreign Investors 3 (Tentative Provisions), which have been in force since April 12 2003.

The New Provisions reflect fundamental underlying concerns that foreign interests are acquiring capacity and market share in China, without adequate oversight by the central government and the need to control the influx of 'hot' money speculating on reminbi-denominated assets. Other key concerns involve shifting ownership of business assets offshore for less than fair value and the illicit overseas 'round-tripping' of China-sourced investment to take advantage of foreign investment incentives.

Well articulated, published regulations that clarify the government's role in M&A are generally welcome. It remains to be seen whether the New Provisions will, on balance, provide greater certainty and lower the perceived risk of investing in China, or prove to be a deterrent to M&A activity that would be beneficial to China's development and specific underperforming industries. The answer to this question will likely depend on the issuance of detailed implementing rules essential to even-handed and transparent application of the New Provisions.

Legislative developments

Tentative provisions

The Tentative Provisions were issued somewhat hastily by the Ministry of Foreign Trade & Economic Cooperation, shortly before the ministerial restructuring that produced the Ministry of Commerce (MOFCOM).4 The Tentative Provisions served to put foreign investors on notice that previously unregulated acquisitions of assets of privately-owned, non-listed Chinese companies would be subject to substantive government scrutiny. Moreover, in an apparent effort to emulate the practice in many Organization for Economic Co-operation and Development (OECD) countries, pending passage of the PRC Anti-monopoly Law(中华人民共和国反垄断法), the Tentative Provisions imposed new procedures for anti-monopoly filings and set trigger thresholds for mandatory filings (Article 19

This premium content is reserved for
China Law & Practice Subscribers.

  • A database of over 3,000 essential documents including key PRC legislation translated into English
  • A choice of newsletters to alert you to changes affecting your business including sector specific updates
  • Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
For enterprise-wide or corporate enquiries, please contact our experienced Sales Professionals at +44 (0)203 868 7546 or [email protected]