Going global

After the General Office of the State Council issued the Circular on the Establishment of a System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors on February 3 2011, the Ministry of Commerce formally released the Provisions for the Implementation of the System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors on August 25 2011. This takes preliminary steps to establish a system whereby a security review must be passed for acquisitions by foreign investors in certain industries and sectors, such as military armament and national defence enterprises, enterprises in sensitive military facilities, important agricultural products, energy, infrastructure, transport services, technology, equipment manufacturing and other industries where actual control may be secured by the foreign investors.

The implementation of the security review system adds a separate review from the government examination system and approval of acquisitions by foreign investors. However, as it does not provide clear sub-categorisations of industries and sectors, it lacks detailed provisions on how to determine the circumstances in which control may be secured by the foreign investors. This makes the scope of the security review vague and causes problems in practice. One way to reduce uncertainty is to prepare fully and conduct informal talks and liaise with the authorities before formally applying for a state security review.

Furthermore, the Provisions also clearly bring “holding on behalf of another, trusts, multi-level reinvestment, leases, loans, control by agreement, offshore transactions” or other means within the scope of the security review of acquisitions, thereby increasing the legal risks of effecting acquisitions through VIEs for example, that is, carrying out investments through a series of agreement arrangements, rather than equity arrangements, and ultimately achieving consolidated accounting statements.

Revisions to the industrial catalogue

The National Development and Reform Commission and the Ministry of Commerce promulgated the revised Foreign Investment Industrial Guidance Catalogue at the end of 2011, making high-end manufacturing a key sector in which foreign investment is encouraged, promoting foreign investment in the modern service industry, moving foreign-invested medical institutions and financial leasing companies, for example from the restricted category to the permitted category, and further opening up the cultural, sports and leisure industries to foreign investment. However, the revised version also strengthens restrictions on foreign investment in the agricultural by-product processing and distribution sector. These revisions will have a guiding effect on future M&A by foreign investors, possibly leading to a marked increase in foreign investment in sectors encouraged or no longer restricted by the state and for which there is great market potential in China, such as the pharmaceutical sector.

Cross-border direct investment in renminbi

In October 2011, the Ministry of Commerce and the People's Bank of China respectively issued the Circular on Issues Relevant to Cross-border Direct Investment in Renminbi and the Measures for the Administration of Renminbi Settlement Matters Relating to Foreign Direct Investment, permitting offshore investors to engage in direct investment activities in China in accordance with the law using renminbi lawfully obtained offshore. Furthermore, at the beginning of 2011, the People's Bank of China issued the Measures for the Administration of Pilot Projects for the Settlement of Renminbi Directly Invested Overseas, permitting non-financial institutions registered in the pilot areas for the renminbi settlement of cross-border trading to engage in direct investment activities offshore using renminbi funds.

These provisions are an important step in the internationalisation of the renminbi and, in particular, permitting foreign investors to invest lawfully obtained renminbi will satisfy the wishes of many Chinese sellers for foreign investors to make payments in renminbi in M&A transactions and will be conducive to the promotion of cross-border M&A.

2. What is your outlook for M&A for the year ahead? What legislation is likely to affect M&A? What changes would you like to see to already promulgated legislation to ease M&A transactions?

One legal factor affecting inbound M&A is the state security review. The main headache here is the lack of clarity, which gives rise to market hopes for more specific rules. The question of the lawfulness of VIEs remains unresolved, with the market continuing to wait and watch for a new policy direction.

Furthermore, not long after the relevant policy was issued, we assisted a client in attempting a domestic investment with offshore renminbi, for which they smoothly secured approval. The demand for foreign investors to make domestic investments in renminbi is strong. With the maturing of the approval procedure and the accumulation of regulatory experience, the procedure for cross-border direct investment in renminbi in 2012 will be clearer, so it is possible that M&A capital contributions made by foreign investors in renminbi will become a trend.

China has now set in motion the procedures for revising the Employment Contract Law, with focus on regulating the placement of temporary workers. If the amended version tightens up on the issue of the placement of temporary workers, it could increase the manpower costs of enterprises in M&A and could cool the already rather tepid M&A market, particularly M&A projects in labour intensive industries.

3. Which sectors attracted the most outbound M&A investments and why? What are some of the key trends you are seeing in M&A deals?

In outbound M&A by Chinese enterprises, in addition to the traditional resource mining and energy sectors, the food and dairy products, agriculture and other sectors have also become points of interest. This is due to China's huge population and the public's worries about food safety that have pushed the agriculture, food and other industries into becoming China's strategic industries. Few offshore acquisitions by Chinese companies are aimed at securing the local market, as the majority remain in the service of the Chinese domestic market. This means that due to the large differences in the legal and cultural environments, the cross-border acquisition of the US cinema group AMC by Dalian Wanda is a solitary case unlikely to be reproduced in the short term and unlikely to result in a large number of Chinese enterprises investing in cultural and media markets abroad.

4. How do measures promulgated by local governments conflict with national-level legislation? How does this affect deals? How do you overcome these measures?

In legal practice, local governments regularly issue incentive policies to attract foreign investment. Local pilot provisions occur where there is a lack of clear provisions nationally. As this type of incentive or special local policy does not directly conflict with national laws, the risks are low. However, as higher level legislation is silent, there remains uncertainty. For example, places such as Shanghai, Beijing, Tianjin and Chongqing previously issued local pilot provisions for QFLPs (Qualified Foreign Limited Partnerships), permitting qualified foreign investors to participate in the investment and establishment of foreign-invested private equity investment partnerships (funds) in China. Given the vagueness of their provisions on the status of the funds, whether domestically invested or foreign-invested, the market at one point interpreted them as meaning that where foreign exchange capital contributed by an offshore investor was less than 5%, it would not affect the fund's nature as domestically invested, and in a short time a number of new funds were established based on these provisions. However, the National Development and Reform Commission provided clarification in a circular in 2012, stating that a capital contribution made in foreign exchange by an offshore investor does affect the domestically invested nature of a fund, and restricted the incentive policies of the local pilot projects.

Then there are unlawful local incentives granted in violation of state provisions. Examples here include refunding through local finances, reducing land grant prices in a disguised manner or providing tax breaks. As these provisions directly conflict with higher level legislation, the long-term legal risks are high and investors may face the risk of the incentives being unrealisable and being asked by the national government to rectify them.

Finally, there are cases of discrepancy between specific local provisions and implementation, on the one hand, and the requirements of state regulation on the other. For example, with respect to payment for labour insurance and the social insurance fund, a number of local governments have not required enforcement in strict accordance with state regulations. Although actual risks in the short-term may not be great, the risk of pursuit in the future cannot be precluded due to the existence of the legal defects.

With respect to the issue of local incentive policies, the specific circumstances must be looked at and a concrete analysis and assessment made, and legal counsel's grasp of the relevant legislative intent and policy direction is crucial. The parties to a transaction should carefully balance the advantages and disadvantages, and seek an appropriate protection and risk sharing mechanism.

5. It was reported that Chongqing received more FDI than Beijing last year, is this a trend you have seen and what advice do you have for M&A transactions in China's interior cities?

Whether foreign investment is directed to interior cities or to first line cities like Beijing and Shanghai is dependent on factors such as state and local policy incentives, the synergistic development of related industries, production cost considerations and specific business needs. The appeal of interior cities to foreign investors is increasing due to state and local incentive policies for investing in central and western China, low labour costs and inexpensive land prices.

In an M&A project involving an interior city, sufficient and effective liaison with the approval authorities is important. Furthermore, foreign investors should be fully aware of and assess the competitive disadvantages of interior cities in terms of labour quality, urban facilities and the quality of the local judicial systems.

6. If you could offer one piece of advice to foreign clients about to engage in M&A, what would it be?

For a lot of foreign acquirers, many of China's legal requirements in cross-border M&A are unfamiliar. For example, in foreign exchange and tax control related issues, Chinese laws contain statutory provisions on M&A pricing and time limits on payment, generally not permitting the parties to a transaction to freely negotiate such terms, meaning that transaction protection measures and pricing mechanisms commonly used internationally, such as earn-out and holdback, face obstacles and uncertainty under Chinese law. This means that, when handling an M&A project, it is essential to have lawyers with an in-depth understanding of Chinese laws and extensive practice experience to assist both parties to the transaction in assessing the risks and designing an alternative localisation plan so as to reduce Chinese legal risks to the greatest extent possible while still achieving the commercial objectives.

走向国际

君合律师事务所的合伙人张颖对中国交易频繁的并购市场的主要趋势，作出了扼要的阐述，并评估了人民币逐步迈向国际化的影响

1. 去年有哪些影响并购的重要法规出台？

2011年，在并购领域有一系列重要法规出台：

安全审查制度

2011年2月3日国务院办公厅颁布《国务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知》，之后商务部于2011年8月25日正式出台《商务部实施外国投资者并购境内企业安全审查制度的规定》，初步确立了外资并购某些行业和领域（主要为军工、国防、敏感军事设施周边企业；重要农产品、重要能源、重要基础设施、重要运输服务、关键技术、重大装备制造等行业且实际控制权可能被外国投资者取得的）需要通过安全审查的制度。

安全审查制度的建立和实施，在原有的外资并购政府审批体系之外，新增加了一项前置审查。但由于对行业和领域没有给出明确具体的细化分类，对如何认定“控制权可能被外国投资者取得”的情况缺乏详细的规定，这使得安全审查的范围比较模糊、实践中存在着不少困扰。而根据我们处理相关项目的经验，目前在正式报送国家安全审查之前，做好充分准备并与主管机构进行非正式约谈、有效沟通，是目前降低不确定性的有效途径之一。

另外，规定还明确将“代持、信托、多层次再投资、租赁、贷款、协议控制、境外交易”等方式也纳入并购安全审查的范围，这使得目前以VIEs（即通过一系列协议安排而非股权安排进行投资并最终实现合并报表）等方式实施并购的法律风险加大。

产业目录的修订

国家发改委和商务部于2011年底发布了新修订的《外商投资产业指导目录》，将高端制造业作为鼓励外商投资的重点领域，鼓励外商投资现代服务业，将外商投资医疗机构、金融租赁公司等从限制类转为允许类，并进一步向外资开放文化体育及娱乐业。但另一方面修订也增强了对外商投资农副产品加工及流通领域的限制。我认为这些修改将对今后的外资并购起到重要引导作用，在国家政策鼓励或不再限制且中国市场潜力巨大的领域（如医药领域）的外商投资很可能会有显著增加。

跨境人民币直接投资

2011年10月，商务部和中国人民银行分别发布《关于跨境人民币直接投资有关问题的通知》和《外商直接投资人民币结算业务管理办法》，允许境外投资者以合法获得的境外人民币依法来华开展直接投资活动。此外，2011年初，中国人民银行还发布了《境外直接投资人民币结算试点管理办法》，允许跨境贸易人民币结算试点地区内登记注册的非金融企业利用人民币资金开展境外直接投资活动。

这些规定有利于人民币的国际化进程，特别是允许外商以合法取得的人民币投资，满足了并购交易中不少中国卖家期望外国投资者以人民币支付的需求，有利于促进跨境并购。

2. 您对于明年的并购活动有什么展望? 明年有什么法规很可能会影响并购活动?对于已颁布的法规，您希望看到什么改变以缓解对并购活动的阻碍？

目前影响跨境境内并购 (inbound M&A) 的主要法律因素之一是国家安全审查，主要困扰是当前国家安全审查的范围还比较模糊，市场在期待具体规则进一步细化。VIE结构的合法性问题仍然是一个未决的难题，市场在继续观望新的政策走向。

另外，相关政策出台不久，我们便协助客户进行了境外人民币境内投资的尝试并顺利取得了批准。我们感觉外资以人民币进行境内投资的需求非常强烈。随着审批程序的成熟以及监管经验的积累，2012年人民币跨境直接投资的流程会更顺畅、明确，并购中外资以人民币出资将有可能慢慢成为一种趋势。

目前中国已启动劳动合同法的修法程序，主要涉及劳务派遣监管问题。可以预见，如果最终出台的修改对劳务派遣问题趋紧，则将增加并购中企业人力成本，有可能会给本已不活跃的并购市场浇上一盆凉水，特别是对劳动密集型行业的并购项目。

3. 哪一个领域吸引了最多的境外并购交易？您看到并购交易有什么重要的趋势？

在中国企业出境并购方面，除传统的矿产资源、能源领域外，食品（乳制品）、农业等领域也逐渐成为热点。这是由于中国庞大的人口和目前公众对于食品安全的担忧，使得农业、食品等行业已成为中国的战略行业。中国公司境外并购少有以取得当地市场为主要目的，大部分还是立足和服务于中国境内市场。因此，鉴于法律环境和人文环境的重大不同，我认为万达收购AMC的跨境并购属于个案，短期内不大可能复制，不太可能出现中国企业境外投资文化、媒体市场的热潮。

4. 地方政府所发布的政策和国家层面的法规之间有什么冲突？对交易有什么影响？您如何面对此类政策呢？

在法律实践中，地方政府经常会出台一些优惠措施以吸引外资，可大致归纳为几种：

（1）在中央层面缺乏明确规定情况下，出台地方试点规定。此类优惠/特殊地方政策，没有与国家层面法律构成直接冲突，风险相对较低，但由于上位法没有明确规定，因此还是存在一定的不确定性。例如，上海、北京、天津、重庆等地此前都相继出台关于QFLP (Qualified Foreign Limited Partnership)，即合格境外有限合伙人制度的地方试点规定，允许符合条件的境外投资人在中国参与投资设立合伙制外资私募股权投资企业（“基金”）。其中关于基金的身份（内资还是外资）的规定模糊，市场上曾一度解读为境外投资人小于5%的外汇出资不影响基金的内资性质，一时间不少新基金根据该等规定设立。而2012年国家发改委在一份通知函中对此予以澄清，明确境外投资人的外汇出资会影响基金的“内资”性质，对地方试点的优惠措施进行了限制。

（2）违反国家规定，给予不合法的地方优惠。比如，通过地方财政返还、变相降低土地地价或提供税收减免等。这些规定由于与上位法有着直接冲突，长远来说法律风险较大，投资者今后有可能面临优惠无法兑现、被中央要求清理的风险。

（3）地方具体规定和操作与国家法规要求不一。例如，在劳动保险、社保基金缴纳方面，不少地方并未严格按照国家法规要求强制执行。虽然短期内实际风险可能不大，但由于存在法律瑕疵，不排除未来被追索的风险。

综上，我认为就地方优惠政策问题应该看具体情况作具体分析和评估，法律顾问对相关立法意图和政策走向的把握将尤其关键。交易各方应仔细平衡利弊、并寻找相应的保护和风险分担机制。

5. 根据报导，去年重庆获得的外商投资比北京还要多，这是你看到的趋势吗？你对中国内陆城市的并购交易有什么建议？

外资是投向中国内陆城市还是北京、上海这样的一线城市，取决于国家或地方政策优惠、相关产业的协同发展、生产成本考虑和具体商业需求等，不能一概而论。目前，内陆城市对外资的吸引力在增强，其优势体现在国家和地方对投资中西部的优惠政策、劳动力成本低、土地地价相对便宜等。

以我个人的经验来说，在涉及内陆城市的并购项目时，与审批机关的充分有效沟通会更为重要。另外，外国投资者应对内陆城市在劳动力素质、城市配套、当地司法体系完善等方面的竞争劣势有充分的认识和评估。

6. 如果要您对将要参与并购活动的外国客户提供一个建议，哪会是什么呢？

中国关于跨境并购方面的不少法律要求，对许多外国并购者来说是陌生的。比如：出于对外汇、税收管理等方面的考虑，目前中国法律对于并购作价、价款支付期限都有法定要求，一般不允许交易方自由协商，这意味着国际上常用的earn-out, holdback等交易保护措施和作价机制在中国法下都在一定程度上存在着障碍和不确定性。为此，在处理并购项目中，很关键的一点是要有对中国法律有着深层理解以及丰富实践经验的律师来帮助交易双方评估风险，设计替代的“本土化方案”，在达到商业目的的同时最大程度地降低中国法律风险。