China Law Blog

Co-blogger, Steve Dickinson, has a new article out in China International Business Magazine, entitled, "New M&A Law:No Major Changes," Steve posits that for all the hype, China's new mergers and acquisitions (M&A) law, set to go into effect on August 1, 2008, will, as a practical matter, leave things pretty much unchanged:

Contrary to expectations, the new law leaves the system for review of foreign M&A transactions unchanged. In fact, it appears that the regulations implementing the new law will follow the foreign model in antitrust review of domestic Chinese merger transactions.

Foreign M&A of Chinese companies is currently governed by the Regulations on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, under which most transactions are processed and approved at the local level. "Most local jurisdictions in China are receptive to foreign investment, and approval for transactions is relatively easy to receive," sometimes even if they conflict with central government policy. The M&A rules require notification and approval of the central government authorities in Beijing:

This review occurs in two critical areas. First, any transaction that has an effect on competition or consumer welfare is subject to anti-monopoly review. Second, any transaction that may impact national economic security is subject to national security review. Virtually any M&A transaction, regardless of size, can be prohibited under either of these review procedures. The standards are open-ended and virtually any interested agency may get involved in the review process. This means that all M&A transactions may be vetoed by central government. Local review and approval is not sufficient, even for small transactions.

China's basic policies for M&A is as follows:

Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.

Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.

Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.

Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.

Steve describes China as "remarkably receptive to direct foreign investment that creates new business activity in China," but opposed to purchases of successful existing businesses and assets. "Such purchases are strongly disfavored, since they are seen as providing no net benefit to China:"

Under this policy regime, venture capital and troubled company buy-out businesses have plenty of room to operate. Strategic alliances in core industries also work well. On the other hand, traditional private equity that focuses on the outright purchase of strong and successful companies simply does not work under this system. Central government regulators will consistently step in and exercise their veto powers to prevent the foreign acquisition of a majority interest in any existing, strong Chinese company. This is not likely to change anytime soon.