China: Amended China M&A Rules Alter the Landscape of Offshore-Onshore Restructurings in China

Last Updated: 24 August 2006

On August 8, 2006, the Ministry of Commerce ("MOFCOM"), joined by the State-owned Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission ("CSRC") and State Administration of Foreign Exchange, amended and released the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises (the "M&A Rules"). The M&A Rules, which take effect September 8, 2006, supersede the existing M&A rules in China that were in place since April 12, 2003 — the Interim Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises ("Interim Provisions").

The M&A Rules represent an important step in the further development of China’s regulation of the foreign acquisition of China-based companies. In addition to the four agencies that promulgated the earlier rules, both SASAC and the CSRC joined in issuing the M&A Rules. MOFCOM will continue to be at the center of regulatory activity in this area but will now be cooperating with an even broader range of government agencies than before. It is clear from the M&A Rules that China’s key government agencies are increasing their attention to M&A activities and can be expected to be even more active in monitoring and regulating foreign investment in China through these type of transactions.

The new M&A Rules are important for the following reasons:

  • Replace the existing M&A rules that have been applicable to China M&A for the past 3 years;
  • Signify greater government attention to cross-border M&A activities;
  • Confirm MOFCOM as key regulator for anti-trust issues related to M&A;
  • Require MOFCOM approval of a range of M&A transactions, while also requiring MOFCOM to coordinate with other ministries during the approval process;
  • Establish CSRC approval procedure for IPOs involving offshore SPVs that hold China assets;
  • Permit the use of foreign corporation securities to acquire China companies;
  • Establish reporting requirements for acquisition of control by foreigners of companies in key industries; and
  • Reinforce ability of government to monitor and prohibit foreign control transactions in key industries.

The M&A Rules grant MOFCOM express authority in anti-trust and M&A review and may significantly affect the means by which offshore-onshore restructurings are undertaken in China in connection with offshore private equity and venture capital financings, mergers and acquisitions, and initial public offerings. The M&A Rules provide the basic framework in the People's Republic of China ("PRC") for the approval and registration of acquisitions of domestic enterprises by foreign investors. Other regulations will be applicable depending on the identities and industry sector(s) of the parties to the acquisition, whether foreign-invested enterprises ("FIEs"), state-owned enterprises, or publicly listed companies.

We have seen a rapid development of M&A activity in China in the last several years, which has given rise to many issues not effectively addressed by the existing M&A rules. It is notable that the M&A Rules were amended and agreed upon by six government agencies within a relatively brief time period (with MOFCOM playing a key coordinating role) whereas the Interim Provisions had been issued by only four government agencies. During this time there has been a significant amount of media coverage of foreign acquisitions of domestic enterprises, and a resulting vigorous public discussion of whether the government should intensify restrictions on foreign-related M&A activity in China - particularly in respect of companies operating in certain sensitive areas. This has been accompanied by further concerns focused on whether the government should impose greater control on activities involving "small red-chip", roundtrip investments and M&A among companies under common control. While the M&A Rules address these issues, it is expected that M&A activity in the near future will require significant case-by-case guidance from MOFCOM and other government authorities as appropriate.

The M&A Rules have expanded from twenty-six articles in the original 2003 version to sixty-one articles organized in five chapters. Highlights of the M&A Rules include the following:

Regulation of Offshore Special Purpose Vehicles. An offshore special purpose vehicle ("SPV") is defined under the M&A Rules as an offshore entity directly or indirectly controlled by PRC individuals or enterprises with the objective of an overseas listing, the main assets of which are its rights and interests in an affiliated domestic PRC enterprise.

Key elements on share-for-share exchanges ("Share Swaps") involving private SPV shares include:

  • MOFCOM approval is required before the PRC individuals or companies establish an SPV;
  • In addition, when an SPV engages in a Share Swap, either when a shareholder of the SPV uses its shares in the SPV or when the SPV itself issues new shares as consideration to acquire a domestic company, it must obtain an initial approval reply from MOFCOM;
  • The domestic company must then seek the approval of the CSRC for the overseas listing of the SPV;
  • Upon the approval of the CSRC, the domestic company must return to MOFCOM to apply for a FIE approval certificate with the annotation "valid for one year from the date of issuance of the business license", indicating that the conversion of the domestic company into an FIE has been approved;
  • 30 days after the listing, the FIE must report to MOFCOM on the plan to return the proceeds of the offshore offering to the PRC; and
  • If the SPV does not complete an overseas listing within one year from the issuance of the business license to the FIE, or if the FIE fails to report to MOFCOM within 30 days of the SPV’s overseas listing, the Share Swap transaction would be unwound and the FIE converted back into a domestic company.

While we understand that the provisions on SPV Share Swaps are intended to clarify issues, they also raise questions that will need to be further clarified by the authorities, such as whether a straight cash acquisition of shares of an offshore company followed by a listing of the offshore company would be subject to the same approval requirements, and whether all listings by any offshore entity with Chinese businesses are subject to approval.

Share Swaps by Foreign Acquirers now Permitted. A critical development in the M&A Rules is the introduction of Share Swaps as a payment method for the acquisition of a Chinese company. Foreign companies may now consider using their own shares to acquire a domestic company in the PRC rather than solely cash.

Key elements on Share Swaps include:

  • shares must be publicly traded and from a company registered in a foreign jurisdiction with a well-developed corporate legal system;
  • foreign acquirers must engage a PRC registered M&A consultant, which will conduct due diligence on the foreign shares and issue a consulting report for review and examination by the approval authorities, and
  • an acquirer must pre-execute certain documents which would be used to roll-back the transaction and re-implement the original share structure of the domestic company if certain conditions - including the Share Swap - are not completed.

Anti-Trust and Related Issues. The M&A Rules heighten the ability of the government to monitor and regulate M&A activity that may result in either concentration of control of industries or control of companies in industries that are considered "key" industries in the PRC economy.

Trade Protection Concerns. The new MOFCOM reporting provisions, combined with the existing anti-trust provisions, raise concerns about an expansion of Chinese trade protection. As widely reported in the media, various acquisitions are currently stalled and awaiting regulatory approval such as the Schaeffler Group’s bid to buy Luoyang Bearing Group, one of China's three largest bearing producers. In July Hong Kong-listed Shanghai Industrial Holdings Ltd. abandoned its bid to buy a 21 percent stake in Lianhua Supermarket Holdings Co. Ltd. after it failed to obtain statutory approval. At this time it is unclear how the PRC government will apply the M&A Rules, but it will be important to monitor them in practice to evaluate their impact on any proposed transaction.

National Economic Security Concerns. The M&A Rules stress the necessity of protecting national economic security in the context of foreign acquisitions of domestic enterprises. Foreign investors must comply with MOFCOM reporting requirements in connection with acquisitions of domestic targets engaged in key industrial sectors, which affect (or may affect) the security of the "national economy", or in connection with acquisitions of domestic targets holding well-known trademarks or traditional brands in China. If the parties fail to declare such an acquisition which causes, or may cause, significant impact on national economic security, MOFCOM has the discretion to join with other relevant ministries to order the termination of the transaction, or to take such other measures as are deemed necessary to mitigate the adverse impact.

Restrictions on Round-tripping Investments. The M&A Rules include new provisions geared at deterring "false" foreign investment. These provisions include:

  • Prohibition on using trusts and other arrangements in the control of offshore or domestic entities. If any of the parties to an M&A transaction are under common control by the same controlling entities, the ultimate controlling parties must be disclosed to the approval authorities, together with an explanation of the purpose of the M&A transaction, and whether the appraisal for the acquisition was conducted on an arm’s length basis.
  • Requirement that if a PRC entity establishes an offshore company for the purpose of acquiring a related domestic company, the post-acquisition company will not enjoy FIE treatment unless (i) foreign investors - other than the PRC-controlled entity - hold 25% or more of the post-acquisition company, or (ii) the offshore company invests additional capital accounting for at least 25% of the post-acquisition company’s total capital.

Conformance with Other Laws. The M&A Rules emphasize that a basic principle of any acquisition activity is compliance with the regulations governing acquisitions of domestic entities which have state-owned assets. The M&A Rules also incorporate certain changes to conform with the recently amended Company Law. The most substantive of these changes is the requirement that if foreign investors will be investing additional registered capital in a domestic company, no less than 20% of that increased registered capital must be contributed upon registration of the new business license. This effectively requires that any increase in registered capital must include a cash component of no less than 20%. The M&A Rules also provide that the parties to the M&A transaction shall pay the PRC taxes in accordance with the PRC tax law and accept the supervision of the PRC tax authority.

The M&A Rules significantly revise China’s M&A framework governing onshore-offshore restructurings and how foreign investors can acquire domestic enterprises, and also signal the PRC government's greater focus on issues related to such cross-border transactions. We anticipate that application of the M&A Rules will be subject to significant administrative interpretation, and it will be important to closely monitor how MOFCOM and other ministries apply them.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions