Hong Kong: MOFTEC Promulgates New Rules For Merger And Acquisition Activities To Be Conducted By Foreign Investors In Mainland China

Last Updated: 29 April 2003
Most Read Contributor in Hong Kong, November 2018

Written by Elaine Lo (Partner) and Andy Yip (Solicitor) of Johnson Stokes & Master (21 Mar 2003)

Summary

The Ministry of Foreign Trade and Economic Co-operation ("MOFTEC"), the State Tax Bureau, the State Administration for Industry and Commerce ("SAIC") and the State Administration of Foreign Exchange jointly promulgated the Provisional Regulations on the Merger and Acquisition of Domestic Companies by Foreign Investors (the "M&A Regulations") on 2 January 2003. The main purpose of the M&A Regulations is to provide guidelines for the acquisition of domestic companies in the People's Republic of China (the "PRC") by foreign investors. However, the new M&A Regulations also contain, for the first time in PRC legislation, anti-competition rules requiring foreign investors to disclose to PRC government authorities the amount of their business turnover in the China market, the number of acquisitions which have been made during the preceding 12-month period, and the market share already possessed (or will be possessed) by a foreign investor and its affiliated entities in the relevant industry.

The M&A Regulations will become effective on 12 April 2003.

Full article

Scope of Application

The M&A Regulations are applicable under the following investment arrangements:

(a)  the acquisition by foreign investors of shares or equity interest in PRC domestic companies, or the subscription by foreign investors of new shares or equity interest in PRC domestic companies, which results in the conversion of such PRC domestic companies to foreign-invested enterprises ("FIEs") (such arrangement being herein referred to as "Equity Acquisition");

(b)  the establishment of a FIE by foreign investors, which FIE is then used to acquire and operate assets purchased from PRC domestic companies; and

(c)  the acquisition by foreign investors of assets from PRC domestic companies, which assets are then used to establish a FIE which (upon its establishment) will operate those assets.

(the arrangements described in sub-paragraphs (b) and (c) above are collectively referred to as "Asset Acquisition").

Major Principles and Requirements

(a) Entry Restrictions

The limitations on foreign ownership in different industries, as outlined in the Foreign Investment Industries Guidance Catalogue (the "Catalogue"), must always be observed. Hence, foreign investors are not allowed to acquire 100% of the equity or shares of a PRC domestic company, the businesses of which are not allowed to be wholly owned and operated by foreign investors under the Catalogue.  In those industries where the Chinese party is required to maintain majority ownership and control, an Equity Acquisition or Asset Acquisition can only be carried out if the Chinese shareholders will remain as the majority shareholders of the newly formed FIE after the acquisition.  Foreign investors are prohibited from acquiring shares or equity interest in those PRC domestic companies which are engaged in industries in which foreign investment is prohibited.

(b) Acquisition Price

The price of the acquisition should be determined on the basis of the valuation report prepared by a PRC asset valuation company entrusted by the parties to the acquisition. If State-owned assets are involved in an Equity Acquisition or Asset Acquisition, the price for the acquisition should be determined in accordance with the relevant regulations governing the management of State-owned assets. The acquisition price should not be, prima facie, lower than the appraised value of the relevant equity interest or assets of the target company as stated in the valuation report.

(c) Payment of Acquisition Price or Capital Contribution

(i)  Foreign investors who establish a new FIE through the acquisition of equity interest, shares or assets of a PRC domestic company should pay the acquisition price in full within 3 months from the date of issuance of the business licence of the FIE. If the approval authorities have agreed to grant an extension of time for the payment of the acquisition price, then at least 60% of the acquisition price should be paid within 6 months, and the remainder of the acquisition price should be settled within 1 year, from the date of issuance of the business licence of the FIE.

(ii) For an Equity Acquisition which involves the subscription for new equity or shares by foreign investors in the target company, foreign investors are required to pay for their subscribed capital within 6 months from the date of issuance of the business licence of the FIE if they intend to pay up their subscribed capital in one lump sum. If a foreign investor intends to pay its capital subscription by several instalments, then not less than 15% of its capital subscription should be paid within 3 months from the date of issuance of the business licence of the FIE.

(iii) If foreign investors intend to establish a FIE through an Asset Acquisition, the time for capital contribution shall be determined in accordance with the provisions of the joint venture contract and articles of association of the FIE. If foreign investors were to first establish a FIE, and then use such FIE to purchase and operate assets acquired from PRC domestic companies, an amount of capital contribution which is equivalent to the price of those assets to be acquired shall be paid in accordance with the time period for the payment of acquisition price set out in item (c)(i) above. The remainder of the capital contribution shall be paid in accordance with the time period set out in item (c)(ii) above.

(iv) If foreign investors use cash as capital contribution and if the equity interest or shareholding of an individual foreign investor is less than 25%, the capital contribution should be made within 3 months from the date of issuance of the business licence of the FIE. If non-cash assets or industrial property rights are being contributed, then the capital contribution may be made within 6 months from the date of issuance of the business licence of the FIE.

(d) Registered Capital and Total Investment

The amounts of registered capital and total investment of a FIE to be formed from an Equity Acquisition or Asset Acquisition shall comply with the following ratios:

Amount of Registered Capital

Amount of Total Investment

1. Less than US$2.1 million

Cannot exceed 1.43 times of the amount of registered capital

2. US$2.1 million to US$5 million

Cannot exceed 2 times the amount of registered capital

3. US$5 million to US$12 million

Cannot exceed 2.5 times the amount of registered capital

4. More than US$12 million

Cannot exceed 3 times the amount of registered capital

Approval Procedure

Foreign investors should make their application for a proposed acquisition to the provincial branch of MOFTEC in the province where the target company is located. If an acquisition is proposed to be made in an industry in which specific approval from MOFTEC at central government level is required, the provincial MOFTEC will forward the application to MOFTEC at central government level for approval. With the exception of those applications requiring special consideration by MOFTEC and SAIC as set out in paragraph 4 below, the examination and approval authorities will make a decision as to whether to approve the application within 30 days after the date of receipt of all the relevant application materials.

Anti-Competition

(a) Foreign investors are required to report to MOFTEC and SAIC if a proposed acquisition falls within one of the following categories:

(i) the business turnover of any one party to a proposed acquisition (including the foreign investor and its affiliated entities) in the China market exceeds RMB1.5 billion in the year of making the proposed acquisition;

(ii) the foreign investor has already acquired more than 10 PRC domestic companies engaging in the same or related businesses as the target company during the past year;

(iii) the market share in China of any one party to the proposed acquisition (including the foreign investor and its affiliated entities) has reached 20%; or

(iv) the proposed acquisition would result in the market share in China of any one party to the proposed acquisition (including the foreign investor and its affiliated entities) reaching 25%.

After considering such issues as market competition and the economic security of the country, MOFTEC and SAIC will decide whether to grant approval for the proposed acquisition within 90 days after the date of receipt of all the relevant application materials.

(b) Foreign investors are also required to submit the acquisition proposal to MOFTEC and SAIC for consideration before making the formal application if the proposed acquisition falls within one of the following categories:

(i) the foreign investor already owns assets in China with a value exceeding RMB3 billion;

(ii) the business turnover of the foreign investor in the China market exceeds RMB1.5 billion in the year of making the proposed acquisition;

(iii)  the market share in China of the foreign investor and its affiliated entities  has reached 20%;

(iv) the proposed acquisition would result in the market share in China of the foreign investor and its affiliated entities reaching 25%; or

(v) the proposed acquisition would result in the foreign investor directly or indirectly investing in more than 15 FIEs in the PRC engaging in the same or related businesses.

(c) Parties to the acquisition can apply to MOFTEC and SAIC for a waiver of the requirements to submit a report or the acquisition proposal to MOFTEC and SAIC as described in sub-paragraphs (a) and (b) above if the proposed acquisition falls within one of the following categories:

(i) the proposed acquisition is capable of enhancing fair  competition in the China market;

(ii) the proposed acquisition will involve the restructuring of an enterprise or enterprises operating at a loss, and can secure the employment of employees of the relevant enterprise(s);

(iii) the proposed acquisition will attract advanced technology and management talent, and can enhance international competitiveness of PRC enterprises; or

(iv) the proposed acquisition can improve the environment.

Conclusion

As the anti-competition rules set out in paragraph 4 above represent the first time that anti-trust or anti-competition legislations are issued, it is difficult to ascertain, at this moment, how the anti-competition rules will be interpreted or applied by the new Ministry of Commerce, which has been established to take over the functions of the now defunct MOFTEC.

The original email legal update is copyright Johnson Stokes & Master at the date written first above. All rights reserved. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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

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 Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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