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, July 2017

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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 by clicking here .

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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