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Foreign Investors involved in acquisitions in China should know transaction process

In the past few years, China has tightened its regulations in various sectors, creating stricter measures to protect sensitive data and national security. Foreign investors interested in acquisitions and disposals of privately owned companies, businesses or assets must know what a typical transaction process involves and how long does it usually take based on the jurisdiction and its laws.

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In China, private acquisitions and disposals are governed by the Company Law and the Civil Code. In addition, foreign investment-related acquisitions are subject to the Foreign Investment Law, the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, the Industry Guidelines on Encouraged Foreign Investment, and the Special Administrative Measures (Negative List) for Foreign Investment Access.

The two main forms of acquisitions and disposals of privately owned companies in China are acquisitions of shares and acquisitions of assets. Though less common, mergers between two companies are also recognized by Chinese law.

The regulatory requirements involved are different depending on the process for acquisitions and disposals. Transactions including foreign investors, state-owned entities (SOEs) or certain special industries are subject to special filings or approvals and take longer than a normal domestic transaction.

The duration of the process goes from 10 to 90 days, but it can differ depending on requirements such as registrations, filings, or approvals from the administrative agencies.

Transactions related to state-owned assets or entities are also subject to SOE-related laws and regulations. Furthermore, acquisitions that meet certain monetary thresholds may be subject to merger control notification and review pursuant to the Anti-Monopoly Law.

If the company is registered in China, the acquisition of shares, business or assets will be governed by local Chinese legislation.

According to the Company Law, the legal title to shares in a company entitles the shareholder to the rights of receiving the profits, participating in important decision-making, and electing the management of the company, among other things.

The legal title to shares in a company is prescribed by law and cannot be negotiated by a buyer, however shareholders may sometimes make bespoke arrangements regarding the exercise of some of the shareholder’s rights.

The rights to possess, use, benefit from and dispose of the asset are part of the legal title. These rights can be exercised and transferred separately, depending on the agreement of the parties involved.

In specific occasions, the equity of a company can be transferred automatically by operation of law. For example, the lawful successor of a deceased person shareholder of a company may succeed the shareholder’s rights. Also, under certain circumstances, the courts have the power to force the transfer of certain shares in a company.

There are differences between legal and beneficial titles. A party registered as the shareholder of a company is deemed the legal owner of the shares registered under its name, but it may be holding those shares for the interest and benefit of the beneficial owner pursuant to certain arrangements between the legal owner and the beneficial owner.

A private arrangement between the legal owner and the beneficial owner with respect to the title of the shares cannot be used against bona fide third parties including creditors.

In the event of multiple sellers, every shareholder must agree to sell for the buyer to acquire all shares, and no minority shareholder can be squeezed out by the buyer without his or her consent. However, shareholders in the company may agree in advance to a drag-along provision or a squeeze-out mechanism in the articles of association or shareholder agreement, which will then apply according to its term in the case of a disposal of the company.

The Company Law does not offer a statutory process to squeeze out minority shareholders. Buyers can take advantage of a merger process, which requires the approval of shareholders that hold at least two-thirds of the entire equity interest of each merging entity, to impose cash consideration on minority shareholders.

The risk in this situation is that the buyer could be sued by minority shareholders who desire to stay as well as the uncertainty of the court rulings given that the law is unclear in this matter.

When it comes to exclusions, there are no assets or liabilities that cannot be excluded from the transaction by agreement between the parties. A buyer can generally choose which assets or liabilities it wishes to acquire in a transaction.

The transfer of assets or liabilities may require customary third-party consents, such as the consents of creditors.

Separate regulatory restrictions may apply on the transfer of shares in a company, a business, or assets, depending on the type of transaction. Foreign investments in certain industries are restricted or prohibited in China; therefore, a transfer of equity interest in a company that falls within these sectors may not be permitted or requires a special authorization.

Transfer of equity interests, business or assets owned by an SOE is also subject to special requirements pertinent to state-owned asset regulations.

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Acquisitions of businesses or assets are also subject to anti-monopoly review as provided for in the Anti-Monopoly Law when the prescribed thresholds are met. In the case of an acquisition by foreign investors of a controlling stake in a company that falls into certain industries that are pertinent to national security, the transaction needs to undergo a national security review.

Transactions that damage the social public interest will be invalid, according to the law.

Third-party consents are commonly required, such as the consent right and right of first refusal of the non-selling shareholders when one or more shareholders intend to sell their stake, as well as the consent of creditors.

Transfers of assets subject to security interests typically require the consent of the holder of the security interests.

Finally, a registration must be filed with the competent State Administration for Market Regulation to reflect the change in shareholder following an acquisition of shares as well as any change in registered capital, legal representative or the composition of the board resulting from the acquisition. The official fees are nominal, but stamp duties may be payable.

Even as the country moves into a new era of regulation, China will remain an attractive market for growth and investment. For many industries, it is still the world’s hottest market.


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