New Chinese International Merger and Acquisition Rules

(Akron/Tire Review) In a move that appears to target the onslaught of overseas investment, China’s Ministry of Commerce implemented new rules earlier this month that increase government regulation of foreign companies’ mergers with and acquisitions of domestic Chinese businesses. The rules expand on previous provisions issued in 2003. The new regulations require regulatory approval whenever a proposed transaction involve a foreign company that has more than 3 billion yuan (approximately $376 million) in assets, more than 1.5 billion yuan ($188 million) in revenue within China, or a 20 per cent or larger share of the domestic market; give foreign investors more than a 25 per cent share of the Chinese market; involve a foreign company that has concluded more than 10 deals over the preceding year in related industries; result in a foreign company’s control of a famous Chinese brand or trademark; or otherwise affect ‘national economic security,’ a term that the regulation leaves undefined.

According to International Trade Daily, foreign investors would not need prior regulatory approval if a proposed merger or acquisition would “improve market competition conditions, ensure job opportunities in loss-making enterprises, introduce advanced technology and experienced managers, or improve the environment.”

The regulations also state explicitly for the first time that foreign companies can use stock shares in lieu of cash to purchase Chinese enterprises.

Economic observers are uncertain what net effect the new rules may have, noting that some provisions could invite more buyouts while others seem to impose new regulatory hurdles. It is interesting to note, however, that the rules were issued at a time when Chinese companies control less than half of China’s foreign trade.

According to Xinhua news agency, foreign corporations accounted for nearly 60 per cent of China’s foreign trade in 2005, earning a total of $831.7 billion. The country’s top 200 importers and exporters included 148 foreign companies and 52 Chinese firms, the article said, including 39 state-owned, nine collectively-owned and four privately-owned companies.

However, substantial gains have been made over the last few years by privately-owned companies, which now account for 11.8 per cent of total import and export value, and the self-employed, which saw the value of their trade jump from $4.2 million in 2004 to $140 million in 2005.