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Preliminary agreements What preliminary agreements are commonly drafted? The initial phase of M&A transactions will ordinarily involve discussions between the seller and the buyer on the commercial and legal parameters for the transaction. Often, these parameters will be recorded in a heads of agreement, letter of intent or memorandum of understanding, which may or may not be legally binding.
Even if not expressed as legally binding, it is common for a period for exclusive negotiation to be agreed; and for the buyer to undertake confidentiality obligations (either as part of the letter of intent, or as a separate non-disclosure agreement) with respect to the information it will receive on the target.
Principal documentation What documents are required? Parties to a direct equity transfer transaction must enter into an agreement to transfer or subscribe for the target’s registered capital. The target’s articles of association (and the joint venture contract or shareholders’ agreement, in the case of a joint venture) will have to be amended or restated to reflect the changes. Where the transaction converts the target into a joint venture, a new joint venture contract or shareholders’ agreement is needed. The amendments or new corporate documents are reviewed by the approval authority along with the equity transfer or subscription agreement.
Other documentation required generally includes a unanimous board resolution of the target, consent from existing co-investors in the target and waiver of their pre-emptive rights to buy the equity transferred, or a unanimous shareholders’ resolution in case of acquisition of a domestic limited liability company. The approval authority may also require the parties to submit other documents for its review, such as bank letters evidencing the buyer’s financial soundness, board resolutions of the parties approving the equity sale, constitutional documents of the parties or other contracts or documents referred to in the transaction documents.
Under applicable rules and prevailing practice, all documents submitted for review and approval need to be in Chinese (with translations of essential documents from other jurisdictions). Officials can refuse to review documents not available in Chinese, delaying the approval process. The Regulations on the Merger and Acquisition of Domestic Enterprises by Foreign Investors require copies of the foreign investor’s constituent documents to be legalised or authenticated, and this may also be required for other documents.
Which side normally prepares the first drafts? While there is no predominant trend, the buyer (and its legal counsel) will often prepare the first draft.
What are the substantive clauses that comprise an acquisition agreement? According to the Regulations on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, the equity purchase agreement shall consist primarily of:
- information about the parties to the agreements (eg, their names and domiciles and the names, positions and nationalities of their legal representatives);
- amount and price of equity purchase or capital increase subscription;
- term and method of performance under such agreements;
- rights and obligations of the parties;
- liability for breach, and dispute resolution; and
- time and place of such agreements.
Where a foreign investor is a party to the acquisition, it is commonplace to have an international style acquisition agreement, with comprehensive representations and warranties and other buyer protections.
What provisions are made for deal protection? Deal protection provisions are not common. Exclusivity provisions are sometimes included in a memorandum of understanding, but these do not usually specify penalties for breach. Break fees are not common.
Closing documentation What documents are normally executed at signing and closing? The following documents are typically executed at signing:
- the equity or asset purchase agreement;
- amendments to the articles of association; and
- shareholder or joint venture agreements.
The completion or closing requirements depend on the nature and structure of the transaction. For example, in a direct equity acquisition, transfer of the target’s registered capital is legally completed only after the relevant approval authority issues formal approval and requires registration with the local Administration for Industry and Commerce. Due to the timing required to complete these government approval and registration procedures, formal closing is rare in such deals. However, this requirement does not apply in an indirect equity acquisition or asset acquisition. In the case of state-owned equity transfers, the transaction will have to be completed at a property rights exchange. Subject to any applicable legal restrictions (eg, full payment of the purchase price within certain periods under the Regulations on the Merger and Acquisition of Domestic Enterprises by Foreign Investors), the parties are generally free to decide the appropriate milestones for closing or completion of the transaction
Are there formalities for the execution of documents by foreign companies? For the purpose of government applications and filings, the foreign company must appoint an authorised representative, usually through a board resolution which may need to be notarised and legalised by the Chinese consulate in the local jurisdiction. The authorities will accept only documents signed by such designated representatives.
Are digital signatures binding and enforceable? Yes, provided that they meet relevant requirements. They are not accepted for government applications and filings.
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