Key Points:

  • M&A loans permitted
  • Risk evaluation and risk management highlighted
  • Uncertainty regarding whether a non-China buyer may apply for M&A loans  

On December 6, 2008 the China Banking Regulatory Commission (“CBRC”) released the Guide for Risk Control of Mergers and Acquisitions (“M&A”) Loans by Commercial Banks (“Guide”), which permits qualified commercial banks to offer M&A loans and which regulates their M&A loan business. This Guide abolished the provisions regarding loans in the General Principles Regarding Loans (1996), which prohibited commercial banks from granting loans to a borrower for M&A transactions.  

The Guide sets standards for commercial banks’ M&A loans, encouraging banking institutions to explore innovative M&A financing to meet increased corporate borrowing needs. The main principle behind the Guide is requiring qualified commercial banks to balance market demand and risk.  

This Guide consists of four chapters and 39 articles providing a definition of M&A and M&A loans, specifying requirements for M&A loans made by commercial banks. These include requirements such as that the buyer and the target corporation be similar in business and strategy, and that the proposed transaction enable the buyer to acquire research and development capacity; key technology; a brand or license; a supply and distribution network; or strategic resources that will increase its competitiveness. Other requirements cover risk management and control, with both general principles and quantitative regulatory standards detailed.  

The Guide regulates considerations for risk evaluation and management for a commercial bank granting an M&A loan. In making M&A loans, a commercial bank must control the entire process and set up sound internal controls incorporating detailed and comprehensive risk assessment and control procedures. These must include information on conditions of acceptance, due diligence, the organization of an inspection, loan agreements, the conditions of draw-down, the internal auditing risk evaluation and more. If an M&A loan involves cross-border transactions, the commercial bank is required to analyze risks including country, foreign exchange and cross-border capital risks. The quantitative ratios on risk concentration and large-risk exposure, as well as leverage ratio, are specifically provided.  

Obviously, this Guide will play an important role in stimulating M&A business. However, the Guide does not clearly stipulate whether a buyer outside China is permitted to apply for a loan from a China-based commercial bank if it intends to conduct M&A business in the PRC. At least one local CBRC counterpart and some banks in Shanghai, when asked this question, replied that they were unsure as to whether the Guide applies to foreign buyers.  

On December 14, 2008 the General Office of the State Council of the PRC released Opinions Concerning Finance Promoting Development of Economy (“Opinions”), Article 17 of which stipulates that commercial banks are permitted to grant loans to both PRC-based and overseas enterprises. According to the Opinions, it appears that an investor outside China may have an opportunity to apply for an M&A loan; however, this issue still requires further clarification.

As a result of this Guide, many PRC-based enterprises will have the opportunity to acquire more funding for their domestic or overseas M&A activities. However, because the Guide encourages domestic enterprises to conduct overseas M&A transactions and requires commercial banks to conduct due diligence on the target company when granting a loan, law firms outside China with particular experience in M&A work can expect more due diligence work from PRC-based clients.