Structures and applicable lawTypes of transaction
How may publicly listed businesses combine?
In China, a ‘business combination’ (namely merger) is a legal concept that generally means bringing together two (or more) separate companies into a single business.
The merger of companies can generally be divided into two types: absorption and consolidation. Both are types of merger.
Absorption is where a company absorbs another company or companies. The absorbing company will continue to exist while the company or companies being absorbed will be dissolved.
Consolidation is where a completely new company is established and the two or more companies being consolidated are dissolved.
For both absorption and consolidation, the remaining company shall take over all the credits and debts of the original companies.
Investors may acquire listed companies through tender offer or agreed acquisition or by any other legal means.Statutes and regulations
What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies?
The main laws and regulations governing business combinations in China are as follows:
- the Company Law of the People’s Republic of China (PRC), effective since 1 January 2006, revised on 28 December 2013; latest amendments came into effect on 26 October 2018: this law sets out some general procedures and conditions relating to business mergers – for example, the quorum required to pass a shareholder resolution with regard to a business merger;
- the Securities Law of the PRC, effective since 1 July 1999, the latest version of which came into effect on 1 March 2020: this law governs the purchase of listed companies (one of the ways of effecting a business merger);
- the State-Owned Assets of Enterprises Law of the PRC, effective since 1 May 2009: this law sets out some general requirements for merging state-owned companies – for example, an assessment of assets may be required before merger;
- the Accounting Standards for Enterprises No. 20 – Business Merger, effective since 1 January 2007: this regulation focuses on the accounting standards for business mergers;
- the Circular on the Merger and Separate Establishment of Foreign Investment Enterprises, effective since 1 November 1999, recently revised on 28 October 2015: this regulation sets out the conditions, requirements and procedures around the merger of foreign-funded businesses;
- the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganisation, effective since 22 February 2008: this regulation stipulates the treatment of enterprise income tax in relation to enterprise reorganisations, revised by the Notice of the Ministry of Finance and the State Administration of Taxation on Issues concerning the Enterprise Income Tax Treatment for Promoting Enterprise Restructuring, effective since 1 January 2014;
- Announcement No. 4 (2010) of the State Administration of Taxation – Measures for the Enterprise Income Tax Administration of Enterprise Reorganisations, effective since 1 January 2010: this regulation sets out relevant tax matters in relation to enterprise reorganisations;
- the Anti-Monopoly Law, effective from 1 August 2008, as certain business mergers may also trigger a review by the Anti-Monopoly Bureau, which is a part of the Ministry of Commerce;
- the Administrative Measures for the Takeover of Listed Companies, effective since 1 September 2006, the latest version of which came into effect on 20 March 2020;
- the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, effective since 31 January 2006, the latest version of which came into effect on 28 October 2015;
- the Interim Provisions of the Ministry of Commerce and the State Administration for Industry and Commerce on the Domestic Investment of Foreign-funded Enterprises, effective since 1 September 2000, the latest version of which came into effect on 28 October 2015; and
- the Provisions Concerning the Administration of Foreign-funded Business-starting Investment Enterprises, effective since 30 January 2003, the latest version of which came into effect on 28 October 2015.
How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?
In addition to the limitations on foreign investments, China adopts a strict foreign exchange control policy that makes cross-border transactions complex if the target company is a Chinese public company. The foreign acquiring party must apply for approval to open a bank account in a foreign currency to receive capital for the transaction with the local Administration of Foreign Exchange where the listed company is located within 15 days of receiving official approval from the Ministry of Commerce. All transactions must generally be completed within 180 days of receiving official approval. If the foreign acquiring party fails to complete the whole transaction within the above time limit, the official approval will become invalid automatically. The foreign acquiring party shall, upon the approval of the Chinese Administration of Foreign Exchange, purchase foreign currency and remit the capital abroad.
The Catalogue of Industries for Encouraging Foreign Investment and the Special Administrative Measures (Negative List) for the Access of Foreign Investment were issued jointly by the National Development and Reform Commission and the Ministry of Commerce to regulate the industries for which foreign investments are restricted or prohibited.
The following laws and regulations apply to cross-border transactions:
- the Interim Provisions on Restructuring State-owned Enterprises with Foreign Investment, which took effect on 14 September 1998;
- Ministry of Commerce Provisions on M&A of a Domestic Enterprise by Foreign Investors, which took effect on 22 June 2009;
- the Catalogue of Industries for Encouraging Foreign Investment (2020 version), which took effect on 27 January 2021; and
- the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2020 version), which took effect on 10 December 2020.
Are companies in specific industries subject to additional regulations and statutes?
The most important industry-specific regulatory scheme in China is the Catalogue of Industries for Encouraging Foreign Investment (the Catalogue) and the Special Administrative Measures (Negative List) for the Access of Foreign Investment (the List), which indicate the Chinese government’s intention to control foreign investments. Industries have been classified into three categories: encouraged, licensed and prohibited.
For licensed industries, the List also reflects the extent to which foreign participation is allowed when investing in China and the criteria may vary subject to the authority’s approval case by case.Transaction agreements
Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements?
In general, PRC laws govern transaction agreements with regard to business mergers taking place in China. According to articles 22 and 24 of the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (revised in 2009), equity purchase agreements, capital increase agreements and assets purchase agreements should be governed by Chinese law.
The Civil Code of PRC expressly provides that three types of contract shall be governed by PRC law only: Sino-foreign equity joint venture contracts, Sino-foreign contractual joint venture contracts and Sino-foreign cooperation contracts on developing natural resources.
Filings and disclosureFilings and fees
Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions?Filings
All company mergers must be filed with the local Administration of Industry and Commerce (AIC) of the city where the company is consolidated or absorbed. They must also be filed with the authorities issuing the relevant company certificates (eg, tax bureaux) if the merger results in the establishment of a new company or in any change on these certificates.
Prior approval is required for specific companies as follows:
- business mergers relating to solely state-owned companies shall be approved by the state-owned Assets Supervision and Administration Commission (SASAC). In addition, a business merger in relation to important solely state-owned companies must also be approved by the people’s government of the city where the company is incorporated after examination by the SASAC; and
- a business merger in relation to foreign-funded companies shall be approved by the local Commission of Commerce.
When any major event occurs that may materially affect the trading price of a listed company’s stock that is not in the public domain, the company must immediately submit an ad hoc report on the event to the securities regulatory authority under the State Council and the stock exchange and make a public announcement on it, in which the cause of the event, the current status and any possible legal consequences of the event must be indicated.
There are no statutory fees or taxes charged for the approval or registration of business mergers.
At the time of writing, there is no registration fee for a company’s establishment or a company change.
If the business merger is effected via share transfer, income taxes may be imposed on the seller on the income deriving from the sale of its shares.Information to be disclosed
What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used?
Before any tender offer is issued the acquirer must issue a report on the acquisition of the listed company as part of a written announcement, which must include the following matters:
- the name and address of the acquirer;
- the resolution of the acquirer to the acquisition;
- the name of the target listed company;
- the purpose of the acquisition;
- a detailed description of the shares to be purchased and the number of shares the acquirer plans to purchase;
- the period of time for which the offer is valid and the offer price;
- the amount of money required for the acquisition and a guarantee thereof; and
- the proportion of the number of shares in the target company held by the acquirer and the target company’s issued share capital as at the date on which the report on the acquisition of the listed company is made.
What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination?
There is no specific requirement for disclosure of large shareholdings in an ordinary company except the following for listed companies.
- Any investor owning a shareholding reaching 5 per cent of the issued shares of a listed company must report the shareholding to the China Securities Regulatory Commission (CSRC) and to the Stock Exchange, and must inform the listed company and announce the shareholder via the local agency of the CSRC within three days of the shareholding threshold being reached.
- The above-mentioned investor holding 5 per cent or more of the issued shares of a listed company must report and announce its shareholding for every 5 per cent increase or decrease in the issued shares in accordance with the above-mentioned procedure.
- The above-mentioned investor holding 5 per cent or more of the issued shares of a listed company must report and announce its shareholding for every 1 per cent increase or decrease in the issued shares to the listed company and the public.
In addition, an investor must disclose further information as follows.
If it holds more than 5 per cent but less than 20 per cent of the issued shares of a listed company while it is the first majority shareholder or actual controller of the listed company, or if it holds more than 20 per cent but less than 30 per cent of the issued shares in a listed company, it must disclose:
- the structure of the controlling shareholder, actual controller and the controlling relationship of the investor and his or her partner;
- the price of obtaining the relevant shares, the required capital amount, or other payment arrangement;
- whether there is competition or continuous transaction between the business of the investor and the listed company, and, if any exists, whether the corresponding arrangement is conducted to ensure the independence of the listed company;
- the subsequent plan for the adjustment of the assets, business, personnel, organisation or articles of association of the company in the coming 12 months;
- any important transaction between the investor and the listed company during the past 24 months; and
- evidence and documents demonstrating the good faith of the investor.
If the purchaser’s shareholding reaches 30 per cent of the issued shares in a listed company and it continues to purchase shares, it shall issue an offer of purchase to all the shareholders of the listed company. However, if the shareholding exceeding 30 per cent is the result of the business merger being approved by the government or the SASAC, the shareholder may apply to the CSRC for an exemption from the offer procedure.
Law stated dateCorrect on
Give the date on which the above content is accurate.
10 April 2020.