Structure and process, legal regulation and consents

Structure

How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?

Acquisitions of shares in a company and acquisitions of assets from a company are the two main forms of acquisitions and disposals of privately owned companies in China. Mergers between two companies are also recognised by laws of the People’s Republic of China (PRC, for the purpose of this chapter only, excluding Hong Kong, Macao and Taiwan), but are less common in practice.

The process for acquisitions and disposals varies depending on the regulatory requirements involved. For example, transactions involving foreign investors, state-owned entities (SOEs) or certain special industries would be subject to special filings or approvals and would take longer than a normal domestic transaction. See question 6 for more details.

The length of time also varies depending on whether any registrations, filings or approvals from the administrative agencies are required but, in most cases, ranges from 10 to 90 days.

Legal regulation

Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?

Private acquisitions and disposals are normally governed by the Company Law of the PRC (PRC Company Law) and the Contract Law of the PRC (PRC Contract Law). In addition, foreign investment-related acquisitions are subject to the Sino-foreign Equity Joint Venture Enterprise Law, the Foreign Owned Enterprise Law and the Sino-foreign Cooperation Joint Venture Enterprise Law (the Three FIE Laws), the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, the Catalogue of Industries for Guiding Foreign Investment, the Special Administrative Measures (Negative List) for Foreign Investment Access and the Certain Provisions on Change of the Equity Interests of the Investors of a Foreign-Invested Enterprise. 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 of the PRC.

Starting from 1 January 2020, the PRC Foreign Investment Law will take effect, replacing the Three FIE Laws. The PRC Foreign Investment Law provides from various angles that foreign invested enterprises should be treated equally with domestic enterprises and the PRC government is committed to providing enhanced protections to foreign investors in many regards.

The acquisition of shares in a company, a business or assets must be governed by Chinese law as long as the target company or the owner of the target business is registered in China.

Legal title

What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?

As prescribed by the PRC 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, electing the management of the company, among others. The legal title to shares in a company is prescribed by law and cannot be negotiated by a buyer, although shareholders may sometimes make bespoke arrangements with respect to the exercise of some of the shareholder’s rights.

The legal title to an asset includes the rights to possess, use, benefit from and dispose of the asset. Depending on the commercial arrangement between the parties, these rights may be exercised and transferred separately.

Under certain circumstances, the equity of a company can be transferred automatically by operation of law. One example of this is that, pursuant to the PRC Company Law, except as otherwise provided in the company’s articles of association, the lawful successor of a deceased natural person shareholder of a company may succeed the shareholder’s rights. Also, under certain circumstances, the courts have the lawful power to force the transfer of certain shares in a company.

There are distinctions between legal and beneficial title. 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 such shares for the interest and benefit of the beneficial owner pursuant to certain arrangements between the legal owner and the beneficial owner. However, the 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.

Multiple sellers

Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?

Typically, 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 such minority shareholder’s consent. Nevertheless, 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.

There is not a statutory process to squeeze out minority shareholders under the PRC Company Law. Arguably, 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. That has an effect of squeezing out such minority shareholders. The buyer and the surviving company may face the risk of being sued by minority shareholders who desire to stay as well as the uncertainty of the court rulings given the law is unclear in this respect.

Exclusion of assets or liabilities

Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?

A buyer can generally choose which assets or liabilities it wishes to acquire in a transaction that is structured as a business or asset sale, and there are no assets or liabilities that cannot be excluded from the transaction by agreement between the parties, unless such exclusion is for illegal purpose such as fraud or illegal avoidance of debt or violation of public policies. The transfer of assets or liabilities may require customary third-party consents, such as consents of creditors as provided for in the agreements with those creditors.

Consents

Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?

Depending on the specific circumstance of the transaction, different regulatory restrictions may apply on the transfer of shares in a company, a business or assets. For example, foreign investments in certain industries are restricted or prohibited in China, and therefore a transfer of equity interest in a company that falls within the prohibited or restricted industries to foreign investors may be prohibited or require a special permit. Transfer of equity interests, business or assets owned by a SOE is also subject to special requirements pertinent to state-owned asset regulations, including that a mandatory evaluation may need to be performed, the sale may need to be conducted in a public manner via a qualified equity exchange or a consent from the state-owned asset regulator may need to be obtained, as the case may be. In addition, in certain regulated industries such as the financial and telecommunication industries, the approval of the industry regulator may also be required.

In addition, 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. Finally, as a general matter, under PRC laws, transactions that damage the social public interest will be invalid.

Are any other third-party consents commonly required?

The PRC Company Law provides for a default consent right and a right of first refusal of the non-selling shareholders when one or more shareholders intend to sell their stake, but the shareholders may also agree otherwise in the articles of association. In addition, as mentioned in question 5, consents of creditors may also be needed pursuant to the agreements with the relevant creditors. Furthermore, transfers of assets that are subject to security interests typically require the consent of the holder of the security interests.

Regulatory filings

Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?

A registration needs to be made with the competent Administration for Industry and Commerce (AIC) 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. Certain assets, such as real property and certain intellectual property rights, are required to be registered in China, and a registration needs to be completed following a transfer of these assets. Registration or official fees payable are nominal, but stamp duties may be payable.