On March 21, CIRC issued the Administrative Measures on the Acquisition and Merger of Insurance Companies (the Measures) which will take effect from June 1, 2014. The Measures apply to M&A activities where an insurer is the target for a merger or acquisition. The target firm could be either a domestic or a foreign invested insurer. The Measures will not, however, apply to any equity investment by insurance firms in non-insurance companies in China or in overseas insurance firms.
On the finance side, with CIRC’s approval, an investor involved in insurance M&A activities may borrow to finance such activities provided that the amount borrowed cannot exceed 50 per cent of the total monetary consideration. This substantially liberalises the existing legal regime under the Administrative Measures onEquity Interests of Insurance Companies and its supplements (the Equity Investment Rules), under which investors are not allowed to use bank loans or other external funds to finance their investments in Chinese insurance firms.
The Measures also relax the tracking record requirement on the investor. The investor, if it contemplates holding more than a 20 per cent equity interest in an insurance company, is no longer required to prove that it has invested in such insurer for at least three years.
Specific regime on acquisition
An acquisition under the Measures means either of the following:
- the acquirer (including its associated parties in concert) acquires more than a one third equity interest in an insurer and becomes the largest shareholder of the insurer; or
- the acquirer acquires no more than a one third equity interest in an insurer but becomes the largest shareholder of such company and may have controlling rights over it.
Under the Measures, subject to CIRC’s approval, the acquirer is permitted concurrently to control two insurance firms which engage in the same type of business. This is a substantial change in the existing regime in respect of equity investment in insurers, under which two or more firms which are controlled by the same entity may not engage in the same type of insurance business if that could give rise to conflicts of interest or competition issues. However, the acquirer, unless otherwise specified, remains subject to a three-year lock in under the Measures and is not permitted to transfer its acquired equity interests in an insurer within such period.
Specific regime on merger
A merger under the Measures refers to two or more insurance firms being merged into one firm by way of absorption or the establishment of a new corporate entity, subject to business separation rule. The current business separation rule, which must be strictly complied with, is that an insurer cannot engage simultaneously in life and non-life insurance business. However, a non-life insurer may, subject to CIRC’s approval, engage in short term health insurance and accident/injury insurance.
Relevant parties such as creditors, policy holders, insureds, or beneficiaries must be notified within 10 days of CIRC approval of the merger. The merger must be announced in a newspaper within 30 days of approval. After the merger, the surviving or the newly established insurance firm succeeds to all credit rights, debts and policy liabilities of the merging entities automatically by operation of law.
Although M&A transactions are common in the insurance sector, this is the first time that CIRC has formally issued regulations governing M&A activities. This may provide a legal basis and guidance for insurers that are performing well to attract high quality capital and allow stronger insurers to invest in their weaker peers.