M&A in China

Apart from the establishment of a new JV with a Chinese partner, taking over an existing Chinese company is another choice to acquire local market within shortened period.

 

Adequate due diligence prior to the acquisition of a Chinese company, is absolutely essential. Since provided reports and contracts are often forged, a potential buyer should always ask himself: Are the received information regarding the target company plausible? Do the impressions of the production facilities gained through site visits match the claimed revenues by the seller? Can existing customers confirm the market position of the target company? The study to answer these questions shall not be delegated to external consultants without adequate knowledge of the industry.

 

M&A transactions require in principle an asset valuation by a licensed valuation company in China. In addition, acquisition of state-owned assets, including state-owned companies, always requires approval by the State Asset Administrative Authority. The purchase price cannot be lower than the prescribed value. As the evaluator may choose between three valuation methods and there are numerous licensed valuation companies competing with one another, they may possibly exert influence on the valuation result.

 

In the past, any transfer of the shares owned by Chinese parties to foreign companies could not take effect until approved by relevant authorities. However, on 30th July 2017, the MOFCOM issued a regulation that abolished the mandatory approval requirement for the takeover of Chinese companies by foreign companies and replaced it with a filing procedure.

 

In recent years, the examination and approval by the MOFCOM in relation to the competition law have become increasingly important. Depending on the complexity of the transaction, this can take several months. Although the relevant rules set deadlines for decision-making, they do not begin to run until the ministry confirms that it has received all the necessary documentation from the applicants. The ministry therefore has a very wide margin in terms of processing time. For most of the major international transactions within recent years, Chinese approval was granted last. Furthermore, The MOFCOM also increasingly combines its permits with certain conditions.

 

Finally, it has to be aware that a new review mechanism from the aspect of national security - the so-called National Security Review – will be conducted for large transactions. According to our knowledge this has so far not yet led to a refusal of a takeover proposal, but its provisions are formulated so vaguely that changes in the political conditions in the future may present new challenges to foreign investors.

 

We have already been involved in several major international M&A transactions and have also been involved in the proceedings before the MOFCOM.

 

Our consulting services concerning M&A transactions in China include:

 

  • Identification of suitable acquisition targets
  • Lobbying with relevant authorities to gain policy support for the project
  • Coordination of the entire due diligence process with participants of specialised financial and other advisors
  • Conducting legal due diligence investigation
  • Drafting and negotiation of contracts necessary for the acquisition
  • Preparation of all required application documents
  • Guidance on/Following through the entire acquisition process
  • Preparation of permit application regarding competition law where applicable