Foreign takeover rules in China lack clarity

New measures governing foreign acquisitions in China mean transactions will come under greater scrutiny, but the new rules have not spelled out what investments are off-limits.

Six government agencies in China promulgated ‘Measures on Acquisitions of Domestic Enterprises by Foreign Investors,’ introducing new rules which give the central government greater control over transactions. The rules, published on the website of China’s Ministry of Commerce, aim to protect state assets and strategic industries from falling into foreign hands, according to English-language China newspaper, Shanghai Daily.
From 8 September onward, the central government will review deals perceived to harm China’s economic interest, or if they threaten to result in a monopoly, in certain industries.

The reviewing agencies are: Ministry of Commerce, State Administration of Foreign Exchange, State Administration for Taxation, State Administration of Industry & Commerce, China Securities & Regulatory Commission, and State Owned Assets Supervision and Administration Commission.

The latest measures replace provisional ones that have been in effect since April 2003, legal firm Paul Hastings said in its latest newsletter, ‘China Matters.’

“The new rules expand the original 26 sections to 61 sections…strengthen Ministry of Commerce’s supervisory role, in part by requiring its approval” in various conditions outlined, the legal adviser noted.

The new measures have pre-empted several types of possible acquisition targets, but fail to list industries that are off-limits, can be reviewed, and fine for investments.

Brett King, a partner at law firm Paul Hastings said: “China just doesn’t have a list of prohibited or possibly prohibited industrial sectors like most Western countries, so it is unclear which type of investments would be allowed.”

“There is not a lot of clarity at this point. But if too many deals get knocked down, people are just going to pull back.”

Carlyle’s acquisition of an 85 percent stake in Xugong Group Construction Machinery in October last year will likely fall apart, according to sources. Carlyle could not be reached for comment.

Separately, the pending acquisition of Shuanghui, a meat processor, by Goldman Sachs and CDH, a China-focused private equity firm, is reported to have hit regulatory hurdles. Sources close to Goldman Sachs said there have been no indications from Chinese regulators to suggest the deal will not be approved.

Rocky Lee, head of venture capital and private equity practice at law firm DLA Piper in Beijing, says the new rules will affect some private equity transactions the firm is advising on.

Under the new rules, regulatory approvals are required for foreigners holding more than 3 billion yuan ($276m) in assets, or generating mainland sales of at least 1.5 billion yuan; acquisitions in which overseas investors would control 20 percent or more of mainland market share, or stakes in more than 15 foreign-invested companies in related industries; control of prominent trademarks or well-known Chinese trade names.

Additionally, special purpose vehicles established solely for the acquisition and financing of specific assets will face a one-year lifespan, and must be approved by the ministry, according to Shanghai Daily report.