1. http://www.horwathintertrust.com.cn
Increased supervision related to foreign investors' M&A
of domestic enterprises in China
Horwath Intertrust China 1. Share swaps are officially allowed for foreign investors to
Shanghai acquire domestic enterprises
3903 Jin Mao Tower
88 Century Boulevard 2. The setup and role of special-purpose vehicle clearly defined
Pudong, Shanghai,
PRC 200101
3. Anti-monopoly inspection and protection of national economic
T: +86 21 5098 8686 security reiterated
F: +86 21 5049 1378
E: China@horwathintertrust.com.cn
Beijing
4F, Scitech Plaza, The Chinese government recently issued a modified set of rules related to
22 Jiangguomenwai Avenue, mergers and acquisitions (“M&A”) of Chinese domestic enterprises by foreign
Beijing, PRC 100004 investors.
T: +86 10 6514 8686
F: +86 10 6512 1378 Effective from 8 September 2006, the Provisions on Acquisition and Mergers
E: David.yu@horwathintertrust.com.cn of Domestic Enterprises by Foreign Investors clarifies a wide variety of issues
related to foreign investors’ acquisition of domestic enterprises. The Provisions
Hangzhou aims to strengthen supervision over foreign investors’ domestic acquisition.
Unit E, 15F, Several new approvals and additional requirements are now applied to the
Mingyang Building, acquisitions of domestic enterprises by foreign investors.
No.18 Jiefang Road,
Hangzhou, PRC 310009
Highlights of the Provisions include the use of share swaps in foreign investors’
T: +86 571 8604 8686 M&A of domestic enterprises, M&As through special-purpose vehicles, and
F: +86 571 8886 1378 anti- monopoly investigations.
E: Michelle.pan@horwathintertrust.com.cn
HW Horwath Group Taiwan 1. Share swaps are officially allowed for foreign investors to
acquire domestic enterprises
12F, 369 FuHsing North
Road, Taipei, Taiwan Chapter 4 clearly permits the use of share swaps in foreign investors’ M&A of
T: +886 2 2718 8686 domestic enterprises, and the nature, conditions, and declaration procedures
F: +886 2 2718 1378 of the share swaps are also explained. It is the first time China permits foreign
investors to use equity shares in M&As that involve foreign enterprises. It is
Horwath Hong Kong Group
anticipated that this new provision will help to foster the development of
2001 Central Plaza, 18 Chinese enterprises in the international market. Previously, preference was
Harbour Road, Wanchai, given to cash payments in M&A deals involving foreign enterprises.
Hong Kong
T: +852 2526 2191 2. The setup and role of special-purpose vehicle clearly defined
F: +852 2810 0502
The Provisions clarifies the setup regulations and the role of special-purpose
vehicles. A special-purpose vehicle refers to an overseas enterprise directly
established or indirectly held by a domestic resident legal person or a domestic
resident natural person in China for the purpose of listing overseas the assets
or rights and interests inside China. Article 42 of the Provisions states that
Horwath refers to Horwath International Association, a Swiss verein. Each member of the Association is a separate and independent legal entity.

2. http://www.horwathintertrust.com.cn
approval from the Ministry of Commerce (“MOC”) is needed to set up a special
vehicle. Article 47 states that the domestic enterprise should submit to the MOC
for approval facts of listing and the plan to repatriate the financed-fund within 30
days after the special-purpose vehicle or its overseas related company is listed
overseas. If the domestic enterprise fails to meet this reporting obligation, the
shareholding structure of the domestic company should be forced to restore to
the original position prior to the M&A process.
The foreign exchange profit, dividend and capital gains by the special-purpose
vehicle should be repatriated back to China within 6 months from the date of
obtaining the profit. In addition, the Provisions requires that overseas profits of
the special-purpose vehicle be repatriated back to China according to the fund
repatriation plan set by the relevant administration of foreign exchange. Profits
generated through financing can be repatriated by
(1) making loans to a domestic company;
(2) setting up a new foreign invested company in China; and
(3) acquiring a domestic company in China.
3. Anti-monopoly inspection and protection of national economic
security reiterated
In regard to anti-monopoly issues, the Provisions emphasizes in Chapter 5
that M&A of domestic enterprises by foreign investors should obtain approval
from the MOC and the State Administration of Industry and Commerce (“SAIC”),
should the deal leads to excessive industry concentration, affects market
competition or harms consumers’ interests. Yet, as far as anti-trust scrutiny
criteria and exempt conditions are concerned, there is no substantial difference
between the Provisions and the former Interim Provisions on Acquisition and
Mergers of Domestic Enterprises by Foreign Investors that was released in
2003.
According to the Provisions, foreign M&As of domestic enterprises affecting
industries of strategic importance, affecting or having the potential of affecting
national economic security, or resulting in ownership transfers of well-
established brand names in China should be declared with the MOC. If the
deal is not declared and has or has the potential to seriously affect the national
economic security, the MOC may demand the relevant parties to eliminate the
impact on national economic security by terminating the action or taking other
measures such as transfer of shares or assets.
Horwath refers to Horwath International Association, a Swiss verein. Each member of the Association is a separate and independent legal entity.