China: Opening the door
September 28, 2006
China: Opening the door. Check it out:(Legal Week Via Thomson Dialog NewsEdge) With the continued growth of China's economy, many Chinese businesses have emerged as attractive acquisition targets. Recognising this, the Government has amended the M&A rules governing foreign investors and the enterprise bankruptcy laws, attempting to boost foreign investors' confidence in China.
China's regulations on mergers and acquisitions of domestic enterprises by foreign investors became effective on 8 September, 2006, and substantially amend and expand the interim M&A rules governing foreign investors adopted in 2003.
The three most notable changes for a foreign investor are:
. The new rules expressly permit the use of a foreign publicly-listed company's shares as consideration for the exchange of Chinese equity securities in connection with an M&A transaction. A multi-step government approval process is required for a share exchange transaction and two major requirements are: the foreign shares used as consideration must be traded on a public stock market and must have a `stable' share price over the previous 12 months; and the foreign-listed company (and its management) must not have been subject to any sanction by a relevant regulatory authority within the past three years.
. Foreign investors must notify a Chinese Government agency if a proposed M&A transaction results in foreign investors controlling any Chinese company that involves or affects a key domestic industry, national economic security or well-known or traditional trademarks or brand names.
These new provisions are broad and vague regarding which industries are `key', when `national economic security' is affected, and what trademarks and brand names are well known or traditional. The Chinese authorities are keen to protect their key industries and assets, a reaction not completely dissimilar to the US Congress' reaction to and interference in the Chinese National Offshore Oil Corporation's proposed purchase of US oil company Unocal in 2005. This is also consistent with the Chinese authorities' consideration of The Carlyle Group's agreement to acquire an 85% stake in Xugong Group Construction Machinery for $375m (197.6m) which, although signed in October 2005, has yet to receive approval.
. A Chinese Government agency must give its approval if a `domestic person' establishes or controls a foreign company and the foreign company acquires a Chinese affiliated company. Requirements for approval are unclear and key terms remain undefined.
When foreign investors acquire a Chinese company, it is common for the foreign investors to offer selected Chinese citizens an opportunity to own equity interests in the foreign company established to make the acquisition. Whether such a transaction would trigger the approval requirement under the 2006 M&A rules is unclear.
Enterprise Bankruptcy Law
In June 2007, China's new Enterprise Bankruptcy Law will become effective. The groundbreaking legislation will streamline bankruptcy procedures and better protect the interests of creditors.
The most significant change from the existing bankruptcy law is that the Chinese Government will no longer play a leading role in bankruptcy cases. Other notable changes are:
. Any Chinese enterprise may be a debtor, regardless of whether the entity is stated owned, private or foreign invested. The interim enterprise bankruptcy law did not establish procedures governing the bankruptcy of financial institutions. However, and very importantly, financial institutions are now covered by the new law that may add transparency and other benefits to creditors who invest in this key sector.
. Displaced workers' compensation claims were often paid ahead of secured claims. The new law reverses this practice and provides that in a liquidation, secured creditors are entitled to distribution to the extent of the value of the collateral prior to any payments to employee for wages, medical insurance, and other compensatory benefits.
. A debtor or a creditor may now apply directly to the court for a reorganisation. A debtor in possession may manage the assets and operate the business of the debtor under the supervision of the administrator, or the administrator may operate the business and administer the assets by engaging the existing management. Only the debtor in possession or the administrator can propose a plan of reorganisation, the exclusivity period is six months after the reorganisation application is accepted by the court and that period may be extended for another three months. If exclusivity expires, the court shall terminate the reorganisation proceeding and declare the enterprise bankrupt.
. The new law allows the People's Court to recognise and enforce the orders and judgments issued by a foreign court sitting in the foreign bankruptcy proceeding to the extent that such orders or judgments may be enforced or recognised by a Chinese court pursuant to any existing treaties or international convention or based on the principle of reciprocity.
Substantial regulatory and legal changes continue to unfold in China, and such changes are reshaping and improving the country's legal environment for M&A, restructuring and bankruptcy transactions, which should generate more confidence in the Chinese market.
Tai Hsia is a London associate and Helena Huang a New York associate at Kirkland & Ellis.
Copyright 2006 Legal Week Publications
Related Tags: foreign investors, enterprise bankruptcy, foreign company, chinese government, foreign, chinese
Cosmos
Del.icio.us
Slashdot
Digg
BoingBoing
Furl
Spurl
Listed below are links to sites that reference China: Opening the door:
Trackback Pings
TrackBack URL for China: Opening the door:
http://blog.tmcnet.com/cgi-bin/mt3/mt-tb.fcgi/28366Previous blog: Insolvency: A closing chapter
VoIP for Enterprise Home PageComments to China: Opening the door
