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Mergers & Acquisitions in 60 jurisdictions worldwide Contributing editor: Casey Cogut
2011 Published by Getting the Deal Through in association with: Aabø-Evensen & Co Advokatfirma Æ´LEX Arendt & Medernach Arias, Fábrega & Fábrega Baião, Castro & Associados | BCS Advogados Bersay & Associés Biedecki bizconsult law LLC Bowman Gilfillan Inc Carey y Cía Corpus Legal Practitioners Coulson Harney Debarliev, Dameski & Kelesoska Attorneys at Law Divjak, Topi´c & Bahtijarevi´c ELIG Attorneys-at-Law Estudio Trevisán Abogados Freshfields Bruckhaus Deringer LLP Gleiss Lutz Grata Law Firm Harneys Aristodemou Loizides Yiolitis LLC Headrick Rizik Alvarez & Fernández Herzog Fox & Neeman Hoet Peláez Castillo & Duque Abogados Homburger AG Hoxha, Memi & Hoxha Iason Skouzos & Partners JA Treviño Abogados Jade & Fountain PRC Lawyers Jose Lloreda Camacho & Co Kettani Law Firm Khaitan & Co Kim & Chang Kimathi & Kimathi, Corporate Attorneys Law Office of Mohanned bin Saud Al-Rasheed in association with Baker Botts LLP LAWIN LAWIN Lideika, Petrauskas, Vali¯unas ir partneriai Madrona Hong Mazzuco Brandão – Sociedade de Advogados Mello Jones & Martin Nagashima Ohno & Tsunematsu NautaDutilh Nielsen Nørager Odvetniki Šelih & partnerji, op, doo Pérez-Llorca Salomon Partners Schönherr Setterwalls Advokatbyrå Simont Braun SCRL Simpson Thacher & Bartlett LLP Slaughter and May Stikeman Elliott LLP Thanathip & Partners Ughi e Nunziante Vlasova Mikhel & Partners Voicu & Filipescu SCA Weil, Gotshal & Manges LLP Wolf Theiss Wong Beh & Toh WongPartnership LLP Wu & Partners, Attorneys-at-Law
Contents ®
Mergers & Acquisitions 2011 Contributing editor Casey Cogut Simpson Thacher & Bartlett LLP Business development managers Alan Lee George Ingledew Robyn Hetherington Dan White Marketing managers Sarah Walsh Ellie Notley Alice Hazard Marketing assistants William Bentley Sarah Savage Subscriptions manager Nadine Radcliffe Subscriptions@ GettingTheDealThrough.com Assistant editor Adam Myers Editorial assistants Nina Nowak Lydia Gerges Senior production editor Jonathan Cowie Chief subeditor Jonathan Allen Senior subeditor Kathryn Smuland Production editor John Harris Subeditors Chloe Harries Davet Hyland Editor-in-chief Callum Campbell Publisher Richard Davey Mergers & Acquisitions 2011 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 © Law Business Research Ltd 2011 No photocopying: copyright licences do not apply. First published 2000 Twelfth edition 2011 ISSN 1471-1230 The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of May 2011, be advised that this is a developing area.
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Global Overview Casey Cogut and Sean Rodgers Simpson Thacher & Bartlett LLP 3 European Overview Stephen Hewes and Richard Thexton Freshfields Bruckhaus Deringer LLP 5 Albania Shpati Hoxha Hoxha, Memi & Hoxha 8 Argentina Pablo Trevisán and Laura Bierzychudek Estudio Trevisán Abogados 14 Austria Christian Herbst Schönherr 20 Belarus Tatiana Emelianova and Andrej Ermolenko Vlasova Mikhel & Partners 26 Belgium Sandrine Hirsch and Vanessa Marquette Simont Braun SCRL 31 Bermuda Peter Martin, Andrew Martin and Anthony Rasoulis Mello Jones & Martin 37 Brazil Maria PQ Brandão Teixeira Madrona Hong Mazzuco Brandão – Sociedade de Advogados 43 Bulgaria Kaloyan Ivanov Todorov Wolf Theiss 49 Canada Richard E Clark and Curtis A Cusinato Stikeman Elliott LLP 55 Merger Control in Canada Susan M Hutton Stikeman Elliott LLP 60 Chile Pablo Iacobelli and Cristián Eyzaguirre Carey y Cía 63 China Lawrence Guo, Henry Xiao and Sophie Sha Jade & Fountain PRC Lawyers 68 Colombia Enrique Álvarez and Santiago Gutiérrez Jose Lloreda Camacho & Co 74 Croatia Damir Topi´c and Mate Lovri´c Divjak, Topi´c & Bahtijarevi´c 80 Cyprus Nancy Ch Erotocritou Harneys Aristodemou Loizides Yiolitis LLC 84 Czech Republic Paul Sestak and Michal Pravda Wolf Theiss 88 Denmark Thomas Weisbjerg, Jakob Mosegaard Larsen and Martin Rudbæk Nielsen Nielsen Nørager 93 Dominican Republic Roberto Rizik Cabral, Sarah De Leon and Claudia Taveras Headrick Rizik Alvarez & Fernández 99 England & Wales Michael Corbett Slaughter and May 104 France Sandrine de Sousa and Yves Ardaillou Bersay & Associés 113 Germany Gerhard Wegen and Christian Cascante Gleiss Lutz 119 Ghana Kimathi Kuenyehia, Sr, Atsu Agbemabiase and Kafui Baeta Kimathi & Kimathi, Corporate Attorneys 127 Greece Evgenia Stamatelou-Mavromichali Iason Skouzos & Partners 133 Hungary David Dederick, László Nagy and Eszter Katona Weil, Gotshal & Manges LLP 139 India Rabindra Jhunjhunwala and Bharat Anand Khaitan & Co 144 Israel Alan Sacks and Daniel Lipman Lowbeer Herzog Fox & Neeman 150 Italy Fiorella Federica Alvino Ughi e Nunziante 156 Japan Ryuji Sakai, Kayo Takigawa and Yushi Hegawa Nagashima Ohno & Tsunematsu 161 Kenya Richard Harney and Haanee Khan Coulson Harney 166 Korea Sang Hyuk Park and Gene Oh Kim Kim & Chang 172 Latvia Raimonds Slaidins and Kristine Meija LAWIN 177 ˇ ioˇcys LAWIN Lideika, Petrauskas, Vali¯unas ir partneriai Lithuania Robertas C 182 Luxembourg Guy Harles and Saskia Myners Arendt & Medernach 190 Macedonia Emilija Kelesoska Sholjakovska and Elena Miceva Debarliev, Dameski & Kelesoska Attorneys at Law 197 Malaysia Wong Tat Chung Wong Beh & Toh 203 Mexico Daniel I Puente Medina and Mauricio Garza Bulnes JA Treviño Abogados 209 Morocco Nadia Kettani Kettani Law Firm 214 Netherlands Willem Calkoen and Martin Grablowtiz NautaDutilh 220 Nigeria Theophilus Emuwa and Chinyerugo Ugoji Æ´LEX 226 Norway Ole K Aabø-Evensen Aabø-Evensen & Co Advokatfirma 231 Panama Julianne Canavaggio Arias, Fábrega & Fábrega 240 Poland Radoslaw Biedecki and Ludomir Biedecki Biedecki 245 Portugal Victor de Castro Nunes, Maria José Andrade Campos and Cláudia de Meneses 252 Baião, Castro & Associados | BCS Advogados Romania Georgiana Badescu Voicu & Filipescu SCA 259 Russia Anton Klyachin and Igor Kuznets Salomon Partners 264 Saudi Arabia Babul Parikh and Shadi Haroon Law Office of Mohanned bin Saud Al-Rasheed 269 in association with Baker Botts LLP Singapore Wai King Ng and Fi Ling Quak WongPartnership LLP 275 Slovenia Natasa Pipan Nahtigal, Bostjan Kavsek and Luka Grasselli Odvetniki Šelih & partnerji, op, doo 284 South Africa Ezra Davids and David Yuill Bowman Gilfillan Inc 291 Spain Vicente Conde Pérez-Llorca 297 Sweden Anders Söderlind, Carl-Johan Bune, Johan Strömbäck, Anders Holmgren, 303 Mattias Bergström and Ola Grahn Setterwalls Advokatbyrå Switzerland Claude Lambert, Dieter Gericke, Dieter Grünblatt and Gerald Brei Homburger AG 308 Taiwan Jerry Chen Wu & Partners, Attorneys-at-Law 316 Thailand Chawaluck Sivayathorn Araneta and Vipavee Kaosala Thanathip & Partners 322 Turkey S Tunç Lokmanhekim and Erman Öncel ELIG Attorneys-at-Law 327 United Arab Emirates Patrick Ko and Omar Momany Freshfields Bruckhaus Deringer LLP 335 United States Casey Cogut and Sean Rodgers Simpson Thacher & Bartlett LLP 341 Uzbekistan Bakhodir Jabborov Grata Law Firm 346 Venezuela Jorge Acedo and José Alberto Ramírez Hoet Peláez Castillo & Duque Abogados 352 Vietnam Tuan Nguyen, Phong Le, Hanh Bich, Huyen Nguyen and Hai Ha bizconsult law LLC 356 Zambia Corporate Advisory Department and Mergers and Acquisitions Practice Group Corpus Legal Practitioners 362 Appendix: International Merger Control David E Vann Jr and Ellen L Frye Simpson Thacher & Bartlett LLP 367 www.gettingthedealthrough.com
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Jade & Fountain PRC Lawyers
China Lawrence Guo, Henry Xiao and Sophie Sha Jade & Fountain PRC Lawyers
1 Types of transaction How may businesses combine?
Two companies in China may combine via: • Mergers: two forms of merger are identified – first, merger by absorption, in which one company absorbs one or more other companies and the absorbed companies are dissolved; and second, merger by establishment, in which two or more companies are merged into a newly created company and the parties to the merger are dissolved. • Share acquisition: a company may acquire existing shares or equity interests of another company. • Assets acquisition: a company may purchase the assets of another company through a transfer of title of the relevant assets, including assignment or novation of contracts. Hybrid ways of combining share acquisition and assets acquisition are also possible. 2 Statutes and regulations What are the main laws and regulations governing business combinations?
The main laws and regulations governing M&A transactions in the PRC include: • the Company Law of the PRC (effective since 1994); • the Securities Law of the PRC (effective since 1999); • the Administrative Measures for the Takeover of Listed Companies (Listed Companies Takeover Measures, effective since 2006); and • the Anti-Monopoly Law of the PRC (effective since 2008). The following regulations apply specifically to foreign-related business acquisitions: • Rules on Mergers with and Acquisition of Domestic Enterprises by Foreign Investors (effective since 2006); • Regulations on Merging and Splitting of Foreign-invested Enterprises, (effective since 2001); • Rules on Transfer of Equity Interests in Foreign-invested Enterprises (effective since 1997); • Provisional Administrative Measures on Verification of ForeignInvested Projects (effective since 2004); • Administrative Rules on Foreign Investors’ Strategic Investments in Listed Companies (effective since 2005); and • The Circular on the Establishment of the Security Review System for Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors (National Security Review Circular, effective since March 2011). If a foreign investor acquires a domestic enterprise or a foreigninvested enterprise (FIE) in China, the foreign investor should make sure that it also complies with the Chinese foreign-investment policies
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and laws and regulations concerning the administration and incorporation of FIEs, such as an equity joint venture company (EJV), a cooperative joint venture company (CJV), a wholly foreign-owned enterprise (WFOE) or a foreign-invested partnership enterprise. 3 Governing law What law typically governs the transaction agreements?
In general, in the absence of other foreign elements, transaction agreements for transactions between two or more Chinese domestic entities should be governed by PRC law. In the event of a foreign buyer directly making acquisitions in China, the share or assets purchase agreement or share subscription agreement must be governed by PRC law. Likewise, the joint venture contract for a Sino-foreign EJV or CJV must be governed by PRC law. For any other agreements, if a foreign company or person is a party to the contract or if there is any other foreign element, the laws of a foreign jurisdiction may be selected. 4 Filings and fees Which government or stock exchange filings are necessary in connection with a business combination? Are there stamp taxes or other government fees in connection with completing a business combination?
If a Chinese domestic company acquires another domestic company that is not listed on any PRC stock exchange, the business combination may be directly registered with the competent company registration authority, namely the SAIC or its local counterpart. If the industry engaged by the target company or assets is specially regulated, an approval or verification may need to be obtained from relevant governmental department in charge of the industry. If the target company or assets are properly characterised as ‘stateowned assets’ in China, or state-owned assets are otherwise being purchased or disposed of, special laws and regulations relating to the administration and supervision of state-owned assets should be complied with. An appraisal of the shares or assets being acquired needs to be conducted by a designated valuation entity. An approval of the acquisition should be obtained from the appropriate state-owned assets administrative entity at the central or local level. Usually, the transaction is subject to public announcement and completion of a competitive bidding process in a designated property exchange. If a purchaser acquires shares of a Chinese company listed on a stock exchange and the purchaser’s shareholding reaches 5 per cent, it would need to submit a report to the China Securities Regulatory Commission (CSRC) and make a public disclosure. Thereafter, whenever its shareholding of the shares of the listed company changes by 5 per cent, the purchaser would assume similar reporting and disclosure obligations. If a purchase already holds 30 per cent or more of the shares of a listed company and intends to purchase more of the listed company’s
Getting the Deal Through – Mergers & Acquisitions 2011
Jade & Fountain PRC Lawyers shares, the purchaser must launch a mandatory tender offer, unless a tender offer exemption from the CSRC is first obtained. The purchaser should submit written reports to the CSRC and make public disclosures prior to making, and upon the completion of, the tender offer. If a purchaser intends to acquire the substantial assets of, or sell substantial assets to, a Chinese listed company, the approval of the CSRC would be required if relevant thresholds are met. Foreign-related business acquisitions
Where a foreign company intends to purchase the shares or assets of a Chinese domestic company, in addition to the merger control review by MOFCOM, competent foreign investment approval authorities at the central or local governmental level would always need to approve the acquisition in accordance with the PRC foreign investment laws and regulations: • The National Development and Reform Commission of the PRC (NDRC) or its local counterpart reviews and approves a foreignrelated acquisition from industrial planning perspectives. • MOFCOM or its local counterpart approves the acquisition agreements and constitutional documents of the resulting foreign-invested enterprise according to PRC foreign investment policies and laws. • Where the industry in which the target company or assets are engaged is specially regulated, the central or local government department in charge of the relevant industry issues its approval from the perspective of the industry administration (see question 17). • National security review: in March 2011, China introduced a national security review for foreign-related business acquisitions. Under the National Security Review Circular, if a foreign investor intends to acquire a target company which is related to the Chinese military or military industries, or is engaged into some other important industry (eg, important agricultural products, energy and resources, infrastructures, transport, key technologies or important equipment manufacturing industries, which would have a bearing on national security), such transaction should be reported to MOFCOM, which in turn will forward the report to the Inter-Ministerial Security Review Committee for its final review and decision. The Inter-Ministerial Security Review Committee is led by the State Council and is composed of the NDRC and MOFCOM and (depending on the transaction involved) other relevant governmental entities. The transaction may not be concluded unless security review approval is obtained. Fees
In China, governmental entities do not usually charge fees in the course of granting approvals. A company registration fee would be collected by the SAIC or its local counterpart when completing a company registration. In addition, stamp duty of 0.05 per cent of the contract value is payable in respect of certain types of contracts (including a transfer of unlisted shares or an equity interest in a Chinese enterprise). 5 Information to be disclosed What information needs to be made public in a business combination? Does this depend on what type of structure is used?
If two Chinese companies intend to merge with each other, both companies shall, after reaching a merger agreement, not only notify the creditors, but also make a public announcement in a national or provincial-level newspaper within 30 days. If a purchaser proposes to acquire shares in, or purchase or sell assets from or to, a PRC listed company, it should make public disclosures accordingly. (See question 4.) A listed company should make public announcements if it engages in a share or asset purchase or sale transaction which meets www.gettingthedealthrough.com
China the relevant thresholds. For instance, if the total value of the assets involved in the transaction is more than 10 per cent of the total assets value of the target company, or if the transaction price is more than 10 million renminbi and more than 10 per cent of the last audited absolute net asset value of the target company, the listed company should make public disclosures. A series of similar transactions that are concluded by a listed company in any 12 consecutive months should be aggregated to determine whether the relevant foregoing thresholds are met. If a share or assets purchase or sale transaction is between a listed company and a connected person, then more stringent information disclosure and shareholder approval requirements apply. 6 Disclosure of substantial shareholdings What are the disclosure requirements for owners of large shareholdings in a company? Are the requirements affected if the company is a party to a business combination?
A shareholder holding 5 per cent or more of the shares of a PRC listed company is treated as a connected person of the listed company. Transactions between such a shareholder and the listed company would therefore be connected transactions. These would include the purchase or sale of assets, making external investments, the provision of financial assistance or security, entrusting others or accepting entrustment to manage assets or businesses, restructuring of a creditor’s rights or debts, entry into licensing agreements, and so on. If a connected shareholder and the relevant listed company engage in a transaction that exceeds 3 million renminbi and is more than 0.5 per cent of the audited absolute net asset value of the listed company in the most recent fiscal year, a public disclosure should be made. Notwithstanding the foregoing, any provision of security by the listed company to a connected person, regardless of the amount of the transaction, should be disclosed after approval by the board of directors, and then submitted to the shareholders for approval. If a shareholder, holding 5 per cent or more of the shares of a PRC listed company, intends to acquire more shares of the listed company, it will be subject to standard information disclosure requirements and tender offer obligations. (See question 4.) 7 Duties of directors and controlling shareholders What duties do the directors or managers of a company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination? Do controlling shareholders have similar duties?
The directors or managers of a company owe duties of diligence and loyalty to the company in accordance with the Company Law. In the context of a business combination, the directors and mangers of a company assume obligations to: • preserve the interests of the company and the shareholders; • treat all purchasers on an equal basis; • place the company’s interest ahead of personal interests; • not abuse its powers to create takeover obstacles for the purchasers; • not offer financial assistance to the purchaser using the resources of the company; or • harm legitimate rights and interests of the company or its shareholders. After a tender offer is commenced and before it is completed, without the approval of the shareholders, the board of directors of the listed company may not attempt to cause any significant effect on the assets, liabilities, rights and interests or business results of the listed company by disposing of assets, making external investments, adjusting the main businesses of the company, providing guarantees, loans, or by any other means. A board director may not resign during the course of a tender offer.
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China A controlling shareholder of a listed company assumes the duty to not abuse its rights as a shareholder or prejudice the legitimate rights and interests of the target company or other shareholders under PRC law. 8 Approval and appraisal rights What approval rights do shareholders have over business combinations? Do shareholders have appraisal or similar rights in business combinations?
If a limited liability company (LLC) intends to merge with another company or to sell its corporate assets it should follow the shareholder approval requirements provided in its articles of association. If a shareholder of an LLC intends to transfer its equity interest in the company to an external party, it should obtain the consent of more than half of the other shareholders and should honour the preemptive rights of other shareholders, unless the articles of association of the company set out different requirements. If a joint-stock company (the legal form of all PRC listed companies) is to merge with another company, at least two-thirds of the shareholders must approve the merger according to the Company Law. If a joint-stock company intends to sell its assets, the shareholder approval requirement is subject to the provisions of the articles of association. Shares of a joint-stock company may usually be freely transferred, unless the articles of association set out special requirements. If a PRC listed company intends to purchase or sell material assets that amount to 30 per cent of the total assets of the listed company, approval of two-thirds of the shareholders present in a shareholders’ general meeting is required. According to the listing rules of the two stock exchanges in the PRC, if a PRC listed company intends to engage in a share or asset purchase or sale transaction that reaches certain thresholds, the company should obtain the shareholders’ approval. For instance, if the total value of the assets involved in the transaction is more than 50 per cent of the total assets value of the target company, or if the transaction price is more than 50 million renminbi and more than 50 per cent of the last audited absolute net asset value of the target company, the transaction should be approved by the shareholders. If a shareholder of a Sino-foreign EJV or CJV intends to transfer its equity in the company to a third-party entity, or if the EJV intends to merge with another company, the unanimous approval of the board of directors and consent of the other shareholders is required. Further, other shareholders enjoy a pre-emptive right to purchase the shares offered for sale. Appraisal rights
In general, shareholders do not have an appraisal or similar right in business combinations under PRC law or in practice. However, a special appraisal right is afforded to state-owned assets administrative entities in share or assets transactions that involve the purchase or disposal of state-owned shares or assets. In such an instance, the appraisal will be conducted by a valuation entity designated by the relevant state-owned assets administrative entity. The appraisal valuation would form the benchmark for the transaction in question. 9 Hostile transactions What are the special considerations for unsolicited transactions?
If an acquirer launches a hostile tender offer to the shareholders of a PRC listed company, the acquirer should comply with the applicable regulations and rules. (See question 4.) As outlined in question 7, the directors of a target listed company should treat all acquirers equally, and should not abuse their powers by creating obstacles for the acquirer or provide any financial assistance to the acquirer using the company’s resources. Furthermore, the board of directors of the target company may not attempt to
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Jade & Fountain PRC Lawyers adversely affect the assets, liabilities, rights and interests or business results of the listed company, unless such action is approved by the shareholders of the listed company. PRC law does not expressly prohibit shareholders of the target company from adopting resolutions, in a shareholders’ meeting, or from taking other actions which are intended to obstruct or frustrate a hostile acquirer. 10 Break-up fees – frustration of additional bidders Which types of break-up and reverse break-up fees are allowed? What are the limitations on a company’s ability to protect deals from third-party bidders?
PRC law does not specifically prohibit or otherwise regulate breakup fees. However, according to the PRC Contract Law, the amount of liquidated damages in the contract may not be ‘significantly higher or lower’ than the actual loss incurred. According to judicial interpretations, issued by the PRC Supreme People’s Court, if the difference between the amounts of the liquidated damages is 30 per cent higher or lower than the actual loss, then this would be treated as being ‘significantly higher or lower’. In this situation, the tribunal may, upon application, make a decision to increase or decrease the liquidated damages. PRC law does not place limitations on a company’s ability to protect deals from third-party bidders. The Listed Companies Takeover Measures prohibit the target company from providing any form of financial assistance to a purchaser in a listed company takeover. 11 Government influence Other than through relevant competition regulations, or in specific industries in which business combinations are regulated, may government agencies influence or restrict the completion of business combinations, including for reasons of national security?
In Chinese domestic business combinations, with the exception of competition regulations, Chinese governmental authorities usually do not influence or restrict the completion of business combinations. However, if the industry engaged by the target company or assets is specially regulated, the approval of relevant governmental department in charge of the industry often is required. In this instance, the relevant governmental department could influence or restrict the transaction to a certain extent. Note, however, that the approval of the CSRC would be required in many instances if a listed company is the target company or is a party to a business combination; and the state-owned assets administrative authority would have regulatory approval powers if stateowned assets were being purchased or disposed of in a transaction. (See question 4.) If a foreign buyer purchases shares or assets of a Chinese domestic company (see ‘Foreign-related business acquisitions’ in question 4), Chinese governmental authorities generally exercise wide discretion in granting an approval. They consider prevailing policies (which change over time) as well as laws and regulations. It remains to be seen how the national security review launched early 2011 will be implemented for foreign acquisitions in China. In any case, this will be an extra layer of governmental reviews for foreign investors. 12 Conditional offers What conditions to a tender offer, exchange offer or other form of business combination are allowed? In a cash acquisition, may the financing be conditional?
A tender offer may be subject to conditions. A tender offer should set forth the offer price and period for which the offer is open for acceptance, which should be not less than 30 days and not more than Getting the Deal Through – Mergers & Acquisitions 2011
Jade & Fountain PRC Lawyers 60 days. In a partial tender offer, the tender offer should specify the number of shares the acquirer intends to purchase and the minimum number of shares that must be tendered by public shareholders in the tender offer process. In a cash acquisition, the financing may not be conditional. The acquirer is required to provide a guarantee for the availability of the funds required to complete the tender offer and should deposit a performance bond of no less than 20 per cent of the total price payable under the tender offer with a designated bank at the beginning of the tender offer period. 13 Financing If a buyer needs to obtain financing for a transaction, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?
The buyer’s financing matters do not have to be addressed in the transaction documents in a business combination. Further, there is no typical obligation on the part of the seller to assist in the buyer’s financing issues under PRC law. The two parties are, however, free to agree between themselves as to whether assistance should be offered and on the terms of the buyer financing matters.
(albeit with ‘equity participation’ by foreign investors), rather than a Sino-foreign EJV or CJV that is subject to normal foreign investment examination and approval laws and regulations. If the seller has an offshore special-purpose holding structure, a foreign investor may indirectly acquire assets in China by purchasing shares in the offshore special purpose company in the foreign jurisdiction. If a foreign buyer intends to acquire the assets of a Chinese target company, the foreign buyer needs to incorporate a new enterprise in China to own and operate the target assets. If a foreign investor intends to acquire shares or assets of a Chinese domestic company, it should comply with, among other things, the Chinese foreign investment policies and regulations, foreign acquisition regulations, merger control filing requirements and the national security review. (See question 4.) If a Chinese company intends to acquire businesses in other countries or regions, the Chinese company needs to obtain outbound investments approvals from NDRC, MOFCOM and SAFE, and/or their counterparts at the provincial or lower level. This process may take two months or longer. 16 Waiting or notification periods Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations?
14 Minority squeeze-out May minority stockholders be squeezed out? If so, what steps must be taken and what is the time frame for the process?
Under the current PRC law, there is no mechanism (such as a statutory short-form merger in some jurisdictions) by which minority shareholders can be compelled to sell their shares in a takeover situation. In practice, if the target company is a listed company and is to be delisted after the takeover, the prospect that the shares of the target company will lose the liquidity offered when available on the stockmarket will force many public shareholders to sell their shares. If the target company is delisted and there remain some public shareholders holding the shares of the target company, the dissenting shareholders would be forced, as a matter of fact, to sell their shares. The Chinese takeover code requires the acquirer to purchase any such remaining shares at the same price as previously offered in the tender offer process. If the target company is a Sino-foreign EJV or CJV in China, a squeeze-out is not possible because a share transfer, merger or recapitulation in or of a JVC requires the unanimous approval by all directors of the EJV or CJV and the consent of all shareholders. 15 Cross-border transactions How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?
In general, a foreign investor may acquire the shares, equity interest or assets of a Chinese company. In the case of a share acquisition, the foreign investor would become the shareholder of the Chinese target company, in which case the Chinese target company would be automatically converted into a FIE. (See question 4.) If a foreign buyer intends to purchase shares in a PRC listed company, it may acquire shares from existing shareholders in a strategic investment. A foreign buyer may also acquire A-type (or B-type) shares indirectly via a QFII (qualified foreign institutional investor) in China. However, QFIIs are subject to strict regulatory operational review and examination requirements set out by the CSRC and State Administration of Foreign Exchange (SAFE). Chinese banking and insurance regulators specifically permit foreign investors to acquire a strategic minority stake of no more than 25 per cent in a Chinese domestic bank or insurance company. In such an instance, the Chinese domestic bank or insurance company would still be treated and regulated as a Chinese domestic enterprise www.gettingthedealthrough.com
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The waiting or notification periods vary significantly depending on the parties and type of transaction involved. If a foreign investor acquires the shares (or equity interests) or assets of a Chinese domestic company (including a foreign-invested enterprise), then in addition to the waiting period required for merger control clearance, the following waiting periods will apply: • if applicable, the governmental department in charge of the special industry may take 30 to 90 days to complete its review; • NDRC (or its local counterpart) usually takes about 30 days to complete its review; • MOFCOM (or its local counterpart) usually takes about 30 days to finish its review; • a national security review (if applicable), according to the regulations, will take 30 days for the phase 1 review and, if applicable, 60 days for the phase 2 review; and • registration of share or equity transfers with the SAIC (or its local counterpart, being the company registrar) in practice often takes from one to several weeks. In practice, the timing required by Chinese approval or registration authorities varies significantly. It is advisable to consult with the rele vant authorities if timing is of essence in a transaction. If the target shares (or equity interests) or assets are characterised as state-owned assets, the state-assets appraisal, the public solicitation process and the approval of the state-owned assets administrative entity may take two to four months or even longer. With respect to a business combination involving the merger of two Chinese domestic companies, a public announcement should be made in a newspaper within 30 days of the merger agreement being concluded. Any creditor that has not received a notice from the company may request the company to pay off its debt or provide corresponding guarantees within 45 days. 17 Sector-specific rules Are companies in specific industries subject to additional regulations and statutes?
Companies in many industries and sectors are subject to additional laws and regulations in China. Where there is a business combination between two Chinese companies and the target company or assets is engaged in an industry which is subject to additional laws and regulations, those requirements should be complied with. Often,
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Update and trends The global credit crisis has caused many multinational companies to cease their M&A activity in China. In 2010 foreign acquisitions in China appeared to be gradually increasing again. On the other hand, the Chinese domestic M&A market has remained dynamic. The domestic position has been greatly aided by the Chinese government’s 4 trillion renminbi stimulus plan, which was implemented after the financial crisis, and by the prospect of renminbi appreciation. There has been an abundance of liquidity in the Chinese economy since 2009. In March 2011, the Chinese central government introduced the national security review mechanism for foreign acquisitions in China. For those industries and sectors captured by the new security review system, it is reasonably anticipated that the central governmental ministries will strengthen their review of foreign acquisitions in China.
approval from the relevant governmental department in charge of the industry is required. Under Chinese foreign investment laws and regulations, many industries are subject to special regulations applicable to foreign investors. These industries include (without limitations): telecommunications, banking, insurance, securities, aviation, transport, international cargo forwarding, advertising, infrastructure construction, travel agencies, hospitals, food products, oil and gas exploration. If a foreign buyer intends to purchase the shares or assets of a Chinese domestic company (including a foreign-invested enterprise) and the industry in which the target company or assets is engaged is specially regulated, the approval of the relevant ministry or local governmental department in charge of the industry usually should be obtained. Other licensing, operational and other types of regulatory requirements applicable to the industry should also be complied with.
This will most probably cause acquisitions in some industries to be more difficult, if not impossible, and such acquisitions will be susceptible to ongoing governmental policies. It is expected that the Chinese foreign investment regulatory authorities will publish an updated Catalogue of Industries for Guiding Foreign Investment later in 2011. The revised catalogue will probably encourage foreign investments in the high-end manufacturing, new technology industries, new energy, energy-efficiency projects and environmental protection sectors. Finally, more and more cash-rich Chinese companies are looking overseas to acquire resources or technologies or to expand their product-manufacturing capability and consumer markets in other countries and regions. It is anticipated that Chinese companies will increase their global M&A activities in the next few years.
framework for dealing with employee issues in business combinations. Under the PRC Labour Law, if a restructuring (which may include all types of business combinations) is necessary for specified reasons and necessitates the termination of employees, the employer needs to notify the trade union or all the employees and take their views into account. The local labour administrative department should also be notified of the termination of employees and the employees must be paid economic compensation based on their years of service. Under the PRC Trade Union Law, enterprises are required to invite trade union representatives to meetings of the company’s board or management and hear their opinions if there are matters to be discussed in respect of the interests and welfare of the employees. When a foreign investor proposes to acquire the shares or assets of a Chinese enterprise, an ‘employee settlement plan’ should be prepared and submitted to the relevant foreign investment approval authorities.
18 Tax issues What are the basic tax issues involved in business combinations?
Different taxes are payable depending on whether a transaction is structured as a share (or equity interest) transaction or an assets transfer transaction. In a share (or equity interest) sale and purchase transaction, the seller will be required to pay enterprise income tax, which is levied on capital gains and business profits generated from the transfer of shares or assets. The uniform tax rate is 25 per cent in China. If a foreign company realises a capital gain derived from China, withholding tax at the rate of 10 per cent (or lower if there is a tax treaty) applies. In an assets purchase and sale transaction, it is likely that more taxes will be due: • enterprise income tax: the selling company would need to pay enterprise income tax for its revenue derived from the assets sale; • business tax is levied on assets transactions, such as the transfer of intangible assets or disposal of real property. The applicable business tax rate may vary but in general is 5 per cent; • deed tax may be levied in connection with various transfers of real property and is paid by the transferee. The tax rate ranges from 3 to 5 per cent; and • land value-added tax may be levied on transfers of real property and is paid by the selling entity. The tax rate ranges from 30 to 50 per cent of the land appreciation value. 19 Labour and employee benefits What is the basic regulatory framework governing labour and employee benefits in a business combination?
The PRC Labour Law (effective from 1995) and the PRC Labour Contract Law (effective from 2008) set out the basic regulatory
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20 Restructuring, bankruptcy or receivership What are the special considerations for business combinations involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring?
Some special aspects should be considered for an M&A transaction involving a bankrupt target company, including: • a buyer dealing with an entity that is known to be in distress should take care to ensure that its dealings are conducted in a manner that will not expose it to the risk of the transaction being found void or being unwound at a later date. An administrator may have the right to claw back assets that were transferred on abnormal terms within one year prior to the application for bankruptcy; • additional approval of the target company’s creditors or the approval of the PRC court which declared the bankruptcy, or both, may be required; and • if a business combination involves a target company that is subject to bankruptcy proceedings, a holistic solution involving the support of all local stakeholders should be planned, including shareholders, employees, government authorities, banks and the Chinese court. 21 Anti-corruption and sanctions What are the anti-corruption and economic sanctions considerations in connection with business combinations?
There are criminal punishments under the PRC Criminal Law for bribery or similar actions. An enterprise or individual might commit the crime of offering bribes to public officials or to employees in nonstate-owned enterprises. A public official, an individual in a stateowned entity, a governmental agency or a state-owned entity, or an Getting the Deal Through – Mergers & Acquisitions 2011
Jade & Fountain PRC Lawyers employee of a non-state-owned enterprise might commit the crime of accepting commercial bribes. A senior executive or an employee working in a state-owned enterprise would be deemed to be working for the state, just as if they were a governmental official. A senior executive or an employee
Lawrence Guo Henry Xiao Sophie Sha
China in a non-state-owned enterprise, or in a foreign company, should be careful to avoid the crime of offering or accepting bribes. Likewise, a non-state-owned enterprise or a foreign company should also take precautions to avoid committing the crime of offering or accepting commercial bribes.
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Mergers & Acquisitions 2011 ISSN 1471-1230
