Mergers and Acquisitions in China

The Practical Application of China Business November 2010 English Volume XI - Number IX French Daily Business News Available at German Italian ...
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The Practical Application of China Business November 2010


Volume XI - Number IX


Daily Business News Available at




Mergers and Acquisitions in China Structuring and Valuing M&As on the Mainland

In This Issue:

Structuring an M&A in China Acquisition Procedures Valuing an Acquisition China’s Asset Appraisal Industry The Current M&A Market in China

Daily Business News Available at





Welcome to the November issue of China Briefing Celebrating 10 Years 1999-2009 Continued reforms and a rebounding economy following the Global Financial Crisis are fueling mergers and acquisitions in China. With M&A activity on the rise – there were several large deals in the industrial, financial and technology sectors – we use this issue of China Briefing to take a look at several aspects of M&As that foreign-invested enterprises should be aware of when investing in China. We first concentrate on how to structure an M&A in China, listing the advantages and disadvantages to several different types of acquisitions available to foreign investors. We then go through some steps that can be taken when valuing an acquisition. As China’s relatively young economy still often lacks reliable, independent high-quality information on a target enterprise, we describe how the asset appraisal industry works in China. Finally, we conclude the issue with an overview of the current M&A market on the mainland. The articles in this issue of China Briefing were researched and written with the help of the China-based foreign direct investment and tax consultancy Dezan Shira & Associates. The firm’s details can be found within the magazine should you need assistance or advice. Best Regards,

Andy Scott Managing Editor, China Briefing

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This Month’s Cover Art The month’s cover art, “Artificial Light,” (oil on canvas) is by the artist Tang Dixin. Tang is a graduate of Shanghai Normal University. Born in Hangzhou, he currently resides in Shanghai where he has been the curator for the Shanghai Duolun Museum of Modern Art and the Ke Center for the Contemporary Arts. The cover is reproduced courtesy of the artist and Oriental Vista Gallery. The gallery aims to promote contemporary art through discourse and exhibitions, increasing the awareness of the general public towards contemporary and avant-garde art. Integrity and professionalism are our foundations for the bridge between the art market, artists and art collectors. Oriental Vista Gallery is located at 19 Shaoxing Lu, Shanghai, China.; [email protected]

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Structuring an M&A in China [ By the Business Advisory Services division of Dezan Shira & Associates ]


hina’s economic reforms and robust growth have fueled an increased pace of mergers and acquisitions. T h e c o u n t r y ’s W T O accession opened previously closed industry sectors to foreign investment, and is gradually allowing greater access to its domestic market for foreign-invested enterprises (FIEs). Inward M&A transactions offering immediate access to a very competitive domestic market are becoming an increasingly attractive alternative to green field investments. In addition, outward M&A investments are booming, as many more Chinese companies need, and are able to pursue, opportunities overseas. Although it used to be more popular for foreign investors to establish FIEs in China from scratch, in recent years there has been an influx of foreign investors using M&A strategies with existing entities. In the current Chinese market there are many benefits of using

M&A over establishing new companies; investors are not only able to forgo lengthy setup processes, but are able to analyze the situation, know the existing problems and prepare for the exact market they are about to enter. Although the number of transactions has significantly increased over the years, average deal sizes are reportedly still under US$20 million, and the few larger transactions always have to undergo a painstakingly long and in-depth approval process. However, it appears that legal factors which may have previously hindered companies from undertaking M&A activity are being addressed by the Chinese government, and as a result, cross-border M&A activity is poised to increase. The previously incomplete and confusing legal framework surrounding Chinese M&A is rapidly adjusting to the new M&A market. Yet, the Chinese investment law system has conflicting goals; while they would like to protect SOEs from

the influx of strong global competitors, they also want to take advantage of the opportunities that western business and technology has to offer. So although the investment rules are becoming clearer, there are still contradictions and legislative gaps. With the relaxation of many industryrelated regulations, increasing sales of state-owned enterprises (SOEs), and restructuring of FIEs in China, the opportunities for M&A activities are rapidly increasing, and many foreign companies are taking advantage of the new investment methods. At the same time, it is important for foreign companies looking for M&A opportunities to understand the China market, the process and regulations for M&A in China and, of course, what they are actually buying and for how much. Concurrently with this market reform, China has been restructuring its stateowned assets. In some sectors, the government is encouraging SOEs

China Briefing | November 2010


Structuring an M&A in China to consolidate into large integrated conglomerates, intended to be global leaders in their fields, while in other sectors, the state is seeking to reduce its equity. These new potential targets offer foreign investors new market entry options.

Type of acquisition

In China the high tax rates and nontransparent regulations often mean that many FIEs consider conducting transactions “offshore” when acquiring assets. A relatively high number of FIEs in China use a holding company, based in Hong Kong or elsewhere, that offer more transparent tax jurisdictions and more flexibility as well as efficiency when transferring interests. In this way, to make an investment in China, a second offshore company can simply purchase the shares of the first company under the laws of the jurisdiction in question. The Chinese government is thus not permitted to regulate such actions and no approval is needed. Traditionally, foreign investors have sought to create a new FIE in order to implement their Chinese investment projects. These FIEs have been established in the form of joint ventures (JVs) or wholly foreign-owned enterprises (WFOEs), with WFOEs being the preferred option, as investing companies can gain complete control of their investment interests.

Types of activity

Setting up an FIE in China has its advantages in that the project can be shaped and controlled to the investors’ needs. Local authorities in China are also familiar with this type of deal structure.


China Briefing | November 2010


Fewer administration issues; requires government approval and registration but no other transfer procedures Less fuss than an asset deal with respect to taxes Operational licenses should be already in place

Subject to full approval of the Chinese authorities; time-consuming and may expose you to existing liabilities (i.e. social welfare) Existing partners have the right to veto the transaction Investor will assume all of the existing obligations, liabilities and restrictions of the target company May require more extensive due diligence and pre-planning

Asset-related acquisition

Investor may choose the preferred assets of the target company Any existing obligations, liabilities or restrictions will remain the responsibility of the target company If new FIEs are established some preferential policies may be available

More complex and involves different procedural requirements for the transfer of different assets and liabilities of the target company Establishment of a new FIE will require separate approval from the authorities and operational licenses Tax issues to consider relating to transfer of assets Potential severance payments to transferred employees

Structuring an M&A

Ensuring that an M&A deal is completed effectively and efficiently requires strict adherence to certain processes and the carrying out of extensive due diligence. Foreign companies must have clear objectives as to what kind of structure they require and at the same time understand what they are trying to achieve through an M&A transaction, as this will greatly affect their choice of target industry, market segmentation, geography, corporate structure, operating objectives, taxation implications and business scope.


Equity-related acquisition

Merger acquisition

Offshore acquisition

No cross-border mergers are available under current PRC law Only possible between FIEs and FIEs, or between FIEs and domestic companies FIE must have already begun business operations and be fully capitalized Should comply with foreign investment catalog and other aspects relating to FIEs Generally not subject to PRC review and jurisdiction

An M&A transaction in China may be consummated through one of the following ways:

Equity acquisition Asset acquisition Merger Off-shore acquisition

The most common is an equity purchase or an asset acquisition. A merger or off-shore equity acquisition may take place but are decidedly rarer. Due to the restrictions placed on foreign business activities in China, foreign investors have steered away from direct investment, and have looked to invest through holding companies set up outside of China with the specific purpose of holding the equity interest in an onshore FIE.

Equity acquisition

This is an acquisition of equity interests or shares in PRC domestic companies by foreign companies:

Only possible if target company has foreign parent and would only apply to the acquisition of the foreign investor’s equity

Acquisition of equity interests or shares from existing investors of a PRC domestic company Subscription of newly increased registered capital or new shares in such a company An equity transaction is subject to full approval of the Chinese authorities and thus is time-consuming and may also expose you to existing liabilities. An investor will assume all of the existing obligations, liabilities and restrictions of the target company so careful due diligence must be carried out.

Asset acquisition

An acquisition of assets of domestic enterprises by foreign investors: Foreign investor setting up a new foreign-invested company in China and using the new FIE to acquire assets from a PRC domestic enterprise and to operate such assets

Structuring an M&A in China Foreign investor acquiring assets from a PRC domestic enterprise and using such assets as its capital contribution to and from a new FIE, including WFOEs

Sign letter of intent and confidentiality agreement Legal and financial due diligence Sign equity transfer agreement

In the past, acquisitions by foreign investors of assets from PRC domestic enterprises and the use of such assets as their contributions to newly established FIEs were not common practice. The preferred acquisition method will also depend on various considerations such as the financial conditions of the target, the required governmental approvals, the transaction time, and the tax consequences of the structure, and as such would require thorough due diligence.


By international standards, mergers and acquisitions are generally only distinguished from each other by the terms of how they are marketed. Under Chinese law, mergers are only possible as onshore transactions. Foreign investors must have set up a FIE in China in order to be able to complete a merger deal. There are two types of mergers: mergers by absorption and mergers by new establishment. A merger by absorption occurs when one company is absorbed by another and the absorbed companies registered capital and assets are merged into the remaining entity; the legal entity of the absorbed business then ceases to exist. A merger by new establishment occurs when each of the companies in question are dissolved and a new legal entity is formed by combining the assets and registered capital of the old companies.

Offshore acquisition

In this scenario, an investor may purchase some or all of the off-shore shares held by the company’s foreign parent, thus acquiring or increasing control of the target company. This option is only possible in the case that the target company has a foreign parent and it would only apply to the acquisition of the foreign investor’s equity.

Approval from the local MOC branch (obtain certificate of approval) Registration with local Administration of Industry and Commerce (obtain business license) Renew foreign exchange registration certificate

Renew enterprise code registration certificate

Renew statistics registration certificate

Renew tax registration certificate Renew financial registration

Renew RMB account opening permit

The Acquisition Process

Usually, the Chinese party will approach the foreign investor or potential investor with a draft “letter of intent” or “memorandum of understanding” outlining the fact that the two parties are going to discuss the matter, and laying out the complete procedures for doing so up to the actual share transfer. Once an investor has chosen their structure, the acquisition will require approval from the Ministry of Commerce (within one month for investment in domestic companies and FIEs) and registration through the State Administration of Industry and Commerce and its local branches.

Equity acquisition

An equity acquisition will involve the transfer or subscription of the registered capital of the target company and be subject to a thorough review from the Ministry of Commerce. An equity acquisition will require the following documentation: Unanimous shareholders resolution of the target domestic company on the contemplated equity acquisition Application for the converting establishment of the FIE Contract and articles of association of the FIE to be formed after acquisition Agreement on the foreign investor’s acquisition of equities of shareholders

Renew customs registration certificate

of the domestic company or on its subscription of the capital increase of the target domestic companies Audit report on the financial statement of the previous fiscal year of the target domestic company Notarized and certified documents for the foreign investor’s identity, registration and credit standing the descriptions about the enterprises invested in by the target domestic enterprise Duplicates of the business licenses of the target domestic enterprise Proposal to arrange employees in the target domestic enterprise Documents relevant to the agreements on liabilities of the domestic company, appraisal report issued by an appraisal institution and disclosure and explanations for the associated transaction, if applicable Other documents related to the business scope and scale, rights may be required

Equity acquisitions by foreign investors may be carried out through an indirect offshore acquisition or as a direct onshore acquisition. Chinese law also permits existing FIEs to make equity acquisitions if certain conditions are satisfied.

Asset acquisition

When setting up asset acquisitions, a foreign investor must either establish a new FIE (usually a WFOE) which purchases and operates the assets, or buy the assets and inject them into a new or existing company.

China Briefing | November 2010


Structuring an M&A in China An asset acquisition will require the following documentation: Resolution of property rights holders or power authority of the domestic enterprise on the consent of the sale of the assets Application for the establishment of the post-acquisition FIE Contract and articles of association of the FIE to be established Asset purchase agreement signed by the foreign-funded enterprise to be established and the domestic enterprise, or by the foreign investor and the domestic enterprise Articles of association and the business license (duplicate) of the target company Creditor notification issued by the target company and the creditor’s statement on the contemplated acquisition Notarized and certified documents for the identity, registration and credit standing of the foreign investor Proposal to arrange employees in the target domestic enterprise Documents relevant to the target company’s liabilities arrangement, appraisal report and disclosures and explanations made by the parties to the acquisition Other documents as required A PRC acquisition vehicle is usually established at the same time as the acquisition to permit the operation of the assets. A great deal of government liaison work may be necessary for this type of transaction and the auditors’ notification is sometimes required. Worker settlement arrangements are also required and examined in the approval ASIA BRIEFING

process; sometimes formal consultations with the target’s workers are also requested.


A merger will generally be approved by the original approval authority of the relevant FIE. Registration procedures should be carried out with the State Administration of Industry and Commerce or local counterparts. Should a merger be capable of creating industry monopolies or market dominance over specific commodities or services, it will be subject to antitrust review and scrutiny by the authorities. If the target company is to be dissolved in the merger, then all creditors must be notified within 10 days of receiving an initial approval reply from the approval authority according to the PRC liquidation and dissolution procedures. They will be subjected to a multi-step approval process with preliminary approvals required from both the surviving and dissolving entities’ approval authorities and a final approval required from the surviving entity’s approval authority. When the merger involves more than one competent authority, it has to be approved by the appropriate authority having jurisdiction over the post-merger FIE. Following the approval, relevant registration procedures should be carried out with the State Administration of Industry and Commerce or its local counterparts. Pre-approval review for possible impact on competition in China is required if the assets or revenues in China exceed specified thresholds.

Mergers & Acquisitions in China To order a copy, please contact [email protected]

Also, if the target company is being dissolved in a merger, all creditors must be notified within 10 days of receiving a reply from the approval authority, pursuant to the PRC liquidation and dissolution procedure. Some key issues to consider: All documents submitted for review must be translated into Chinese; some authenticated translations will be required depending on the local practice Approvals generally require 30 days but a number of factors (such as size, approval level, locality, etc.) may have a significant effect on the approval time period Any amendments to the registration or company particulars must be filed with the competent Administration of Industry and Commerce and updated appropriately The purchase price must be based on a third party appraisal of the assets or equity interest acquired Pre-approval review for possible effects on competition in China is required if the assets or revenues of either or both parties in China exceed specified thresholds Dezan Shira & Associates assists clients with their mergers, acquisitions, or joint ventures with Asia-based companies. The firm’s associates evaluate the prospective b u s i n e s s o r p o t e n t i a l m e rg e r o r acquisition via various methods including performing a thorough due diligence, investigating human resource practices and evaluating the overall health of the company. For more information, please contact [email protected] or visit

• China’s M&A Environment • M&A Regulations Concerning China Listed, State-Owned, Foreign Invested and Privately Held Companies • M&A Transaction and Acquisition Structures • Due Diligence – Legal, Financial and Operational • Valuing a Target Company • Negotiation Strategies

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• Purchasing of Bankrupt Assets • Converting Chinese Companies to Foreign-Owned Entities • Inheriting Labor Law and Tax Issues

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China Briefing | November 2010

• Common Mistakes in M&As

Valuing an Acquisition [ By the Business Advisory Services division of Dezan Shira & Associates ]


n September 8, 2006 the Ministry of Commerce implemented the Provisions on the Acquisition of Domestic Enterprises by Foreign Investors, a modified set of rules related to the M&A of Chinese domestic enterprises by foreign investors. The provisions aim to further increase corporate transparency, cut back on the practice of “round-tripping” by Chinese companies looking to benefit from incentives offered to foreign investors, as well as strengthen the mechanism by which foreign firms are supervised in their acquisition of domestic enterprises. One regulation is the requirement of the employment of an outside asset appraisal organ and the use of the subsequent appraisal as a basis for the determination of the transaction price. The essential parts of the provision are as follows: Parties to acquisition (both equity and asset related) must determine price on the basis of equity interest to be transferred or assets to be sold as assessed by an asset appraisal organ Parties are prohibited from transferring equity interest or selling assets at a price “obviously lower” than the assessed value All foreign firms involved in M&A with a domestic enterprise must seek outside asset appraisal organs Asset appraisal of non-SOE enterprises is to be conducted using internationally accepted appraisal standards, and asset appraisal of SOE enterprises is subject to state-owned enterprises Asset appraisal regulations Because the result of the asset appraisal is to establish the reference price for the transaction, the valuation process is one that foreign investors will want to begin early and remain involved in throughout.

Investors will want to begin their own asset valuation processes before commencing the process through a third party. This will give foreign investors an idea of what they are willing to pay, as well as providing a yardstick by which to measure the effectiveness of the independent asset evaluator. Valuation techniques Valuation of non-SOEs Appraisal of non-SOEs is to be conducted by an approved asset appraisal organ, using internationally accepted accounting standards. Performing due diligence for the real value of domestic enterprises remains important. A potential acquiring company of a domestic Chinese enterprise would still perform its own valuation of the business to establish the price range which they are willing to pay for the target business. Financial due diligence should still be performed prior to the appraiser’s valuation as it will play a key role in identifying factors impacting the acquiring company’s valuation model as well as identifying opportunities to present evidence to the authorized appraiser which may influence the appraiser’s valuation before it is finalized. Some points to consider: There is no single universal valuation method that provides an appropriate value in every case as each target has unique characteristics that need to be considered In practice it is usually better to apply several different techniques and then compare the results as this will usually reveal the factors which are adding or destroying value In addition to valuing a target on a stand-alone basis it is also necessary to consider how much the target will be worth to the acquiring company as a whole after the transaction is completed

A discounted cash flow method is often used as it takes into account future benefits to the acquiring company, however, this method has its problems, for example, China’s expanding economy makes predictions of cash flows complicated and agreeing on an appropriate discount rate is not as straightforward a process as in more developed economies; potential buyers should use sensible calculation methods and make sure they are accepted in advance by the decision makers Again there may be difficulties, therefore the application of several techniques and subsequent comparison is strongly advised. Asset appraisal in China must be approached with additional care as there are many more China-specific factors that may play a vital role in estimating value. There are a number of problems to overcome.

Quality information

The quality and accuracy of valuation is heavily dependent upon the quality and accuracy of the information and data upon which it is based. In more developed countries there is a multitude of information available to help valuers better understand the enterprise, the industry, and relevant market conditions, including published studies, market research papers, annual company reports and other publicly available information. However, China’s relatively young economy lacks such reliable, independent information. Various problems that foreign firms have encountered include: firms keeping two sets of books, maintaining poor accounting records, having a high volume of off-book sales, failing to make a distinction between corporate and personal funds, lack of an understanding of basic accounting principles, and an inability to provide a satisfactory estimate of production capacity.

China Briefing | November 2010


Valuing an Acquisition In China, it is difficult for valuations to be officially checked against market price. China comparisons are also difficult, as indicators and benchmarks which are only two years old may not be the best signs of the current economic and financial situation in China.

Accounting standards

The Ministry of Finance (MOF) has worked hard to reduce the gap between Chinese and international accounting standards. Since 1997, eight regulations on accounting practices have been passed. The MOF still has much to do before China’s accounting procedures can fully meet international standards. There are clearly a number of issues to overcome, such as possible fraudulent transactions.

Intangible assets

The valuation of intangible assets is always a difficult task, and is a fairly new concept in China. Intangibles, including goodwill, are amortized using the straightline method over their useful lives and no more than 10 years, whereas standard international practice tends to allow for a 20 year amortization process. Intangible assets must be valued on an annual basis, and if the book value is greater than their recoverable value, they are required to provide for the devaluation. R&D costs incurred before legally obtaining an intangible asset such as a patent, if any R&D costs arise, must be expensed in the period in which they are incurred. In addition, the valuation of intellectual property must be taken into consideration.

Contingent and hidden liabilities

Some Chinese companies may display a few shortcomings with regard to regulatory compliance, and as a result may accumulate significant tax and other liabilities over time. Should these liabilities be exposed in a timely fashion, correct adjustments can be made to the overall assessment of the value of the asset. However, such liabilities may be buried deep within the accounting books and may not be readily apparent. In the case of asset acquisitions, it is necessary to verify legal ownership of the domestic enterprise’s assets. It should also be verified that the domestic enterprise’s assets can be legally transferred, and that they have not been used as collateral against any loans or liabilities the domestic enterprise has incurred, especially because in China it is common for a third party’s property to be included in the company’s books. Equity acquisition is faced with a higher degree of risk, owing to hidden financial burdens such as loans, debts and bad inventories, and human resource issues such as unpaid social security, employee income taxes, labor contract clauses and labor disputes. Firms should focus on specific characteristics of the asset in question, including the nature of the industry and the characteristics of key management.


China Briefing | November 2010

Asset valuation of state-owned enterprises

The management of state-owned enterprise valuation is dictated by the different classes of government managing the businesses - central, provincial, local city and county. The Land and Resources Commission of the State Council is mainly in charge of the administration of more than 190 large enterprises including solely state-owned and state-holding industrial and commercial enterprises. Financial enterprises are managed by the Ministry of Finance, the provincial state resource committee supervises state-owned provincial enterprises, the local city’s state resource committee supervises the state-owned local enterprises and the county committees supervise state-owned county enterprises. However, if the project is for listing, the valuing report is managed

by the Land and Resources Commission of the State Council, irrespective of the current management. Most of the valuation for domestic SOEs is for restructuring of the stockholding or listing on the stock market, acquisition, mergers, and reorganization. Generally, valuation is of all the assets (fixed and current). So the biggest differences between domestic and international valuation work is that connection between the book value of the current enterprise’s assets and the valuation must be established. Before valuation, a certified accountant carries out a financial audit and the audited book value is deemed as the pre-valuation value. Since the registered assets valuer evaluates all assets (fixed and current) some accounting knowledge and approaches are required and it is difficult for property valuers from overseas to comply with the specific demands of the valuation of the current assets of state owned enterprises unless they have accounting expertise or work with a partner. It should be noted that the National Securities Committee and National Capital Committee usually demand that the depreciated replacement cost (DRC) should be applied for the valuation of tangible assets for state-owned enterprises listed overseas (they have approved the use of income method). PRC valuation experts rarely understand obsolescence and this is one area – the application of obsolescence in DRC calculations – that international valuation experts demonstrate their abilities.

China’s asset appraisal industry

Valuation approved by the State Council is under the administration of departments like the State Owned Assets Supervision and Administration Commission of the State Council. At the same time valuation falls under the respective industrial and self-disciplinary management of industrial associations including the China Appraisal Society, China Institute of Real Estate Appraisers, China Real Estate Valuer Association and China Automobile Dealers Association. This leads to many anomalies including that valuers cannot be

Valuing an Acquisition substituted by each other. Especially for assets valuation, real estate valuation and land valuation, the three areas can only be carried out at the same time by three different types of qualified valuers upon approval by the competent authorities from the three different industries.

by international appraisal theories and will give priority to conceptual regulations rather than detailed or inflexible regulations. The current appraisal report form will be changed through attaching importance to quality and information disclosure in the standards.

If a state-owned business intends to list on the stock market, then valuations can only be completed by registered valuation institutions with securities business and certified assets appraiser qualifications. The land valuation can only be conducted by land valuation institutions with Class A and certified land valuers qualifications. If the purpose of enterprise valuation is for a mortgage loan, only an institution with the appropriate real estate valuation qualification and a real estate valuer will be authorized for this work.

The valuation basis is an important part of asset appraisal theory in countries with a well-developed appraisal industry such as the United States or the United Kingdom. The identification and definition of valuation bases are promoted by the world’s main appraisal standards, including the “International Valuation Standards,” the “Uniform Standards for Professional Appraisal Practice” and the “European Valuation Standards,” as the keys for determining appropriate appraised value.

In addition to all this, the operational scope of the real estate valuation institution and land valuation institution may fall into three different categories: Class-A qualification, with which the institution may undertake valuation work throughout the entire country for all purposes (Class A land valuation can be divided into Class A and Class A minus – institutions with Class A minus qualification may undertake valuation work throughout the entire country except for land valuation for stock market listing); Class B, with which the institution can operate within a province; Class C, with which the institution is only allowed to undertake valuation work at the local city level.

The same asset can have different values under different conditions, markets and purposes of appraisal, e.g. market value, investment value, liquidation value, insurance value, taxation value, etc. Under international standards appraisers should not use undefined value bases in their valuation work to avoid misleading readers and users of the appraisal report. Appraisers should always make clear if a non-market basis is used in a valuation, so that the users of the appraisal report will not deem it as the market value by misunderstanding. This concept is being adopted by China’s appraisal regulatory and supervisory bodies, but at a slow pace.

Since the 1990s, a large number of formative documents have been released successively concerning asset appraisal in China. In August 2002, the “Assets Appraisal Standards-Basic Standards (Draft For Comment Solicitation)” and the “Professional Ethics For Assets AppraisalBasic Standards (Draft For Comment Solicitation)” were released, for which comments are under the drafting process.

Attention is finally being paid to information disclosure within the appraisal industry as well as to importance of the appraisal methodology. A number of serious problems have occurred in listed companies, in particular due to improper and insufficient information disclosure in valuation reports. As a consequence, appraisal companies and governing bodies are setting out to change this legacy and appraisers are now required to fully disclose relevant information, which will allow users of appraisal reports to understand and confidently use the appraisal results.

The proposed new appraisal standards are a development of and amalgamation of the previous individual guideline documents. The standard is being guided

Finally, importance is being placed on educating users of appraisal reports to correctly understand and use reports – in this way a perceived failure of appraisal

Status of establishment and characteristics of China’s assets appraisal standards

in China caused by misunderstanding or malignant use of the report users can be especially avoided. In appraisal work for assets reorganization, there are a number of other issues to consider for potential investors relying on PRC valuations. Reorganization plan – there are various forms of acquisition and restructuring Asset valuations and the approach of appraisers generally can sometimes reflect the perceived reorganization plan Property rights – the appraiser should pay special attention to the property rights of the assets, in particular, of the listed companies before 1997; some listed companies, where one party became a shareholder by contribution by land, still have equity in forms of land transfer and assignment, so equity has both state share form and corporate share form Creditors – sometimes the assets transferred to the company may involve the transfer of liabilities, but who will have charge of the assets? Due diligence – special importance should be attached to the completeness, compatibility, function or effectiveness of the assets; the status of the property rights; as well as to the compatibility of the assets with documented income, costs, and revenue Identify the assumptions and restrictions for assets valuation – this should be reasonable; where analysis of the development status of the industry and the company is obviously inconsistent with the actual status, the appraiser should evaluate carefully Choose proper appraisal methods – a number of different methods should be used in order to make a comprehensive analysis and correct mistakes; this is now a legal requirement Ensure a normal asset appraisal report and attach importance to information disclosure Dezan Shira & Associates assists clients with their mergers, acquisitions, or joint ventures with Asia-based companies. For more information or to obtain the firm’s brochure, please contact [email protected] or visit

China Briefing | November 2010


China’s M&A Market [ By Francesca Baruffi, China Briefing ]


fter experiencing a lull in activity in 2008, mergers and acquisitions in China have greatly expanded in 2009 and 2010. Although incoming M&As remained strong in the past two years, Chinese-led outgoing acquisitions have taken off. Both staterun and private firms with the capital and resources required to undertake large M&A deals have been active in crossborder M&A activity. China’s M&A activity has been largely centered on the natural resources industry, including oil, coal, and other minerals. In order to meet China’s giant and evergrowing energy needs, both state-owned and private companies have looked overseas. In 2009, the Chinese oil company Sinopec bought the Swiss company Addax Petroleum for over US$6 billion, and a Chinese mining company, Yanzhou Mining, acquired Australian-owned Felix Resources for over US$3 billion. Chinese-led M&As have not been limited to the natural resources sphere either. Chinese machinery company Tengzhong caused a stir in 2009 by leading a highprofile M&A in the United States, purchasing the automotive brand Hummer for a reported US$100 million. China led a total of over 30 outbound M&A deals in 2009, comprising a large chunk of the over 60 inbound and outbound crossborder M&A deals and totaling US$37.7 billion in value in 2009. Chinese outbound M&As have picked up even more steam in 2010. In October, China Petrochemical purchased Brazilian company Repsol for US$7.1 billion, this year’s biggest energy acquisition. Natural resource M&As have remained the main focus of activity, but the Chinese government is looking to expand into other sectors such as technology, services and manufacturing. In August of this year, Chinese Geely Holding Group completed its acquisition of car manufacturer Volvo from Ford in a US$1.5 billion deal.


China Briefing | November 2010

The number of inbound investments through mergers and acquisitions has also seen some growth since the economic downturn. Companies from Korea, Taiwan, the United States, Australia, and other European countries have increasingly looked into expanding their global reach. Emerging industries such as technology and food and beverage companies have looked to China to diversify their markets in the face of the economic downturn. In 2009, inbound investments focused on the industrial, financial, technological, media, and communications sectors. However, 2009 was not without large inbound M&A deals. Spanish banking group BBVA invested US$1.45 billion in China Citic Bank, boosting its stake in the Chinese firm to 15 percent. Inbound investments totaled US$11.1 billion in capital inflows, a decrease compared with US$22.1 billion in 2008. 2010 has also been a favorable year for cross-border M&As into China. The total M&A value for the year-to-date has reached an all-time high of US$139.3 billion, topping the US$134.6 billion in M&As in the same period last year. American technology company Apple, traditionally slow in leading M&A activity, has been in talks to acquire a Sichuan technology company, and hopes to acquire another company, Handseeing Technology Co., this fall. Earlier this year, U.S. food manufacturer HJ Heinz Co. settled on purchasing Guangdong food manufacturer Foodstar for US$165 million, pending Chinese governmental approval. While Chinese M&As have been relatively balanced in recent years between inbound and outbound investments, the noticeable growth of Chinese-led outbound M&A deals draws attention to two points: the expanding reach abroad of Chinese firms, and the complications associated with inbound M&As in China.

Chinese cross-border outbound investments have gathered much international attention in recent years. With the Chinese government’s backing and encouragement to reach overseas, Chinese state-owned and private firms have moved to seek out new investments abroad. These deals abroad have incited some foreign alarm amid a period of protectionism. Some foreign firms are wary that Chinese companies’ motives for making M&A deals are to gain a strategic advantage, for example by acquiring the foreign firms’ intellectual property. The approval of Chinese-led M&As by foreign governments has also been fraught with some conflict. Despite these political rows, however, it is clear that China’s continued growth through the economic recession has given Chinese investors more freedom to play a larger role in M&A activities. On the reverse side, investing in China is becoming increasingly complicated, with both incentives and deterrents for conducting mergers and acquisitions. There are numerous benefits for a foreign firm involved in cross-border M&A deals. Firstly, M&A deals enable foreign companies to expand their market and consumer base, and can eliminate competition in the country in which it is investing. The acquiring firm can also use the existing structures, frameworks, and connections established by the domestic company, and enable a smoother transition for the acquiring company. Even with these positive effects, inbound M&A deals also come with complications and frustrations. China’s rapidly growing economy has necessitated regulatory changes and new laws and procedures, which change by the day and are sometimes vague and unspecific. There are multiple agencies within the Chinese government that are responsible for approving and facilitating M&A deals with foreign investors, which come

China’s M&A Market into conflict with each other over which companies will be let in to invest.

Establishment work process flow for mergers and acquisitions in China

(Please note variations may occur regionally and in specific industries requiring additional licensing)

As with all M&A processes, integrating the domestic company can also result in difficulties. The purchasing company will inherit any and all of the baggage of the company being acquired, including social issues, current practices and other liabilities. Additionally, the foreign company may find that its views of corporate responsibility and integrity may clash with former and current practices of the domestic firm. While acquiring or merging with a domestic company may provide a sound barrier against domestic regulatory infringements, it could also pull the foreign firm into unsound or not completely legal transactions made by the domestic firm. It is therefore not difficult to ascertain the causal factors of the recent M&A imbalances that have emerged in 2009 and 2010. The economic downturn has both incited losses and created opportunities for investors around the world, and many Chinese firms have seized on the occasion to conduct M&A deals to their advantage. Outbound M&A activity from China is expected to climb over the foreseeable future, giving Chinese firms further ties to industries abroad. For more information and ongoing coverage of M&As in China, please visit China Briefing’s daily news at Sign up for our complimentary weekly China and Asia business and regulatory roundup.


Sign confidentiality agreement and initial agreement (memorandum) with partner company


Financial and legal due diligence (on-site due diligence and issue written report)


Negotiation of and signing of equity transfer agreement


Name pre-registration (applicable if the company name is changed)

Approval of environmental impact statement (applicable to manufacturing E companies only), articles of association, equity transfer agreement and feasibility study report F

Issue approval certificate


Issue business license Company now legally exists


Registration or renewal of forex registration certificate


Open foreign capital account (applicable if registered capital is increased)


Capital contribution (applicable if registered capital is increased)


Capital verification


Making chops


Enterprise code registration


Renewal of RMB basic account opening permission


Customs registration


Financial registration


Renewal of statistics registration

P Renewal of business license

Procedural time frame: typically three to four months from commencement to issuing of license, depending on specific licensing complexities within certain industries.

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