A Guide to Mergers and Acquisitions in China

Alongside the establishment of the State-owned Asset Supervision and Administration Commission (SASAC) of the State Council in March 2003, Chinese authorities start to orderly construct a new state-owned asset management system from top to bottom. Under the control of this new state-owned asset management system, a new wave of privatization of state-owned enterprises (SOEs) is emerging in China. As compared to the past privatization of state-owned enterprises, this new wave of privatization presents a remarkable feature — the state property of enterprises has to be transacted publicly at the property trade markets. In past, local governments privatized most SOEs in the way of insider holding shares to purchase their SOEs, such as management buy-out (MBO), employee stock ownership plan (ESOP), so that excluded outsiders to purchase SOEs. The insider holding shares to purchase their SOEs has occurred a bulk of state-owned assets to be embezzled and eroded by insiders. The severe erosion of state-owned assets led the central government to make decision on establishment of SASAC and a new state-owned asset management system from top to bottom. As a result, SASAC promulgated the “Opinion on Normalizing Ownership Transformation of SOEs” on 25 November 2003 and the “Interim Regulation on Transference of State Property of Enterprises” on 31 December 2003 respectively to avoid the erosion of state-owned assets. These regulations stress that the transference of state property of enterprises has to be transacted at competitive price at the property trade markets, and publicized information on transactions. Thus, China opens the door to a lucrative market for outside investors to purchase and merge SOEs. At the same time, the “Interim Provisions on Introducing Foreign Investment to Reorganize State-owned Enterprises” promulgated by the former State Economy and Trade Commission (SECT), Ministry of Finance (MOF), State Administrative Bureau of Industry and Commerce (SAIC), and State Administration of Foreign Exchange (SAFE) has been come into force since January 2003, so that the emerging new wave of privatizing SOEs brings foreign investors a good opportunity to purchase and merge the Chinese SOEs.

How to capture this good business opportunity? Undoubtedly, this question is looking forward to being understand for foreign investors. To capture this good business opportunity, it is necessary to understand a series of questions: The privatization progress of Chinese SOEs and its features; The new state-owned asset management system and structure; The legal base of emerging privatization of SOEs and its features; The procedures for ownership transformation of SOEs; How state property of enterprises to be transacted at the property trade markets? The holders of state property at the different levels—Who have the authorities to sell out the SOEs? The legal base and qualifications of foreign investors to purchase and merge the Chinese SOEs; The procedures and methods of transaction for state property at the property trade markets; How foreign investors to purchase and merge the Chinese SOEs at the property trade markets? What significant questions should be considered to purchase and merge SOEs for foreign investors? This report, based on the latest regulations and policies, provides the detailed discussions step by step, and guides foreign investors to purchase and merge the Chinese SOEs.