David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman wrote an article about China's
new M&A rules for FW Private Equity
and Venture Capital Review 2006.
China's
New M&A Rules:
Will the "Yuan Rush" Hit its
First Speed Bump?
Last
month, while most of us were on vacation,
six key Chinese ministries adopted sweeping
new rules relating to foreign acquisition
and ownership of PRC enterprises, known
as the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors.
However, I prefer to call the new regulations
the "Chinese M&A Lawyer Full Employment
Act of 2006." The new rules just took
effect and could have a profound impact
on the efforts by U.S. companies to
obtain toeholds in the Chinese market.
The rules allow share swaps as a method
of acquisition for the first time, which
will simplify the structure in many
foreign acquisitions. But the new regulations
also dramatically increase the number
and types of transactions that require
central government approval, in many
cases multiple agency approval. For
example, a potential acquisition by
a foreign company of a business in a
"sensitive industry," or which incorporates
a well-known Chinese brand, will require
approval.
Larger acquisitions, as well as those
by offshore "special purpose companies"
set up to make the purchase (including
public "shell" companies used in reverse
merger transactions with PRC companies),
will face layers of government analysis,
including the consent of the Ministry
of Commerce or MOFCOM. I expect that,
at least in the short term, any transaction
requiring approval, even if approval
is expected to be obtained, will be
slowed while the consent process is
undertaken.
Why is this happening now? In recent
years, the savings rate in China has
skyrocketed, exceeding the country's
domestic investment needs, thereby reducing
the need for foreign direct investment
(FDI). This is coupled with the PRC's
growing concern about foreign control
of domestic companies against a relatively
small annual FDI of about $60-70 billion.
The new rules also appear, in part,
to have been triggered by the Carlyle
Group's attempt to acquire a stake in
Xugong Group Construction Machinery,
a $350 million deal which has been stalled
in government approvals for nearly a
year. Xugong controls the majority of
China's crane and road-paving equipment
market. Yet some are surprised at the
timing, as many thought any new tightening
of FDI would wait until after China
is showcased in the 2008 Beijing Olympics.
China's role in the global economy is
also a concern which led to this change.
Li Deshui, former head of the National
Bureau of Statistics, has stated: "If
China lets multinationals' malicious
mergers and acquisitions go ahead freely,
China can act only as labour in the
global supply chain." Others have expressed
concern about foreign owners which have
shut down R&D departments of Chinese
enterprises, potentially weakening China's
technological development.
The government believes these changes
represent a step in the maturity of
the regulatory environment for an M&A
business that is still in its infancy,
encouraging FDI but preventing both
undervaluation of PRC assets in foreign
sales and the loss of important companies.
Many specifics still need to be ironed
out, and it appears that some ambiguous
aspects of the new regulations will
be clarified in the months to come.
For example, it is not yet clear what
industries are considered "sensitive"
by MOFCOM.
To avoid discouraging FPI in China through
these new regulations, the Chinese government
needs to ensure that foreigners applying
for approval for an acquisition see
a fair and speedy process. Resources
should be focused on necessary staffing
and funding to deal with what is likely
to be a mountain of requests for approvals.
All efforts should be made to avoid
even an appearance of favoritism or
other improper activities in seeking
or obtaining approvals.
In addition, as soon as possible MOFCOM
and the other agencies should clarify
that which is still vague in the new
regulations, so that practitioners can
plan and advise foreign companies properly
as they are contemplating transactions.
Ultimately, hopefully this simply becomes
the "new normal" for M&A players
and deals move forward without significant
impediments or confusion.
One thing is for sure, however, those
foreign players interested in acquiring
Chinese companies will now face greater
scrutiny and review of their transactions
than ever before.
