China Issues Rules on Foreign Investment Via Share Swaps

On August 10, the Chinese government issued rules outlining the conditions for foreign investment in local companies through share swaps, paving the way for such transactions in merger and acquisition deals. The regulations also cover the entry of foreign investors in local companies through mergers and acquisitions.
The rules, which take effect on September 9, were issued by the Ministry of Commerce, the state-owned Assets Supervision and Administration Commission, the State Administration for Industry and Commerce (“SAIC”), and three other government agencies. The new rules come as some deals await regulatory approval.

For example, Xuzhou Construction Machinery Group Co. is waiting for regulators to approve Carlyle Group L.P.'s investment in the company, the Chinese firm's listed unit Xugong Science & Technology Co. said in June. For foreign companies to be allowed to acquire stakes in local companies through share swaps, they must have shares listed on stock exchanges abroad and stable prices in the past year.

The local company should get an advisor to conduct due diligence and issue a report on matters related to the share-swap deal, such as the foreign investor's financial situation, the rules said. As part of the rules on mergers and acquisitions involving foreign investors, the Ministry of Commerce will require notification on deals that give foreign investors a controlling stake in companies that are linked to vital industries, affect national economic security, or have well-known brand names, said the notice.

The notice also specified conditions for an antitrust review. The commerce ministry and the SAIC will assess a prospective deal's impact on market concentration, competition and consumer interests, it said. The antitrust review is needed if a company involved in the transaction has revenue of more than CNY1.5 billion in China that year, holds a market share of 20% or more in China, or ends up holding a market share of 25% or more after the transaction, among other conditions.

The draft law also sets conditions for an antitrust review by the government. The new rules reiterated that the government will consider companies as foreign-invested enterprises if foreign investors hold more than 25% of their registered capital.

For more information contact:

Nicholas Wetzler
202-589-1835
nwetzler@dbmlawgroup.com