December 13,2007

Navigating a Regulatory Maze

By Ma Wenluo
Looks like the Chinese government is becoming a lot stricter on mergers and acquisitions (M&A), especially for foreign companies. The application and approval process is going to be much more complicated and time consuming.     

On the 10th of September, China Securities Regulatory Commission (CSRC) published a list of candidates for membership on the Listed Company Acquisition & Restructuring Review Committee (ARRC). CSRC will elect 18 ARRC members from those 52 candidates, who will then work together to further enforce and restructure the M&A process in China.

The ARRC will review whether listed company acquisition and restructuring application meet requisite conditions, check relevant materials and opinions issued by securities service organizations and professionals, scrutinize the initial report issued by the relevant functional departments of the CSRC, and provide a report on the reviewed acquisition.

Currently a great deal of foreign capital enters the Chinese market by way of merger and acquisition.  The Chinese government is increasingly cautious about the security problem posed by such transactions. Most developed countries tend to look out for their own best interest and national security when foreign enterprises come in wanting to control local firms.  For instance the US has the CFIUS or the Committee on Foreign Investment, which is a inter-department agency led by the US Treasury, mainly responsible for assessing and monitoring security issues potentially caused by foreign investments. On the 26th of July, US president Bush signed the ‘Foreign Investment and National Security Act,?which expanded the scope of homeland security to include the possible threat posed by incoming foreign capital. At the moment China doesn’t have an equivalent institution. Moreover, China has yet to build a comprehensive legal system to handle such concerns, particularly with respect to the monitoring and processing of foreign M&A.

Recent statistical figures, which have peaked the government’s concern, show that foreign capital controls 21 different sectors in China. In response, the government has already prolonged the approval process on M&A by foreign companies, much to the international business community’s dismay.  This comes in contrast to the expansion of the QFII (qualified foreign institutional investors) quota from USD 10 billion to 30 billion, which allowed an increase of foreign financial involvement on Chinese soil. 

Setting up ARRC is also a step towards executing the previously announced (30th of August) ‘Anti-Trust Law?in the security market. In the past, 60% of total shares in listed companies were non-tradable. Now, the government has put these non-tradable shares up for grabs, a move which will further facilitate financial restructuring and M&A activities.

But this is only the beginning. China will need to establish a supervisory institution like the US’s CFIUS. The so-called ‘Anti-Trust Law,?has however failed to indicate the creation of such a committee.

Moreover, ARRC will only monitor M&A of listed companies. For an M&A triggered by a foreign investor, the whole approval process will be a maze set by scattered regulations from different ministries. It is the Ministry of Commerce (MOC) that has the right to investigate M&A involving foreign companies and gives final approval. The ‘Regulations for Foreign Investors Acquiring Domestic Companies?specifies that the MOC has the reviewing right on foreign companies acquisition of domestic companies and the newly-rectified?/span>The regulations for Foreign Investors Acquiring Domestic Companies?specifies in the fifth chapter that the MOC has the right to review application of foreign companies acquiring domestic companies and the right of setting up relevant thresholds for their M&As. 

On the 10th of December, a revised version of  ‘Catalogue for the Guidance of Foreign Investment Industries,?breaks down foreign investment into three economic sectors: foreign capital-encouraged sectors, foreign capital-restrained sectors and foreign capital-prohibited sectors.

There is also another regulation specially designed for state-owned companies, which is ‘Regulations for State Shareholder Transferring Their Listed Company Shares?by State-owned Assets Supervision & Administration Commission of the State Council (SASAC).

The State Administration for Industry & Commerce (SAIC), on the other hand, has the right to supervise the market competition, punish monopolistic behaviors and unfair trading.

Obviously, if a state-owned company wants to sell its controlling stake to foreign investors, it will take a long time to gain approval from all these agencies, which greatly reduces the efficiency of the whole M&A process.



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