China: Mergers & Acquisitions Comparative Guide

1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Private M&A transactions are structured as either:

• equity deals by transfer of the registered capital; or
• asset deals by transfer of the title to the assets.

In terms of acquisitions of listed companies, it is typical for buyers to purchase the shares of the target from the majority shareholder on the secondary market or through a tender offer. In addition, there are certain alternative methods available under Chinese law, including:

• merging with or into another entity, often through a share swap, as a result of which the target is wound up;
• purchasing the registered capital of the majority shareholder of the target, thereby achieving indirect control of the target;
• entering into 'act-in-concert' contractual arrangements with other shareholders, thereby achieving joint control of the target;
• winning a judicial auction of the shares of the majority shareholder of the target; or
• transferring shares of the target under a government administrative order, which typically takes place between state-owned enterprises.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

The key differences between an equity deal and an asset deal are outlined below.

Authorisation: An equity deal usually requires the consent of the selling shareholders and sometimes triggers minority shareholders' rights such as a right of first refusal or co-sale rights. An asset deal typically requires a board resolution of the seller, unless the assets constitute a substantive disposal by the target, in which case the shareholders' consent may be required.

Licences and permits: The target may continue to operate with its current licensing and permits despite a change of ownership, although certain industry regulators may require pre-approval of the eligibility of the target's new shareholder. In contrast, the buyer in an asset deal cannot acquire the target's licences and permits along with the assets.

Employment: A change of ownership in the target does not usually interrupt the employment of existing employees. In contrast, in an asset deal, the buyer will have to hire the employees from the target and enter into new engagement arrangements with them.

Contingent liabilities: Unless otherwise agreed by the parties, unknown liabilities of the target will remain associated with it despite any change of ownership. In an asset deal, the buyer will not assume unknown liabilities of the target.

Payment: The payment for the purchase of registered capital may take the form of cash or shares if the buyer is a listed company, or a combination of both. In contrast, in an asset deal, the target will typically accept cash as payment.

Government registration: The change of shareholder will require the target to file a registration change with the State Administration of Market Regulation. In an asset deal, land use rights, property title, movable asset title and so on must be registered with various government authorities.

Ownership continuity: An equity deal will interrupt the continuity of the target's ownership; whereas a transfer of title of certain assets will not cause such interruption.

Tax: In an equity deal, the seller is subject to income tax and stamp duties. The tax treatment for the disposal of assets is more complicated and may incur various taxes depending on the different types of assets involved.

1.3 What factors commonly influence the choice of sale process/transaction structure?

The primary factors that influence the choice of sale process or transaction structure may include the following:

• The purpose of the transaction: For instance, if the selling shareholders wish to sell the business for cash, it will be difficult to persuade them to enter into an asset deal. Alternatively, in some cases the buyer may wish to buy certain business units but not the whole company.
• Efficiency: In general, an asset deal takes longer to complete, due to the increased complexity of the documentation and the changes to registration needed. If the parties desire a speedy transaction, they may opt for an equity deal.
• The findings from the due diligence: In some cases, unsatisfactory findings from the financial or legal due diligence may persuade the buyer to buy selected assets from the target instead of entering into an equity deal.
• Tax: Tax efficiency often plays an important role in parties' decision on deal structure.

In terms of public M&As, other key factors in determining how the buyer should approach the target include:

• the financial strength of the target's controlling shareholder;
• its shareholding percentage; and
• the composition of the target's public shareholders.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

Typically, in the early stages of an M&A transaction, the seller will require the potential buyer to enter into a non-disclosure agreement before it will provide access to any due diligence materials. It is common practice for the seller to also require the potential buyer to submit a non-binding letter of intent (LOI); the parties will negotiate and confirm the terms of the LOI prior to commencing due diligence. The LOI should:

• identify the potential buyer and its associated parties; and
• outline the certain key terms on which the buyer wishes to proceed, such as:
• • the purpose of the transaction (eg, the percentage of equity interest that the buyer is seeking to acquire);
  • an estimate of the target's value;
  • the payment term;
  • any conditions precedent to completion; and
  • the proposed exclusivity period.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

There are no restrictions on the use of break fees under Chinese law. However, in practice, it is rare to include a break fee clause.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

Equity and debt are both available as financing tools for M&A deals in China, and it is not uncommon to use both.

Certain financing tools may be preferred depending on the nature of the buyer. For instance, state-owned enterprises and public companies are generally preferential borrowers in terms of being granted bank loans for financing M&A deals, as compared to private companies. Public companies may also use tools such as private placements and corporate bonds to finance their acquisitions; and in certain cases, they may issue additional shares to the seller as part of the consideration. The financing tools available to private company buyers are relatively limited and the conditions are generally more stringent. Banks often ask the founders and third parties to provide guarantees in addition to the target's equity or assets as collateral. Private company buyers are sometimes backed by private equity funds, in which case they may raise funds for acquisitions by issue of additional equity to the investors.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

In private M&As, the seller commonly engages a financial adviser – typically an investment banking firm; or in some cases, the financial advisory service arm of a big accounting firm – to formulate valuation models and administer the sale process. The seller will also be advised by its legal advisers and sometimes by tax advisers. In private M&As, the buyer will typically engage legal and financial advisers for the purpose of conducting due diligence and preparing legal documents.

In public M&As, the buyer is required by law to engage a qualified financial adviser. The financial adviser will formulate an opinion after verifying matters such as:

• the buyer's credit record for the preceding three years;
• the legitimacy of the funds for the acquisition;
• the buyer's readiness to perform the undertakings; and
• the truthfulness, accuracy and completeness of the information disclosed.

The buyer will also engage a legal adviser to render a legal opinion, which is required by law, and to prepare transaction documents and disclosures. Public M&A deals often require the engagement of accounting firms and appraisal firms as well.

In a public M&A, the board of the target must engage an independent financial adviser and seek an independent opinion on the tender offer. The independent financial adviser will conduct due diligence on the buyer in relation to issues set forth by law and will formulate an independent opinion. The target will typically also engage a legal adviser and an accounting firm.

If a board member, supervisor, senior management or employee of a public company initiates a buyout, the target should engage a qualified appraisal firm to formulate an appraisal opinion on the target's asset value. The independent board members must engage an independent financial adviser and obtain its professional opinion on the transaction.

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

In an asset deal, the selling company will bear the costs of the advisers, since it is the party receiving services. In an equity deal, the selling shareholders will bear the costs of the advisers. If the target pays for the advisers on behalf of the shareholders, this may raise tax concerns, since no substantive services are being delivered in return for the expenses incurred.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

(a) Commercial/corporate

In relation to the target:

• its registered capital and paid-up capital;
• its current shareholder composition;
• authorisations for the sale required by the articles of association;
• any provisions in the articles of association that may restrain the seller's ability to sell;
• its business registration and other licences and permits required to operate in certain industry sectors, such as:
• • telecommunications;
  • financial services;
  • culture and entertainment;
  • radio, film and television broadcasting;
  • transportation; or
  • mining; and
• for foreign buyers, whether the target's business sector is open to foreign control and the applicable shareholding percentage level.

(b) Financial

• Bank loan agreements typically include change of control provisions that require the lender's consent in advance.
• Any third-party rights on the target's shares and assets should be examined.
• It is common, especially for private companies, to enter into connected transactions that are not at arm's length, which sometimes are not in the favour of the target.

(c) Litigation

The buyer should conduct public searches and request the disclosure of the details of any pending litigation, arbitration or winding-up proceedings that involve the seller, the target and its directors, supervisors and other senior management, in order to evaluate the merits of the deal and take action accordingly.

(d) Tax

Tax due diligence of the target is typically conducted by accounting or tax due diligence firms.

(e) Employment

This will focus on:

• whether the target has entered into labour contracts with all employees;
• whether the target is contributing to employees' social welfare accounts (retirement, medical, unemployment, work-related injury and maternity) and housing funds in compliance with the requirements applicable under local law;
• whether the target has any accrued liabilities for overtime work compensation;
• to the extent that the target uses outsourced labour or contractual workers, whether this practice is in line with Chinese law;
• with respect to employees in the research and development sector, whether the target has performed due diligence on unilateral hires to confirm their compliance with any non-compete undertakings imposed by their previous employer;
• whether the target pays consideration to leaving employees in order to enforce non-compete provisions;
• whether there are any applicable employee stock option plans and the extent to which those plans have been performed; and
• any pending disputes with employees.

(f) Intellectual property and IT

The buyer will conduct public searches and request disclosure from the buyer on the target's authorised and pending intellectual property, including patents, trademarks, copyrights and domain names, as well as any pending disputes.

It is common practice for businesses to engage in joint research and development with universities and colleges, in which case provisions with respect to entitlement to IP rights prosecution and commercial use should be carefully examined.

Due diligence of IT systems is rarely conducted in domestic deals; although buyers may sometimes enquire whether any pirate software is being used in the target's business.

(g) Data protection

The primary sources of data protection law in China are the Data Security Law (DSL) and the Personal Data Protection Law, both effective since 2011.

Under the Chinese data protection legal regime, a buyer should examine the target's compliance with the regime governing data collection and use, including:

• whether the target's operations concern certain specific industries, actions or locations referenced in the DSL;
• the target's policy on data collection and use, if any;
• the sources of data held by the target and the legal grounds for its collection;
• the method for storing the data collected;
• the purpose and method of data use;
• the transfer of data; and
• any disputes in relation to the above.

(h) Cybersecurity

China introduced a Cybersecurity Law in 2016 and supplemented this with the Cybersecurity Review Measure (CRM) in 2022.

The CRM requires any network platform operator that possesses the data of at least 1 million users to file for a cybersecurity review prior to carrying out any plan to raise funds overseas through:

• public equity offerings;
• initial public offerings; or
• alternative methods such as:
• • a reverse takeover;
  • a merger with a special purpose acquisition company (SPAC); or
  • a direct public offering.

Foreign public buyers – including SPACs and buyers paying the consideration with shares – should carefully examine:

• whether the target:
• • qualifies as a network platform operator; and
  • possesses the data of more than 1 million users; and
• whether the deal would be considered to constitute an indirect public offering of the target.

(i) Real estate

Questions to consider include the following:

• How were any land use rights acquired? Has the consideration been paid up?
• Are there any restrictive covenants on the use or transfer of the land use rights?
• Have the properties on the land been properly approved and inspected prior and subsequent to their construction?
• Are there any liens or collateral interests on the land use right or the properties?

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

• The National Enterprise Credit Information Publicity System, operated by the State Administration for Market Regulation, displays business information of companies, including:
• • registered capital;
  • address;
  • corporate history; and
  • details of the shareholders, directors, supervisors and management.
• The public database of the Trademark Office, Patent Office and Copyright Office operated under the National Intellectual Property Administration contains information on the prosecution of intellectual property.
• Information on litigation can be obtained from China Judicial Process Information Online, operated by the Supreme People's Court.
• The official websites of the China Securities Regulatory Commission, the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the National Equities Exchange contain details of public companies and public disclosures.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

Vendor due diligence is not common in China, but it happens from time to time where the vendor does not wish to deal with due diligence requests from multiple potential buyers. There is no general practice as to whether the buyer may rely on the due diligence report and liability cap; the parties may have to negotiate this on a case-by-case basis.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

There is no single approval that applies to all M&As in China. Transactions may be subject to approval and review for various reasons, such as:

• industry sector;
• foreign investment;
• national security; and
• business concentrations.

Industry sector: The regulators of certain sectors impose stringent qualifications on investors seeking to access the industry through M&As. These include:

• the military;
• financial services;
• postal service and telecommunications;
• transportation;
• culture and entertainment; and
• broadcasting, etc. .

Both the buyers' qualifications and the substance of the transaction may be subject to review by sector regulators.

Foreign investment: The Ministry of Commerce (MOC) and the National Development and Reformation Commission (NDRC) jointly maintain and update a catalogue which specifies the industry sectors that are prohibitive and conditional to foreign investment. All M&As by foreign buyers in these sectors will be subject to approval by the MOC or its local branches.

National security review: In addition to regular foreign investment approval, foreign buyers that are seeking to acquire a controlling interest in businesses in sensitive sectors that concern the following will be subject to a national security review:

• military;
• national defence security;
• agricultural products;
• energy;
• resources;
• infrastructure;
• transportation; and
• techniques or equipment of critical significance.

Business concentrations: China updated its anti-monopoly legislation in 2022 and has proposed a new set of test standards for anti-monopoly review for business concentrations through M&As. The thresholds that currently trigger such review include the following:

• Each of at least two participants' revenue in mainland China exceeds RMB 400 million; and
• All participants' combined revenue worldwide exceeds RMB 10 billion and/or their combined revenue in mainland China exceeds RMB 2 billion.

State-owned businesses: Transactions that involve the disposal of a state-owned controlling interest in the target and the acquisition of the same by any buyer not funded by the state will be subject to approval by the local government.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

There is no one government body that supervises M&A activities across the board. In terms of foreign investments, the Ministry of Commerce is in charge of approving foreign buyers' M&A activities in China. A national security committee under the State Council, headed by the MOC and the NDRC and staffed by industry regulators, is the reviewing body for any foreign M&As that concern sensitive sectors. The State Administration for Market Regulation is the authority that reviews and decides on business concentration matters arising from M&As.

Specific industry regulatory bodies will also be consulted and their approval sought if M&A activities in those sectors require such approval. For instance, the National Financial Regulatory Administration – previously known as the China Banking and Insurance Regulatory Commission – reviews and approves M&As involving commercial banks, insurance companies and other non-banking financial service institutions; while the Ministry of Industry and Information Technology regulates M&As that involve telecommunications infrastructure.

Under China's Listed Companies Acquisition Administrative Measures, the primary supervising body for public M&As is the China Securities Regulatory Commission. The stock exchanges supervise securities trading activities and information disclosures associated with public M&As.

4.3 What transfer taxes apply and who typically bears them?

Income tax: The seller is liable for income tax on the net gain derived from the disposal of equity or assets. The applicable rate is 25% for resident corporate entities and 10% for non-resident entities, which will be withheld by the buyer. The income tax rate for individual seller is 20%.

Value added tax (VAT): The seller in an asset deal is liable for VAT on the sale value. The tax rate is 2% to 3%, depending on the types of fixed assets involved.

Tax on land and property appreciation: In an asset sale, the seller is liable for tax on the appreciation of land use rights and property, at a progressive rate from 30% to 60%.

Deed tax: In an asset deal, buyers of land use rights and properties will be liable for deed tax at a rate of 3% to 5% of the transaction value.

Stamp duty: Both the buyer and the seller will be liable for their own stamp duty of 0.05% of the contract value.

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

The concept of giving representations and warranties is not intrinsic to Chinese law. It is not uncommon to find that only very basic expressions equivalent to fundamental warranties such as title to equity or assets and due authorisations are included in the purchase and sale agreement in a domestic transaction. Where the parties are more sophisticated or in a cross-border transaction, more extensive representations and warranties will be given covering all aspects of the target's business, including:

• title to and non-encumbrance of the equity or assets;
• due authorisations;
• compliance with laws and charter documents;
• material contracts;
• material assets;
• intellectual property rights;
• the target's tax, accounting and financial situation;
• employment matters;
• environmental compliance; and
• litigation, administrative penalties and other claims.

Under Chinese law, making untruthful statements is generally characterised as a breach of contract giving rise to a right to damages. If the injured party can demonstrate that the untruthful statements were made deliberately with a view to enticing it into the transaction, it may invoke the Civil Code, which provides that any party entering into agreement under influence of fraudulent measures may seek to rescind.

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

The seller will try to limit its liability exposure by:

• adding 'materiality' and 'best knowledge' qualifiers to specific representations and warranties;
• imposing a post-closing time limit for the buyer to bring claims; and
• including deductibles or caps on the aggregate damages that the buyer may claim.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

It is not common to see this in domestic deals in China. In cross-border M&As where the sellers are foreign parties and cannot provide any collateral for the buyer to enforce against for potential breach liabilities, the parties may sometimes resort to warranty and indemnity insurance.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

The following methods are often used, individually or collectively, to provide the buyer with greater assurance in relation to potential claims:

• making the payment in instalments and holding back a certain amount to be released only once the time limit for claims has expired;
• setting up an escrow arrangement to hold in escrow part or all of the consideration, which will be released once the time limit for claims has expired; and
• requesting a guarantee from third parties.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

Restrictive covenants after closing – in terms of the seller agreeing not to compete in the same business sector and not to solicit – are common, especially where an integral business is sold to the buyer. The definition and scope of the subject business activities and geographical area will be considered, along with the duration of the restrictions. The speed at which the specific industry evolves is also a relevant factor in deciding on the appropriate duration of the restrictions. Chinese law does not explicitly limit the duration of restrictive covenants and judicial practice shows that the courts will generally respect the parties' agreement.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

If there is a gap between signing and closing, it is common to find:

• provisions that limit the seller and the target's activities outside the ordinary course of business during this period; and
• conditions precedent to closing. Typical conditions include the following:
• • All representations and warranties remain truthful at closing;
  • All necessary authorisations and approvals, both internally and from authorities have been obtained;
  • There will be no change in legislation or regulatory policies in China or other jurisdictions that would restrain the parties' market access. This is increasingly seen in cross-border deals due to the rapidly changing geopolitical environment; and
  • A MAC – judicial practice shows that where the parties have agreed specific tests or scenarios for the MAC, the courts tend to respect the parties' agreement.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

The Listed Companies Acquisition Administrative Measures provide that the process for acquiring a public company through a tender offer is as follows:

Indicative acquisition announcement	The offeror must: prepare a report on the proposed acquisition ('offer report'); engage a financial adviser; notify the target; and make an indicative public announcement of the proposed acquisition with a summary of the offer report.
Disclosure of the offer report	The offeror has up to 60 days to disclose the full offer report after making the indicative announcement; otherwise, the offeror must notify the target and make a public announcement once every 30 days until the full report has been disclosed.
Board and independent financial adviser opinions	The board of the target has 20 days to formulate an opinion on the offer and engage an independent financial adviser to render an opinion on the offer.
Offer period	The offer period commences on the next day following disclosure of the offer report and lasts from 30 to 60 days, except where a rival offer is made. The offer may not be withdrawn during the offer period.
Settlement	The securities firm should handle the settlement within three business days of completion of the offer period.
Completion report.	Th offeror must submit a written report on the outcome of the acquisition to the exchange within 15 days of the conclusion of the offer period.

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

The buyer may build up its stake prior to making a tender offer but must observe the following rules in terms of information disclosure:

• The buyer must report to the China Securities Regulatory Commission, the exchange and the target and make a public announcement within three days of the date on which its interest in the target reaches 5% of the total issued shares. For this purpose, the interest of the buyer and those of any parties acting in concert will be consolidated. An interest in any shares is considered to exist if the buyer may direct the voting of such shares.
• Thereafter, the buyer must notify the target and make a public announcement for every 1% change in its interest in the target.
• The buyer may not trade the target's shares before completing the above notification and disclosures.
• A mandatory tender offer must be made in order for the buyer to continue purchasing the target's shares once the buyer's aggregate interest in the target has reached 30% of the total issued shares.

During the tender offer period, the buyer may not purchase the target's shares by any means other than through the tender offer.

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to 'sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

The Companies Law and the Securities Law do not include mechanisms for the squeeze-out of remaining minority shareholders. To the contrary, the Securities Law provides the remaining minority shareholders with the right to sell out to the buyer if the target will no longer be listed as a result of the acquisition.

Other than this sell-out right, Chinese law provides rather general and in-principle protections to minority shareholders in public M&As, including requirements:

• for the majority shareholder not to abuse its control power and act to the detriment of minority shareholders' interests; and
• for the directors, supervisors and management not to take actions to the detriment of minority shareholders' interests.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

The Listed Companies Acquisition Administrative Measures require a bidder to provide at least one of the following to demonstrate that it has committed financing at the time of making its initial indicative announcement for the acquisition:

• a certificate of deposit of not less than 20% cash consideration for the acquisition or a certificate showing that all securities to be used as consideration have been deposited in custody with China Securities Depository and Clearing Corporation Limited;
• a commitment of funds issued by the bidder's bank; or
• a written commitment by the bidder's financial adviser to undertake joint and several liability with the bidder for payment of the consideration.

6.5 What threshold/level of acceptances is required to delist a company?

If, as a result of the acquisition, the shares held by public shareholders fall below 25% of the total issued shares of the target, or below 10% if the target's aggregate share capital value exceeds RMB 400 million, the exchange will delist the target's shares.

In addition, Chinese law provides for certain alternative approaches through which the target may voluntarily apply to the exchange to delist its shares, including where:

• the shareholders' general meeting resolves to delist the company's shares;
• the target merges with an existing company or into a newly established company; or
• the shareholders resolve to dissolve the company.

6.6 Is 'bumpitrage' a common feature in public takeovers in your jurisdiction?

Rival offers are sometimes made during a tender offer period, but activist shareholders and bumpitrage are not common features in China.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

The offer price in the tender offer may not be less than the highest price paid by the same offeror to purchase the same class of shares within the six-month period preceding the date on which the indicative announcement of the acquisition is made.

In addition, if the offer price is less than the mathematical average value of the daily weighted average prices for the shares' 30-day trading period preceding the date on which the indicative announcement was made, the offeror's financial adviser must analyse the shares' trading record for the preceding six-month period in order to determine, among other things:

• whether the share price has been manipulated;
• whether any undisclosed parties have acted in concert; and
• whether there are alternative consideration payment schemes; and
• the fairness of the offer price.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

The Listed Companies Acquisition Administrative Measures give the buyer the opportunity to withdraw from the acquisition after the date on which the initial indicative announcement is made. Various reasons have been cited for withdrawal at this stage, including:

• failure to obtain the necessary industry regulatory approvals; and
• parties that were acting in concert discontinuing their cooperation.

However, the buyer is no longer allowed to withdraw from the offer once the full offer report has been publicly disclosed and the offer period has commenced.

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

This is not a common practice in public M&As in China. The Listed Companies Acquisition Administrative Measures give shareholders the right to retract their acceptance of the offer until the last three trading days before the offer period concludes. In the last three trading days, retraction of acceptance is no longer allowed.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

Chinese law does not restrict hostile bids in general. Any bids aimed at gaining control over a listed company may be carried out, even if such bids are not communicated to or supported by the board or management of the target. Typically, hostile bids are implemented through the purchase of shares on the secondary market or tender offer. There are certain alternative approaches – for example, where the equity of the controlling shareholder of a listed company is available for sale in a judicial auction, the bidders may participate and bid in the auction.

7.2 Must hostile bids be publicised?

Hostile bids must adhere to the requirements on tender offers and the disclosure of information. Upon acquiring 5% of the target's shares, the hostile bidder must disclose its position. In addition, hostile bidders that initiate a tender offer must submit an offer report according to the tender offer rules; and the target will make a public announcement disclosing the full report upon receiving it.

7.3 What defences are available to a target board against a hostile bid?

Prior to any hostile bids being made, the target board may propose to adopt defensive measures in the articles of the company, such as:

• incorporating staggered board or enhanced board member qualification requirements;
• requiring that a higher percentage of shareholders vote in the event of hostile bids; and
• giving the board certain general authorisation to adopt defensive measures in the interests of the company and the shareholders.

During a hostile bid, measures that are commonly adopted by the board include:

• introducing a friendly bidder as a 'white knight';
• initiating lawsuits in an effort to halt the hostile bid; and
• diluting the hostile bidder's shares through share repurchases, private placements and so on.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

There has been increasing interest in and attempts to acquire listed companies, especially by state-owned enterprises (SOEs) at all levels. Notable public M&A deals include:

• Nasdaq-listed JD.Com's acquisition of Deppon Express, a logistics service provider listed on the Shanghai Stock Exchange (SSE), through the purchase of its majority shareholder and a follow-on tender offer;
• the acquisition by Wuxi Guolian Group, a local SOE in Wuxi municipality, of SSE-listed Minsheng Securities – one of China's major investment banking firms – through the judicial auction of its majority shareholder's equity; and
• the acquisition by Shandong Energy Group – a Shandong-based SOE that specialises in energy-related investment – of Shenzhen Stock Exchange-listed chemical manufacturer Qixiang Tengda from its majority shareholder, Cedar Holdings.

In terms of private M&As, there seems to have been an increase in small to mid-sized transaction opportunities as a result of foreign investor divestments. Chinese buyers' interest in outbound M&As is apparently growing now that the recovery from COVID-19 has officially concluded.

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

The National People's Congress (NPC) has proposed major amendments to the Chinese Company Law. A second draft amendment bill was reviewed in 2022 by the 13th NPC and was published for public comment earlier this year. The third draft of amendment bill was recently submitted to the 14th NPC for review in August, 2023. In addition, the State Administration of Market Regulation, China's anti-monopoly review authority, is in the process of adopting a new set of standards for the reporting of business concentrations.

The 2021 list of prohibitions on foreign investment published by the Ministry of Commerce and the National Development and Reform Commission contained fewer items than the previous version, suggesting that China continues to welcome foreign direct investment in general. However, foreign investment and M&As in sensitive sectors will conceivably be subject to tighter and ample scrutiny.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

To ensure the smooth closing of M&As, the first point for advisers to bear in mind when dealing with Chinese counterparties is to ensure that all participants have a consistent understanding of the substance and procedural steps of the deal. To this end, it is critical that the advisers prepare a detailed checklist which outlines all steps and conditions to closing, and assign these to a responsible party.

If the parties anticipate a relatively longer period between signing and closing during which certain approvals and conditions must be obtained and satisfied, they should stay in communication on the progress of this process, either directly or through their advisers, so as to avoid any sudden and undesired surprises.

In a cross-border equity deal between a Chinese party and a foreign party, Chinese law stipulates that the seller must first complete the registration of the change in share transfer and then submit the proof as a particular to the foreign exchange in order to obtain payment. This is disadvantageous for the seller, so its advisers should establish a proper mechanism to ensure that the seller receives payment. If the seller is the foreign party and the Chinese buyer must withhold income tax from the payment, the adviser will also need to monitor the withholding tax computation closely and ensure that the amount is accurate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.