Legal and Financial Regulations of Mergers & Acquisitions in China

Introduction

As a company’s strategic business activity, a merger or an acquisition is often used for leapfrogging competition, business transformation or performance improvement. It improves the asset structure and reallocates resources to free up more capacity and improve operational efficiency; Therefore, through mergers and acquisitions, companies are afforded the possibility to expand their business at a reasonable price and with low risk.

1. The Definition of Mergers and Acquisitions

M&A, an abbreviation for the term mergers and acquisitions, referring to the consolidation of companies or their major business assets through financial transactions between companies.

The terms "mergers" and "acquisitions" are often used interchangeably, but they differ in meaning. A more elaborative and understandable description to distinguish the two terms are though the following equation examples, "mergers" means entity A+B=A, B is absorbed by A or A+B=C, forming a new entity “C”, while "acquisitions" means the acquiring company obtains the majority stake in the acquired firm, wherein both companies preserve their names and organizational structures.

2. Legal Provisions on Mergers and Acquisitions in China

In the legal scope, M&A transactions are essentially a civil commercial act of equity transfer, with the specific steps of an M&A to be found in our previous article Merger of Domestic Enterprises by Foreign Investors in China. However, the transfer of shares is not unrestricted. For example, according to Article 141 of the Company Law of the People's Republic of China (Revised in 2018) ("Company Law"), if the company has been established for less than one year, the original shareholders shall not transfer their equity, which means that the company may not be acquired by other companies within one year of its establishment.

In addition, in order to facilitate a smooth merger of the company, Article 142 (2) and (4) of the Company Law also stipulate the circumstances in which the company could acquire its own shares. Shareholders who hold objections to the merger can request the company to acquire their shares, which to some extent reduces resistance during the merger process.

The parties to the merger shall fulfill the obligation to provide notification of the company’s debt, and the creditors shall have the right to require the company to settle the debt or provide corresponding security.

3. Pricing in M&A

The pricing of the assets in an M&A transaction is carried out by any of the following methods, book value, equity value, enterprise value, and discounted cash flow method or net present value method.

The book value method determines the price for the buyer based on the net book asset value, and the equity value method is determined by the stock price; The enterprise value method is through a comprehensive and integrated valuation of the target company; While the discounted cash flow method/net present value method determines the price based on the present value of the forecast future earnings of the business.

4. The Taxation Treatment of M&A Transactions

Appropriate financing methods for M&A transactions can reduce the tax burden. The acquired party can make reasonable use of tax incentives to increase its bargaining power in the negotiation process and increase the selling price.

Conclusion

China has been developing strongly in new energy, electric vehicles and related industries in recent years, and has been expanding globally with government support and actively seeking M&A opportunities; Meanwhile global business exchanges are gradually recovering during the post-pandemic era, M&As are projected to play a key role in the global industrial transformation.

If you need any monitoring in the legal and financial sectors of M&A transactions in China, feel free to get in contact with us: info@dpgroup.biz.