The Acquisition and Leveraged Finance Review: China


Commercial banks are the primary source of debt finance in acquisition transactions. Trust companies and finance companies also play an important role in the debt financing market. Unsecured credit facility, secured facility, revolving facility for working capital purposes, bonds and convertible bonds are the most commonly used debt products. Mezzanine finance is commonly seen in China in innovative transaction. Hybrid debt-plus-securities instruments are also commonly arranged, under which companies can issue securities backed by the credit assets consisting of the debts arising out of a number of loans of multiple borrowers in the national inter-bank bond market or stock exchanges, and the qualified investors, thus, may be able to negotiate and trade these securities.

Private equity and venture capital (PE/VC) are other important sources of funding and are becoming more and more important in the acquisition market. However, PE/VC mainly provide equity finance since debt finance by PE/VC is limited in China.

Regulatory and tax matters

In China, an entity can only conduct lending business after obtaining the permit or approval from finance regulators, such as People's Bank of China, China Banking and Insurance Regulatory Commission (CBIRC) or finance regulation bureau of local government. Major market players in the debt financing industry are commercial banks, policy-oriented banks, trust companies, finance companies, lending companies and micro-lending companies, which should conduct business according to the applicable laws and regulations.

i Acquisition finance

Commercial banks, policy-oriented banks, Chinese branches of foreign banks, finance companies of enterprise groups should comply with the Guidelines for Risk Management of Acquisition Financing by Commercial Banks (the Acquisition Finance Guidelines) promulgated by CBIRC in 2008 and amended in 2015. The Acquisition Finance Guidelines stipulate that the financing amount may not exceed 60 per cent of the total acquisition price of a transaction and the term of the loan may not exceed seven years.

According to the Acquisition Finance Guidelines, a lender conducting acquisition financing business must: (1) have sound risk management and an efficient internal control mechanism; (2) have a capital adequacy ratio of no less than 10 per cent; (3) meet applicable regulatory requirements in all of its other regulatory indices; and (4) have a professional team to conduct the due diligence and risk assessment of acquisition financing.

The Acquisition Finance Guidelines also set forth the requirements for the acquisition financier to maintain the internal control and risk management system, including:

  1. ensuring its aggregate outstanding amount of acquisition financing does not exceed its net tier-1 capital for the same period, and its aggregate outstanding amount of acquisition financing to a single borrower does not exceed 5 per cent of the net tier-1 capital for the same period;
  2. assessing the strategic, legal, regulatory, concentration, business, financial and regulatory risks of an acquisition transaction;
  3. reporting to the CBIRC the concentration limit on a per-borrower, group customer, industrial, national or jurisdictional basis;
  4. ascertaining the leveraged ratio of acquisition financing and ensuring reasonable funding by equity contribution;
  5. strengthening due diligence and post-lending loan management and supervision; and
  6. adding mandatory provisions in the facility agreement to protect the lender's right, such as the provisions on the lender's right to take risk control measures upon occurrence of material adverse change in the target group and the equity funding as a condition precedent to the disbursement of the acquisition financing.

ii Syndicated loan

The Guidelines for Syndicated Loan Business (the Syndication Guidelines), promulgated by CBIRC, stipulates the rights and responsibilities of the lead bank, agent bank and participating bank, form of syndication and documentation requirement. If a single bank acts as the lead bank, its commitments should not be less than 20 per cent of the total commitment, and the participating shares of the other members should not be less than 50 per cent of the total commitment.

iii Anti-money laundering and anti-corruption compliance

As a member of the Financial Action Task Force, China is devoted to fighting against money laundering. The People's Bank of China (PBOC) is the key regulator of anti-money laundering. In addition to the Anti-Money Laundering Law, the Provisions on Anti-Money Laundering of Financial Institutions issued by the PBOC stipulates detailed requirements for financial institutions and certain non-financial institutions to comply with, including identifying a client's identity, preserving information about their clients and transactions, and reporting large transactions or suspicious transactions.

The Criminal Law establishes a criminal offence in relation to money laundering. The Supreme People's Court and the Supreme People's Procuratorate may issue guidelines on the application of criminal law to combat money laundering activities.

Anti-corruption is largely stipulated in the Criminal Law, Anti-unfair Competition Law and related regulations. There is no legislative guidance specifically applicable to financial institutions regarding the administration of anti-corruption matters.

iv Tax

Interest on loans is taxable income, and unless otherwise stipulated by law, the taxable income of the enterprises is generally subject to 25 per cent of the corporate income tax in China. The overseas branch office (with no legal person status) of a Chinese resident bank is considered a resident of China for tax purposes. The income of the overseas branch office is taxable together with its head office, and no withholding tax is payable for the interest paid from a domestic institution to the overseas branch office, provided that, if the overseas branch collects the interest on behalf of a non-Chinese resident, the domestic enterprise is obligated to withhold income tax for the interest paid to the overseas branch. If the actual management organ of a Chinese enterprise's overseas subsidiary is located in China, the overseas subsidiary will be considered a Chinese resident as well.

Interest expenses are deductible against operating income of the borrower.

Unless otherwise stipulated in the tax treaties or other tax preferential treatment, a Chinese resident borrower should withhold corporate income tax at the rate of 10 per cent for the interest paid to the non-resident lender.

Financial institutions are subject to 6 per cent VAT for income accrued from the debt financing. A VAT exemption is granted if the loan is made to small or micro enterprises or self-employed households.

Parties to a loan agreement executed within the territory of China shall pay stamp tax at a rate of 0.005 per cent of the loan amount. If a loan agreement is executed outside China but will be used in China (e.g., for governmental registration or court enforcement), stamp duty will also be applicable.

Security and guarantees

The types of security under Chinese law include mortgages, pledges, guarantees and liens. The security package most commonly used in acquisition finance transactions are share pledges, cash deposits, corporate or personal guarantees or a combination of the above. A mortgage of real estate (including land use right), pledge over receivables or intellectual property rights may also be required by a lender providing leverage finance.

A grant of cross-border security or guarantee is subject to regulation of the State Administration of Foreign Exchange (SAFE); for example, the provision of a guarantee or security by an onshore non-bank entity in favour of an overseas entity securing the debt of an overseas borrower should be registered with the SAFE after the execution of security documents.

In the case of a listed company takeover, the listed company should not provide any form of financial assistance to the acquirer, or any security in favour of the acquirer or its affiliate.

Security is irrevocable if it is granted within one year of the court accepting a bankruptcy application with respect to the security provider to secure an unsecured debt.

Priority of claims

Secured claims should be repaid in priority from the proceeds of the secured assets. After full repayment of the secured claims, the remaining amount of the proceeds of the secured assets (if any) will be considered as the bankruptcy assets of an insolvent borrower.

Other claims should be paid in the following order from the bankruptcy assets:


i Governing law

In a domestic transaction, Chinese law should be the governing law of the transaction agreement. In cross-border transactions, the parties may choose the governing law of the transaction agreements. English law, Hong Kong law and New York law are most often chosen by the parties as the governing law of the cross-border credit facility agreement.

In the absence of a choice of law, the court will apply the rules of closest connection to determine the governing law. For example, the law of the jurisdiction in which the lender is located may govern the financing agreement.

There are some exceptions to the parties' freedom of choice of law. Where the collateral is the immovable asset, the law of the jurisdiction where the immovable assets are located should be the governing law of the security agreement. Chinese law mandatorily applies to certain agreements relating to foreign investment in China, such as, for example, share purchase agreements, asset purchase agreements and subscription agreements involving foreign entities, as well as Sino-foreign equity joint venture contracts, Sino-foreign contractual joint venture contracts and contracts for Sino-foreign joint exploration and development of natural resources that will be performed within China.

Generally, the courts will uphold the choice of law provisions as long as such provisions do not violate the public policy of China or contradict the mandatory provisions of Chinese law.

If the court determines that the parties intentionally create the ground to apply foreign law to avoid the application of Chinese law, it will not uphold the application of foreign law and Chinese law will apply instead.

ii Recognition of foreign judgment or arbitration award

China is a contracting state of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. A foreign party may submit an arbitral award from a foreign arbitral tribunal to a Chinese court for recognition and enforcement. If the court determines recognition and enforcement does not violate the basic principles of Chinese law and is not contrary to the sovereignty, national security or public policy of China, it will recognise the arbitration award.

Where the final and conclusive civil judgment or written order of a foreign court is submitted to a Chinese court for recognition and enforcement, it will be reviewed by the court in accordance with the international or bilateral treaty concluded by or between China and the jurisdiction where the judgment order is made or in accordance with the principle of reciprocity. If there is an international or mutual enforcement treaty, then court judgment will be enforced according to the treaty. Without an enforcement treaty, enforcement could be made under the reciprocity principle. There is no definition of reciprocity principle under Chinese law. The current Chinese court practice is that if there is a precedent that a foreign jurisdiction enforced a Chinese court judgment, then the PRC court may enforce the court judgment of that jurisdiction under the reciprocity principle. In the suggestion to promote the One Belt One Road Initiative (BRI), the Supreme People's Court proposed that a Chinese court may consider first enforcing a foreign judgment so as to actively establish a reciprocal relationship if that foreign jurisdiction has committed to giving China reciprocal treatment or if there is good judicial cooperation between China and that jurisdiction.

Acquisitions of public companies

The Measures on the Administration of Acquisition of Listed Companies (the Acquisition Measures) promulgated by the China Securities Regulatory Commission (CSRC) are the principal regulations on the acquisition of public companies. The acquisition of listed companies can be made through an agreement or tender offer.

i Mandatory offer requirement

If the investor, acting alone or jointly with others by agreement, wishes to purchase the shares of a listed company from a third party by agreement, so that the aggregate shares held by such purchaser would exceed 30 per cent, the purchaser shall launch the general tender offer to acquire all the remaining shares of the target company before completion of the purchase by agreement.

If the investor holding more than 30 per cent of the shares of a listed company wishes to further increase its shareholding percentage acting alone or jointly with others by agreement, it should launch the tender offer to acquire all or part of the shares of the target company.

The tender offer requirement may be exempted in certain cases set out in the Acquisition Measures.

ii Disclosure of the financing terms

The tender offer report should, among other things, disclose the term and price of the acquisition, the source of funding required for the acquisition and the guarantee structure in relation thereto. The purchaser shall engage a financial adviser who shall conduct adequate due diligence on the purchaser's capacity to pay the takeover price and the source of funds, disclose the verification process and basis in detail, and state whether the purchaser has the capacity to make the tender offer.

iii Squeeze-out

There are no such squeeze-out rules in China. However, in the case of a general tender offer, the purchaser is required to specify in the offer report, among other things, the closing date after delisting and arrangements for the shares held by the remaining shareholders after expiry of the offer period. If, at the end of the offer period, the target company fails to meet the listing requirement (i.e., less than 25 per cent of the shares are held by the public, or the total value of the shares of the target exceeding 400 million yuan, less than 10 per cent of shares are held by the public), the target company should be delisted. If requested by the remaining shareholders, the purchaser should purchase the shares then held by the remaining shareholders within the timeline as provided in the purchaser's offer report on the same terms as the tender offer.

iv Conditionality

In the case of a tender offer, the purchaser should first prepare the offer report and disclose the summary of the offer report in a brief announcement. All the conditions to the offer shall be highlighted in the summary of the report. The offer report will be disclosed after the conditions have been satisfied. Unless otherwise waived by the CSRC, the offer report is unconditional.

Chinese law currently does not stipulate requirements on the offer conditions. Obtaining governmental approval is commonly seen as a condition in the summary of the offer. There are cases where a satisfactory due diligence result is the condition in the summary of the offer.

v Form of payment

The purchaser may, by means of cash, securities or a combination of the two, or by other lawful means, pay the purchase price for acquisition of a listed company. In the case of payment in securities, the purchaser should provide audited financial and accounting statements, a securities evaluation report of the securities issuer for the last three years, and should cooperate with the independent financial adviser engaged by the target company in its due diligence investigations. In the case of payment in transferable bonds, the bonds must have been listed on the securities exchange for at least one month. In the case of payment in securities that are not listed on any securities exchange, the purchaser must provide a cash payment option for the offerees to choose from.

In the case of a general tender offer to acquire all the shares of the target company, the consideration should be paid in cash. If the purchaser wishes to pay the consideration by transferable securities, it must, at the same time, also offer the cash payment option for the offerees to choose.

vi Certain funds requirement

The purchaser should provide at least one of the following measures to guarantee performance:

The year in review

Since covid-19 is under control in China, mergers and acquisitions continue to increase. While cross-border investment is still limited as a result of the pandemic, the growth of acquisitions mainly comes from the Chinese market. In the first half of 2021 there were over 6,000 reported acquisition deals, of which 45 deals exceeded US$1 billion each in value. Those acquisition deals mainly happen in the industry upgrade, dual-circulation and low-carbon sectors.

The acquisition of listed companies is not common but acquisition by listed companies is very active in the Chinese market. September 2021 witnessed the second-largest acquisition deal in history. Tianshan Cement, a listed company controlled by China Building Material Group (CBMG), acquired substantial shares of four cement companies that are also controlled by CBMG. The purchase price reached nearly 100 billion yuan, of which around 50 billion yuan was settled by new shares issued by the purchaser and 40 billion yuan was settled by cash. Banks did not participate in this transaction since the purchaser uses its own cash and issued new shares to pay the purchase price.

On 15 November 2020, a Regional Comprehensive Economic Partnership (RCEP) was officially signed after 31 rounds of negotiations over the past eight years. China has approved the RCEP and the contracting parties have agreed to enact the RECP from 1 January 2022. RCEP will become an important platform for China to continue opening up to the outside world. China's trade with RCEP participating countries (RPCs) accounts for approximately one-third of its total foreign trade, and paid-in investment from RPCs makes up over 10 per cent of the total paid-in investment in China.


Transactions in the Chinese domestic market are active. As a result of the pandemic, outbound investment by Chinese investors will continue to face great challenges. However, it is expected that cross-border activity for the remainder of 2021 will grow and recover gradually.

In 2020 China became the world's largest destination for foreign direct investment. Foreign investment in China will continue to increase, driven by the relaxation in market access. Once the RECP comes into force in 2022 it may further promote investment in China and other RECP countries.


1 Gulong Ren is a partner at AnJie Law Firm.

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