The Mergers & Acquisitions Review: China

Overview of M&A activity

The total value of China M&A activities in 2019 fell to US$558.7 billion, the lowest level since 2014.2 Compared to 2018, transaction value and volume dropped by 14 and 13 per cent respectively, with the overall decline primarily due to a sharp reduction in domestic and outbound M&A activities; however, inbound M&A activities showed a 6 per cent increase in 2019 compared to 2018.3

In 2020, the volume of Chinese outbound acquisitions has been affected by the challenges posed by the covid-19 pandemic, the escalating China–United States trade tensions, the evolving European Union–China relations and the tightening of foreign investment review rules by foreign countries (most notably, the US, certain EU Member States and Australia). In the first half of 2020, the value of announced Chinese outbound M&A activities was US$14.6 billion, a figure that is 40 per cent lower than the same period of 2019 and the lowest in the past decade. In terms of deal volume, 248 outbound M&A deals were announced in the first half of 2020, a 17 per cent decrease compared to the same period of 2019.4 Instead, China inbound M&A activity has increased in 2020, despite all the challenges, as foreign investors find comfort in China's successful handling of the pandemic, and continuous efforts to attract foreign investment and the opening up of China's markets to foreign investors. Some of the main examples of such efforts are embodied in the Foreign Investment Law of the People's Republic of China (FIL), promulgated on 15 March 2019 and effective on 1 January 2020, which is aimed at creating a level playing field for foreign and domestic investors, and the updated Negative Lists (as defined below) effective from 23 July 2020, which have further liberalised certain investment sectors. Therefore, foreign investment flow into China has increased every month since January 2020. In the first five months of 2020, the total value of announced inbound M&A deals reached US$9 billion.5


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General introduction to the legal framework for M&A

i General regime governing mergers and acquisitions

The Company Law of the People's Republic of China contemplates two types of merger of corporations in China:6 merger by absorption (whereby a company absorbs another company, with the former surviving and the latter being dissolved) and merger by new establishment (whereby two or more companies merge into a new company, with all the participating companies being dissolved). The acquisition agreement involving the purchase of equity interests or assets is a sale and purchase contract subject to the general and special provisions of the Contract Law of the People's Republic of China.

If a merger or acquisition involves a listed company, it is subject to additional rules, including the Securities Law of the People's Republic of China, the Administrative Measures on Acquisition of Listed Companies and the Administrative Measures on Material Asset Reorganization of Listed Companies.

ii Special regime applicable to foreign investment

M&A carried out onshore in China involve a procedurally onerous and document-intensive exercise. Therefore, if the offshore option is available and does not increase the tax burden, offshore transactions are typically preferred by most foreign investors. If the equity interests are already owned by foreign investors, this option is usually available, as most foreign investors structure their China investments using intermediary offshore special purpose vehicles that act as holding companies, often set up in Hong Kong or Singapore. Domestic Chinese investors, especially state-owned enterprises (SOEs), on the other hand, typically (although not necessarily) hold their shares directly onshore.

If a transaction is carried out onshore, it is subject to certain regulatory requirements and approvals applicable to foreign investment, including the following:

Negative Lists

All foreign investment into China is subject to the Special Administrative Measures (Negative List) for Foreign Investment Market Access (National Negative List), which applies to the whole territory of China except for the free trade zones (FTZs),7 and the Special Administrative Measures (Negative List) for Foreign Investment Market Access in Pilot Free Trade Zones (FTZ Negative List and, together with the National Negative List, Negative Lists), which applies to the FTZs. The Negative Lists set out the sectors that are restricted or prohibited to foreign investment. Investment in a restricted sector is subject to the limitations set out in the Negative Lists (such as foreign investment caps and requirements on the nationality of senior managers).

Approval and record filing

Foreign investment projects are subject to record filing with the State Administration for Market Regulation (SAMR). Traditionally, foreign investment in a restricted sector was subject to approval by the Ministry of Commerce (MOFCOM). However, as explained in Section III, the MOFCOM approval requirement has been repealed in connection with the entry into force of the FIL on 1 January 2020.

If an investment is in a regulated industry (like many technology, media and telecommunications sectors, or banking and insurance services, to name but a few), additional approvals by or filings with the competent industry regulators may be required.

Foreign investment projects also require, in theory, approval by or record filing with the National Development and Reform Commission (NDRC), particularly in the case of restricted category projects above a certain amount as well as certain infrastructure and fixed assets projects set out in the Catalogue of Investment Projects Subject to Governmental Approval issued by the State Council on 12 December 2016.

M&A Regulations

The acquisition of equity interests or assets of domestic capital enterprises by foreign investors is subject to the Provisions on Foreign Investors' Merger with and Acquisition of Domestic Enterprises (M&A Regulations). The M&A Regulations impose, among other things, a statutory timetable for the payment of the purchase price and mandatory valuation requirements. The statutory timetable for the payment of the purchase price in this type of transaction has traditionally made it challenging to introduce typical retainers or holdbacks of a portion of the purchase price, although creative solutions can be found to recreate the same legal effect. However, the good news is that, as noted in Section III, the Chinese authorities no longer apply this timetable in practice in most cases, although the M&A Regulations are still formally effective.

These requirements do not apply to acquisitions of foreign invested enterprises8 and acquisitions of Chinese domestic capital enterprises9 by existing foreign invested enterprises.

National security review

The National Security Law of the People's Republic of China promulgated on and effective from 1 July 2015 (National Security Law) provides that China would establish national security review and supervision systems and mechanisms, conducting a national security review over certain types of foreign investments that impact or may impact national security.

While the National Security Law seems to serve as an umbrella law for national security review issues, it does not provide much operational detail, particularly with respect to mergers and acquisitions and foreign investment matters. More specific rules were issued prior to the National Security Law.10 Under such rules, a national security review applies to investments in, among others, military industrial and industrial-related enterprises, enterprises near key and sensitive military facilities, other entities related to, inter alia, national defence, and key domestic enterprises in agriculture, energy and resources, infrastructure, transport, technology and assembly manufacturing, whereby foreign investors acquire the actual controlling right thereto. National security reviews are conducted by an inter-ministerial panel led by MOFCOM and NDRC, along with other departments relevant to the industry targeted by the foreign investment. The panel's decision is final.

Acquisition of listed companies

Chinese listed companies may list A shares and B shares on the Chinese stock exchanges. A shares are denominated and traded in renminbi. B shares are denominated in renminbi and traded in foreign currency.

Foreign investors are allowed to purchase B shares freely. However, foreign investors can only purchase A shares:

  1. through a strategic investment pursuant to the Measures on Administration of the Strategic Investment by Foreign Investors in Listed Companies, subject to requirements in terms of, among other things, an investor's qualifications, minimum investment size and lock-up period;11 or
  2. under the qualified foreign institutional investors (QFII) or renminbi qualified foreign institutional investors (RQFII) schemes. Alternatively, A shares can be acquired through the Shanghai–Hong Kong Stock Connect and Shenzhen–Hong Kong Stock Connect channels established in 2014 and 2016, respectively, which enable orders to be placed through a broker in Hong Kong.

iii Special regime applicable to the acquisition of state-owned assets

The acquisition of equity interests in, and assets of, Chinese SOEs is subject to specific procedures and requirements. The main pieces of legislation regulating this area are the People's Republic of China Law on State-owned Assets of Enterprises promulgated on 28 October 2008 and effective from 1 May 2009, and the Measures for the Supervision and Administration of the Transaction of State-owned Assets of Enterprises promulgated on and effective from 24 June 2016.

The procedures and requirements for these types of transactions include, save where an exception applies:

  1. approvals from the State-owned Assets Supervision and Administration Commission of the State Council, the SOE or its parent, and the local people's government (as applicable);
  2. financial audit and mandatory appraisal of the equity interests or assets to be acquired; and
  3. a public auction conducted on an authorised property rights exchange.

Strategies to increase transparency and predictability

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Developments in corporate and takeover law and their impact


The FIL was voted into law on 15 March 2019 and took effect on 1 January 2020. It represents the most significant overhaul to China's foreign investment legislation, having repealed the rules that traditionally governed foreign invested enterprises (FIEs) since the 1980s, namely the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law and the Wholly Foreign-Owned Enterprise Law, together with their respective implementing regulations (collectively, FIE Laws).

On 31 December 2019, the State Council promulgated the FIL Implementation Regulations, which came into effect from 1 January 2020, sitting alongside the FIL. Around the same time, MOFCOM and SAMR issued a set of new rules and circulars (collectively, Ancillary Rules) in an apparent effort to reconcile a number of old rules governing and regulating foreign investment and FIEs in China with the FIL and the FIL Implementation Regulations, and to reform the previously applicable filing system for foreign investment projects and the corporate information reporting system, among others. The Supreme People's Court also weighed in and promulgated its first set of judicial interpretations on the FIL, entitled the Supreme People's Court Interpretations on Several Issues concerning the Application of the Foreign Investment Law, addressing issues as to the validity of investment contracts in relation to foreign investment.

Against the backdrop of trade tensions with the US and the EU, the official purposes of the FIL are (leaving out the more political ones) to create a level playing field for foreign and domestic investors, expand China's opening up policy, promote foreign direct investment into China and protect the lawful rights and interests of foreign investors, and regulate the administration of foreign investment. The major implications of the FIL, FIL Implementation Regulations and Ancillary Rules are, among others, the following:

FIE organisational structure

The FIL and the FIL Implementation Regulations require all FIEs to abandon the organisational structure adopted pursuant to the FIE Laws and adapt it to the Company Law of the People's Republic of China or Partnership Law of the People's Republic of China, as applicable, including with respect to their organisational form, capital contribution, governance structure, financial and accounting matters, and dissolution and liquidation. A five-year transitional period is provided by the FIL to allow FIEs to transition to the new regime.

MOFCOM approval and record filing

The Ancillary Rules have abolished the MOFCOM approval or record filing regime previously applicable to foreign investment projects, and replaced it with a much more streamlined requirement to conduct a single filing with SAMR via the Enterprise Registration System and the National Enterprise Credit Information Publicity System maintained by SAMR. Under this new regime, if an investment project is in a restricted sector listed in the Negative List, SAMR or the competent industry regulator conducts a reviewing process to examine whether the restrictive requirements under the Negative List are satisfied, while MOFCOM is no longer involved.

Information reporting mechanism

The FIL and the FIL Implementation Regulations have established an information reporting mechanism that imposes reporting obligations on all companies, including FIEs. The reporting obligations require the submission of certain information reports12 to SAMR according to the detailed procedures set out in the Foreign Investment Information Reporting Measures promulgated by MOFCOM and SAMR jointly on 30 December 2019 and effective from 1 January 2020. These measures have repealed the MOFCOM foreign investment record filing regime that has been implemented since 2016. As a result, FIEs no longer need to submit any information to MOFCOM directly: all information is submitted to SAMR through the Enterprise Registration System and the National Enterprise Credit Information Publicity System.

Payment deadlines under the M&A Regulations

As noted in Section II, the Chinese authorities no longer apply in practice the payment timetables provided by the M&A Regulations, although they are still formally effective. This is seen as a development that fits within the new regime introduced by the FIL, although the FIL did not officially repeal or amend the M&A Regulations. However, it is possible that further rules will be implemented to this effect.

ii Negative Lists and Encouraged Industries Catalogue

On 30 June 2019, NDRC and MOFCOM jointly released a new version of the National Negative List and FTZ Negative List, and the Encouraged Foreign Investment Industries Catalogue (Encouraged Industries Catalogue), all effective from 30 July 2019. The sectors restricted to foreign investment listed in the 2019 Negative Lists were reduced from 48 to 40 in the 2019 National Negative List compared to the 2018 National Negative List, and from 45 to 37 in the 2019 FTZ Negative List compared to the 2018 FTZ Negative List. The main liberalisations involved the sectors of mining, energy, manufacturing, infrastructure, transportation, value-added telecommunications, agriculture, and culture and entertainment.

The Encouraged Industries Catalogue integrated its two predecessor catalogues, that is, the Guidance Catalogue for Foreign Investment Industries (2017 Version), which generally applied throughout China, and the Catalogue of Priority Industries for Foreign Investment in Central and Western China, which specifically applied to the Central and Western (less developed) areas and provided an expanded scope for encouraged industry sectors for foreign investment. In particular, it includes 415 nationwide encouraged industries (including 67 new and 45 revised industries) and 693 Central and Western area-encouraged industries (including 54 new and 145 revised industries). More than 80 per cent of the new and revised industries relate to high-end manufacturing.

On 24 June 2020, NDRC and MOFCOM issued a new version of the National Negative List and FTZ Negative List, both of which took effect from 23 July 2020. The sectors restricted to foreign investment listed in the 2020 Negative Lists were reduced from 40 to 33 in the 2020 National Negative List compared to the 2019 National Negative List, and from 37 to 30 in the 2020 FTZ Negative List compared to the 2019 FTZ Negative List. The main liberalisations involved the services, manufacturing (notably, removing restrictions on the manufacturing of gasoline commercial vehicles) and agricultural sectors. In addition, on 31 July 2020 NDRC and MOFCOM issued a new version of the Encouraged Industries Catalogue in draft form subject to public consultation, which is expected to replace the 2019 version, and on 1 September 2020 NDRC issued an additional Encouraged Industries Catalogue specific for the Hainan FTZ in draft form subject to public consultation. The overall direction of travel for the Negative Lists and Encouraged Industries Catalogue is quite positive, with clear, progressive reductions in the number of sectors restricted or off limits to foreign investment.

iii New rules on equity investments by FIEs

Traditionally, only certain types of FIEs have been permitted to make equity investments in China out of their capital account, namely foreign-invested investment enterprises, foreign-invested venture capital investment enterprises and qualified foreign limited partner funds (collectively, investment-type FIEs).

Since July 2019, pilot programmes have been rolled out in various FTZs whereby FIEs that were not registered as investment-type FIEs (non-investment FIEs) established in the relevant FTZs were permitted to make equity investments out of their capital account. On 25 October 2019, China's State Administration of Foreign Exchange published the Circular on Further Promoting Cross-border Trade and Investment Facilitation, effective on the same date. This Circular facilitates M&A transactions by FIEs by allowing non-investment FIEs to make equity investments using the funds in their capital account, to the extent the investment complies with the Negative Lists and other applicable laws and regulations.

iv New FTZs

China introduced six new FTZs in Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang in August 2019, and three additional FTZs in Beijing, Hunan and Anhui in August 2020. So far, China has established 21 FTZs in total, scattered around many of its regions, provinces and municipalities. Generally speaking, foreign investment in the FTZs is subject to fewer market access restrictions and benefits from more relaxed foreign exchange policies, favourable tax regimes, government subsidies and other types of industry support.

Us antitrust enforcement: the year in review

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Foreign involvement in M&A transactions

i Outbound M&A13

The most preferred destination for Chinese outbound M&A in the first half of 2020 has been Asia, with half of the top 10 target countries being Asian countries, including India, Malaysia, Saudi Arabia, Singapore and South Korea. Asian countries, especially the Member States of the Association of Southeast Asian Nations, present geographical advantages, share a similar culture with China and have generally adopted a less hostile attitude towards Chinese M&A. Additionally, investment in those countries is fostered by the Belt and Road initiative proposed by the Chinese government.

In the first half of 2020, the most popular industry for Chinese outbound M&A has been consumer goods, in which the deal value increased by 26 per cent year-on-year and accounted for 26 per cent of the total deal value of Chinese outbound M&A; other popular industries for Chinese outbound M&A have included TMT and financial services.

The US was the single largest target country of outbound Chinese M&A in the first half of 2020, but this is owing to a single large M&A transaction in the financial industry. The Netherlands and France were also among the top 10 target countries of Chinese outbound M&A in the first half of 2020. However, Chinese outbound M&A into the US and the EU is a decreasing trend due to the challenges posed by the covid-19 pandemic, geopolitical risks and the tightening of foreign investment review rules, particularly with regards to advanced technology and other critical infrastructure. In particular, in the first half of 2020, Chinese outbound M&A into the US and the EU increased by 20 per cent and decreased by 65 per cent, respectively, accounting for 24.32 and 16.89 per cent of the total value of Chinese global outbound M&A, respectively. Although Chinese outbound M&A into the EU declined sharply overall in the first half of 2020, it achieved significant growth in the Netherlands, Italy, France and Luxembourg.

ii Inbound M&A14

After having taken a hit in the first quarter of 2020, Chinese inbound M&A has been rising sharply since the second quarter of 2020, scoring a total of US$12.8 billion in terms of announced deal value (an increase of 16 per cent from the first quarter of 2020). Foreign investment into China in the first quarter of 2020 mainly originated from Asia (over US$6 billion) and the EU (US$4.5 billion). In the second quarter of 2020, the value of announced acquisitions by buyers from the EU totalled US$8 billion, followed by Asia (US$3.275 billion) and North America (US$1.5 billion). In 2020, there have been a number of large inbound acquisitions in the automotive, consumer goods and finance industries, among others (please refer to Section V).

China is set to remain an attractive destination for foreign investment given the size and importance of its market, including a booming internal consumption market and a favourable policy environment, with the government making considerable efforts towards the further liberalisation of its economy and an increase of foreign investment to the country.

Significant transactions, key trends and hot industries

European and American multinationals have been the main driving force of China inbound M&A deals in 2020. Some of the largest and most prominent deals have taken place in the automotive, consumer goods and finance industries, as well as the life sciences and healthcare sector. In particular, the finance and automotive industries, among others, have benefitted from a recent wave of market liberalisations that have contributed to attracting more foreign investment in these areas. The consumer goods sector has also recorded substantial M&A activity in 2020.

As regards the automotive sector, foreign investment restrictions (i.e., the foreign ownership cap and maximum number of joint ventures) on the manufacturing of gasoline commercial vehicles have been removed from the Negative Lists in 2020. The restrictions remain in place for the manufacturing of gasoline passenger vehicles, which are scheduled to be removed in 2022, while no restrictions apply to the manufacturing of new energy vehicles and special purpose vehicles. Some of the most significant transactions in the automotive sector in 2020 included the following:

  1. in January 2020, Mercedes-Benz and Geely established a joint venture to manufacture electric vehicles (EV) in Ningbo;
  2. in May 2020, Volkswagen entered into definitive agreements to acquire a 26.47 per cent stake in the Chinese battery maker Guoxuan High-Tech Co, Ltd for a consideration of around €1.1 billion,15 becoming the first foreign-owned automaker directly investing in a Chinese EV battery maker; and
  3. in June 2020, Volkswagen entered into definitive agreements to increase its 50 per cent equity stake to a 75 per cent equity stake in its Chinese joint venture with Anhui Jianghuai Automobile Group Corp, Ltd by investing around €1 billion16 – the biggest M&A deal in the EV sector.

In the consumer goods sector, the largest inbound M&A deal in the first half of 2020 was probably PepsiCo, Inc's acquisition of Hangzhou Haomusi Food Co, Ltd (Be & Cheery), one of the largest online snack companies in China, from Haoxiangni Health Food Co, Ltd, for a consideration in excess of US$700 million.17 Other noteworthy deals (including domestic transactions) were:

  1.'s acquisition of Gome Retail Holdings (one of China's largest appliance retailers) in March 2020;
  2. the funding rounds of Perfect Diary (led by Tiger Global Management and Hopu Management) in April 2020 and Heytea (led by Hillhouse and Coatue Management) in March 2020;
  3. Wumart's acquisition of Metro China in October 2019;
  4. Suning's acquisition of Carrefour China in June 2019; and
  5. Heineken's US$3.1 billion acquisition of a 40 per cent stake in CRH beer in the second quarter of 2019.

As regards the finance sector, the Negative Lists no longer provide any foreign investment restrictions. The remaining restrictions in the finance sector were removed between July 2019 and April 2020 with the opening up of the bond underwriting and credit rating businesses and the removal of the 51 per cent foreign ownership cap on securities companies, fund managers, futures companies and life insurance companies. Several international players have taken advantage of these liberalisations, for instance:

  1. in April 2020, JP Morgan Chase & Co announced the acquisition of the residual equity stake in its Chinese securities joint venture,18 turning it into a wholly-owned subsidiary and becoming the first foreign firm obtaining sole ownership of its Chinese fund management operations;
  2. in March 2020, Goldman Sachs and Morgan Stanley announced that they had received the final regulatory approvals to acquire a majority stake in their Chinese security joint venture;19
  3. in June 2020, Ergo Group purchased a 24.9 per cent stake in Taishan Property & Casualty Insurance for a consideration of around US$125 million;20 and
  4. in December 2019, AXA acquired the remaining 50 per cent stake in its Chinese subsidiary AXA Tianping Property & Casualty Insurance Company for a consideration in excess of US$660 million,21 becoming the largest wholly foreign-owned property and casualty insurer in the Chinese market.

The life sciences and healthcare sector has also been an important destination for foreign investment. China is estimated to be the world's second-largest pharmaceutical and biopharma market in 2020.22 In 2019, the biopharma sector, which counts on strong policy support, and the hospital segment recorded several large M&A deals including Amgen's acquisition of a 20.5 per cent stake in Beigene for approximately US$2.7 billion, Grifols' acquisition of a 26 per cent stake in Shanghai RAAS Blood Products for approximately US$1.9 billion, New Frontier Corporation's acquisition of United Family Healthcare for a value in excess of US$1.3 billion, and another undisclosed acquisition in the hospital segment reportedly valued over US$1 billion.23 In 2020, among the major transactions in the life sciences and healthcare sector, Shionogi & Co and Ping An Life Insurance established two joint ventures in China and Hong Kong with a total investment reported to be in the range of US$466 million,24 and substantial private equity and venture capital investment was recorded in the area of digital health reportedly accounting for a quarter of the total financing activities of the entire life sciences and healthcare industry in China in the period from January to February 2020.25

Financing of m&a: main sources and developments

The economic slowdown in 2019 and the outbreak of the covid-19 pandemic in 2020 have caused a severe decline in the volume of onshore acquisitions, and therefore substantially reduced the demand for onshore acquisition finance, in the PRC. On the other hand, banks in the PRC are required by the People's Bank of China not to call their loans on borrowers who are materially adversely affected by the covid-19 outbreak with a view to help businesses going through financial difficulties.

For the past year, instead of focusing on originating new acquisition finance deals or launching new financing structures, banks in the PRC have spent more time dealing with extension requests, waiver requests and restructuring transactions. We have seen borrowers requesting various waivers, such as delaying of principal repayments and relaxing of financial covenants, typically on a temporary basis (e.g., relaxed financial covenants that will be restored in two years' time), or a temporary waiver of an investment grade downgrading event. Although banks are potentially exposed to higher credit risks by giving such waivers, banks in China seem to be more receptive to such requests without imposing additional costs or requesting additional security or guarantees.

The volume of private equity investment in China in 2020 has been significantly affected by the covid-19 outbreak and relevant geopolitical challenges, including the escalating China–US trade tensions. However, China is the world's third-largest private equity market after the US and the UK,26 and is expected to remain a strong market going forward, particularly as China has brought the covid-19 pandemic under control and its economy is back on a path of growth. In particular, the market has shown encouraging signs of resilience, with the recovery of domestic consumption and a boost to digitalisation and innovation, trends that have even been accelerated as a result of the pandemic. The trend for private equity activities in China has been shifting from minority investments to the acquisition of controlling stakes, and fundraising tends to be concentrated within a limited number of funds that can count on a strong track record.27

Employment law

Employment relationships established with an entity in China are generally governed by complex and voluminous national, provincial, municipal and local laws and regulations, of which the Labour Law of the People's Republic of China and the Employment Contract Law of the People's Republic of China (Employment Contract Law) are the most significant. As a general comment, there have not been any developments in China's employment legislation relevant to M&A in the past year.

The basic premise of the Employment Contract Law is that in China (unlike in some other jurisdictions) an employer is not allowed to dismiss an employee at will. Unilateral termination of an employment contract by an employer must be for cause (i.e., for a reason for termination stipulated expressly by the law). In an equity purchase transaction involving a Chinese target company, the general rule is that the employment-related liabilities and obligations of the target company survive the closing (as the employees remain employed by the target company). However, the parties may contractually allocate among themselves (e.g., by providing the relevant indemnities) such liabilities and obligations arising prior to the closing. In very rare cases, an equity purchase transaction may constitute a material change to objective circumstances under which the employment contract was entered into that makes the employment contract incapable of being performed and that would justify the termination of the employment contract by the target company pursuant to the Employment Contract Law (however, terminating an employment contract on this ground requires satisfying multiple conditions that may be difficult to be met in practice).

In an asset purchase transaction, the employees do not automatically transfer from the seller to the buyer together with the assets and business. The transfer of employees can only be completed by terminating their respective existing employment contract with the seller and entering into a new employment contract with the buyer as the new employer, both of which are subject to each employee's consent. The employees who accept to be transferred from the seller to the buyer are entitled, at their option, to request for the immediate payment of severance payable under their employment contract with the seller as of the date of the termination, or to carry forward their total years of service at the seller with the buyer (in which case the buyer will be responsible, when the employment contract with the buyer will end, for paying the aggregate amount of severance based on the employees' total years of service with the seller and the buyer). The seller and the buyer may agree in the asset transfer agreement how to allocate the liability for severance payments between themselves, and the buyer, seller and each transferred employee typically enter into a tripartite agreement to regulate the terms of the transfer from the seller to the buyer.

Tax law

Taxation on the income derived by non-resident enterprise in a cross-border M&A transaction is primarily governed by the Enterprise Income Tax Law, the Implementation Regulation of the Enterprise Income Tax Law and the Tax Collection and Administration Law, and is supplemented by various tax announcements issued by the State Administration of Taxation, and the Ministry of Finance. In the past year, no further rules for the taxation of non-resident enterprises in M&A transactions have been published.

In the case of a share acquisition, capital gains derived by non-resident enterprise transferors in the transfer of shares in Chinese enterprises are subject to a 10 per cent withholding tax in China, and a 0.05 per cent stamp duty is payable by each of the transferor and transferee.

The State Administration of Taxation Announcement [2017] No. 37 and Caishui [2009] No. 59 constitute the main framework regarding the tax treatment of the income derived by non-resident transferors in M&A transactions. Announcement [2017] No. 37 provides guidance on withholding tax calculations and payment for cross-border M&A transactions. Caishui [2009] No. 59 sets out conditions under a the transferor could enjoy a tax exemption on the capital gains derived in a group restructuring.

In the case of an asset acquisition, depending on the nature of the transferred assets, the Chinese subsidiary of the non-resident enterprise transferor that owned the assets may be subject to value added tax and local surcharges, land value added tax and so forth, in addition to the enterprise income tax on the gains derived from transferring the assets.

Competition law

On 2 January 2020, SAMR released draft amendments to the Anti-Monopoly Law of the People's Republic of China (AML) for public consultation (Draft). The biggest changes in the Draft are those in the merger control provisions, which are most relevant to M&A. In particular:

  1. the Draft proposes to clarify the term controlling right, which is a key for determining whether a deal constitutes a reportable transaction. However, the Draft's proposed definition of the term is overly broad and, as such, it fails to provide sufficiently clear and practical guidance for market participants;
  2. as to the numeric filing thresholds, the Draft proposes to shift back the power to fix and change the revenue thresholds from the State Council to SAMR. With no procedural or substantive limits to this power, if left unchecked, this delegation of powers could (at least theoretically) allow SAMR to reset thresholds on short notice and depart from the revenues-only benchmarks;
  3. another quite far-reaching proposal is to transfer a provision that allows SAMR to review transactions below the currently set revenue thresholds, which is currently contained in a State Council regulation, into the AML itself. This change could be interpreted as a statement of intent (as antitrust regulators globally are musing about introducing new thresholds to capture certain transactions below the thresholds, especially in the digital economy, dubbed killer acquisitions); and
  4. furthermore, the Draft introduces a stop the clock option for SAMR to interrupt a merger review process instead of strictly following the statutory deadlines. While a more flexible approach to timing may work to the benefit of the merging parties in some cases, the overall effect could well be to inject additional uncertainty into the review process.

In August, 2020, SAMR formally adopted four key antitrust guidelines on how the AML applies in the automotive sector, on the intellectual property rights and antitrust interface, on the leniency regime and on the commitments procedure. Among other things, the guidelines on the intellectual property rights and antitrust interface provide that the assignment of intellectual property rights, or even exclusive licences, may under certain circumstances constitute a reportable transaction for merger control purposes.

As to merger control enforcement, during 2019 SAMR unconditionally cleared 443 cases. In an otherwise slower year for corporate deal activity, as of 1 October 2020, SAMR has unconditionally cleared 318 cases. In 2019, SAMR imposed remedies on five mergers. In comparison, as of 1 October 2020, SAMR has conditionally approved four cases, namely Wabco/ZF Friedrichshafen, Nvidia/Mellanox, Infineon/Cypress and the Danaher/GE biopharma business.

On 16 July 2020, SAMR unconditionally cleared a transaction between Shanghai Mingcha Zhegang Management Consulting Co, Ltd and Huansheng Information Technology (Shanghai) Co, Ltd to establish a greenfield joint venture. This development is noteworthy, as this is likely the first (at least well-known) case where SAMR has cleared a merger control filing for a transaction where one party to the transaction was part of a group with a variable interest entity (VIE) structure. VIE structures are contractual arrangements mainly used in certain sectors such as telecommunications to address foreign ownership restrictions under Chinese law.

Finally, SAMR also continued its string of enforcement actions to penalise gun jumping in an acquisition of minority shares. For example, on 14 October 2020, SAMR published its decision imposing penalties on Zhejiang Construction Investment Group for failing to file its acquisition of a 29.83 per cent shareholding of Dohai under the AML.


China encourages foreign investment in sectors of strategic importance, particularly those listed in the Encouraged Industries Catalogue, including primarily certain key technologies (high tech, healthcare, AI, renewable energy, carbon capture, circular economy, semiconductors), and investments in underdeveloped regions (such as Western regions) or regions where China plans to develop expertise in a particular sector, including in connection with the government's Belt and Road initiative and Made in China 2025 strategy.

China's automotive market is the world's largest and fastest-growing market, both in terms of traditional gasoline vehicles and new energy vehicles, and is being pursued actively by foreign automakers, either directly or through joint ventures with local Chinese automakers. The gradual elimination of foreign investment restrictions in the automotive sector presents an opportunity for foreign players to enter the Chinese market through a wholly foreign-owned entity or to increase their equity stake in their existing joint ventures where the law and commercial strategies so allow.

The consumer goods sector is projected to remain a strong sector for inbound M&A. China's consumer market is set to overtake that of the US, becoming the world's largest consumer market this year. Its expansion is a priority for the government given its systemic importance in achieving a transition to a consumer-driven economy and being a key driver of GDP growth and a recession-resistant industry that can help the Chinese economy recover from the covid-19 pandemic. Hot trends in the consumer goods sector are the combination of online and offline channels ('new retail'), the integration and optimisation of supply chains, healthy food products, and health and wellness products and services for a class of consumers that are increasingly sophisticated and focused on high quality and wellbeing. Deal activity is expected to revolve around these hot areas.

The life sciences and healthcare sector is also expected to remain an important destination for M&A in China. Investment in this sector is expected to be driven by innovation and digital transformation with the development of new technologies and services such as online medical platforms and remote medical consultation systems, powered by AI, the internet of things and big data, and revolve also around the areas of biopharma, R&D and medical devices, as well as the emerging health and tech sector.28

Finally, the ongoing SOE reform, more recently embodied in the Three-Year Action Plan for the Reform of State-Owned Enterprises (2020–2022), may also present interesting M&A opportunities as China promotes the mixed ownership and reorganisation of its SOEs, including through their privatisation.29


1 Lu Zhou is a partner at Hogan Lovells.

2 PwC M&A 2019 Review and 2020 Outlook, released by PwC in February 2020 ( The figure includes domestic, inbound and outbound transactions. Domestic and inbound transactions include targets from Mainland China, Hong Kong, Macao and Taiwan. Outbound transactions include buyers from Mainland China and Hong Kong.

3 idem.

4 An Overview of Chinese Outbound Investment for the First Half Year of 2020, published by EY on 30 July 2020 (

5 'Who's Buying Whom? covid-19 and China Cross-Border M&A Trends', published by Rhodium Group on 18 June 2020 (

6 Unless otherwise stated, China and PRC mean the People's Republic of China excluding, for the purposes of this chapter, Hong Kong, Macao and Taiwan.

7 The FTZs are designated areas where the government experiments with market liberalisation measures on a pilot basis before expanding them to the whole of the Chinese territory if and when suitable. The first FTZ was the Shanghai FTZ, which was established in 2013. There are now 21 FTZs in total covering a large part of the Chinese territory, six of which were newly added in August 2019 (Shanghai, Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shaanxi, Hainan, Shandong, Jiangsu, Guangxi, Hebei, Yunnan, Heilongjiang) and three of which were newly added in August 2020 (Beijing, Hunan, Anhui).

8 i.e., Chinese companies wholly or partially owned by foreign shareholders.

9 i.e., Chinese companies wholly owned by Chinese shareholders.

10 In particular, the Circular of the General Office of the State Council concerning the Establishment of a Security Review System for Mergers and Acquisitions of Enterprises within China Involving Foreign Investors, effective as of 2 March 2011; the Announcement of Provisions of the Ministry of Commerce on the Implementation of a Security Review System for Mergers and Acquisitions of Enterprises within China Involving Foreign Investors, effective as of 1 September 2011; and the Notice of the General Office of the State Council on Issuing the Measures for the Pilot Program of National Security Review of Foreign Investments in Pilot Free Trade Zones, effective as of 8 May 2015.

11 A new version of the Measures on Administration of the Strategic Investment by Foreign Investors in Listed Companies, issued in draft form on 18 June 2020, proposes to relax some of these restrictions.

12 The information to be submitted includes, among other things, the basic corporation information of the enterprise, its investors and actual controller, and information about the investment or transaction, and any subsequent changes thereof.

13 The information in this section is primarily quoted from 'An Overview of Chinese Outbound Investment for the First Half Year of 2020', published by EY on 30 July 2020 (

14 The information in this section is primarily quoted from China Outbound and Inbound Investments Q2 2020, China Investment Research, Volume 46, published by Grisons Peak in July 2020 ( and China Outbound and Inbound Investments Q1 2020, China Investment Research, Volume 45, published by Grisons Peak in April 2020 (

27 In search of alpha: Updating the playbook for private equity in China, published by McKinsey & Company in August 2020 (

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