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21 June 2011
Background
Following Chinas State Councils announcement early this year of its intent to set up a new state-level investment review body to ensure merger and acquisition deals struck by foreign firms in China do not conflict with Chinese national security interest, in March 2011 the Chinese Ministry of Commerce (MOFCOM) issued a paper outlining the new regulations entitled Interim Provisions on Matters regarding Implementation of the National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors. The interim provisions came into force on March 5, 2011 and are expected to expire on August 31, 2011 at which time a formal set of laws are expected to be published with additional details made public upon implementation. However, there are still many unanswered questions, as the consultation process occurs in parallel with the implementation of the national security review procedures for current foreign investments. While these new regulations increase the central governments control over foreign investment in China, complicating the regulatory process, foreign investors now have even more responsibility to communicate their intent and purpose of pursuing deals to a wide range of Chinese stakeholders. Targeted messaging and clear communication with these audiences is essential to a successful transaction in China, especially in the context of an evolving legal framework and a more dynamic media environment. This paper reviews the regulatory requirements concerning China inbound M&A, challenges and implications for foreign businesses, and sets out some recommendations to minimize the regulatory risks and protect the reputation of a foreign acquirer and ensure a successful transaction.
Opportunities for Foreign Investors in the Context of Chinas Twelfth Five-Year Plan
M&A activity is closely aligned with government policy priorities. The policy priorities, development goals and industry targets for the current plan were set last October and formally unveiled and approved at the recent National Peoples Congress held in Beijing in March in the form of the Twelfth Five-Year Plan (2011-2015). The dominant theme of the Twelfth Five-Year Plan is sustainability, which is not only reflected in the growing focus on developing renewable energy and promoting environmental friendly practices, but a strong commitment to building a sustainable economic structure. China will now prioritise encouraging foreign participation in emerging industries, particularly where foreign expertise and technology are required; in other areas of the local market it is unlikely that foreign participation will be encouraged any time soon, for example in the telecom, insurance, construction and automobile industries where the EU businesses are keen to have access to. Overseas, the dominant preoccupation in energy security and cleaner energy sources can be expected to lead to a continued mandate for the key stateowned enterprises to look to secure supplies through investment in offshore projects. This is expected to be primarily in the form of low-risk off-take agreements, joint-ventures with local players and taking minority shareholdings. The impact of these shifts in focus laid out in the new Five-Year Plan will take time and effort to bring to fruition. While the roadmap is clear, the extent to which central government has the political capital and will to see it into practice remains to be seen.
The EU Perspective
With strong growth forecast, China is the most important strategic market for European businesses which plan to expand further. However, Chinese companies are rapidly becoming more competitive and are improving in fields that were previously the strongholds of European and US companies. In this increasingly competitive environment, access to subsidies and government policies and regulations, that are perceived as discriminatory, are a growing concern for European businesses in China. In 2008, less than three percent of EU outbound foreign direct investment went to China. In comparison, 9.8 percent of EU FDI went to Switzerland and 34.8 percent went to the United States in the same year according to Eurostat. According to the European Chamber 2010 Business Confidence Survey, some 36 percent of surveyed companies have seen the regulatory environment becoming less fair towards foreign invested companies over the past two years. More worrying, some 39 percent of the respondents expect the regulatory environment for foreign companies to actually worsen over the next two years, and a further 22 percent anticipate that there will be no improvement. The relations with China are a major policy focus of the EU and issues such as forced technology transfer, insufficient IP enforcement, discriminatory public procurement markets and an intransparent regulatory environment are critical issues for the EU. The EU and China are engaged in official discussions to find a common understanding and promote cooperation: Competition Policy Dialogue: Since 2004 the EU and China are engaged in discussions to promote mutual understanding of policy approaches and legislation and cooperation in the field of competition policy. The next meeting will take place on 8 July 2011. EU-China High Level Economic and Trade Dialogue (HLD) launched in 2008 strengthens the relationship between the European Commission and the State Council of China at Vice-Premier level. It deals with issues of strategic importance to EU-China trade and economic relations and provides impetus to progress concretely in sectoral dialogues. At the last HLD in December 2010 the parties discussed how competition policy can help to create level playing field conditions. EU-China Trade Project (EUCTP) supports the Chinese government's trade reform and sustainable development agenda and also aims to promote fair competition. New Partnership and Cooperation Agreement negotiations launched in 2007. The Agreement is planned to contain a chapter on competition policy where the EU aims to address all areas of competition law (anti-trust, mergers and state aid) with a view to provide effective rules on enforcement, and cooperation. However progress has been very slow because of divergent views. Memorandum of Understanding between NDRC and United Kingdom's Office of Fair Trading Signed in January 2011, this is the only formal cooperative arrangement between the Chinese antimonopoly authorities and overseas antitrust authorities to enhance cooperation between the NDRC and the OFT in the area of the enforcement of competition policy.
Despite ongoing reinforced dialogue, tensions between the EU and China are rising. In particular the export restrictions on raw materials and the forced technology transfer - including the requirements of foreign companies in high-tech sectors to become part of joint ventures with Chinese companies - are seen as a systematic strategy to boost Chinese companies over foreign competitors. It will become increasingly challenging for the EU to protect the interests of EU businesses in China on the one hand and maintain good political relationships. A modern anti-monopoly law and a fair implementation would be an encouraging signal for the EU to continue its competition dialogues.