China Releases New Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors

On August 8, 2006, China released the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the "Provisions"). The Provisions, effective on September 8, 2006, signify the Chinese government's attempt to develop more detailed regulations on foreign acquisition of China-based companies, and that China's key government agencies are paying more attention to mergers and acquisition ("M&A") activities. The Provisions confirm that Ministry of Commerce ("MOFCOM") will serve as the key regulator for anti-trust issues in connection with M&A.

The Provisions also provide that certain important M&A transactions require MOFCOM approval. The new approval provisions and the existing anti-trust provisions have reflected an expansion of Chinese trade protection. The Provisions emphasize the necessity of protecting national economic security in the context of foreign acquisitions of domestic enterprises. Foreign Investors must comply with MOFCOM reporting requirements related to acquisitions of domestic targets engaged in key industrial sectors, which may affect the security of the national economy, or related to acquisitions of domestic companies owning famous trademarks or traditional brands in China.

The Provisions also establish China Securities Regulatory Commission approval procedures for initial public offerings involving offshore special purpose vehicles that hold China assets. The special purpose vehicle is defined as an offshore entity directly or indirectly controlled by Chinese individuals or enterprises with the goal of an oversea listing, the main assets of which are its rights and interests in an affiliated Chinese domestic company.

These new Provisions, like many other provisions, will be subject to further administrative interpretation. White and Williams will closely observe how MOFCOM and other government agencies apply these new provisions and how they impact the M&A activity at US companies in China.