SECTION 1: Market overview
1.1 What have been the key trends in the M&A market in
your jurisdiction over the past 12 months and what have been
the most active sectors?
Overall, the China M&A market slowed down somewhat in
the past 12 months. We attribute this mainly to market issues
and regulatory changes, especially relating to outbound
investment policies. That said, M&A in certain industries
grew robustly, such as in artificial intelligence (AI), big
data, healthcare and advanced manufacturing.
1.2 What M&A deal flow has your market experienced and
how does this compare to previous years?
According to PwC's M&A 2017 Review and 2018 Outlook,
"2017 China M&A value fell 11% to $ 671 billion off the
record highs of 2016". The total deal volume in 2017 was 9,839
transactions compared to 11,407 in 2016. Despite of the
slowdown, 2017 still ranks as second highest in the past five
years in terms of deal volume and value.
1.3 Is your market driven by private or public M&A
transactions, or both? What are the dynamics between the
The Chinese market is driven by both private and public
M&A transactions. Indeed, it is not uncommon to see private
and public M&A transactions occurring in parallel. For
example, some listing companies may involve M&A investment
funds to acquire target companies first, and then initiate an
(major) asset restructuring to acquire the targets by issuing
shares to the M&A investment funds.
1.4 Describe the relative influence of strategic and
financial investors on the M&A environment in your
Both strategic and financial investors significantly
influence the M&A environment. For example, the internet
giants in the China market, Baidu, Alibaba and Tencent
(collectively BAT) are dominant strategic investors in the
China internet and technology industries. They also have
significant influence over start-up companies and certain
private equity (PE) and venture capital (VC) investors.
Likewise, some PE and VC investors go to great lengths to build
market influence in selecting investment targets and leading
investment trends in specific industries.
SECTION 2: M&A structures
2.1 Please review some recent notable M&A transactions
in your market and outline any interesting aspects in their
structures and what they mean for the market.
In August 2017, ELE, a leading food delivery company in
which Alibaba is a major shareholder, announced its acquisition
of Baidu Waimai. Upon closing, Baidu Waimai will become a
wholly-owned subsidiary of ELE and will continue to operate as
an independent brand for high-end food delivery services. ELE
will issue new shares to Baidu as partial payment of the total
consideration. In the M&A market, BAT companies usually
insist as a standard provision that any companies in which they
invested are prohibited from selling to another BAT company
(among other significant competitors). This deal, however,
shows that such restrictions are not absolute and under certain
circumstances, Alibaba and Baidu may work together (at least
2.2 What have been the most significant trends or factors
impacting deal structures?
Notable factors include industry practice, market share of
the target or the acquirer (in the cases of strategic
investors), founder background, regulatory environment, etc.
Capital increase or share transfer or a combination of both are
common deal structures.
A recent policy-driven trend in 2017 is that many PRC
investors have switched to pure offshore structures when
conducting outbound investment to avoid the Chinese regulatory
SECTION 3: Legislation and policy changes
3.1 Describe the key legislation and regulatory bodies that
govern M&A activity in your jurisdiction.
The key laws and regulations include the PRC Company Law,
Sino-Foreign Joint Venture Law, the Sino-Foreign Cooperation
Joint Venture Law and Foreign Enterprise Law, and the
implementation rules of such laws; outbound investment
regulations; foreign exchange laws and regulations; company
registration laws and implementation rules; PRC Corporate Tax
Law and its implementation rules.
Key regulatory bodies include:
- In general, the State Administration of
Industry and Commerce (SAIC) and the State Administration of
- With respect to outbound investment, the
National Development and Reform Commission (NDRC), the
Ministry of Commerce (MOFCOM), the State Administration of
Foreign Exchange (SAFE).
- With respect to public M&A, the China
Securities Regulatory Commission (CSRC).
- The Anti-Trust Bureau of MOFCOM, which
governs anti-trust issues of M&A transactions.
- For certain specific industries, such as
the education, healthcare and media industries, the Ministry
of Education, the China Food and Drug Administration and the
State Administration of Press, Publication, Radio, Film and
Television may also be the governing regulatory bodies for
any M&A deals in the industry.
- The local branches of the above regulatory
|NB: Values may exclude
certain transactions, for example asset
3.2 Have there been any recent changes to regulations or
regulators that may impact M&A transactions or activity and
what impact do you expect them to have?
On November 3 2017, the NDRC promulgated the
Administrative Measures on Enterprise Outbound
Investment which has enter into force on March 1 2018
(Administrative Measures). The Administrative Measures and
accompanying rules such as the Catalogue of Sensitive
Industries for Outbound Investment and the template documents
for the Administrative Measures are expected to allow closer
monitoring and heightened transparency for the NDRC with
respect to outbound investments.
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact M&A in your jurisdiction
in the near future?
As the laws governing foreign investment were promulgated in
the 1980s immediately after the opening reforms by the PRC
government, some articles are obsolete or even contradict other
existing laws, such as the Company Law. In this connection,
there have been efforts to replace the current foreign
investment laws and promulgate new ones. In particular, MOFCOM
led the preparation of a new Foreign Investment Law, a draft of
which was published for public comments in 2015. However, the
draft law was met with an intensive public discussion,
especially in the international business community and no
subsequent drafts of this law have appeared to date.
Nevertheless, given existing issues in the current foreign
investment-related laws, it is widely expected that the PRC
government and the National People's Congress (NPC) will
eventually adopt new laws to regulate foreign investment.
However, as foreign investment plays a significant role in
China's economic growth, any significant changes of laws may
have far reaching consequences.
Nevertheless, trial regulations have been underway in select
areas, such as the Free Trade Zones. The PRC government and NPC
are also rolling out new foreign investment laws and
regulations to ease administrative burden on foreign investors
to invest in China.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the M&A market in your jurisdiction.
Inexperienced buyers tend to neglect the importance of
government approvals/filings in PRC M&A transactions in
certain industries and consider the processes to be mere
formalities. In practice, some government authorities even may
substantially review transaction documents and raise concerns
or requests which may affect the overall deal structure.
Potential investors are therefore advised to communicate with
relevant government authorities early and often to ensure the
smooth closing of M&A deals.
4.2 Are there frequently asked questions or often
overlooked areas from parties involved in an M&A
In M&A deals in which exiting shareholders receive all
or a portion of the sale proceeds, parties tend to agree in
principle of the tax obligations without consulting PRC tax
authorities in advance. As a result, issues often arise when
actual tax filings are made. Sometimes the selling shareholders
may even request the buyers to raise the purchase price in
order to cover "unexpected" tax obligations. It is generally
advisable to consult tax advisors early on the tax implications
of the transactions and ensure that selling shareholders are
aware of such implications as early as possible.
4.3 What measures should be taken to best prepare for your
In the PRC, parties should pay special attention to the
- specific industry regulations, which may
include shareholder qualifications, foreign investment
restrictions and/or capital thresholds;
- arrange for project financing as soon as
possible once deal structure is determined. In particular,
for a cross-border transaction, the parties may discuss
financing solutions simultaneously with M&A project
itself. Due to the outbound restrictions set by the PRC
government in late 2016, we have seen many outbound
investments terminated/put on-hold due to funding
- do not underestimate employment risks, as
PRC employment law is highly complex and local and could
cause last minute issues;
- consult anti-monopoly specialists early in
the transaction, who can assess whether filing will be needed
in the PRC or any other jurisdictions, as such filings could
be time consuming and could result in substantial
SECTION 5(a): Public M&A
5.1 What are the key factors involved in obtaining control
of a public company in your jurisdiction?
The key factors in obtaining control of a public company in
- the shareholding percentage of the listed
company that the buyer needs to acquire;
- the buyer's own track record in terms of
legal compliance, securities actions, debt;
- the source of funds for the purchase of
the intended shares;
- compliance with relevant rules, e.g., the
Administrative Rules on Acquisition of Listed Company and
relevant rules on disclosure (see below); and
- the buyer's commitment to hold the
purchased shares for the periods as specified by listing
5.2 What conditions are usually attached to a public
Common conditions attached to a public takeover offer
- the buyer's track record in terms of legal
compliance, securities actions and debt status meeting the
applicable legal requirements;
- full compliance with the disclosure rules
of the stock exchange, such as public disclosure of further
share purchases after a buyer holds 5% or more of the shares
in a listed company;
- the submission of a takeover offer
proposal to the stock exchange and the CSRC for
- no objection is raised by the CSRC or the
relevant stock exchange; and
- the sources of funds meeting applicable
5.3 What are the current trends/market standards for break
fees in public M&A in your jurisdiction?
Given the generally high purchase price involved in public
M&A deals, we have seen more and more companies adopt break
fee mechanisms to mitigate the risk of the deal falling apart.
However, for cross-border M&A deals, more detailed
mechanisms are often included in the transaction documents
which specifically take in to account applicable foreign
SECTION 5(b): Private M&A
5.4 What are the current trends with regard to
consideration mechanisms including the use of locked box
mechanisms, completion accounts, earn-outs and escrow?
Locked box mechanisms, completion accounts, earn-outs and
escrow are all common consideration payment mechanisms in the
PRC. In some deals, a combination of these may be adopted for
various reasons. Strategic investors often focus on the overall
growth of the target company and therefore tend to favour
earn-out mechanisms to motivate founder
Escrow-like arrangements are sometimes used in the PRC, but
due to local restrictions, these are more common in real estate
deals and need to be handled with a local notary (not a bank).
As such, where an escrow arrangement is needed, parties tend to
arrange for the purchase price to be paid at the offshore
5.5 What conditions are usually attached to a private
The conditions attached to a private takeover offer usually
- consideration amount, form (cash or
equity/share), payment schedule;
- key closing conditions, such as obtaining
necessary government approvals (if applicable), completion of
company registration alteration;
- overall closing timeline;
- tax obligation allocation;
- break fees.
5.6 Is it common practice to provide for a foreign
governing law and/or jurisdiction in private M&A share
Subject to the Law of the Application of Law for
Foreign-related Civil Relations, yes. However, in some cases
PRC laws may mandate the use of PRC laws in certain key
transaction documents. For instance, where a purely domestic
company is being purchased or invested in by a foreign buyer,
the parties must choose PRC law as governing law. Therefore,
parties should consult their advisors prior to determining the
governing law for the transaction's share purchase
5.7 How common is warranty and indemnity insurance on
private M&A transactions?
Currently, it is not common for parties to purchase warranty
and indemnity insurance on private M&A transactions in the
PRC M&A market.
5.8 Discuss the exit environment in your jurisdiction,
including the market for IPOs, trade sales and sales to
The IPO review process is comparatively lengthy in China
which also involves uncertainties. It is common for a company
to wait one to two years before it is able to officially submit
its IPO application. Recently the market has also seen a large
number of IPO applications rejected. The official review itself
may also take one year or even longer, subject to legal,
financial or other issues raised by the IPO review board.
As a result, trade sales and sales to financial sponsors are
more common. Those sales are usually dependent on the company's
status, e.g., market share, financial performance, overall
growth prospects, etc., and if selling to a financial investor,
the buyers will in turn weigh their exit possibilities.
SECTION 6: Outlook 2018
6.1 What are your predictions for the next 12 months in the
M&A market and how do you expect legal practice to
We believe that the M&A will continue to grow in 2018.
As PRC outbound investment policies become clearer, we foresee
outbound M&A picking up speed. Domestic PE/VC investment
activities will remain strong, as the government continues to
encourage innovation and entrepreneurship. Certain new
technology industries, such as AI, cloud computing, life
sciences, advanced manufacturing, etc., will continue to
experience rapid growth. Publicly listed companies will also
continue to play a significant role in M&A deals.
Counsel, DaHui Lawyers
T: +86 21 5203 0688
F: +86 21 5203 0699
Cloud Li is a senior member of DaHui Lawyers'
M&A and private fund practices. He graduated from
Fudan University law school and Transnational Law and
Business University, Republic of Korea. He has
extensive experience representing European and North
American multi-nationals, large state-owned and private
Chinese companies and PE funds in fund formation,
mergers and acquisitions, investments, dispute
resolution and compliance matters. He assists clients
in a variety of different industries, including
internet, entertainment, media, health care, energy,
transportation, infrastructure and real estate.
His recent representations include a few PRC listed
company acquisitions of target companies in and out of
China in the media and transportation sectors using
onshore and offshore structures. He has also advised a
number of leading PE funds investing in energy,
infrastructure and financial sectors.
Counsel, DaHui Lawyers
T: +86 21 5203 0688
F: +86 21 5203 0699
Leo Wang is a member of DaHui Lawyers' M&A and
corporate teams. He graduated from Peking University
law school and Georgetown University law centre. He has
worked for many years with extensive experience in
foreign direct investment, M&A, general corporate
compliance and outbound investment. He assists clients
in a variety of different industries, including IT,
entertainment, media telecoms, education, e-commerce
and real estate.
His recent representations include a PRC listed
company's acquisition of a controlling interest in a
Korean-listed company. To date, this deal is one of the
largest investments by a Chinese enterprise in a Korean
television producer. He has advised on a public M&A
project on behalf of a PRC listed company to purchase
two target companies in the video game and
entertainment industries in China. He represented two
leading exhibition and event organisation companies in
purchasing several internationally recognised show
events in China.