On August 8, 2006, the Ministry of Commerce, State Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission and State Administration of Foreign Exchange jointly promulgated “Provision on the Acquisition of Domestic Enterprises by Foreign Investors” (referred to as the “Provision” hereinafter”). The Provision makes the further subdivision and modification for the “Interim Provision on the Acquisition of Domestic Enterprises by Foreign Investors” (referred to as “Interim Provision” hereinafter) issued back in 2003. In comparison with the Interim Provision, the author deems that the following aspects of the Provision deserve more of our attention:

1、Payment Method

Chapter 4 of the Provision regulates that the foreign investors may adopt the equity-payment-based acquisition of a domestic enterprise by a foreign investor. The so-called equity-payment-based acquisition of a domestic enterprise by a foreign investor means that the shareholders of an overseas company purchase the equities of a domestic company by paying the equities of the overseas company it holds, or that an overseas company purchases the increased capital of a domestic company by paying its increased shares. Such provision will do much for the multinational acquisition of the enterprise and also provide the support for the application of the provision in respect of the special-purpose vehicle newly created in this Chapter. However, it should be seen that the Provision also make the restriction against such equity-payment-based acquisition, Article 29 regulates that: “The equities of the domestic and overseas companies involved in the equity-based acquisition of a domestic company by a foreign investor shall meet the following conditions: (1)They are lawfully held by the shareholders and may be transferred in accordance with the law; (2)There is no dispute over their ownership, they are not held in pledge and they are not subject to any other limit of right; (3)The equities of an overseas company shall be listed publicly in an overseas lawful securities exchange market (excluding the over-counter exchange market); and (4)The transaction price of the equities of the overseas company in the recent 1 year remains stable.

2、Special provision for the newly-created special-purpose vehicle

Chapter 4 of the Provision newly creates Section 3 to make the regulation for the special-purpose vehicle. Article 39 regulates that: “The term “special-purpose vehicle” refers to an overseas company which a domestic company or natural person directly or indirectly controls for the purpose of making its actual domestic company equities get listed abroad.”

Doubtlessly, the provisions of this section will make the restriction against the overseas listing of Chinese enterprises. Quite a few of overseas listing of Chinese medium and small-size enterprises employ the “red chip model”, that is, the actual controller of the domestic enterprise establish the shell corporation in such offshore centers as Cayman Island, BVI, Bermuda Islands in its individual name and then increase the capital and stock of such shell corporation with the equity of domestic enterprise and acquisition the assets of such domestic enterprise and ultimately achieving the target of indirect overseas listing with such shell corporation’s name.

Prior to the enforcement of the “Provision”, in accordance with the provisions of “Notice on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Vehicles” No. 75 [2005] of the State Administration of Foreign Exchange issued on October 21, 2005, if the domestic enterprise desires to make overseas listing by establishing such special-purpose vehicle, it only needs to, before establishing or controlling an overseas special purpose vehicle, bring the following materials to the local branch or department of foreign exchange administration to apply for going through the procedures for foreign exchange registration of overseas investments, and when it contributes the assets or stock rights of a domestic enterprise it owns into a special purpose vehicle, or engages in stock right financing abroad after contributing assets or stock rights into a special purpose vehicle, go through the procedures for modification of foreign exchange registration of overseas investments with regard to the net asset equities of the special purpose vehicle it holds and the variations thereof, there are no requirements else. However, after the enforcement of the Provision, there are some adversely effects on the domestic enterprises’ making overseas listing by establishing the special-purpose vehicle in the light of the regulations of the Provisions. Article 42 of the Provision regulates that: “To set up a special-purpose vehicle abroad, an overseas company shall apply to the Ministry of Commerce for going through the examination and approval formalities……after the party who establishes or controls a special-purpose vehicle obtains approval document for Chinese enterprise to make overseas investment, it shall apply to the foreign exchange control authority of the place where it is located for going through the formalities for the register of overseas investments.”; Article 45 regulates that: “If the Ministry of Commerce approves the documents as required in Article 44 of these Provisions upon preliminary examination, it shall issue a letter of in-principle approval. The domestic company shall, upon the strength of the letter of in-principle approval, submit to the securities regulatory institution of the State Council the application documents for getting listed.”, that is, after the Provision comes into effective, the overseas listing by means of such “red chip model” must firstly be examined and approved by the Ministry of Commerce. It indicates that such enterprise who desires to make overseas listing will undertake more costs, including time and money and uncertainties.

3、To strengthen the State’s control on the acquisition by foreign investors

On the basis of “Interim Provision”, Article 4 of the Provision further regulates strictly that: “…The business scope of any enterprise invested by the domestic enterprise prior to the acquisition shall meet the requirements in the industrial policies on foreign investments. If it does not, adjustment shall be made.”

Article 11 regulates that: “Where a domestic company, enterprise or natural person intends to take over its domestic affiliated company in the name of a company which it lawfully established or controls, it shall be subject to the examination and approval of the Ministry of Commerce.”

Article 12 regulates that: “Where a foreign investor intends to obtain the actual controlling power of a domestic enterprise it plans to take over, and if any important industry is concerned, or if it has an impact on or may have an impact on the national economic security, or it will lead to the transfer of the actual controlling power of a domestic enterprise which holds a well-known trademark or a historic Chinese brand name, the parties concerned shall file an application with the Ministry of Commerce.”

Article 15 regulates that: “The parties to an acquisition shall state whether there is a connected relationship between the parties to the acquisition. If both parties belong to a same actual controller, the parties shall disclose their actual controller to the examination and approval authority and make an explanation about whether the purpose of acquisition and the assessment result conform to the fair value of the market. The parties shall not dodge the aforesaid requirements by trust, holding shares on behalf of others, or by other means.”

Chapter 5 regulates the antitrust review for the acquisition

4. The Provision specifically regulates that where a domestic company, enterprise or natural person takes over a domestic affiliated company in the name of an overseas company it lawfully established or controls, the foreign-funded enterprise so established shall not enjoy the treatments to foreign-funded enterprises”

── Tanke