The Chinese government is considering a law that will allow
share-swapping between foreign and Chinese companies undertaking
mergers and acquisitions.
The draft regulation on consolidations between foreign and
domestic companies demonstrated the government's attempt to
strengthen supervision of mergers and acquisitions, reported the
China Securities Journal.
The Ministry of Commerce first drafted a regulation in 2004 and
revised it this year, aiming to give detailed guidance and make
better use of foreign investment.
The fourth chapter confirms stock ownership exchanges and cash
are allowable as payment for overseas-held stakes in domestic
companies.
Li Dacheng, a lawyer with the DLA Piper Law Office, said it was
the first time the country had clarified the regulation concerning
foreign investors and permitted share swapping.
Other experts regarded the regulation as bringing China into
line with the international market. Previously, the Chinese market
gave priority to cash payments, so the regulation would guide
foreign investors, said Liu Xiaodan, manager of the United
Securities Corporation mergers and financing department.
Sun Xiaohua, an expert with the Ministry of Commerce, said the
2004draft was a good framework, but failed to mention foreign
mergers and acquisitions in sectors that could jeopardize China's
industrial and economic integrity.
The first draft required the Ministry of Commerce approval for
bids by foreign investors to control companies that dominated
sectors of Chinese industry, owned famous brands or employed more
than 2,000 people, or when the move could affect China's economic
security.
Regulators had been pressured after controversy involving the
US-based Carlyle Group's agreement to pay US$375 million to
purchase a subsidiary of the Xugong Group, China's construction and
machinery giant.
Under the agreement signed by the two parties last October,
Xugong Group was to sell 85 percent of its shareholding in Xugong
Group Construction Machinery Co. to Carlyle. The Chinese firm, with
annual revenues of 17 billion yuan (US$2.1 billion), controls more
than 50 percent of China's crane and road paving equipment
market.
Sources close to the deal said the ministry had stalled the
takeover for fear that it might jeopardize China's machinery
industry.
Foreign acquisitions of leading companies were "a new problem
China has to face, while advancing economic reform and opening up",
said Song Heping, deputy director of the ministry's Industrial
Damage Investigation Department, last month.
The ministry was trying to balance protection of indigenous
industries with the investment enthusiasm of foreign companies,
Song said.
(Xinhua News Agency August 9, 2006)