Foreign Investment Into China Mergers And Acquisitions Due To The Risks And Legal Issues

On December 11, 2001, China officially became the 143rd member of the World Trade Organization, and started to integrate to the world trade fully. It signaled the further integration of China's economy with the globalized economy, and also the challenges from the globalized economy. During the second half of the 20th century, from the General Agreement on Tariffs and Trade through the Uruguay Round Negotiations, the World Trade Organization has been finally established to promote more open economy and globalization. The trend of globalization further boost Mergers and Acquisitions (M&A) of the 20 century to its peak, especially in January 2000, the merge of American Online (AOL) with Time Warner, with their combined market value of 350 billion dollars shake the business world. And later on Compaq's merge with HP in 2001.From mid eighties of the 20th century, especially in the nineties, the flow of international capital funds changed drastically, by way of Mergers and Acquisitions to do direct investing had become most popular. With the background of globalization of the economy, transnational companies had been actively doing mergers and acquisitions to strengthen their market position, to reduce cost, to bring up efficiency and to maximize the utilization of resources. In recently years, foreign direct investment grew rapidly, mergers and Acquisitions, especially mergers and acquisitions by foreign companies will play a more and more important role in China's economy. The reform of the state-owned companies also give foreign company great opportunities for M&A. The diversification of foreign investment and the improvement of investment environment, especially after China's entrance of WTO, give a promising future to foreign companies.There is no doubt that China has become a major M&A market in Asia. M&A has promoted the betterment of Industrial deployment and the restructuring of many industries, and it also help companies gain competitive edges and market chances. Of course, due to policy and environmental restraints, transnational M&A will encounter many problems and risks in China. Therefore, the sound legal protection of foreign M&A has become the main issue for the healthy, steady and speedy development of China's economy. It brings to the authority's attentions already. The foreign history of M&A has proved that it has to be based on sound market mechanism and legal supervision for them to succeed.On the basis of old laws and regulations, such as Interim Provisions for Foreign Investors to Merge government-owned corporation of Aug. 1999 by State Economic and Trade Commission (repealed), from 2001, more regulations has been enacted, such as Some Opinions Relevant to Foreign Investment in Listed Companies. From 2002, M&A related laws were enacted, such as Provisions on Guiding the Orientation of Foreign Investment of April 2002, Catalogue of Industries for Guiding Foreign Investment. On March 7, 2003, Interim Provisions for Foreign Investors to Merge Domestic Enterprises jointly by Ministry of Foreign Trade and Economic Cooperation, State Administration of Taxation, State Administration for Industry and Commerce, State Administration of Foreign Exchange. In 2004, the Measures for the Administration of Foreign Investment in the Commercial Sector and the Provisions on the Establishment of Investment Companies by Foreign Investors in 2004 by Ministry of Commerce.In 2006, Interim Provisions for Foreign Investors to Merge Domestic Enterprises by Ministry of Commerce, In accordance with the Rules on the Merger or Acquisition of a Domestic Enterprise by a Foreign Investor jointly by Ministry of Commerce, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission and State Administration of Foreign Exchange. And in 2007, Guide for the Anti-Monopoly Declaration by a Foreign Investor in the Merger or Acquisition of a Domestic Enterprise. From the enactment of many new laws and regulations, we know that M&A has been ever booming since the turn of the century in China. In Dec, 2004, Lenovo Co. China bought out IBM's PC department. This was a deal pleasing both sides, but still had to face the strictest regulations of the free economic countries, the laws of USA.This deal of China's company buying international businesses to be globalized attracted both the attentions of China and USA authorities, the global business community also paid their attentions to see if a new round of competition for world number one has begun.The year of 2006 was called the Year of M&A in China, XCMG was merged by American Carlyle Group this year. This case had caused the re-examination of M&A by foreign company in China by the nationals. It had been reviewed from the perspectives of economic safety, foreign over national treatment, etc. by the Chinese authorities as well. In order to achieve orderly economic development, in Jan 2008, Anti-monopoly Law of the Peoples'Republic of China by Standing Committee of the National People's Congress has been put into effect. The restraint to foreign M&A and how it affects foreign capital are about to see.Facing globalization and the hot money of investing China, it is expected that foreign funds will keep coming. How to control the M&A activities under the international investment regulative structure and under China's special economic control regulations are now important to know. It is said to be reciprocal to both sides of the M&A, but the odds of successful M&A is only 25%-30%. So while the numbers of M&A is increasing, we have to study many issues including the maintenance of competition environment and order, national security, the labor's rights under socialist market economy, the shareholders'interest of both sides, and the protection of minority shareholders, etc.At the moment, there are only a few studies on the new M&A trend in China, and we are also lack of practical analysis on the problems of actual cases. This is inconsistent with the growing numbers of foreign M&A, especially with the industry and capital market in China. How to prepare foreign companies and the supervisory authorities to be ready for the new chances and challenges, the author will from all respects analyze the legal issues and their possible development, assess the various models of foreign M&A according to the their types, processes, legal restraints and risks. The paper hopes to prepare companies ready for foreign M&A to more actually serve their industries rather than simply play a game in capital market.If we look into the details of the action of M&A, we will find that risk prevention and contract negotiations are the important parts of it. Therefore contract must be the dominating factor to all economic activities, and also the key to the success of company activities. So we can see Article 174 of the Company Law of the People's Republic of China regulates the basic rules of M&A agreement, and Article 23 of the Anti-monopoly Law of the People's Republic of China regulates the application documents. The paper analyzes the possible traps and provides a「five force analysis model on private law」to assess the fairness of contract and suggestions to avoid possible risks. China is now a member of WTO, she has related international regulations to follow, except for those relating to control of foreign investment, such as Foreign Direct Investment (FDI), M&A and joint venture, Trade-Related Investment Measures (TRIMs) will have to been taken care. While foreign capitals doing M&A ambitiously in China, how foreign companies should do to plan, assess and analyze in order to structure a reasonable process and sign a contract to achieve to their goals, is the paper's core concern. In M&A, the merging process will meet most of the problems. How to identify them and clearly consent to by both sides is the most important part in M&A. Therefore this paper will emphasize the following: to detail the theory and the practical experience of M&A, to analyze M&A process, it's risks and the types of contract traps, and finally try to provide an ideal contract or ideal contents of it .The purposes of this paper is 1. to fully legalize foreign M&A in China. 2. to highlight important issues need to be considered in a foreign M&A in China. 3. to provide suggestions to avoid risks for foreign M&A in China. 4. to search for an ideal M&A contract for M&A in China. 5. to provide an assess model for the results of foreign M&A in China.With the numbers of foreign M&A in China are growing, how to set up a safety mechanism to avoid the economic and social problems resulted from failures of M&A activities will be the authorities and market traders'concerns. How to protect trade safety with least control under free market economy is also an important issue concerned by all players. The advantages of economics of scale and economics of scope brought by the free market traders shall be least controlled ideally, but, in reality they usually overrun business ethics and government controls. The paper think, these two ends are contradicting each other all the time, and unlimited commercial M&A will finally cause the imbalance of social economics, to worse the imbalance of the economic powers among classes of the society. Therefore, how to reasonably control and to internalize the social responsibilities into business policies will also be covered in the paper.The phases of this paper are as follows: 1.the influence on M&A market in China by the regulations of WTO. 2. emphasis on the importance of foreign M&A legalization in China. 3. the problems and resolutions suggested for the legalization of foreign M&A in China. 4. an ideal contract model to avoid failures. 5. development of a new model for foreign M&A in China. The most important part of this paper, is to built a「five force analysis model on private law」to do legal controls and to provide rules to contract and risk avoidance during M&A. It is also for the authorities to check the balance between respecting of market mechanism and public interests, such as anti-trust and national safety.