Legal Considerations On The Cross-Border Merger & Acquisition By Way Of Share SWAP

Cross-border merger & acquisition by way of share swap with its unique advantages has been broadly adopted in the world. With our policy of encouraging"in-bound investment"and"out-bound investment"as well as the improvement and development of our investment environment and corporate governance, it is necessary and better to develop the cross-border merger & acquisition by way of share swap in China. However, at present, there are strict restrictions as to the types of the cross-border merger & acquisition by way of share swap in China (i.e. only two types of foreign enterprises'shareholdings can be exchanged with the domestic enterprises'shareholdings, including"oversea listed company"and"oversea special purpose vehicle (SPV)") which not only have been seriously limited to the development of our domestic entities in the world, but also have a full impact on the foreign enterprise investment in China.This thesis aims at finding out problems relevant to cross-border merger & acquisition by way of share swap from three aspects (regarding limitation and encumbrance of foreign investment examination and approval administration system, corporate governance systems applicable to foreign and domestic enterprises as well as tax law administration) and proposes preliminary suggestions accordingly.In Chapter 1, it is to state the necessity and significance of development of cross-border merger & acquisition by way of share swap in China associated with its relevant nature and typical cases. In Chapter 2, it is to find out problems relevant to cross-border merger & acquisition by way of share swap from the above mentioned three aspects. In Part 1, issues regarding the limitation and encumbrance of foreign investment examination and approval administration system, including (1) disadvantages due to limitation of types of cross-border merger & acquisition by way of share swap, (2) examination of transaction consideration, (3) examination and approval procedures, (4) rationality on statutory clauses of transaction agreement. As part of issues caused from our corporate governance system, in Part 2, it is to further find out problems from inapplicability and difference on corporate governance systems respectively applicable to domestic enterprises and foreign invested enterprises. i.e. Firstly, issues as to lack of regulations protecting legitimate rights and interests of shareholders of companies and relevant beneficiaries. Secondly, regulations aiming at protection of interests of transaction parties are applicable to typical share transfer by way of cash only rather than by way of share swap and these make adverse impact to certain shareholders with different opinions to the transaction. Thirdly, due to the different corporate governance systems respectively applicable to domestic enterprises and foreign invested enterprises, there are potential problems on abusing rights by certain shareholders in foreign invested enterprises under the relevant laws and regulations as well as problems on conversion between domestic enterprises and foreign invested enterprises in relation to corporate management structure. In Part 3, issues relevant to tax law administration, i.e. limitation on ambit of"special tax treatment"applicable to cross-border merger & acquisition by way of share swap as well as a series of issues relevant to supervision and administration of non-tax residents, etc.In Chapter 3, it is to propose preliminary suggestions in relation to the issues raised above. In Part 1, reform of foreign investment examination and approval system, i.e. (1) improvement of requirements for consideration of cross-border merger & acquisition transaction by way of share swap, (2) optimisation of requirements for examination and approval procedures, (3) clarity of statutory clauses in the corresponding transaction agreement, (4) reform of foreign investment approval system into approval and registration systems. It is necessary to avoid the stiff system of examination and approval which imposes uniformity on all enterprises. In the process of improvement of our legal regime, firstly, we may consider making the relaxation of all types of share swap transactions between foreign enterprises in relation to the foreign invested enterprises in China and subsequently, making the relaxation of other types transactions step by step. In Part 2, Improvement and unification of corporate governance systems of domestic enterprises and foreign invested enterprises, it is to suggest from two aspects, one side is to improve the relevant corporate governance regulations and another side is for unification of corporate governance systems. In Part 3, suggestions for improvement of relevant tax laws and regulations in relation to cross-border merger & acquisition by way of share swap, i.e. extension of the ambit of"special tax treatment"applicable to cross-border merger & acquisition by way of share swap gradually, perfection of supervision administration of non-tax-residents and improvement of relevant tax laws and regulations.