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What affects do the new rules on Mergers and Acquisitions have on shares and assets?

The new rules tighten requirements on arms length valuations of shares and other assets, without addressing the question of whether cross-border share swaps will enjoy the same tax advantages that are enjoyed by domestic non-cash transactions under current tax regulations.

The use of share swaps in a company’s early-stage financing or restructuring appears to be blocked by the new rules’ statement that a share swap is only permitted where the foreign company is already listed, or is a special purpose vehicle that will be listed within a year. Where cash is used in this early-stage financing or restructuring, it may still be deemed a common control transaction, which the new rules specify must obtain an additional approval from MOFCOM. A domestic-invested company cannot enjoy preferential treatment as a foreign-invested enterprise (FIE) merely through being acquired by a foreign company that is controlled by domestic residents. Instead, it must receive injection from the controlled foreign company, or from other foreign investors, of new capital equaling 25 percent or more of the total. (Precisely how this 25 percent will be calculated is not yet clear.) A domestic-invested company also cannot change its status to that of an FIE by having its originally domestic investors acquire foreign nationality. Where the new rules specify their application to domestic invested companies acting as investors, it appears that individual domestic investors will continue to be governed solely by the SAFE’s Circular Huifa [2005] No.75 of last year, which continued in effect and which also contains a number of provisions that have now been expanded upon by the new rules. The new rules supersede the “Temporary Rule on Mergers and Acquisitions of Domestic Enterprise by Foreign Investors” issued on 7 March 2003.

Detailed implementing regulations would normally follow. In view of the new rules’ joint issuance by a large number of government departments, it is likely that these departments will act more independently in developing implementing regulations or guidelines for different issues. Potential M&A investors will need to be attentive to those regulations as they become available, and will need to consult with government authorities in order to avoid the pitfalls of the new China M&A environment and to take advantage of new opportunities.

 

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