Key considerations when acquiring a company in China
By David Papier
Acquisitions present an effective way for U.S. companies to secure a presence in China. The following are some key considerations to help position a smooth transaction.
Due Diligence. Diligence is heightened in countries which have different social cultures and may involve a high level of non-compliance, including insufficient social welfare contribution, tax evasion and corruption that may result from societal norms. In particular, a U.S. buyer should comprehend and take reasonable steps to detect and deter any bribery of foreign public officials.
Structure/Regulatory Approval. China may require change of business license registration and approval from the Commission of Commerce/Ministry of Commerce if there is any change in the shareholding structure. To help avoid the attendant time delay, an acquisition may be structured in manner where a non-Chinese parent company is acquired instead of the Chinese operating company. However, a tax declaration with the competent PRC tax authorities would still need to be made even if the acquisition is consummated via an offshore structure.
Share Swap. Chinese nationals who receive equity as part of the deal consideration may need to register the shares they receive with the State Administration of Foreign Exchange (SAFE), which can be an expensive and timely endeavor. Failing to register shares with SAFE may prevent the Chinese company from making distributions to an offshore parent. Also, prior approval from the Commission of Commerce/Ministry of Commerce may be required if an acquiror directly acquires the equities of the target company, which approval is difficult to be obtained.
Incentive Compensation. SAFE registration is also required if employees in China are granted stock options by an offshore entity. Thus, careful consideration should be afforded so employees of a Chinese company are adequately incentivized following the acquisition.
There are many considerations which should be taken into account when one is looking to acquire a company located in China. Parties should engage legal advisors who can help guide them in what can be choppy waters.