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SCMP Reporter

FOREIGN participation in China's mergers and acquisitions activity is robust, with overseas investors taking part in joint ventures and indirect investment.

  Baker and McKenzie lawyer Cole Capener said merger and acquisition activity was alive and well in China in two different forms, despite reports to the contrary.

  Acquisitions of shares in China have not been easy because of Beijing's fears that state assets were leaking away to foreign investors.

  When two Japanese companies bought legal-persons shares from Shanghai-listed Beijing Light Bus in August last year, the transaction was criticised. Even Premier Li Peng was reported to have attacked the deal.

   Mergers and acquisitions activity has been hampered by fears of investors that they may inherit hidden liabilities of Chinese companies by buying shares.

  However, Mr Capener said this fear had not slowed merger and acquisition activity.

  'Much more quietly, there is a continuing boom in other types of transactions - asset acquisitions transactions,' he said.

  He said joint ventures were increasingly used to facilitate bigger deals where the operating assets of large, state-owned enterprises were taken over. Last year, China's actual foreign investment rose 11.7 per cent to US$37.74 billion.

  Foreign investors also were making use of indirect investment. Mr Capener said multinationals were acquiring shares in offshore companies that held interests in mainland assets, rather than setting up joint ventures.

   Last year Belgian cement producer CBR bought a 5 per cent stake in China Century Cement, which operated three cement works in China, from Hong Kong-listed Guangzhou Investment.

  Mr Capener said the key advantage was that the deal was governed by non-Chinese law, enabling disputes to be settled in overseas courts, which were more experienced.

   The foreign buyers could obtain warranties from sellers that might not be available on the mainland. Although indirect investment was becoming widely used, Mr Capener said asset acquisitions through joint ventures would remain the first choice for foreigners.

  Asset acquisitions would allow foreign investors to control the transaction structure as well as providing direct contacts with Chinese partners.

  China's Company Law restricts a company from investing more than 50 per cent of its net assets in subsidiaries.

  Mr Capener said the provisions governed only joint-stock limited companies and limited-liability companies. State-owned enterprises did not fall under the jurisdiction of the law.

  'It is not being interpreted by the authorities to restrict the right of an SOE to transfer all operating assets to a joint-venture company,' he said.

  Mergers and acquisitions would become a viable tool for China's state enterprise reform, he said.

  'China cannot allow a large percentage of those enterprises to go bankrupt because of the resulting unemployment. The only realistic way to continue enterprise reform is to allow greater merger and acquisition activity by foreign investors.' 



Overseas activity in M&A 'alive and well'