It's a case of buyer beware if moving into the mainland
For any transaction there must be no question that what is bought is what was actually bargained for, warn partners at Norton Rose
? It is important at the outset to understand what it is that you are buying and to ensure that you are not unwittingly buying more or less than you had bargained for. Foreign investors will generally choose to work with an adviser to conduct a legal review, or due diligence, on the target company. Due diligence covers many facets of a target company and its business but, at a minimum, should seek to verify that the company has been duly established, holds the licences necessary to undertake its business activities, owns or leases the assets it needs to carry on its business, has appropriate contracts in place with key trading partners and its employees and identify any areas of particular concern (e.g., is the company involved in any disputes that could result in it having to pay damages after it has been acquired?).
In tandem with the legal due diligence, it would be prudent to carry out a review of the financial and tax aspects of the company and other, more specialist, forms of review (such as an environmental audit/review) may be warranted depending on the sector in which the target company operates.
The acquisition will need to be documented in an equity transfer agreement. This will be an opportunity to gain additional contractual protection and to seek warranties and indemnities (especially for any potential liabilities discovered during due diligence for which the purchaser is unwilling to take the risk).
The Ministry of Commerce will need to approve the transaction and the consideration for the transaction. Depending on the sector and the location of the target company, additional approvals may also be required from a specific industry regulator and the National Development and Reform Commission (although in many localities NDRC approval is handled in a "one-stop shop" as part of the ministry's approval).
The Anti-monopoly Law of 2007 (the AML), which came into effect in August 2008, established a broad merger control regime in the mainland. The ministry's Anti-monopoly Bureau is responsible for the merger control review and clearance.
Transactions which qualify as "concentrations" as defined in the AML and meet the turnover thresholds set out in the State Council Regulation of 2008 on the Notification Thresholds for Proposed Concentrations of Business Concentrations, are subject to a mandatory pre-merger notification procedure before the ministry and cannot be implemented pending review.