The Authors

v

List of Abbreviations

xiii

Acknowledgments

xvii

Introduction

1

ch. 1

The Evolution of the Investment Environment and Culture Issues in China and Their Relevance When Doing Business in the Middle Kingdom

3

[§]1.01.

From the Economic Reform to New Form of Investments

4

[§]1.02.

Joint-venture and Wholly Foreign-owned Enterprises: First Forms of Investments

5

[§]1.03.

Entry to the WTO and Evolution of Investments: The Rise of M&A

6

[§]1.04.

The WTO 10 Years On

7

[§]1.05.

Plans to Foster Economic Growth

8

[A].

Growing Domestic Market through Consumption

9

[B].

Chinese ODI the "Going Out" Policy

11

[C].

Focus on Innovation and Technology

13

[D].

Consolidation and Restructuring of Business

14

[E].

Other Growth Opportunities

15

[§]1.06.

Cultural Obstacle to Business in China

16

[A].

The Law

16

[B].

Role of Government

18

[C].

Social Relationships: Concepts of Guanxi and Mienzi

19

[D].

Language and Communication (Indirectness)

20

[E].

Understanding China's Rising Middle Class

21

[F].

How M&A Can Help Mitigate Cultural Differences

22

ch. 2

Categories of Investment in China and the Basic Forms of Businesses and Their Operation

25

[§]2.01.

Introduction: The New Catalogue for the Guidance of Foreign Investment

25

[§]2.02.

Direct and Indirect Ways to Enter the Chinese Market

28

[A].

Direct Ways

29

[B].

Indirect Ways

30

[§]2.03.

Evolution of the Business Environment, and the Representative Office

31

[A].

Representative Office

33

[§]2.04.

Branch of a Foreign Company

35

[§]2.05.

Introduction to the Foreign Trade Companies (FTCs)

36

[§]2.06.

Foreign Invested Commercial Enterprises (FICEs)

37

[§]2.07.

Introduction to the Sino-foreign Equity Joint Venture (EJV)

38

[A].

Basic Characteristics of the Sino-Foreign Equity Joint Venture

39

[B].

Application Procedure for the Establishment of an EJV

40

[C].

Corporate Governance of an EJV

41

[D].

Advantages and Disadvantages in Choosing to Operate an EJV

42

[E].

Dissolution of an EJV

43

[§]2.08.

Introduction to the Sino-foreign Contractual Joint Venture (CJV)

44

[A].

Basic Characteristics of the Contractual Joint Venture

44

[B].

Application Procedure for the Establishment of a CJV

46

[C].

Corporate Governance of a CJV

47

[D].

Advantages and Disadvantages in Choosing to Operate a CJV

48

[E].

Dissolution of a CJV

49

[§]2.09.

Introduction to the WFOE

50

[A].

Basic Characteristic of the Wholly Foreign Owned Enterprise

50

[B].

Application Procedure for the Establishment of a WFOE

52

[C].

Corporate Governance of a WFOE

53

[D].

Advantages and Disadvantages in Choosing to Operate a WFOE

55

[E].

Dissolution of a WFOE

56

[§]2.10.

Introduction to the Foreign Company Limited by Shares

57

[§]2.11.

Final Considerations on the Choice of the Investment Options and Concerning Protection of Minority Interests

58

ch. 3

Mergers and Acquisitions and Its Regulatory Framework

61

[§]3.01.

Concept of "M&A" under Chinese Law and the New Legal Framework

61

[A].

Acquisition of SOEs and Valuation of State-Owned Assets

68

[B].

Acquisition of Public Company: Introduction

71

[C].

Effectiveness of the Transfer Agreement

71

[D].

Merger, Post-merger Form, Post-merger Registered Capital

72

[1].

Post-merge Form of the New Company

72

[2].

Post-merged Registered Capital

73

[E].

Subscription of New Equity and Max Permitted Debt-to-Equity Ratios

74

[F].

Specifications on the Minimum Capital Required

75

[G].

Assets Acquisitions versus Equity Acquisitions and the Use of the Due Diligence

76

[§]3.02.

Ministry of Commerce's New Move to Delegate More Investment Authority to Local Offices

79

[§]3.03.

Key PRC Government Agencies Involved in the Approval of the Transaction

79

[§]3.04.

Taxation Framework for Enterprise Restructuring in China: A General Introduction

81

[§]3.05.

Employees as an "Asset" and a Key Factor for the Success of the M&A Transaction

83

[§]3.06.

Chinese Firms Are Becoming Global with M&A

86

[§]3.07.

China to Encourage More M&A Activity

87

ch. 4

Takeover of Listed Companies

91

[§]4.01.

Takeovers of Listed Company: Establishing a Presence by Acquiring Equity

91

[§]4.02.

Basic Elements Investors Need to Know about Chinese Stock Exchanges

95

[A].

Buying shares in China: lot size in the different bourses, and permitted gateways. Functioning of the QFII

97

[§]4.03.

Features of the New "Takeovers Regime in China" and Content of the "Takeovers Code"

100

[A].

Listed Company Takeovers: An Introduction

100

[B].

Mandatory Bid Rule

101

[C].

Tender Offer Rules

103

[D].

Obligation of Disclosure of Substantial Shareholdings

105

[E].

Examples of Takeovers by Tender Offer

108

[1].

General Offer

108

[2].

Partial Offer

108

[§]4.04.

Share Swaps: The New Method to Acquire a Domestic Enterprise (DE)

109

[A].

Foreign-Listed Share Swap: Outlines

112

[B].

Pre-IPO Share Swap: Outlines

112

[C].

Acquisitions by Chinese-Controlled Offshore Companies

113

[D].

Examples of Share Swaps

114

[§]4.05.

A Review and Outlook of VIE (Variable Interest Entity) and Other Related Issues: Introduction

115

[A].

Definition of VIE

116

[B].

Key Elements of VIE

116

[C].

Why China's Regulatory Authorities Are Challenging the VIE Structure?

117

[D].

Alipay Case Analysis

119

[E].

French SEB's Acquisition of Supor

120

[F].

Carlyle-Xugong Case

121

[G].

Coca Cola-Huiyuan Case

122

[§]4.06.

Takeover Defenses

122

[§]4.07.

Prohibited Trading Activities When Acquiring a Listed Company

124

[§]4.08.

Recent Development in the Securities Market

126

[§]4.09.

Delisting of Listed Companies: New Reforms to Improve Financial Investments

127

[§]4.10.

China Securities Market: The Role (and Opportunities) of Foreign Firms

127

ch. 5

The New Anti-monopoly Law End the Revised Merger Control Regime

129

[§]5.01.

The New Anti-monopoly Law and an Introduction to the New Merger Control Regime in China

129

[A].

Features of the AML

130

[1].

Abuse of Dominant Market Position: Specification

131

[2].

Level of approval

132

[B].

What Are the Procedural Time Limits?

132

[C].

When Do You Report a Concentration for Review?

133

[D].

Improvements on Merger Control Regime But Still to Be Refined

134

[§]5.02.

Anti-monopoly Review in China & "Merger Control" in the EU: Similarities

135

[A].

Reporting Concentration in the EU: Introduction

137

[§]5.03.

Anti-monopoly Review in the Near Future

139

ch. 6

Dispute Resolution in China: Understanding the Legal Environment and an Overview on the Different ADR Mechanisms

143

[§]6.01.

Development of a New Legal Framework for Dispute Resolution

143

[§]6.02.

Two Basic Options: Negotiation and Mediation (or "Conciliation")

144

[§]6.03.

Arbitration: The Most Formal ADR Mechanism

145

[A].

Content of the Arbitration Law

146

[B].

Arbitration in the Civil Procedure Law

147

[§]6.04.

Litigation: Understanding the Procedures (General Introduction to Civil Procedure)

148

[§]6.05.

Administrative Proceedings

152

[§]6.06.

Factors to Be Considered in Choosing One Method of ADR

153

[§]6.07.

Advantages and Disadvantages of the Various Dispute Resolution Mechanisms

153

[§]6.08.

Some Simple Rules to Limit Disputes

155

[§]6.09.

The China International Economic and Trade Arbitration Commission: Introduction

157

[§]6.10.

Interpretation of the Supreme Court on the Enforcement of Foreign Award in the Main Land China

159

[§]6.11.

The Notice and Its Significance

160

ch. 7

The Evolution of Contract Law and Its Importance for Enterprises Operating in the Market

163

[§]7.01.

General Principles of Civil Law and the Contract Law

164

[A].

General Principles of the Contract Law

164

[B].

Formation of Contracts: Offer and Acceptance (Basic Elements)

165

[C].

Validity of the Contract

166

[D].

Confidentiality

167

[E].

Performance

168

[F].

Modification, Assignment and Delegation

169

[G].

Rescission and Termination

169

[H].

Liabilities for Breach of a Contract

170

[§]7.02.

The Sale Contract and Its Relevance in an Asset Acquisition

172

[A].

Main Characteristics of the Sale Contract

172

[§]7.03.

Purchase of Assets and of Equity: National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors

172

[A].

Scope of Review

173

[B].

Content of Review

174

[C].

Review Procedures

174

[1].

Procedures

174

ch. 8

Protection of Intellectual Property Rights in China When Doing Business

177

[§]8.01.

Defining the Potential Problems: Introduction to the Legal Framework on IPRs

178

[A].

Trademarks

179

[B].

Patents, Utility Models and Design Rights

180

[C].

Copyright and Software

182

[1].

Software Protection

183

[D].

Trade Secrets

184

[§]8.02.

Other Regulations Having an Impact on IPRs

185

[§]8.03.

Relevance of the Anti-unfair Competition Law

187

[§]8.04.

Responding to Intellectual Property Rights Abuse

188

[A].

Actions under the Civil Law

189

[B].

Actions under the Criminal Law

190

[§]8.05.

Technology Transfer, and Import of Intellectual Property Rights

190

Conclusion

193

Appendix I

No. 6 Decree of the Ministry of Commerce PRC on Promulgation of the Provisions on M&A of a Domestic Enterprise by Foreign Investors

195

Appendix II

[CSRC Decree No.56] Decision on Amending Article 63 of the "Administration Measures on Takeover of Listed Companies" (i.e. "Takeovers Code")

215

Appendix III

Circular of the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce Concerning Printing and Distributing Provisions for the Alteration of Investors' Equities in Enterprises with Foreign Investment

243

Glossary

251

Bibliography

255

Chinese Publications

257

Table of Chinese Legislation

263