China's New M&A Rules Force Foreign Investors to Reassess Contracts

China's new guidelines on mergers and acquisitions are forcing foreign investors in the Internet sector and other restricted Chinese industries are looking into changing their contracts with local companies, reports the Wall Street Journal.


Under the new guidelines, China's National Development and Reform Commission and the Ministry of Commerce will conduct national-security reviews of companies in the defense, resources and technology sectors, as well as other industries.


Additional rules released by the ministry earlier this month indicate that investments made through a widely used format known as a "variable interest entity," or VIE, structure—which Chinese companies in restricted industries use to obtain foreign investment—may also be subject to review.


"Foreign investors shall not use any methods to materially circumvent the Security Review, including but not limited to the use of, authorization agreements and trust agreements, multiple layers of re-investment schemes, lease agreements, loan agreements, control agreements, or offshore transactions," according to the Ministry of Commerce rules cited by the Journal.


Rocky Lee, head of Cadwalader, Wickersham & Taft LLP's Greater China corporate practice, told the Journal that his firm is helping clients fix or upgrade their VIE contracts so that, if transactions are voided, investors can expect to recoup at least a portion of their money.


"Just about all of our financial and institutional investors are now carefully examining these issues," Lee tells the newspaper.


The new rules are unlikely to unravel existing VIE deals because Beijing has little incentive to cause major disruptions in the booming Internet industry and because any unraveling would be difficult to execute.





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