The system of cross-border stock-for-stock M & A was established for the first time through the implementation of "the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors" (here after called "Provisions on Mergers and Acquisitions") enforced on 8th September 2006. The definition of stock-for-stock M&A was stipulated by article 27 of "Provisions on Mergers and Acquisitions" as the term "Mergers and Acquisitions of Domestic Enterprises by Foreign Investors" means that the shareholders of an overseas company purchase the equities of a domestic company by paying the equities of the overseas company they hold, or that an overseas company purchases the increased capital of a domestic company by paying its increased shares.
Stock-for-stock M&A divides itself into two parts: stock-for-stock merger and stock-for-stock acquisition. The essence of stock-for-stock merger is the combination of corporate personality; while the essence of stock-for-stock acquisition is one kind of activity about stocks selling or purchasing, maintaining present corporate personality. Moreover many governments and investors pay more and more attention on stock-for-stock M&A, because this investing mode has less financial pressure, but with tax benefits1, and it also breaks the restriction on M&A scale.
However, according to "Provisions on Mergers and Acquisitions", the method of paying equities is not applicable to all kinds of M&A. It is available just under the following two situations: (1) Mergers and acquisition of domestic companies by oversea listed companies; and "oversea listed" only refers that "the equities of an overseas company shall be listed publicly in an overseas public and lawful securities exchange market (excluding the over-counter exchange market)"2 ; (2) Acquisition of domestic companies by special-purpose company, which refers to an overseas company that a domestic company or natural person directly or indirectly controls for the purpose of getting its actual domestic company equities listed abroad. This essay is going to focus on cross-border stock-for-stock M & A for its first situation.
Since as a mode of absorbing foreign capital the system of cross-border stock-for-stock M&A was just introduced in China, "Provisions on Mergers and Acquisitions" prescribes strict qualifications to foreign investors and their shares, in order to guarantee the quality of imposing foreign capital and prevent from the conceivable risks.
Firstly, a foreign company must be up to the mustard as follows: (1) it should be established legally and the registered place has self-contained company law system; (2) the company and the governors have not been punished by supervising institution in the latest 3 years; (3) the foreign listed company is a company whose getting listed place has improved system of security exchange.
Secondly, the foreign shares that are going to be listed and traded must be under the following conditions: (1) must be held and can be transferred by shareholders legally; (2) are exempt from any ownership dispute, any mortgage, and any rights restriction; (3) should be listed and traded in foreign public and legal security exchange market (except for counter exchange market); (4) their transaction price in recent year remains stable. 3
However, we should take notice of the situation that it has no any case about achieving cross-border stock-for-stock M&A after the ordination of "Provisions on Mergers and Acquisitions". What kind of problem is existed behind such meticulous clauses? It is a problem that must be considered not only by legislators but also by investors. In my opinion, the system of cross-border stock-for-stock M&A lacks operability at present.
First of all, the current regulations on equity investment and stock-for-stock M&A are incomplete in China. For the problem of equity investment, besides the principle provision in "Company Law", it prescribes in "Regulations of the People's Republic of China on Administration of Registration of Companies" that "where any shareholder contributes capital in any other property form other than currency, in-kind, intellectual property or land use right, the measures for registration thereof shall be prescribed by the State Administration for Industry and Commerce in collaboration with the relevant departments of the State Council". Nevertheless, such registration measures have not been stipulated by now.
Secondly, "Company Law" has no regulation about stock-for-stock M&A. "Provisions on Mergers and Acquisitions" belongs to department bylaw, which is in a lower legal hierarchy. It lacks support of higher-level law towards the system of cross-border stock-for-stock M&A, lacks consolidation and harmony, and therefore comes into conflict with the relevant prescripts of other departments.
Finally, the definition of being able to be contributed shares is restricted very carefully according to "Provisions on Mergers and Acquisitions". Further more, equity price influenced by a lot of factors, such as daily operation and security market is unstable. Thus it is hard to fulfill the demand of that --"the trade price of foreign shares remains stable in recent one year" in "Provisions on Mergers and Acquisitions".
In conclusion, in my point of view, it is necessary to establish the legal system on Cross-Border Stock-For-Stock administration under present legislation framework, which can improve the maneuverability of the system of Cross-Border Stock-For-Stock. It should be ascertained in "Company Law", which prescribes the relevant system, conditions and procedures of stock exchange. It should also be defined about the related conditions and procedures of stock exchange of listed company in "Security Law".
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1. Stock-for-stock M&A benefits from taxing deferring, compared with currency - M&A.
2. Pls. refer to "Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors"article 29, http://www.sinolinkconsulting.com/cn/Library/html/?629.html
3. Pls. refer to “Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors” article 29, http://www.sinolinkconsulting.com/cn/Library/html/?629.html
