China's New Monopolies Rules May Stall Mergers And Acquisitions

by Mary Swire, Tax-News.com, Hong Kong

28 August 2008

New Chinese regulations on monopolies, which came into effect at the beginning of this month, will make it increasingly challenging for overseas firms to engage in cross-border transactions according to Deloitte, the business advisory firm.

These rules will require a governmental review of all M&A transactions where parties have a combined turnover of over RMB 2bn (USD293mn) in China or RMB10bn in total worldwide, as well as two or more of the parties having had more than RMB400mn of revenue in China in the previous accounting year.

Deloitte warns that private equity acquirers in particular are likely to be caught by these limits as the combined turnover of all their portfolio companies would also be considered.

According to Deloitte, whilst the mechanics of these rules are still unclear, penalties for breach seem severe, with fees of up to 10% of the previous year’s turnover for an infraction. Significantly, these rules will apply not only to acquisitions of businesses based in China, but also to deals where the parent is overseas. So any large multinational transaction where the target has substantial operations in China would require clearance from the Chinese authorities. Unlike Western regulatory authorities, however, there is no designated timeline for how long this review process will take, thereby potentially further drawing out an already time-consuming process.

Commenting on the new rules, Ken Dewoskin, senior advisor at Deloitte China stated: “It is expected that the anti-monopoly law will be applied selectively and possibly protectively. This may lead to further hurdles for foreign investors seeking to take significant market share positions in China and already facing intense competition from domestic investors, some State-funded. The AML adds to other regulatory changes since 2006 that have increased administrative control over the M&A marketplace, and that, in turn, has often reduced the flexibility and even the viability of investment initiatives from EU countries. But as is often the case with China, foreign financial investors who are resourceful and innovative may find these new challenges work to their advantage.”

Andrew Curwen, Global Head of transaction services at Deloitte, added: “Chinese assets remain in demand; despite more recent caution their economy remains very active with strong growth predictions including the estimate that by next year, China will be the world’s largest manufacturer. Given this, many multinationals are keen to do deals and establish themselves in the region. These new rules will make it more difficult for buyers to break into certain sectors, especially where state controlled monopolies operate.”

Matt Rourke, Corporate Finance Partner at Deloitte in Hong Kong commented: “Overseas buyers need to be very careful to abide by these new rules and seek the appropriate clearance. Our view is that advice should be taken locally on any deal, whether an acquisition or joint venture with a Chinese company."

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