New rules could be boon and bane for Chinese M&A

By Eadie Chen and Langi Chiang

BEIJING (Reuters) - Business forays into China could become both easier and harder under Commerce Ministry rules covering foreign investment and takeovers published on Wednesday.

The regulations give foreign buyers explicit authorization for the first time to pay for stakes in Chinese companies in shares instead of cash, but they also confer broad new powers to block investments in key industries if they are deemed to be a danger to China's economic security.

The ministry said on its Web site (www.mofcom.gov.cn) that the rules would take effect on September 8. An earlier draft was published in a state-run newspaper on Tuesday.

Carol Zhu, a mergers and acquisitions adviser in Beijing with a major international accounting firm, doubted the new rules would have a big impact on M&A because big takeovers were already subject to strict vetting.

"I think the government is in two minds about foreign companies buying into Chinese firms," Zhu said.

"On the one hand, it wants to absorb quality foreign capital, which is why it is going to allow share swaps. But on the other hand, it is anxious to block risky or poor takeovers."

Corporate lawyers agreed that paying with shares would give foreign buyers welcome new financing options.

"The approval of share swaps is very much in line with international practice and will provide more flexibility for foreign acquisitions in China," said Han Xiaojing, a founding partner of Commerce & Finance Law Offices in Beijing.

By Eadie Chen and Langi Chiang

BEIJING (Reuters) - Business forays into China could become both easier and harder under Commerce Ministry rules covering foreign investment and takeovers published on Wednesday.

The regulations give foreign buyers explicit authorization for the first time to pay for stakes in Chinese companies in shares instead of cash, but they also confer broad new powers to block investments in key industries if they are deemed to be a danger to China's economic security.

The ministry said on its Web site (www.mofcom.gov.cn) that the rules would take effect on September 8. An earlier draft was published in a state-run newspaper on Tuesday.

Carol Zhu, a mergers and acquisitions adviser in Beijing with a major international accounting firm, doubted the new rules would have a big impact on M&A because big takeovers were already subject to strict vetting.

"I think the government is in two minds about foreign companies buying into Chinese firms," Zhu said.

"On the one hand, it wants to absorb quality foreign capital, which is why it is going to allow share swaps. But on the other hand, it is anxious to block risky or poor takeovers."

Corporate lawyers agreed that paying with shares would give foreign buyers welcome new financing options.

"The approval of share swaps is very much in line with international practice and will provide more flexibility for foreign acquisitions in China," said Han Xiaojing, a founding partner of Commerce & Finance Law Offices in Beijing.

The Commerce Ministry recently convened a meeting with five other government authorities, the first of its kind in China, to discuss Carlyle's bid, according to media reports.

Yang Ling, a partner at law firm Zhi Yi Xing in Shanghai, said she did not see any link between the Commerce Ministry regulations and the backlash against foreign investment.

"The timing of the release of the rules is more related to the opening of China's financial markets, its macro controls and the development of domestic stock markets," Yang said.

But Dan Roules with law firm Squire, Sanders & Dempsey in Shanghai said the public had a perception that the government did not have enough oversight of takeovers like the one for Xugong.

"It wouldn't surprise me at all if this was intended to at least appear to be allowing them more control over those kinds of situations," he said.

But Roules said there was no reason to interpret the rules as a sea change.

"What we have generally seen with China is a willingness to move at their own pace toward opening markets in a reasonable manner," he said.