Simpler merger code to further boost China’s overseas M&A push

HONG KONG China is planning to remove the need for State Council approval for large, sensitive outbound deals and will allow Chinese companies to vie for the same target, a move likely to further boost record overseas acquisitions by Chinese companies.China’s chief outbound investment regulator, the National Development and Reform Commission (NDRC), has published draft rules aimed at both speeding up approvals and allowing head-to-head competition between Chinese bidders.Under the proposed rule changes, Chinese companies seeking to carry out a deal of $2 billion or more in sectors or countries that China deems sensitive will no longer need approval from the State Council, or to provide proof of financing.The State Council, China’s cabinet, is chaired by Premier Li Keqiang and includes the heads of major departments and agencies. Sensitive deals will still need the approval of the NDRC and the Ministry of Commerce, or MOFCOM, China’s other investment regulator.The State Council, NDRC and MOFCOM did not respond to Reuters’ requests for comment.The NDRC has also proposed reducing the role its regional bureaus play in approving regular deals, a move that should strip out an extra layer of red tape faced by companies based in far-flung provinces. The draft was published online in early April, just as China’s outbound push seemed to have stalled following Anbang Insurance Group Co’s decision to drop a $14 billion bid for Starwood Hotels, but has not been widely reported.The proposal would also remove the NDRC’s discretionary power to operate an informal policy of giving one Chinese company the exclusive right to bid for an overseas deal.This policy was aimed at preventing competition among Chinese bidders at the expense of the state, but has been criticized by market participants.”The new proposal is very encouraging, as it shows the NDRC is moving away from this regime and more toward a market-driven process,” said Xiong Jin, international partner at law firm King & Wood Mallesons in Beijing.

The new rules are expected to come into force soon after the consultation closes on May 13.M&A FRENZYThe NDRC proposal is the latest move by the Chinese government to relax its outbound investment rules after it began an overhaul of the opaque and complex regime in 2014 in a bid to spur Chinese companies to buy up strategic assets in sectors including food and technology.The overhaul helped trigger an M&A frenzy that saw Chinese buyers delivering a record $104 billion of outbound deals last year, nearly double that of 2014, according to Thomson Reuters data. The tally so far this year is $97 billion.

In a landmark change, Beijing moved in 2014 to a filing-based registration system for outbound investments.That meant that a vast majority of China overseas M&A no longer required approvals, but only a registration with the NDRC and MOFCOM, with filing confirmations typically issued in around seven working days. Only investments in sensitive sectors such as media and telecoms, or sensitive countries such as those under sanctions, remained subject to review and approval by the NDRC and MOFCOM, with deals of $2 billion or more needing the blessing of the State Council. “Over the past two years, the government has been relaxing the outbound investment rules to push more Chinese companies to go global, but the rules are still not very straightforward and there can be some ambiguity around the thresholds for approvals,” said Nanda Lau, a partner at law firm Herbert Smith Freehills in Shanghai. “The latest NDRC proposal should simplify and expedite the approval process, and will also level the playing field increasing competition between bidders.”

The NDRC and MOFCOM approval process normally takes around 20 business days, but this can extend up to three months if State Council approval is required.But China’s need to keep a lid on capital outflows means Chinese investors cannot expect an entirely smooth ride, even under the proposed new regime.Funding arrangements will still need to be registered with the State Administration of Foreign Exchange (SAFE), which is carefully watching outflows.About $175 billion left China during the first quarter of the year compared with a record $674 billion for all of 2015, according to data from the Institute of International Finance.SAFE did not respond to a request for comment.SAFE has in recent months tightened up the process for approving funds, requiring extra paperwork and ad hoc meetings, to ensure transactions are genuine, lawyers and bankers said.”China will continue to ease the outbound M&A rules, but there will be some bumps in the road,” said Andrew McGinty, Shanghai-based partner at law firm Hogan Lovells International.”Recent developments around sharp outflows may temporarily hold up that process, but the mid-to-longer term direction in favor of liberalization is set to continue.” (Reporting by Michelle Price and Denny Thomas; Additional reporting by Sue-Lin Wong in Beijing; Editing by Alex Richardson)

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