In 2024, China’s M&A market showed a notable recovery. According to Wind Information data, the total number of M&A transactions for the year reached 8,378, representing a 5.6% decline compared to 2023. However, the total transaction value increased by 1.6% year-on-year, breaking the downward trend observed over the previous two years.

Specifically, the total transaction value rose to CNY2.02 trillion in 2024, marking a 1.6% year-on-year increase. Notably, in the second half of 2024, the M&A market in China reached CNY1.23 trillion, with year-on-year growth of 9%. This upward trend indicates that, despite a decrease in the number of transactions, the average size of M&A deals has increased, reflecting a shift towards larger-scale and higher-quality transactions.

In 2024, multiple policies were introduced at the national level to encourage M&A, playing a positive role in guiding market activity and corporate behaviour.

In April, the State Council issued Several Opinions of the State Council on Strengthening Regulation, Preventing Risks and Promoting High-quality Development of the Capital Market (the “New Nine National Guidelines”).

On 24 September, the China Securities Regulatory Commission (CSRC) released the Six M&A Guidelines, emphasising market-oriented principles and enhancing the capital market’s role in M&A.

On 19 June, the Eight Guidelines for the STAR Market proposed greater support for M&A, encouraging STAR Market-listed companies to conduct upstream and downstream industrial chain integrations and acquire high-quality unprofitable “hard-tech” enterprises.

From the perspective of market performance, these policy measures have had a significant effect. Wind Information data shows that since the beginning of 2024, the number of restructuring events disclosed by all A-share listed companies has increased compared to 2023, with a noticeable rise in the activity of listed companies participating in M&A. Companies are also more actively seeking suitable M&A targets based on policy directions, focusing on core businesses, new quality productivity and industrial chain integration. M&A behaviour has become more rational and standardised, gradually shifting from pure scale expansion to emphasising synergies, technological upgrades and other high-quality development goals.

In 2024, the level of activity in M&A varied significantly across different industries.

Technology Sector: A Hotspot for M&A

The technology sector emerged as one of the most active areas for M&A. In the semiconductor industry, numerous companies engaged in acquisitions to secure advanced technologies, expand their market share and enhance their global competitiveness. These transactions aim to integrate resources and overcome key technological challenges, particularly as domestic demand for semiconductor self-sufficiency grows. In the artificial intelligence (AI) sector, companies are also leveraging M&A to strengthen their technological capabilities and accelerate the application of AI across various industries. For instance, leading tech firms are acquiring companies specialising in AI algorithm development and application deployment.

Manufacturing Sector: Active M&A for Transformation

The manufacturing sector also saw robust M&A activity. In the automotive industry, companies are facing challenges such as declining industry cycles, the elimination of outdated capacity and increasing industry concentration. M&A has become a critical tool for resource integration and industrial upgrading. Traditional manufacturing companies, under pressure to transform and upgrade, are actively using M&A to acquire new technologies, enter new markets and secure resources, thereby improving their competitiveness. Many manufacturing firms are proactively utilising capital market tools to achieve their strategic goals.

Pharmaceutical Sector: Frequent M&A for Innovation

The pharmaceutical sector has been highly active in M&A, positioning itself as a key driver of new productive forces and potentially becoming one of the most dynamic and policy-benefiting sectors. For large pharmaceutical companies, acquiring “external innovation” through M&A and licensing is as important as internal R&D. Many companies are using M&A to expand their product lines, enter new therapeutic areas and enhance their R&D capabilities. Driven by factors such as an aging population and increased health awareness, opportunities for M&A in innovative drugs and medical devices continue to emerge.

The Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by the Ministry of Commerce (MOFCOM) stipulate three types of acquisition methods: equity acquisition, asset acquisition, and share swap acquisition.

• Equity acquisition refers to a foreign investor purchasing the equity of shareholders of a domestic non-foreign-invested enterprise (hereinafter referred to as a “domestic company”) or subscribing to the capital increase of a domestic company, thereby transforming the domestic company into a foreign-invested enterprise.
• Asset acquisition refers to a foreign investor establishing a foreign-invested enterprise and, through this enterprise, agreeing to purchase the assets of a domestic enterprise and operate those assets. Alternatively, it may involve a foreign investor agreeing to purchase the assets of a domestic enterprise and using those assets to establish a foreign-invested enterprise to operate them.
• Share swap acquisition refers to the act of a shareholder of an overseas company using the equity they hold in the overseas company, or to the overseas company using its newly issued shares, as a means of payment to purchase the equity of shareholders of a domestic company or to subscribe to the newly issued shares of a domestic company.

In China, M&A are regulated by a combination of governmental authorities and regulatory bodies, each overseeing specific aspects of the transaction process. The primary regulators are as follows.

• The State Administration for Market Regulation (SAMR) plays a central role in regulating M&A activities, and particularly in enforcing antitrust and competition laws. It reviews transactions to ensure they do not create monopolies or harm market competition. SAMR approval is mandatory for deals that meet certain thresholds related to turnover or market share.

• MOFCOM oversees foreign investment-related M&A activities, including transactions involving foreign investors acquiring domestic companies. It ensures compliance with China’s foreign investment laws and policies, such as the Foreign Investment Law and the Negative List for Foreign Investment.

• The CSRC is the key regulator for M&A involving listed companies. It supervises the disclosure of information, fairness of transactions and protection of minority shareholders’ interests. The CSRC also reviews and approves significant asset restructurings and backdoor listings.

• The National Development and Reform Commission (NDRC) is involved in M&A activities that impact national economic planning and industrial policies. It reviews transactions in strategic sectors, such as energy, infrastructure and technology, to ensure alignment with China’s broader economic goals.

• The State Administration of Foreign Exchange (SAFE) regulates cross-border M&A transactions by overseeing foreign exchange controls. It ensures that foreign currency transactions comply with China’s capital flow regulations and that funds are used appropriately.

• In addition to national regulators, local governments and authorities may also play a role in approving or facilitating M&A transactions, especially those involving state-owned enterprises (SOEs) or regional economic development projects5.

These regulators work together to ensure that M&A activities in China are conducted in a manner that aligns with legal, economic, and strategic objectives. Companies engaging in M&A must navigate a complex regulatory landscape and obtain approvals from the relevant authorities to complete their transactions.

MOFCOM and the NDRC oversee the filing or approval processes for foreign-invested enterprises, where applicable. The SAMR handles the registration, modification, and establishment of foreign-invested enterprises and partnerships. Additionally, the Anti-Monopoly Bureau, operating under MOFCOM, is tasked with reviewing business operator concentrations in M&A transactions, if such reviews are necessary. For foreign investments in specialised sectors, such as financial institutions or aviation, approval from the relevant regulatory authorities is also required.

Regarding the negative list review, foreign investments must adhere to the Special Administrative Measures (Negative List) for the Access of Foreign Investment, in addition to complying with the market access negative list, which restricts investments in certain industries.

In terms of national security review, the Security Review Measures for Foreign Investment mandate that any investment potentially impacting national security must be proactively declared to the Office of the Working Mechanism of the NDRC prior to implementation.

Furthermore, the information reporting system requires foreign investors or foreign-invested enterprises to submit annual reports to the relevant commerce authorities. This is done through the enterprise registration system and the national enterprise credit information publicity system, as stipulated in the Measures for the Reporting of Foreign Investment Information and the Notice on Foreign Investment Information Reporting.

Foreign investment restrictions in China are primarily governed by two negative lists. The first is the market access negative list, which applies to all enterprises operating in China. The second is the Negative List for Foreign Investment Access, which specifically regulates foreign investments.

• The Market Access Negative List (2022), jointly issued by the NDRC Commission and MOFCOM, outlines six prohibited items and 111 items that require prior approval for access.
• The Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), also issued by the NDRC and MOFCOM, came into effect on 1 January 2022. This list includes 31 sub-items across 12 major sectors, such as mining, manufacturing and utilities like electricity, heat, gas and water supply. The restrictions vary, including outright prohibitions on investment, operational restrictions and shareholding limits.

In China, business combinations (eg, mergers, acquisitions and joint ventures) are primarily regulated under the Anti-Monopoly Law of the People’s Republic of China (AML) and its supporting regulations. Key antitrust provisions include:

• mandatory notification – transactions that meet certain turnover thresholds must be notified to the SAMR for antitrust review, where failure to notify can result in penalties including fines and orders to unwind the transaction;
• prohibition of anti-competitive conduct – the AML prohibits business combinations that may eliminate or restrict competition, such as monopolistic agreements, abuse of market dominance and concentrations that harm market competition; and
• compliance guidelines – the SAMR has issued guidelines to help enterprises comply with antitrust requirements, including risk management and compliance systems for business combinations.

In M&A transactions, terminating employee labour relations is a complex issue due to potential adjustments in business direction, management and workforce needs. Ensuring a smooth and compliant termination is a major challenge for both the target company and the buyer.

Under the Chinese legal framework, the termination of labour relations is strictly regulated, especially unilateral termination by employers, which requires specific conditions and procedures. In M&A, termination plans must consider both the approach and costs. Typically, a combination of mutual agreement and lawful unilateral termination is used, such as under Article 40(3) (significant changes), Article 41 (economic layoffs) or Article 44 (dissolution) of the Labor Contract Law, supplemented by other unilateral methods like non-renewal of contracts. For unilateral termination, parties must assess local judicial interpretations and alignment with the transaction context. Offering compensation beyond statutory minimums can help achieve mutual agreement under Article 36, reducing legal risks and ensuring smooth transitions.

Termination costs vary by approach. Unilateral termination may require statutory compensation depending on the circumstances, while mutual agreement termination involves negotiated compensation, often above the statutory minimum. Factors like employee preferences, budget, and past practices influence compensation. Additionally, employers must address outstanding payments, such as unused annual leave, social insurance, taxes or equity incentives, arising from the labour relationship.

Key considerations during termination include the following.

• Documentation: mutually agreed termination requires the signing of a labour contract termination agreement, with key provisions including payment settlement, liability waivers and post-termination obligations; unilateral termination requires the issuance of a termination notice, the content of which depends on the termination approach.

• Non-compete clauses: These determine whether restrictions are enforced or waived based on business needs, especially if the sold business no longer competes.

• Labour union involvement: Unions must be notified for unilateral termination and consulted for economic layoffs to ensure compliance and communication.
• Employee representative assemblies: For SOEs, major decisions like restructuring require union consultation and employee assembly approval.
• Labour authorities: It is necessary to report economic layoffs and engage local authorities at an early stage to prevent or manage disputes.

China has established a national security review mechanism for acquisitions, particularly those involving foreign investors or sensitive industries. Acquisitions in sectors such as defence, energy, technology and infrastructure may trigger a national security review. The review assesses whether the transaction poses risks to national security.

The review is conducted by an inter-ministerial committee led by the NDRC and MOFCOM. Transactions deemed to threaten national security may be blocked, modified or subject to additional conditions to mitigate risks.

In April, the State Council issued the New Nine National Guidelines, proposing to fully leverage the capital market’s role as the main channel in the M&A process, strengthen its functions in property pricing and trading, broaden financing channels for M&A, diversify payment methods and encourage listed companies to focus on their core businesses. By comprehensively utilising M&A, equity incentives and other methods, companies are being urged to improve their development quality. This policy set the tone for the year’s active M&A market, guiding listed companies to actively seek M&A opportunities aligned with their core businesses and enhance their competitiveness through resource integration.

On 24 September, the CSRC released the Six M&A Guidelines, emphasising market-oriented principles and enhancing the capital market’s role in M&A. The guidelines support listed companies in moving towards new quality productivity by encouraging M&A in strategic and future industries, including cross-industry deals and acquisitions of unprofitable assets to strengthen supply chains and core technologies. They also promote industrial integration to address issues of scale without strength in some industries, simplifying review procedures for listed company integrations and encouraging private investment funds to participate through mechanisms like lock-up period “reverse hooks”. Additionally, the guidelines increase regulatory tolerance for valuation, performance commitments, competition and related-party transactions to optimise resource allocation. Efforts to improve M&A efficiency include supporting diverse payment tools (eg, cash, shares, convertible bonds) and phased financing, while a simplified review process streamlines procedures and shortens timelines. Intermediaries are urged to enhance services, and regulatory efforts should be increased to combat illegal activities and protect small and medium investors.

On 19 June, the Eight Guidelines for the STAR Market proposed greater support for M&A, encouraging STAR Market-listed companies to conduct upstream and downstream industrial chain integrations and acquire high-quality unprofitable hard-tech enterprises. Driven by this policy, data from the Shanghai Stock Exchange showed that since the release of the Eight Guidelines, the STAR Market accelerated its pace, with over 40 equity acquisition transactions disclosed, more than double the number year-on-year, totalling over RMB11 billion. By the end of October, several STAR Market companies had released related M&A plans, with some already completing M&A, further directing resources towards new quality productivity.

In 2024, the Chinese government introduced a series of policies and regulations aimed at revitalising and standardising the M&A market. These policies, issued by key regulatory bodies such as the State Council and the CSRC, have played a pivotal role in guiding market activity and fostering high-quality development.

It is common for bidders to build a stake in the target company before launching a formal offer. Principal stakebuilding strategies include:

• open market purchases – acquiring shares through stock exchanges, often gradually to avoid triggering disclosure thresholds prematurely;
• block trades – purchasing large blocks of shares from existing shareholders, such as institutional investors; and
• pre-offer agreements – negotiating agreements with key shareholders to secure their support before the offer is announced.

According to Articles 13 and 14 of the Administrative Measures on Acquisition of Listed Companies, as well as Opinion No 19 on the Application of Securities and Futures Laws – Opinion on the Application of Articles 13 and 14 of the Administrative Measures on the Acquisition of Listed Companies issued by the CSRC, the following applies.

• When an investor and persons acting in concert acquire 5% of the issued shares of a listed company through securities trading on a stock exchange, they must prepare an equity change report within three days from the date of the occurrence of such event. This report must be submitted to the CSRC and the stock exchange, notified to the listed company and publicly disclosed. During this three-day period, the investor and persons acting in concert are prohibited from further trading the shares of the listed company.
• After reaching the 5% threshold, if the shareholding of the investor and persons acting in concert increases or decreases by 5% through securities trading on a stock exchange, they must comply with the reporting and disclosure requirements outlined in the foregoing. Additionally, from the date of the occurrence of such event until three days after the disclosure, they are prohibited from further trading the shares of the listed company.
• After reaching the 5% threshold, if the shareholding of the investor and persons acting in concert increases or decreases by 1%, they must notify the listed company and make a public disclosure on the day following the occurrence of such event.
• If an investor and persons acting in concert intend to acquire at least 5% of the issued shares of a listed company through an agreement transfer, they must prepare an equity change report within three days from the date of the occurrence of such event. This report must be submitted to the CSRC and the stock exchange, notified to the listed company and publicly disclosed.
• After reaching the 5% threshold through an agreement transfer, if the shareholding of the investor and persons acting in concert increases or decreases by 5% or more, they must fulfil the reporting and disclosure obligations outlined in the foregoing.

Companies cannot set higher reporting thresholds than those mandated by law, but they may lower the thresholds in their articles of incorporation or by-laws. Other common hurdles to stakebuilding include regulatory scrutiny, restrictions on foreign ownership in certain sectors and the need for approvals from authorities like the CSRC.

Dealings in derivatives, such as equity swaps or options, are allowed in China. However, they are subject to strict regulatory oversight to prevent market manipulation and ensure transparency.

Concerning securities disclosure laws, holdings through derivatives that confer economic or voting rights equivalent to shares must be disclosed under the same thresholds as direct shareholdings. Concerning competition laws, if the derivative position could influence control or market competition, it may trigger antitrust filings with the SAMR.

When an acquirer holds a certain percentage of shares in a listed company, it triggers mandatory information disclosure obligations in the Chinese securities market. Depending on the acquirer’s shareholding ratio and whether it becomes the largest shareholder or de facto controller of the listed company, the acquirer or its engaged intermediaries must prepare different types of disclosure documents.

Through a simplified equity change report, as stipulated in the Administrative Measures on the Acquisition of Listed Companies and the Content and Format Guidelines No 15 for Information Disclosure of Companies Offering Securities to the Public – Equity Change Report (“Guidelines No 15”), or a detailed equity change report, as required by Guidelines No 15 and the Content and Format Guidelines No 16 for Information Disclosure of Companies Offering Securities to the Public – Acquisition Report of Listed Companies (“Guidelines No 16”), the purpose of the shareholding must be disclosed. If an investor increases its shareholding in the listed company, it must disclose the purpose of the shareholding and whether it intends to continue increasing its holdings within the next 12 months. In the case of a detailed equity change report, the decision-making process and timeline for the acquisition must also be disclosed.

Typically, no disclosure is required at the initial approach stage unless material information is leaked or the target is a listed company and the approach could significantly impact its share price. For listed companies, disclosure may be required if negotiations reach a stage where the transaction is reasonably certain to proceed, as per the Measures for the Administration of Takeovers of Listed Companies.

While signing a non-binding letter of intent (LOI) does not usually trigger mandatory disclosure, listed companies may need to disclose material developments that could affect their share price. Once definitive agreements are signed, immediate disclosure is mandatory for listed companies to ensure market transparency and protect investor interests.

Market practice often exceeds legal requirements in terms of the timing and scope of disclosure, as follows:

• early disclosure – companies may voluntarily disclose negotiations earlier than legally required to manage market expectations or prevent speculation;
• detailed disclosures – market practice often includes more detailed disclosures than legally mandated, such as providing additional context about the strategic rationale for the transaction; and
• regulatory engagement – companies frequently engage with regulators like the CSRC to ensure compliance and avoid delays in approval processes.

Due diligence in China typically covers the following areas:

• financial due diligence – review of financial statements, tax records and cash flow projections to assess the target’s financial health;
• legal due diligence – examination of contracts, litigation risks, intellectual property and compliance with laws and regulations;
• operational due diligence – evaluation of the target’s business operations, supply chain and workforce;
• regulatory due diligence – assessment of industry-specific regulations, antitrust risks and foreign investment restrictions; and
• environmental, social and governance (ESG) due diligence – this is increasingly important, particularly for transactions involving SOEs or sensitive industries.

In Chinese M&A deals, “standstill” provisions are commonly used, especially in listed company acquisitions. These clauses restrict the acquirer from trading the target’s shares during negotiations or due diligence to protect the target’s interests and prevent equity changes before deal terms are finalised. They also block hostile takeovers in the open market during the confidentiality period, preventing the acquirer from exploiting insider knowledge to the detriment of the target’s shareholders.

Exclusivity clauses, which prohibit the target from negotiating with other parties for a specified period, are also frequently included in LOIs or term sheets to protect the acquirer’s interests during the negotiation process.

It is permissible and common for tender offer terms and conditions to be documented in a definitive agreement in China.

The process for acquiring or selling a business in China typically takes 3 to 12 months, depending on the complexity of the transaction, regulatory approvals and the involvement of SOEs. Key factors influencing the timeline include:

• due diligence – comprehensive financial, legal and operational due diligence can take one to three months.
• regulatory approvals – antitrust reviews, national security reviews and sector-specific approvals may extend the process by several months; and
• negotiations and documentation – drafting and finalising transaction documents, including share purchase agreements, can take one to two months.

China has a mandatory offer threshold under the Measures for the Administration of Takeovers of Listed Companies. If an acquirer obtains 30% or more of a listed company’s shares, they are required to launch a mandatory tender offer to all shareholders unless an exemption is granted.

Cash is more commonly used as consideration in China due to its simplicity and certainty. However, shares are sometimes used in mergers involving listed companies.

To bridge value gaps, common tools include:

• earn-outs – payments are contingent on future performance;
• escrow arrangements – funds are held in escrow to address post-closing adjustments; and
• valuation adjustments – mechanisms used to adjust the purchase price based on financial metrics.

Common conditions for a takeover offer include regulatory approvals, shareholder approval and the absence of material adverse change (MAC). Regulators, such as the CSRC, restrict overly broad or subjective conditions to ensure fairness and transparency.

The minimum acceptance condition for tender offers is typically 50% of the target’s shares, as this provides the bidder with control. However, bidders often aim for 90% or more to facilitate squeeze-out mechanisms.

A business combination can be conditional on the bidder obtaining financing. However, such conditions must be clearly disclosed, and the bidder must demonstrate a reasonable likelihood of securing the funds.

Concerning common deal security measures, bidders can seek break-up fees, non-solicitation provisions and match rights. Recent regulatory changes have streamlined approval processes, reducing the length of interim periods in some cases.

If a bidder does not seek 100% ownership, they may negotiate for:

• board representation – securing seats on the target’s board;
• veto rights over key decisions such as mergers, asset sales or capital raises; and
• information rights – access to financial and operational data.

Shareholders in China can vote by proxy. Proxy voting is commonly used in shareholder meetings to facilitate participation by institutional and retail investors.

Squeeze-Out Mechanisms

If a bidder acquires 90% or more (the specific proportion can be negotiated) of the target’s shares, they can force the remaining shareholders to sell their shares at the offer price.

Short-Form Mergers

Short-form mergers are less common in China but can be used to simplify the acquisition of minority shares. According to Article 86 of the Company Law, when a company merges with another company in which it holds more than 90% of the shares, the merged company is not required to obtain a resolution from the shareholders’ meeting. However, the other shareholders must be notified, and they have the right to request the company to purchase their equity or shares at a reasonable price. If the payment for the merger does not exceed 10% of the company’s net assets, a resolution from the shareholders’ meeting is not required, unless otherwise stipulated in the company’s articles of association.

It is common to obtain irrevocable commitments from principal shareholders to tender or vote in favour of the transaction. Negotiations usually occur before the public announcement of the offer. These commitments often include a fiduciary out, allowing shareholders to accept a superior offer if one emerges.

Preparation and Announcement of a Tender Offer Report

The acquirer must prepare a tender offer report, engage a financial advisor, notify the target company and issue a summary announcement of the report.

If the acquisition requires regulatory approval, the acquirer must highlight this in the summary announcement and publicly disclose the full tender offer report after obtaining approval.

Key Contents of the Tender Offer Report

The tender offer report must include:

• acquirer’s details – the name, address and, if a legal entity, registration details, legal representative and equity control structure of the acquirer;
• acquisition purpose – the decision-making process, purpose of the acquisition and whether further share purchases are planned within 12 months.
• target company details – the name of the listed company and type of shares to be acquired;
• transaction terms – the number and percentage of shares to be acquired and the offer price, funding sources and payment arrangements.
• offer conditions – the specific conditions and duration of the tender offer;
• current holdings – the number and percentage of shares held by the acquirer at the time of the announcement;
• impact analysis – analysis of the acquisition’s impact on the target company, including potential competition or ongoing transactions with the acquirer’s affiliates, and measures to ensure the target’s independence.
• future plans – plans for adjusting the target’s assets, business, personnel, organisational structure or articles of association within 12 months.
• historical transactions – significant transactions between the acquirer (and its affiliates) and the target company in the past 24 months.
• recent trading – details of the acquirer’s trading of the target’s shares on the stock exchange in the past six months.

• additional information – any other information required by the CSRC.

Special Requirements for Full Tender Offers

For full tender offers, the acquirer must disclose the risks of delisting, the timeline for completing the acquisition after delisting and arrangements for remaining shareholders to sell their shares. If the offer aims to terminate the target’s listing status, the acquirer is exempt from disclosing the impact analysis.

When shares are issued as part of a business combination, the following disclosures are required:

• prospectus – a detailed prospectus must be filed with the CSRC, outlining the terms of the share issuance, the purpose of the transaction and the financial impact on the company;
• financial information – the prospectus must include audited financial statements of the companies involved, prepared in accordance with Chinese accounting standards (CAS) or international financial reporting standards (IFRS); and
• risk factors – the prospectus must disclose potential risks associated with the transaction, such as integration challenges or regulatory uncertainties.

According to Guidelines No 16, the acquirer is required to disclose its financial information and submit such disclosed financial materials to the stock exchange and the listed company for record-keeping purposes. Specific requirements include:

• financial statements for the most recent three years, along with the audited financial report for the most recent fiscal year – the disclosure must include the main content of the audit opinion, the accounting standards adopted, the major accounting policies and notes on key accounting items;
• if the acquirer has been established for less than one year or was specifically set up for the acquisition, it must disclose the financial information of its actual controller or holding company in accordance with the requirements in 7.2 Type of Disclosure Required;
• if the acquirer is a domestically listed company, it may be exempt from disclosing financial statements for the most recent three years – however, it must specify the name and publication date of its annual report; and
• if the acquirer is a foreign investor, it must provide financial reports prepared in accordance with CAS or IFRS.

Certain transaction documents, such as the tender offer report, board report and independent financial advisor’s report, must be disclosed in full to the public. Some documents, such as detailed internal valuations or sensitive commercial agreements, may remain confidential if they contain proprietary information or trade secrets. However, key terms and conditions of the transaction must still be disclosed.

According to the PRC Company Law, directors owe duties of care, loyalty and compliance to the company during a business combination, ensuring decisions are made in the company’s best interests and comply with laws.

While the principal directors’ primary duty is to shareholders, there is increasing emphasis on considering other stakeholders, such as employees, creditors and society, reflecting evolving corporate governance trends. Directors must also ensure proper disclosure of material information, especially in listed companies.

In China, it is common practice for boards of directors to establish special or ad hoc committees during significant business combinations, such as mergers or acquisitions. These committees are typically formed to:

• focus on specific aspects of the transaction, such as valuation, due diligence or negotiation; and
• ensure thorough and impartial evaluation of the deal.

Such committees are particularly important when some directors have a conflict of interest. For example, directors with personal or financial ties to the transaction may recuse themselves from decision-making, and independent directors or external advisors may be appointed to the committee to ensure objectivity and fairness. This practice aligns with corporate governance principles and helps maintain transparency and credibility in the decision-making process.

In China, courts generally defer to the judgment of the board of directors in takeover situations, provided that the board fulfils its statutory duties and acts in the best interests of the company and its shareholders. This deference is similar in principle to the business judgment rule (BJR) in the United States, though it is not explicitly codified in the same manner.

Under the Measures for the Administration of Takeovers of Listed Companies (Article 32) and the Measures for the Administration of Takeovers of Non-Listed Public Companies (Article 27), the board of directors is required to:

• conduct thorough investigations into the qualifications, creditworthiness and intentions of the acquirer;
• analyse the terms of the takeover offer and provide recommendations to shareholders on whether to accept them;
• engage independent financial advisors to provide professional opinions; and
• disclose relevant information, including the board’s report and the financial advisor’s opinion, within specified timeframes (eg, 20 days after the acquirer’s announcement).

Chinese courts typically defer to the board’s decisions if:

• the board has followed proper procedures, such as conducting due diligence and obtaining independent advice;
• the decision is made in good faith and without conflicts of interest; and
• the board’s actions are aimed at protecting the company’s and shareholders’ interests.

However, courts will intervene if there is evidence of:

• breach of fiduciary duties, such as failure to investigate the acquirer or provide accurate disclosures;
• gross negligence or fraud, such as hiring unqualified advisors or violating takeover commitments; or
• illegal actions, such as providing financial assistance to the acquirer or setting improper obstacles to the takeover.

While the legal framework primarily applies to listed and non-listed public companies, it serves as a reference for other companies in China. Boards are expected to act diligently, transparently and fairly in takeover situations to avoid legal risks, such as regulatory penalties (eg, warning letters from the CRSC) or shareholder lawsuits.

In China, directors involved in a business combination (such as a merger or acquisition) often seek independent outside advice to ensure compliance with legal requirements, protect shareholder interests and make informed decisions. The following forms of advice are commonly utilised:

• independent financial advisors provide valuation, fairness opinions and risk assessments are required under Chinese regulations for listed and non-listed public companies;

• legal advisors ensure compliance with antitrust, securities and foreign investment laws and assist in structuring transactions and drafting agreements; and

• auditors and accountants review financial statements and identify potential liabilities, which is critical for assessing the target company’s financial health.

Conflicts of interest involving directors, managers, shareholders or advisers are subject to significant scrutiny in China, both judicially and by regulatory authorities. This scrutiny is aimed at ensuring fair and transparent decision-making, particularly in transactions such as M&A.

Judicial Scrutiny

Concerning breach of fiduciary duties, courts may intervene if directors or managers are found to have prioritised personal interests over those of the company or shareholders, and shareholders can file lawsuits against directors or managers for actions that harm the company’s interests due to conflicts of interest.

Regulatory Scrutiny

The CSRC actively monitors conflicts of interest, especially in listed companies, and may impose penalties such as fines, warnings or market bans. Directors and managers must disclose potential conflicts of interest, where failure to do so can result in regulatory action.

Hostile tender offers are not prohibited under Chinese law but are not common in practice. The regulatory environment, cultural preferences for consensus and significant presence of SOEs create substantial barriers to such transactions. While not prohibited, hostile bids are rare and often face scrutiny from regulators like the CSRC to ensure alignment with national economic policies and public interests.

Directors in China are permitted to use defensive measures to protect the company from hostile takeovers, provided such measures comply with legal and regulatory requirements. However, the use of defensive measures must be justified as being in the best interests of the company and its shareholders.

Common defensive measures include:

• poison pills (issuing new shares to dilute the acquirer’s stake) – however, the implementation of poison pills in China is restricted due to limitations on preferred shares and other legal constraints;
• white knight strategies – seeking a friendly alternative buyer;
• golden parachutes – implementing costly executive compensation packages to deter acquirers; and
• shareholder rights plans – adopting plans that grant existing shareholders special rights in the event of a takeover bid.

Directors owe fiduciary duties to the company and its shareholders when enacting defensive measures. These duties include:

• duty of loyalty – acting in the best interests of the company and avoiding conflicts of interest;
• duty of care – making informed and reasonable decisions to protect shareholder value; and
• compliance with laws – ensuring that defensive measures comply with Chinese laws and regulations, including antitrust and securities rules.

Directors cannot unilaterally “just say no” to a business combination without valid justification. Any decision to block a transaction must be based on a thorough evaluation of the offer’s impact on the company and its shareholders. Directors must demonstrate that their actions are in the company’s best interests and comply with legal requirements. Failure to do so may result in regulatory penalties or shareholder lawsuits.

Litigation in connection with M&A deals is not especially common in China, but it does occur, particularly in cases involving disputes over valuation, breach of contract or regulatory compliance. The prevalence of litigation is lower compared to some jurisdictions, as parties often prefer to resolve disputes through negotiation or arbitration due to the lengthy and complex nature of court proceedings.

Litigation is most commonly brought after the deal has been signed, but before its completion, especially when:

• one party alleges a breach of contract, such as failure to meet pre-closing conditions or misrepresentation of financial or operational information;
• regulatory approvals are delayed or denied, leading to disputes over contractual obligations; or
• shareholders challenge the fairness of the transaction, particularly in cases involving minority shareholders or SOEs.

The COVID-19 pandemic in early 2020 led to several M&A disputes, offering key lessons for parties involved in pending transactions.

• Force majeure and MAC clauses: Many disputes centred on whether the pandemic constituted a force majeure event or triggered MAC clauses. Courts and arbitral tribunals emphasised the importance of clear contractual language to define such terms.
• Due diligence: The pandemic highlighted the need for thorough due diligence, particularly regarding the target company’s financial resilience and operational continuity.
• Regulatory risks: Delays in regulatory approvals due to pandemic-related disruptions underscored the importance of factoring in potential regulatory uncertainties when drafting transaction timelines.
• Dispute resolution mechanisms: The pandemic reinforced the value of including robust dispute resolution mechanisms, such as arbitration, to expedite the resolution of conflicts.

Shareholder activism is growing in importance in China, though it is not as prominent as in some Western jurisdictions. Activists in China primarily focus on:

• corporate governance – advocating for better board oversight, transparency and accountability;
• ESG issues – pushing for improved climate change disclosures, diversity initiatives and sustainable practices; and
• financial performance – encouraging companies to enhance shareholder value through better capital allocation, cost management and strategic initiatives.

Activists in China sometimes advocate for M&A transactions, spin-offs or divestitures to unlock shareholder value. For example, activists may push for spin-offs of non-core assets to streamline operations and focus on high-growth areas, and they may encourage M&A transactions to achieve synergies or enter new markets. In some cases, activists advocate for divestitures of underperforming business units to improve financial performance.

Activists in China rarely interfere with announced transactions, but they may challenge deals if they believe the terms are unfavourable to shareholders. For instance, activists may question the valuation or strategic rationale of a proposed transaction, and they may seek to influence the outcome through shareholder votes or public campaigns. In extreme cases, activists may resort to litigation to block or renegotiate a deal.