In the last few months, a very noticeable trend in the Chinese market has been that foreign capital is flowing out, while Chinese private equity firms are stepping in to acquire the assets being sold off by the exiting foreign investors.

In terms of sectors, the heat of investment and financing in technology, especially the robotics industry, is obvious. In contrast, the large-scale industry, manufacturing and consumer sectors are more popular in the mergers and acquisitions (M&A) market.

Affected by geopolitical factors, foreign companies and foreign capital are selling off their assets in China. As a result, domestic Chinese capital is acquiring these assets. It is worth mentioning that in the last few months, private equity firms have been more active on transactions involving Chinese listed companies compared to before. For example, the acquisition of Tiamaes, a Chinese A-share listed company, by Qiming Capital is a very clear case in point.

In recent years, with the rapid development of industries such as information technology and artificial intelligence, China has introduced a series of new regulations in compliance, especially in data compliance, privacy protection and patent protection, moving towards stricter supervision.

Particularly in cross-border transactions, whether traditional deals or technology transfers, geopolitical factors have increased the uncertainties and led to stricter compliance and regulatory requirements. As a result, private equity investors are more cautious in selecting transaction counterparts or target companies.

The Antitrust Bureau of China, as the regulatory body responsible for conducting antitrust reviews of concentrations of undertakings in accordance with the law, is tasked with providing consultations, accepting filings related to antitrust reviews of concentrations of undertakings, and conducting corresponding antitrust hearings, investigations and reviews. In recent years, the bureau has increasingly promoted simplified procedures for filings of concentrations of undertakings, significantly streamlining the process and reducing the timeline for such filings. From this perspective, it has actually fostered the development of the M&A market.

There is no difference in how national security (or other) regulators look at financial investors depending on whether or not they are sovereign wealth investors.

Sanctions are becoming increasingly stringent. Influenced by geopolitical factors, China may impose countermeasures on transactions in specific national markets. For example, if a Chinese private equity fund wishes to invest in the United States, it may not be able to complete an outward direct investment.

In China, legal due diligence in transactions is highly detailed and systematic. Taking the perspective of buy-side counsel for private equity firms as an example, the process includes the following steps:

• Buy-side counsels send a due diligence checklist to the target company.
• The target company assists in preparing the relevant materials for due diligence.
• Buy-side counsels review the materials either on site or in a data room.
• Based on the reviewed materials, buy-side counsels prepare an interview list and conduct interviews with stakeholders of the target company, such as founders, management and major shareholders.
• According to the reviewed materials and the results of the interviews, buy-side counsels provide a due diligence report.

In addition to business issues, the legal due diligence report will include:

• basic company information: equity structure, financing history, organisational structure, history of changes in control, creditor-debtor relationships, etc;
• key business contracts and agreements, including supplier/vendor contracts, client contracts and an analysis of major clients;
• labour and personnel matters, insurance coverage, environmental impact assessment systems and intellectual property (protection, application and maintenance); and
• dispute resolution situations.

In auction sales, it is relatively common for the seller to provide a due diligence report when the seller is a private equity firm.

As the sell-side legal adviser, one may provide a standard version of the due diligence report (as mentioned in 4.1 General Information), or alternatively, only provide an issue list that includes the principal red-flag issues to the buyer. In such circumstances, the sell-side adviser will not solely rely on this report; in fact, in large transactions, both parties typically place greater reliance on their respective independent due diligence.

Acquisitions by private equity funds are usually conducted in the form of a sale and purchase agreement, with other scenarios being relatively rare.

There are definitely some differences in the acquisition terms between a privately negotiated transaction and an auction sale. However, the key still lies in which party has the stronger bargaining power in the transaction. In an auction sale, the seller is likely to be in a dominant position, as more options enable the seller to be more assertive. For example, the seller might require the buyer to purchase M&A insurance as a precondition for the deal. On the other hand, in a transaction involving a sale and purchase agreement, the buyer’s demands might be greater, such as imposing constraints on liability clauses or setting core conditions for payment.

Private equity funds typically still set up a holding entity to acquire the underlying assets. This holding entity may be established in the Cayman Islands or Singapore. Acquiring the underlying assets through this entity makes it more convenient for co-investors (including limited partners (LPs), the deal team and employees) to participate in the investment.

In the majority of instances, private equity funds will utilise their own capital. The employment of leverage is a rare occurrence and is typically reserved for transactions of substantial magnitude. When leverage is utilised, the purchaser is required to obtain a commitment letter from a financial institution to affirm that its financial position is sound.

When leverage is utilised, the transaction cycle is inevitably extended due to the involvement of bank borrowing. This is particularly disadvantageous for the purchaser in an auction sale, where it faces competition, as a prolonged transaction cycle is a significant drawback. Therefore, in most cases, purchasers will still prefer to utilise their own capital.

The existence of deals involving a consortium of private equity sponsors is acknowledged. However, it is not a frequent occurrence. It is typically observed in the context of large-scale transactions.

Various forms of consideration structure will be used in private equity transactions. Generally, sellers and target companies tend to favour locked-box consideration structures, which, however, impose stricter controls on leakage during the interim period. If the transaction uses closing accounts for pricing, the parties will have their own understandings of the extent of price adjustments. When disputes arise between the parties regarding price adjustments, a clear solution must be in place to stipulate how such adjustments will be made.

Earn-outs, deferred consideration and roll-over structures are common features.

The most notable difference when private equity funds participate in transactions is that, due to their fiduciary duties to their LPs, private equity funds are very cautious about assuming liabilities (including indemnities, guarantees, etc) and typically will not agree to assume such responsibilities during negotiations.

Fixed-price locked-box consideration structures are not commonly utilised in transactions. However, should this mechanism be employed, interest is typically charged.

In transactions where closing accounts are employed for pricing, price adjustments are necessitated. In the event that the parties have divergent understandings of the price adjustment, a clear dispute resolution mechanism is imperative within such a consideration structure. Consequently, the parties engage in negotiations with a high degree of clarity regarding the price adjustment under these circumstances.

Conversely, when fixed-price locked-box consideration structures are utilised, the situation is relatively more favourable, unless significant leakage occurs.

The determination of these matters hinges upon the nature of the transaction in its entirety and the specific circumstances at hand. For instance, apart from mandatory closing conditions, if the parties to an M&A transaction are driven by certain business objectives, additional closing conditions will inevitably be imposed. To illustrate further, in a particular transaction where a portion of the assets cannot be held by the buyer or must be divested for various reasons, the completion of such divestitures will certainly be a prerequisite for closing.

Material adverse change/effect provisions are relatively common. If the interim period between the signing and closing of a transaction is excessively prolonged, there will assuredly be provisions relating to material adverse changes to mitigate risks, preventing the buyer from losing the purpose of acquiring the assets due to significant changes arising from other factors (such as geopolitical considerations). This also serves as a safeguard for exit.

Whether a transaction typically depends on third-party consent also depends on the nature of the target company’s business. For example, for a company with a “business to business” model, where a few major clients play a crucial role in the business, if these major clients are hostile to the acquirer, the business would struggle to operate even after the acquisition. In such cases, the M&A transaction would require the consent of these key third parties.

Accepting a “hell or high water” undertaking is exceedingly rare.

Irrespective of the type of transaction, due to the fiduciary duties owed by private equity firms to their LPs, private equity firms are inherently cautious about assuming liabilities. Even in the face of mandatory regulatory conditions, such as the notification requirements under China’s Anti-Monopoly Law for concentrations of undertakings, private equity firms will not assume an obligation as extreme as “hell or high water”. At most, they may undertake a “best efforts” obligation.

Given that the seller is obligated to sell at a good price, when the seller is in negotiations and another buyer presents a better offer, if the buyer wishes to terminate the original negotiations, they are required to pay a break fee to the original buyer.

Both break fees and reverse break fees are encountered. The amounts ranges from 4% to 10% of the transaction value.

The conditions triggering termination include: (1) the transaction has not been consummated prior to the longstop date; (2) the failure to obtain the required third-party approvals (including those from governmental authorities, shareholders’ meetings, boards of directors, etc); and (3) a material breach by the counterparty.

The specific longstop date is contingent upon the circumstances of the particular transaction, with durations of six months, eight months or 12 months being common.

The allocation of risk is distinct where the seller or buyer is private equity-backed.

Where the seller or buyer is a private equity firm, they are highly cautious about risk and cannot assume excessive liability for indemnification or guarantees. In contrast, where the transaction party is a corporate entity, there is somewhat more flexibility in assuming risk.

Private equity funds generally do not provide representations and warranties, except for fundamental representations/warranties. Whether and how the management team provides representations and warranties depends on whether the representations and warranties provided by the target company and its shareholders are sufficient.

In China, M&A insurance exists in transactions, covering basic warranties and business-related risks, but not tax matters. It is typically provided by insurers.

Litigation is frequently involved, especially in connection with earn-out clauses. In China’s equity investment and financing market, this typically manifests as the invested company and/or its founders being required to repurchase all or part of the equity held by investors at a specified price if the company fails to meet agreed-upon milestones (such as going public or achieving certain performance targets) within the stipulated time frame.

Over the past year, in China’s domestic capital market, transactions involving the change of control of listed companies have been quite active. There are also quite a few transactions supported by private equity funds. However, for a long time, privatisation transactions whereby the acquirer purchases shares of a listed company to cause the shareholding structure to fall below the listing requirements, thereby achieving the purpose of delisting, have been relatively rare.(here, we do not consider non-cash privatisation models such as mergers by absorption, share swaps, etc), and privatisation transactions supported by private equity funds are even rarer, which may be related to the fact that listing status itself is a scarce resource.

According to the listing rules of China’s stock exchanges, in the context of a privatisation transaction, the target company and its board of directors shall strictly comply with a series of legal procedures, including but not limited to:

• convening board meetings and shareholders’ meetings;
• timely issuing public announcements to fulfil information disclosure obligations;
• promptly applying to the stock exchange for the suspension or resumption of trading of the company’s shares and their derivative products; and
• engaging legal counsel to issue a legal opinion regarding the delisting.

According to the laws and regulations in China, when an investor and its concert parties’ equity interest in the shares of a listed company reaches 5% of the issued shares of the company, and for each subsequent increase or decrease of 5%, a report on changes in equity interests shall be compiled within three days from the date of occurrence of such fact, and a written report shall be submitted to the China Securities Regulatory Commission and the stock exchange, and the listed company shall be notified and an announcement shall be made. Moreover, within three days from the date of occurrence of such fact, trading of the listed company’s shares shall be suspended.

For private equity-backed bidders, it is critical to note that the aforementioned 5% disclosure threshold refers to the combined shareholding percentage of the bidder and its concert parties (including affiliated private equity funds), encompassing both shares registered under their names and those over which they have de facto voting control despite no formal registration. Failure to adhere to this calculation standard – specifically, if the combined holdings of the bidder and its concert private equity funds reach 5% without fulfilling the requisite disclosure, filing and trading suspension obligations – will result in the portion of shares exceeding 5% being subject to a 36-month voting rights restriction. This could materially adversely affect the overall acquisition plan.

According to the Measures for the Administration of Takeover of Listed Companies (2025 Revision) issued by the China Securities Regulatory Commission, if an acquirer holds 30% or more of the issued shares of a listed company through securities trading on a stock exchange and intends to further increase its shareholding, it shall proceed by way of a mandatory tender offer – either a general offer or a partial offer.

For private equity-backed bidders, when calculating the aforementioned 30% mandatory tender offer threshold, it is crucial to note that shareholdings of affiliated parties may need to be aggregated pursuant to Chinese legal requirements. This includes scenarios where:

• different private equity funds are controlled by the same entity;
• one party has control over another; or
• one party can exercise significant influence over another’s decision-making.

Notably, even in the absence of share transfers, if a party grants voting rights to the bidder through a voting rights entrustment arrangement, domestic securities regulators may still aggregate the voting rights entruster’s holdings with those of the bidder for threshold calculation purposes. This could potentially trigger the 30% mandatory tender offer requirement.

Under PRC laws and regulations, in a tender offer transaction, the acquirer must pay the purchase price in cash. Even if the consideration may be paid with transferable securities permitted by law, the acquirer must simultaneously offer cash as an alternative payment option to the shareholders of the target company. In practice, cash has been the predominant payment method in various types of listed company acquisitions in the domestic capital markets.

PRC laws also impose a minimum price requirement for tender offers: the offer price for the same class of shares must not be lower than the highest price paid by the acquirer for such shares during the six-month period preceding the announcement date of the tender offer.

Subject to the procedural requirements for the acquisition of listed companies, the laws and regulatory authorities in China do not actually impose strict restrictions on the acquirer’s use of offer conditions and the establishment of deal protection clauses. However, based on publicly disclosed information, most tender offers do not contain special offer conditions and rarely include deal protection clauses such as break fees, matching rights or force-the-vote provisions.

In the acquisition of Tiamaes Technology, Qiming Venture Capital first signed an agreement in the name of the general partner Suzhou Qihan to lock in the equity, and then completed the fund-raising (Suzhou Qichen) to take over the transaction. The funding came from LPs such as Oriza Holdings (43.48%) and Kunshan State-owned Capital (21.74%), forming a step-by-step process of “agreement signing → fund registration → fund-raising → closing and transfer of ownership”.

This case demonstrates that in the acquisition of domestic listed companies, funds can be raised after the agreement is signed. However, in practice in the domestic capital market, the acquirer generally proves its financial strength before the transaction and does not use obtaining financing as a condition for the offer.

Given the stringent regulatory requirements imposed by the PRC capital markets on the governance structure of listed companies – including but not limited to compliance with the Guidelines for Articles of Association of Listed Companies and the Code of Corporate Governance for Listed Companies – it is challenging for bidders to establish special governance rights within the corporate governance framework beyond securing greater voting influence at the shareholders’ meeting level through mechanisms such as voting rights entrustment, voting rights waiver or concert party arrangements.

In the PRC capital markets, there is no mechanism to push debt down to the target company, nor is there a mandatory squeeze-out mechanism to force minority shareholders to sell their shares. However, under certain specific circumstances, eligible shareholders may request the company to acquire the shares they hold.

In tender offer transactions, it is relatively uncommon for major shareholders of the target company to directly issue irrevocable commitments to accept the offer or pledge their voting rights.

According to PRC laws and regulations, shareholders that intend to accept a tender offer must generally appoint a securities company to handle the pre-acceptance procedures. Such “pre-acceptance” signifies a preliminary expression of intent by the target company’s shareholders to accept the offer. Shareholders that have pre-accepted the offer may appoint a securities company to withdraw their pre-acceptance within three trading days prior to the expiration of the tender offer period. However, if the tender offer period is within the final three trading days before its expiration, pre-accepted shareholders lose the right to withdraw their acceptance. Consequently, if a shareholder receives a more favourable bid, it retains the flexibility to reconsider its decision – provided the withdrawal request is submitted before the tender offer enters its final three trading days.

In private equity transactions, equity incentives for the target company’s management team are common. Specific rights depend on the management team’s future value and participation. Notably, some buyout funds prefer to restructure the management team rather than retain the existing one.

The granting of “sweet equity” is a common practice, typically implemented through the issuance of equity incentives to the management team, often in the form of an Employee Stock Ownership Plan.

For instance, if a member of the management team departs from the company for cause (eg, due to a material breach), their unvested equity interests are typically subject to forfeiture. Conversely, if the departure is not for cause, the vested portion of their equity interests may be retained, while the unvested portion is repurchased at a market-determined fair value.

Such restrictive covenants are generally present, including confidentiality agreements, non-compete clauses, non-solicitation of clients, non-disparagement commitments and intellectual property ownership provisions. These are typically required to be agreed upon and adhered to, and are commonly included as essential terms in the employment contracts of the management team.

From the perspective of a buyout fund, veto rights and significant control over the business are typically not granted to the management team in M&A transactions.

In the context of a control acquisition, private equity funds typically demand a high degree of control over the target company, encompassing the appointment of board seats, the scope of matters requiring approval by the board of directors and the shareholders’ meeting, as well as the hiring and dismissal of senior executives.

In contrast, for minority equity acquisitions or investments, private equity funds generally require only basic investor preferential rights with respect to the target company, such as priority in dividends, priority in liquidation, and repurchase rights.

Generally, private equity funds will not be implicated merely by virtue of being shareholders of a company, unless core personnel of the private equity fund have indeed personally participated in the wrongful conduct of the company.

In addition to equity sales and initial public offerings (IPOs), exit strategies typically encompass two methods: first, exit via M&A; and second, dividend distribution (that is, obtaining cash flow from dividends through well-performing enterprises in terms of operating results).

The dual-track approach is relatively common. On one hand, both investors and the company are actively exploring the feasibility of an IPO. On the other hand, investors also consider selling their stakes when the valuation is favourable.

The triple-track scenario is uncommon. From the company’s perspective, there may be instances where investors sell their existing shares, the company is simultaneously preparing for an IPO, and the company is also accepting investments from other investors. However, it is not common for the same private equity fund to initiate both a sale and a reinvestment concurrently.

Drag rights and tag rights are both common in contractual provisions. In practice, the threshold for exercising drag rights typically requires the consent of more than 75% to 80% of the shareholders. As for tag rights, there is a scenario after corporate financing where, if the founder exits, the investors are required to tag along and sell their shares.

The management team of the target company generally seeks robust exit protections. For institutional investors, they certainly do not wish for a minor shareholder or management to arbitrarily initiate a drag sale of the company. Therefore, they set high barriers for the exercise of drag and tag rights.

The lock-up period arrangements for IPO exits must first comply with the regulations and requirements of the exchange. In China’s A-share market, the controlling shareholders of listed companies are required to have a lock-up period of at least 36 months. For other shareholders, a lock-up period of at least 12 months is mandated. Secondly, in compliance with the regulations, private equity sellers typically agree to a lock-up period of 12 to 24 months.

Both “relationship agreements” and private equity-led IPOs are rare in China.