New start-up companies are typically advised to incorporate in China. Entrepreneurs aiming for future overseas listings may be advised to incorporate or restructure into an offshore holding company, primarily in the Cayman Islands.

In recent years, it has become increasingly easy to establish new companies in China. The time required for company incorporation may vary depending on whether the tech company’s activities include production activities.

• For the establishment of a R&D-focused tech company, registration can be completed in just a few days, provided that the company has a registered office, directors, supervisors, and management team in place.
• For the establishment of a tech company with production activities, it may take several months or even longer to complete the site selection and company registration process.

There is typically no requirement for initial paid-in capital for company incorporation unless the company will be engaged in specific business activities.

It is often recommended that new start-up companies establish themselves as limited liability companies in China while a partnership is often recommended for setting up an investment fund or a holding vehicle.

Start-up companies commonly receive early-stage financing from entrepreneurs and numerous venture capital firms. Where venture capital firms provide the funds, simplified investment agreements are typically utilised to outline the standard preferred rights granted to these firms.

Common sources of venture capital in China encompass funds of funds, affluent entrepreneurs, government-sponsored funds, and major corporations. For geopolitical and other reasons, local venture capital firms have been more active than foreign venture capital firms in China.

There are well-developed standards for venture capital documentation in China. These standards initially primarily focused on safeguarding the interests of investors. However, there is a growing trend among start-up companies to seek enhanced protection within venture capital documentation.

Chinese regulations stipulate that only joint stock companies are permitted to publicly list in domestic markets. Start-up companies therefore seeking listings in Mainland China through an A-share listing or Hong Kong through a H-share listing must transform their corporate structure from a limited liability company to a joint stock company.

Furthermore, if start-ups intend to pursue an overseas listing, it is advisable for them to undergo a corporate restructuring, transitioning from an onshore to offshore structure.

Investors historically preferred IPOs over sales. However, there has been a shift in investor behaviour, and they are now open to both IPOs and sales as potential avenues for liquidity, depending on the transaction terms.

Chinese tech companies are currently more inclined to list in China. With the introduction of China’s STAR Market and the Beijing Stock Exchange’s GEM favouring internet and tech companies, Chinese companies may increasingly focus on an A-share listing in mainland China and a H-share listing in Hong Kong. When considering an IPO, a Chinese company’s choice between a domestic listing, a foreign listing, or a dual listing depends on several factors.

• Market environment and listing requirements: the company’s goal for a quick IPO, especially for high-growth private enterprises, may lead them to prioritise foreign capital markets like the US stock market. This offers significant funding opportunities for Chinese internet tech and new economy companies. A-share listing requirements tend to be stricter than overseas listings.
• Industry characteristics and company attributes: traditional manufacturing companies with stable business models tend to favour A-share listings. Biopharmaceutical development companies meeting the requirements of China’s STAR Market may prioritise listing on the Shanghai Stock Exchange. Smaller biopharmaceutical research companies may consider listing in Hong Kong.
• Valuation and liquidity considerations: companies assess whether the proposed exchange offers a higher valuation and greater liquidity after listing. Companies in the TMT industries often preferred overseas listings and companies in the traditional industries often preferred domestic listings.
• Compliance procedures: companies also consider whether they need to fulfil certain procedures required by Chinese authorities to list overseas, such as filing with the China Securities Regulatory Commission (the “CSRC”) or obtaining consent from the Cyberspace Administration of China (the “CAC”) if they handle a significant amount of user data.

In terms of future sales, opting for an overseas listing can be a double-edged sword. On the one hand, if a company chooses to list on an exchange outside of China (neither a A-share nor H-share listing), it must operate through an offshore structure. This can complicate a future sale if the buyer is a purely domestic company. It can also lead to cross-border tax issues and scrutiny from multiple jurisdictions.

On the other hand, overseas sales often have shorter timeframes from initiation to completion, making the sale process of overseas-listed companies faster. Additionally, selling an overseas-listed company typically offers diverse payment methods and more flexible transaction structures, allowing both parties to design more adaptable deal arrangements.

If the sale of the company is chosen as a liquidity event, in most cases, the seller(s) would run the sale through bilateral negotiation and agreement with the potential buyer, for more flexibility and to avoid being restricted by the procedural requirements of an auction.

The typical transaction structure of a sale as a liquidity event in China involves the following.

• The sale of all equity interest in the company held by all shareholders (including the founder(s) and the VC investors) in one go.
• The sale of all of the equity interest in the company in two steps:
1. the sale of the controlling equity interest in the company held by all shareholders (including the founder(s) and the VC investors) as the first part of the transaction, with the management to remain as a minority shareholder after closing to keep the company as a going concern during the handover and transitional period; and
2. the sale of the minority equity interest retained by the management after the transitional period.
• The sale of the equity interest held by the VC investors only, with the founder(s) to continue to operate the company.

While the entire company can be sold for cash only, stock only or a combination of stock and cash, it is becoming more and more popular for VC investors to pay in cash only, in the case of a sale as a liquidity event.

Founders’ Representations and Warranties

In China, founders are believed to have all knowledge and full de facto control of the company before the sale, and it is therefore believed necessary, reasonable and fair for founders to be liable (through eg, an obligation to act and/or indemnity) to the buyer for representations and warranties in respect of the company (including its assets, operation, capabilities and liabilities) for certain periods of time after closing. However, the length of time may differ for different representations and warranties.

VC Investors’ Representations and Warranties

VC investors usually only give representations and warranties on their legal standing to sell the equity interest they hold in the company (including those in respect of their own capacity and authority to sell and those about the equity interest they hold) without touching upon the assets, operation and other aspects of the company (as it is run by the founders).

Escrow and Holdback

An escrow arrangement is always advisable and commonly seen in cross-border transactions, but less used for domestic deals, as it is thought to be costly, both financially and procedurally, by domestic players. Holdbacks are more accepted and used by domestic buyers and sellers for domestic deals, as it does not involve a third-party escrow agent and can offer more practically viable protection to the buyers and save costs. In one exceptional category of M&A transaction where a foreign buyer acquires equity interest in a 100% domestic company in China (without any foreign shareholder), the full purchase price should be paid within one year of the change of registration of the company, which will limit how the escrow and holdback terms can be written in these cases.

Representations and Warranties Insurance

Insurance for non-breach of representations and warranties are not customary in China.

Spin-offs are customary in the technology industry in China. The key drivers for considering a spin-off may include optimisation of valuation, divestiture of non-core business and expansion of access to funding.

The parties to a spin-off may opt for special enterprise income tax treatment, provided that certain conditions are satisfied.

Spin-Off as Defined Under Tax Regulations

Under the relevant tax regulations, a spin-off refers to a transaction where an enterprise (“dividing enterprise”) splits and transfers part or all of its assets to an existing or newly established enterprise (“spin-off enterprise”), and the shareholders of the dividing enterprise receive equity of the spin-off enterprise or non-equity consideration.

General Tax Treatment vs Special Tax Treatment

In the general tax treatment of a spin-off, the dividing enterprise will recognise gains or losses based on the fair value of the transferred assets, and the tax basis of the assets received by the spin-off enterprise will be the fair value of the assets. The consideration received by the shareholders of the dividing enterprise will be treated as distribution or liquidation. The losses of the relevant parties to the spin-off will not be carried over or utilised.

In the case of special tax treatment, the tax basis of the assets received by the spin-off enterprise will be the dividing enterprise’s original tax basis of the assets. Income tax matters relating to transferred assets will be succeeded by the spin-off enterprise. Part of the losses of the dividing enterprise may be utilised by the spin-off enterprise.

Where the shareholders of the dividing enterprise are required to forfeit part or all of their equity in the dividing enterprise (“old equity”), the tax basis of the equity in the spin-off enterprise (“new equity”) received by the shareholders of the dividing enterprise will be the tax basis of the old equity forfeited by them. Where the shareholders of the dividing enterprise are not required to forfeit any of the old equity, the tax basis of the new equity will be zero. Alternatively, the tax basis of the old equity will be reduced according to the ratio of the transferred assets in the spin-off to all assets of the dividing enterprise, and the reduced tax basis will be applied evenly to the new equity. “Tax-free” (or deferral of tax) treatment is therefore achieved.

Conditions for Special Tax Treatment

Certain conditions must be satisfied for the relevant parties to a spin-off to opt for special tax treatment. They include the following.

• The spin-off should have a bona fide business purpose.
• All the shareholders of the dividing enterprise should receive the equity in the spin-off enterprise in proportion to their original shareholding percentage.
• The original substantive business operations relating to the transferred assets must remain unchanged for 12 months after the spin-off.
• The payment in the form of equity received by the shareholders of the dividing enterprise will be no less than 85% of the total consideration.
• The major shareholders who receive payment in the form of equity will not transfer the equity obtained for 12 months following the spin-off.

A spin-off immediately followed by a business combination is possible. However, if the parties to a spin-off opt for special tax treatment, continuity of business operations and ownership of the equity received as consideration must be maintained for 12 months. A spin-off immediately followed by a business combination may result in tax exposure.

Spin-off is a complex and time-consuming process. The timeframe for a spin-off varies depending on several factors. A spin-off may take several months or even more than one year.

The parties are not required to obtain a ruling from the relevant tax authority prior to the spin-off. They should instead file the relevant documents with the competent tax authority when they complete the annual income tax return for the year in which the spin-off is completed.

Where the relevant parties request confirmation from the relevant tax authority, application for the confirmation could be submitted to the provincial level tax authority, which in principle should issue the confirmation before the annual income tax return has to be filed.

It is customary to directly or indirectly acquire a stake in a public company prior to making an offer. Where the buyer (through trading at the stock exchange) comes to hold or control 5% of the issued shares of the public company, or (through share transfer by agreement) will come to hold or control 5% or more of the issued shares of the public company, the buyer will have to, within three trading days, submit a written report to CSRC and the relevant stock exchange; notify the public company; and make an announcement.

For each subsequent increase or decrease of 5% in the shareholding, the buyer will be subject to the same reporting and announcement obligations. Furthermore, for each increase or decrease of 1% in the shareholding, the buyer will have to notify the listed company within the next trading day, and the listed company will make an announcement accordingly.

Where the buyer comes to hold or control 5% or more, but less than 20%, of the issued shares of the public company, but is not the largest shareholder or actual controller of the listed company, it will state the purpose of the shareholding and whether it intends to continue increasing its interest in the listed company during the following 12 months in its report. Where:

• the buyer comes to hold or control 20% or more of the issued shares of the public company; or
• the buyer comes to hold or control 5% or more, but less than 20%, and becomes the largest shareholder or actual controller of the listed company, it will also state its follow-up plan during the following 12 months with respect to the listed company, such as adjustment to its assets, business, staffing, organisational structure, articles of association, etc in its report,

the buyer is not required to make a proposal or state that it will not be making a proposal within a specified period of time, unless the tender offer is triggered.

The threshold for a mandatory offer is 30% of the issued shares of a listed company, except for mandatory offer exemptions permitted under the laws.

A tender offer will be triggered, unless exemption of the tender offer is permitted under the laws:

• where the buyer comes to hold 30% of the issued shares of the target company and continues to increase the shareholding, it will make a general offer or partial offer;
• where the buyer intends to acquire more than 30% of the issued shares of the target company through share transfer by agreement, shares exceeding the 30% will be acquired by tender offer. The buyer will make a general offer before performance of the agreement; and
• where the buyer is not a shareholder of the target company but has interests over more than 30% of the issued shares of the target company, through investment, agreement and other arrangements, it will make a general offer.

Acquisition of a public company could be effected by various methods, such as:

• acquisition of its shares through trading at the stock exchange;
• share transfer by agreement (usually with the controlling shareholder of the public company);
• subscription of shares in a private placement;
• takeover offer;
• acquiring the voting rights through investment relationship, agreement or other arrangement (such as voting trust); or
• a combination of two or more of these methods.

Typically in practice, the acquisition is achieved through share transfer by agreement, or in combination with other methods (eg, voting trust or subscription of shares in a private placement).

A merger option is available, but not often used for acquisitions of public companies. A merger may generally involve more parties and trigger more information disclosure requirements or regulatory approvals (as the case may be) and the implementation will be more complicated.

Cash transactions are more typical in public company acquisitions. Payment in stocks or a combination of cash and stocks are usually adopted in the mergers of public companies.

Cash payments must be offered if:

• a general offer is made for the purpose of delisting the target company; and
• a general offer is made, as conditions for exemption of tender offer are not satisfied.

Where the buyer elects to pay the transaction price in transferable securities or securities not listed and traded at a stock exchange, it is required to offer cash payment as an option for the shareholders of the target company to choose.

In the case of the tender offer, the offer price will not be lower than the highest price paid by the buyer for the shares within the six months prior to the indicative announcement of the summary of the tender offer. In a stock-for-stock transaction, the price of the shares to be issued by the buyer will not be lower than 80% of the average trading price of the shares of the buyer in 20, 60 or 120 trading days prior to the announcement of the resolution of the buyer’s board in respect of the transaction.

In practice, in order to bridge value gaps, the transferring shareholders (usually the controlling or substantive shareholders) may agree to compensate the buyer and/or the target company, if the target company fails to achieve pre-agreed financial indicators (usually net profits).

The buyer is generally permitted to set its conditions for a tender offer, provided that the mandatory requirements are satisfied. This is particularly the case in a voluntary tender offer.

These mandatory requirements include the period of the tender offer; the minimum number of shares to be acquired; the minimum price to be offered; and provision of required guarantee for the payment of the purchase price. All shareholders of the target company will be treated fairly. Shareholders holding the same class of shares will be treated equally.

The regulator will not generally restrict the use of offer conditions but supervise the process to ensure that the laws and regulations are complied with.

As discussed under 6.3 Transaction Structures, the acquisition is typically effected through share transfer by agreement, or in combination with other methods. Accordingly, it is customary for the parties to enter into related transaction agreements.

The target company may undertake to refrain from certain acts during the period from signing to closing and co-operate in the obtaining of the relevant regulatory approvals.

The parties to the transaction agreement are more likely to be the shareholder of the target company, rather than the target company, in addition to the buyer. The representations and warranties are more likely to be made by the transferring shareholder.

In the case of a tender offer, no separate transaction agreement will usually be entered into, other than those required by laws and the relevant stock exchange.

The minimum acceptance conditions of a tender offer are usually set based on the purpose of the acquisition, the distribution of the shareholding of the target company, transaction costs, etc.

In the case of a voluntary tender offer or a mandatory tender offer (where a general tender offer is not triggered), the shares to be acquired will not be less than 5% of the issued shares of the target company.

If, upon the expiry of the acquisition period, the distribution of the shareholding of the target company does not satisfy the listing requirements of the relevant stock exchange, the listing and trading of the stocks of the target company will be terminated. Before completion of the takeover, the shareholders that have not tendered will have the rights to sell their stocks to the buyer, on equal terms offered in the tender offer, within a reasonable period and the buyer is obliged to purchase.

There is no squeeze-out mechanism under the laws to buy out shareholders that have not tendered following a successful tender offer.

Certain funds are required to launch a tender offer. The buyer is required to engage a financial adviser, who will conduct a due diligence investigation on the capability of the buyer to pay the consideration and its funding sources and issue an opinion.

The buyer is required to provide one of the following as guarantee for its performance of the tender offer.

• A deposit of not less than 20% of the total consideration in the designated bank (if consideration is payable in the form of cash).
• Custody by the securities registration and clearance institution of all stocks to be used for payment (if consideration is payable in the form of stocks listed and traded at the relevant stock exchange).
• A bank guarantee for the consideration.
• Joint and several undertaking of the financial adviser in respect of the payment of consideration.

In its tender offer report, the buyer will disclose its funding sources and the guarantee it has provided. If the funds are borrowed, material terms of the loan agreement will also be disclosed.

Deal protection measures are more likely to be granted by transferring shareholders (rather than the target company) in transactions by way of share transfer by agreement, acquiring the voting rights through investment relationship, agreement or other arrangement. These measures may include confidentiality, exclusivity, break-up fees, or deposit/earnest money.

Where the listing of the target is terminated as a result of the tender offer, the bidder could negotiate and agree with other shareholders on the governance rights with respect to the target.

Where the target remains listed after completion of the tender offer, typical governance rights the bidder can obtain are the rights to nominate or recommend candidates for an agreed number of directors or certain senior management posts. As required under the laws and regulations, a listed company will be separated from its controlling shareholders in such aspects as personnel, assets and financial affairs, and will be independent in operational terms.

It is common to obtain irrevocable commitments from principal shareholders of the target company to tender or support the transaction, in order to reduce deal uncertainty. These commitments, if made by the principal shareholders, should be binding. Whether there will be an “out” in the case of a better offer will generally be subject to negotiation between the buyer and the shareholders. Under the relevant laws and regulations, the shareholders of the target company are permitted to withdraw their acceptance of the offer up to three trading days before the expiry of the tender offer.

The tender offer or the terms of the tender offer do not need to be approved prior to the launch by the CSRC or the relevant stock exchange, which will provide supervision to ensure compliance with the laws and regulations during the tender offer process.

The timeframe for the tender offer is generally established by the buyer, provided that the relevant mandatory requirements are complied with. The period of acquisition in the tender offer will not be less than 30 days and will not exceed 60 days unless a competing takeover offer is announced. The buyer is not permitted to change the takeover offer within 15 days of the expiry of the offer unless a competing takeover offer is announced.

The indicative announcement on the summary of a competing takeover offer will be made no later than 15 days before the expiry of the buyer’s takeover offer. Where a competing takeover offer is announced, and the buyer makes changes to its takeover offer so that the remaining term of its takeover offer is less than 15 days, the buyer will extend the takeover offer to no less than 15 days and not exceed the expiration of the competing takeover offer.

Generally in the tender offer process, the buyer will make an indicative announcement on the summary of the tender offer report and will indicate in the summary if any regulatory or antitrust approvals are required. The buyer will typically announce the tender offer report after obtaining the approvals.

The buyer is required to announce the tender offer report within 60 days after the indicative announcement. If the announcement cannot be made within the 60-day period, the buyer should notify the public company on the next business day following the expiry of the 60-day period and make the relevant announcement. It should then make an announcement every 30 days until the tender offer report is announced.

If the required regulatory or antitrust approvals cannot be obtained, the buyer may cancel the acquisition plan after making the indicative announcement and before announcement of the indicative announcement report. Under these circumstances, the buyer will announce the reason and cannot acquire the same company again within 12 months.

Setting up and starting to operate a new company in certain sectors in the technology industry in China is subject to specific regulations and/or approvals. These sectors are listed in the “Negative List for Market Access”published by the relevant PRC authority. The “Negative List for Market Access” includes the sectors that companies are not allowed to enter, as well as the restricted sectors companies can only enter with prior administrative approval. In theory, companies have free access to all of the sectors that are not on this “Negative List for Market Access”.

Restricted sectors in the technology industry and the respective regulatory bodies include the following.

• Basic and value-added telecommunications services (the Ministry of Industry and Information Technology or its local branches).
• Radio stations, radio frequency, satellite TV, cable TV (the Ministry of Industry and Information Technology and the National Radio and Television Administration or their respective local branches).
• Online media and publication (the National Radio and Television Administration, the Press and Publication Administration and the Ministry of Culture and Tourism, or their respective local branches).
• Online games (the Press and Publication Administration or its local branches).

The timeframe for obtaining approvals in each restricted sector varies, but normally take at least three to six months.

The CRSC is the primary securities market regulator for M&A transactions in China. Other market regulators may be involved if the M&A transaction is in certain restricted sectors or involves foreign investment.

There are certain restrictions on foreign investment in China, primarily listed in the Negative List for Foreign Investment Access (the “Foreign Investment Access Negative List”) published by the relevant PRC authority. These are as follows.

• Foreign investors will not invest in any prohibited sectors in the Foreign Investment Access Negative List.
• Foreign investors will meet the investment conditions for the restricted sectors in the Foreign Investment Access Negative List.
• For the sectors not included in the Foreign Investment Access Negative List, theoretically no specific filing is required for the foreign investment. However, it may still be subject to other filings such as the national security review (the “NSR”), depending on the sectors, locations, controlling right or other factors involved in the foreign investment.

NSR

There is a NSR of foreign investment acquisitions in China. Under the current NSR regime, there are no officially published specific restrictions or considerations for investors or buyers based in a particular part of the world.

Industries or areas that may be subject to the NSR include the following.

• Investment in military industry, military auxiliary industry and other fields related to national defence security and investment in areas surrounding military installations and military industrial installations.
• Investments in important:
1. agricultural products;
2. energy and resources;
3. equipment manufacturing;
4. infrastructure;
5. transport services;
6. cultural products and services;
7. information technology and internet products and services;
8. financial services;
9. key technologies; and
10. other important fields relating to national security, whereby the actual control of the invested companies vests in the foreign investor.

Specifically, the “actual control” of the invested companies refers to:

• where the foreign investor holds at least 50% of the equity of the invested companies;
• where the foreign investor holds at least 50% of the equity of the invested companies, but has voting rights that have a material effect on the resolutions of the board of directors and shareholders’ meeting/shareholders’ assembly; and
• where the foreign investor is otherwise able to have a material effect on the decision-making, human resources, finance, and technology of the invested companies.

Export Control

There is an export control regime in China that can be divided into the following three elements.

Controlled list

This is a regular list maintained by the relevant regulatory body listing the controlled items.

Temporary list

For items not included in the controlled list, the relevant regulatory body may impose temporary control for up to two years.

Export licence

An export licence is required for the export of items in the controlled or temporary list, or items that may:

• endanger national security or national interest;
• be used in the design, development, production or use of weapons of mass destruction or their means of delivery; or
• be used for terrorist purposes.

However, China’s export controls generally regulate the export of technology or products. It is not usually a major concern in foreign investment where the technology or products are usually imported into China, rather than being exported overseas.

Under the PRC Monopoly Law (the “AML”) and the State Council Regulation on the Notification Thresholds for Concentration of Business Operators (the “Notification Thresholds Regulations”), if a business operator acquires control over other business operators through the acquisition of shares and/or assets, the transaction is a “concentration of business operators”, and if the transaction meets the turnover thresholds, the transaction is notifiable to China’s State Administration for Market Regulation (the “SAMR”).

The “concentration of business operators” refers to:

• a merger of business operators;
• a business operator acquiring control over another business operator through equity or asset acquisition; or
• a business operator acquiring control over another business operator or being able to impose decisive influence over another business operator through contracts or other arrangements.

A notification must be made to the SAMR before the transaction if the relevant business operators’ turnover exceeds any of the following thresholds.

Threshold 1 (New Thresholds in Force as of January 2024)

The aggregated worldwide turnover of all business operators involved in the concentration in the last fiscal year exceeds RMB12 billion.

Each of at least two of the business operators involved in the concentration has Chinese turnover exceeding RMB800 million in the last fiscal year.

Threshold 2 (New Thresholds in Force as of January 2024)

The aggregated Chinese turnover of all business operators involved in the concentration in the last fiscal year exceeds RMB4 billion.

Each of at least two of the business operators involved in the concentration has Chinese turnover exceeding RMB800 million in the last fiscal year.

Labour-Related Regulations

The labour law regulations that acquirers should primarily be concerned with in M&A transactions in China are the Labour Law, the Labour Contract Law, the Social Insurance Law and the Regulations on Administration of Housing Fund.

Works Council

China has a trade union regime. Generally speaking, the functions of trade unions in China may differ from those in other countries. Rather than being in conflict with employers, trade unions in China operate in a much softer way, aiming to maintain a harmonious relationship between employers and employees, and are usually less powerful than trade unions in other countries.

According to the PRC Trade Union Law, employees have the freedom to choose whether and how to establish a trade union and become a member of it, and employers are only required to respect and support the right and not obstruct them.

During special cases such as lay-offs due to extreme operational difficulties, or the employer’s unilateral termination of employment contracts, employers are required to notify trade unions first or obtain opinions from them, but their opinions are usually not binding.

Theoretically, the trade union may also represent its members to negotiate working benefits and sign collaborative employment contracts with the employers, but this is relatively rare in practice.

China has a foreign exchange control regime, which usually takes the form of local bank registration. A foreign exchange registration is required at local banks in the following circumstances.

• The establishment of a foreign invested company, and the subsequent injection or reduction of registered capital.
• The acquisition of shares in a Chinese company by a foreign investor from a Chinese investor.
• Daily transaction of foreign invested company if certain settlement or purchase of foreign currency are involved.
• The remittance of funds out of China as a result of liquidation, dividends or withdrawal of investment.

Generally speaking, transactions involved with foreign exchange are tightly scrutinised but will be permitted as long as they have a true and reasonable basis and comply with the foreign exchange control requirements and procedures.

In April 2024, the Ministry of Industry and Information Technology (the main PRC authority governing the technology, automobile and telecommunications industry) announced a pilot policy to lift foreign investment controls in some of the value-added telecommunication services (the “VATS”) sectors in Beijing, Shanghai, Hainan and Shenzhen. The pilot policy marks one of the most significant legal developments in China in the last few years in terms of the foreign investment in the technology industry.

The VATS which benefited from the pilot policy included internet data centres (IDCs), content delivery networks (CDNs), internet service providers (ISPs), e-commerce (EDI) and internet content providers (ICPs). Before the pilot policy, these sectors were either completely closed to foreign investors or open to foreign investors with limited foreign shareholdings of no more than 50%.

Following the introduction of the pilot policy, most of these VATS sectors are now open to 100% foreign shareholding. This means foreign investors may generally enjoy the same treatment as domestic investors do in the pilot cities, assuming they meet all the conditions listed in the pilot policy.

A public company in China is generally allowed to provide due diligence information to bidders with regard to its operations and other relevant matters. The provision of the information would be subject to the public disclosure rules of the listed company and internal authorisations under its articles of association.

If it is a public bid, the public company will generally provide the same information to all bidders.

The public company may allow for a reasonable level of technology due diligence depending on the specific requirements of the bidders and the negotiations between the parties.

China has data privacy laws and regulations, most notably the Personal Information Protection Law (the “PIPL”). One of the most important rules established by the PIPL is that the collection and processing of individual’s personal information require valid legal bases, which is usually in the form of the data subjects giving prior consent.

Technology companies usually possess the personal information of numerous users. For due diligence carried out by a potential buyer of a technology company, it is not possible to obtain prior consent from all of these users. As a result, the potential buyer may be restricted from full access to the user information during the due diligence process.

When a Bid is Required to be Disclosed

Since it is generally believed that a bid may have relatively significant impact on the share price of the company, the bid is required to be disclosed to the public at the earliest of:

• resolutions of the board of directors or board of supervisors adopted in respect of the bid;
• a letter of intent (or other document of the similar nature) or definitive agreement signed by the parties to the potential deal; or
• the bid becomes known to a director, supervisor or senior management of the company.

How a Disclosure is Required to be Made

The disclosure of the bid is required to cover the cause and current status of the contemplated deal, as well as its potential effects on the company.

The full text of the disclosure should be published on the website of the exchange where it is listed and the website of the newspaper qualified by the CSRC. An additional summary of the disclosure should also be published in a physical copy of the newspaper.

Prospectus Required

Among other situations, a prospectus for the issuance of shares in a stock-for-stock takeover or part of a business combination has to be prepared and filed if the issuing would result in the buyer having more than 200 shareholders.

Listing Required

In a stock-for-stock deal, the stock issued to the seller by the buyer as all or part of the consideration for the deal should be publicly tradeable at a stock exchange and the buyer therefore has to either be a public listed company or apply to a stock exchange to list its shares in its home country.

If, as a result of the acquisition, a bidder will hold 20% or more of the shares of the target listed company, or the bidder will hold less than 20% (but more than 5%) of the shares but become the largest shareholder or the actual controller of the target listed company, the bidder is required to produce and file inter alia its financial statements for the last three years and the audited financial and accounting report for the latest fiscal year (unless the bidder is already listed on a Chinese stock exchange) in its disclosure documents in a cash or stock-for-stock transaction. The financial statements and reports should be prepared in accordance with the Chinese GAAP or the international GAAP.

Copies of the transaction documents of an acquisition deal of a listed company are required to be filed with the CSRC and/or the stock exchange where the target company is listed.

Under Chinese company law, the principal duties owed by directors to the company are:

• a duty of loyalty;
• a duty of diligence; and
• a duty to comply with the law, including a duty to protect the company’s interest against inter alia its shareholders.

In most situations where directors breach their duties, the board of supervisors and the shareholders will have the legal standing to sue them on behalf of the company (or for the shareholders in the cases where their interest is damaged).

It is not common for boards of directors to set up special or ad hoc committees in business combinations or use them when some directors have a conflict of interest.

The board of directors of the target company (and the other functions of the company) are not expected to be actively involved in M&A negotiations, while it is more customary in China for the parties to the deal (ie, the sellers and buyers) to approach each other and negotiate directly, except in respect of due diligence where the company’s co-operation is expected (under the instruction and/or leadership of the board of directors).

Litigation by shareholders challenging the board’s decision to recommend a merger or acquisition transaction (if any) is rarely seen in practice in China.

In a merger or acquisition deal in China, independent outside advice is usually sought by and given to (and therefore paid for by) the sellers ie, the shareholders of the company (including the founder(s) and VC investors). This advice normally includes legal, financial and tax advice from outside advisers in respect of the deal structure, valuation, pricing and legal aspects of the transaction.

Financial advisers in China are not banned from providing a fairness opinion, but their doing so is rarely seen in practice.