Compliance issues with domestic acquisitions by foreign investors

With the opening of the Chinese market, acquisitions of domestic businesses by foreign investors have become a primary means of foreign direct investment. The following is an overview of key compliance issues encountered in the course of acquisitions by foreign investors. In practice, a more detailed analysis should be conducted, taking into account the specific circumstances of each transaction.

Access compliance

An acquisition by a foreign investor must first satisfy market access requirements. The investor should make sure that the enterprise, post-acquisition, complies with the requirements on business scope set out by state policy with respect to foreign investments. If any industry-specific qualification requirements on foreign shareholders have been imposed – for example, with the advertising and telecommunications industries – the investor should also meet these requirements.

In practice, there are instances where an area is permitted under industrial policy, but the industry’s regulatory authority has not formulated implementation rules for the entry of foreign investment. In such circumstances, the concerned industry remains a grey area for foreign investors. Take the third-party payment business for example. Although a few foreign-invested enterprises (FIEs) have been granted operation permits, the People’s Bank of China is yet to issue detailed provisions regulating foreign-invested payment institutions, thus leaving a relatively large degree of uncertainty for business backed by foreign investments in this area.