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New Rules Offer Clarity On China's Outbound M&A Crackdown

On August 18, 2017, China’s State Council issued guidelines clarifying rules passed a year ago by the State Administration of Foreign Exchange (SAFE) limiting outbound investments as cover-up to move money out of China.

The new guidelines provide different policies for Chinese companies’ investment overseas, broadly dividing overseas investment into three categories:

  • investments in “real estate, hotels, entertainment, sport clubs, [and] outdated industries” are restricted;

  • investments in sectors that could “jeopardize China’s national interest and security, including output of unauthorized core military technology and products” and investments in gambling and pornography are prohibited; and

  • investments in establishing R&D centers abroad and in sectors like high-tech and advanced manufacturing enterprises that could boost China’s Belt and Road Initiative, and investments that would benefit Chinese products and technology will be encouraged by Chinese outbound regulators.

These guidelines are new and we have to wait and see how they will be interpreted and implemented by regulators. Still, there may be reasons to believe they will have a net positive effect on the China-U.S. M&A market. The new guidelines bring about greater certainty to buyers, lenders and targets on whether a deal will get approved by Chinese regulators.

The volume and size of Chinese outbound M&A is already on an upward trajectory in the second quarter of 2017, as buyers are already getting more acclimated to SAFE rules announced at the end of 2016 restricting the outflow of Chinese capital. Chinese buyers completed 94 deals totaling $36 billion in Q2, compared to the 74 deals totaling $12 billion in Q1. The current Chinese outbound M&A trend, coupled with greater certainty under the new guidelines, is likely to result in more Chinese outbound M&A deals during the last quarter of 2017, as well as in 2018.

© 2018 Foley & Lardner LLP


About this Author

Shang Kong, Foley Lardner, Corporate Finance Lawyer, Operating Agreements Attorney

Shang Kong is an associate and business lawyer with Foley & Lardner LLP, where he focuses his practice on corporate finance, representing public and private companies in connection with both stock and asset acquisitions, and operating agreements. He is a member of the firm’s Transactional & Securities Practice and the Automotive Industry Team.

Prior to joining Foley, Mr. Kong was an associate with a national law firm. While earning his law degree, Mr. Kong served as a legal intern with the Wayne County Prosecutor’s Office. 

Zhu Julie Lee, Milwaukee, business lawyer, partner, Foley Lardner, China, taxation, mergers acquisition

Z. Julie Lee is a partner and business lawyer in the Milwaukee office of Foley & Lardner LLP. Ms. Lee has extensive experience representing clients with their cross-border transactions, with an emphasis on China. She counsels clients on mergers and acquisitions, joint ventures and strategic alliances, and commercial transactions such as supply agreements, licensing arrangements, distributorship agreements, cross-border technology transfer and practical ways to protect intellectual property transferred to a foreign country. Additionally, Ms. Lee provides tax and business law advice relating to the formation, operation, termination and reorganization of corporations, limited liability companies and partnerships in the U.S. She represents taxpayers in administrative and judicial disputes with the Internal Revenue Service and the Wisconsin Department of Revenue on income tax, sales/use tax and property tax matters. She has also done a significant amount of international tax work, including assisting U.S. clients to structure acquisitions and reorganizations outside the U.S., structuring foreign clients’ investments in, and acquisitions/dispositions of, U.S. businesses and real estate, and advising foreign clients on U.S. estate tax matters. She is a member of the International, Taxation, and Transaction & Securities Practices and the Automotive, Energy and Sports Industry Teams.

Ms. Lee received her undergraduate degree from Beijing University in 1991. She joined Foley & Lardner after receiving her J.D. degree, cum laude, from Northwestern University School of Law in 1998. During law school, Ms. Lee served as co-president of the Northwestern International Law Society, co-founded the Northwestern Small Business Legal Clinic, and was an articles editor of the Northwestern Journal of International Law and Business.