China M&A rejig holds lawyers in suspense

Companies were rushing to complete deals before the revised rules were put into effect earlier this month. They add further tiers of regulation to the previous provisional regulation, which was published in 2003.

Linklaters corporate partner Betty Hiu Yee Yap commented: "Initially people will be more concerned and the pace of transactions will slow down."

The provisional regulation did not deal expressly with foreign M&A activity in politically sensitive areas, where there has been growing concern about the loss of state-owned assets and the increasingly low prices that foreigners were paying in takeovers.

Yap said: "The new rules provide a platform for the government to consider the foreign acquisitions of well-known Chinese brands, protecting how foreign investors can take control of Chinese household names."

The new 'Provisions for Foreign Investors to Merge with Domestic Enterprises' state that foreign investors must now seek Ministry of Commerce approval in certain circumstances, including when a Chinese company owns a famous brand or employs more than 2,000 people.

Yap expects "broad uncertainties" following the implementation of these rules, especially for investors who have ongoing deals, as there is concern that the additional legal requirements will delay the deal timetable. The regulation has also created a new platform for foreign mergers and acquisitions because, for the first time, when foreign companies merge with or acquire domestic enterprises, share swaps are permitted in lieu of cash payment.

Yap said: "It's early days, but if you put it in the context of this year's legal developments, there have been significant changes.

"The Chinese government is trying to put in place a better legal framework and legal structure to facilitate transactions."