OECD urges China to rethink M&A rules

18 December 2006 00:00  [Source: ICB Americas]

China's move to tweak its merger and acquisition (M&A) rules in September has met with mixed reactions from the international community.

A recent report by the Organisation for Economic Cooperation and Development (OECD) urged the world's fourth-largest economy to reconsider the move because some of the new regulations have made M&As more onerous for foreign companies.

For instance, the new rules call for the central government to scrutinize M&As more closely before approving them previously, they were done at the provincial level.

OECD has criticized the more stringent approval process as complex, urging China to make the process "more transparent, clearer and simpler."

These controversies come at a time when M&As are gathering momentum in China, including in the chemical industry.

Niche sectors that present opportunities for M&As in China include specialty chemicals, driven by the demand for technology and research and development expertise, analysts said.

The new M&A rules are also meant to steer the Chinese government toward attracting investment in value-added industries such as research and development, petrochemicals, pharmaceuticals and renewable energy.

It may take some time before it becomes apparent how the new policies will affect foreign investors' perception of the business environment in China.

Some of the new rules lack clarity, leading to confusion among investors.

One such rule, according to the OECD, is the new screening requirement on M&As that is applicable to foreign investors who are looking to buy a company involved in a major industry that may have an impact on national economic security, or may result in the transfer of a famous trademark or traditional brand.

The international group recommended the Chinese government provide a listing of the sectors that qualify as "major industry," explain the criteria for the identification of a famous trademark or traditional brand and define the meaning of national economic security.

But the OECD said that some of the regulations were positive.

One example requires parties to a cross-border acquisition to disclose information such as the purpose of the acquisition and if they were affiliated to each other, enhances transparency of the M&A process.

Additionally, analysts welcomed regulations that provide the government with better control over the inflow and outflow of capital as the new rules also cover Chinese companies incorporated overseas.

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