Tighter Control on Foreign Acquisitions in China? – The XCMG Case

Abstract

As the world’s fourth-largest economy, China’s dramatic economic growth has facilitated the increasing pace of foreign merger and acquisition (M activities. In 2001 the landmark entry of China into the World Trade Organisation (WTO) has even fuelled the process for foreign investors to acquire Chinese companies during the reorganisation of state-owned enterprises (SOEs). A large number of foreign investors are adjusting their investment strategies to match these opportunities. Globalisation has not only presented new opportunities for business, it has also brought new challenges. Nevertheless, China’s legal environment is not as developed as its economic achievements, which makes foreign acquisitions subject to restrictive rules and burdensome procedures. Such an uncertain phenomenon is illustrated through the spectrum of the Xuzhou Construction Machinery Group Co. Ltd (XCMG) Case (hereinafter referred to as XCMG), which is at a crucial stage of macro-economic control implementation. The Carlyle Group, a major international private equity firm’s acquisition of XCMG has been pending since October 2005. The outcome of this ongoing acquisition will be considered a significant test case of China’s attitude toward foreign acquisitions. This article analyses possible legal risks during an M&A transaction. It would be conducive for potential foreign investors not to ignore but understand better the unique legal environment in China. Meanwhile, it could be considered a wake-up call for China to be aware of the legal significance afterwards.