A foreign investor wishing to acquire or increase its equity in a target company registered in the PRC would commonly do so in one of the following ways:

• Direct acquisition, where the foreign investor buys all or part of the equity of the PRC target company or subscribes for an increase in capital of the target directly,
• Offshore/indirect acquisition, where the foreign investor acquires or increases the equity of the PRC target company via the offshore purchase of or subscription for an increase in equity in the target's foreign parent(s),
• Asset acquisition, where a foreign investor, using a new or existing foreign invested enterprise (FIE) as the acquiring vehicle, directly buys some or all of the business and assets of the PRC target company.

State-owned interests and special types of acquisition: The Law of the PRC on the State-Owned Assets of Enterprises, passed in October 2008, was a reminder of how significant state-owned enterprises (SOEs) are in the Chinese national economy. It remains the Chinese government's objective to spin-off SOEs in less sensitive sectors, particularly SOEs in poor financial shape. Since early 2003, foreign investors have been allowed to acquire domestic creditors' rights (debts) in the target SOE and thereby qualify for the opportunity to later convert such debts into equity in the company (similar to a convertible bond). The normal means of direct equity or asset acquisition applicable to regular companies outlined above will also apply, with certain special rules and restrictions. Such acquisitions could also raise other issues, such as state asset valuations and employee resettlement issues.

It is a mandatory requirement under PRC law that the transfer of state-owned assets and equities shall be conducted through a listing and bidding process at an authorized property rights exchange center. Apart from the above, for private deals, auction processes are seen in some M&A deals of relatively large sizes. Bid process letters are not commonly used in the transfer of state-owned assets and equities administered by exchange centers. In contrast, in auction deals led by private sellers, bid process letters are typically used, and both nonbinding indicative bid letters and binding letters at the final offer stage are commonly seen in China.

A scheme of arrangement is not applicable under PRC law.

Mergers: Western-style mergers between two or more companies are possible but are rarely seen in the PRC. Current PRC statutory mechanisms recognize two means of mergers: a merger by absorption and a merger by new establishment. A merger by absorption involves one company absorbing another, after which the absorbed company is dissolved and its registered capital and assets are merged into the surviving entity. In a merger by new establishment, both pre-merger companies are dissolved and a new company is established, holding an aggregate of the pre-merger companies' assets and registered capital. Generally, the post-merger entity would be a complete successor to the pre-merger entities, that is, it would assume all rights and liabilities of those pre-merger entities. However, creditors of the participating companies may opt to have their claims repaid in full before the completion of the merger.

Cross-border mergers are currently unavailable under PRC law, i.e., it is not possible to directly merge a foreign entity with a domestic company (including FIEs). For foreign investors, the only permissible forms of mergers in China are between FIEs and FIEs, or between FIEs and domestic companies.

Generally, share and equity acquisition are more common than asset acquisition since asset deals are usually more time-consuming and complicated to execute.

Traditionally, foreign investors usually establish a presence in the PRC via one or more of the following legal forms:

• Representative offices
• Sino-foreign joint ventures (JVs)
• Wholly foreign-owned enterprises (WFOEs)
• Foreign-invested joint-stock limited companies (FISCs)

The latest option is the foreign-invested partnership (FIP). The more flexible FIP form is now starting to replace the foreign-invested venture capital enterprise (a form of a PRC vehicle used by some international investors to acquire Chinese targets), particularly with PRC investment funds aimed at foreign investors.

A JV or a WFOE takes the form of a limited liability company (LLC) that does not issue shares but has "registered capital," which is registered with the business registry. FISCs (currently less common in China) are share-issuing companies similar in legal form to Western-style corporations. An FIP may take the form of a limited liability partnership, which is akin to its Western-style counterparts.

The maximum number of an LLC setup in the PRC is 50. For LLCs in certain regulated sectors (e.g., general aviation), foreign investment may be subject to ownership restriction. As a result, such companies need to have at least one Chinese shareholder and one foreign shareholder, and the foreign shareholder may only hold a minority stake depending on the business scope of the company.

A direct acquisition will take place in the PRC and may be subject to PRC approval as well as registration information reporting requirements, which may be time-consuming and involve government discretion, i.e., the PRC authorities may withhold approval (if applicable) if they perceive problems with the transaction.

The foreign buyer in a direct share acquisition generally assumes all existing or contingent obligations and liabilities of and restrictions applicable to the PRC target company in proportion to its equity in the target, unless explicitly carved out or excluded before or during the transaction.

Offshore/indirect acquisition of shares: This option is available only if the PRC target companies have foreign investors. An offshore acquisition takes place in the offshore company's jurisdiction of incorporation and it is generally not subject to PRC jurisdiction and review, except in certain circumstances under the PRC's antitrust and national security review regimes and PRC tax disclosures. This could change under the FIL that affords the MOFCOM or its local counterparts authority to approve certain types of offshore acquisition whereby the actual control of a domestic enterprise is transferred to a foreign investor.

In addition, if the offshore company's ultimate shareholders are PRC nationals or entities, certain PRC filings should have been made with the State Administration of Foreign Exchange (SAFE) that should be carefully reviewed during due diligence.

The foreign buyer in an indirect share acquisition generally assumes all the existing or contingent obligations and liabilities of, and restrictions applicable to, the PRC target company via the target's parent company, unless explicitly carved out or excluded before or during the transaction.

In an asset deal, the buyer may need to set up a new entity with local registration authority to take over the transferred assets as well as the transferred employees (if the buyer does not have an existing suitable entity in China). In addition, permits and licenses are not automatically transferrable in an asset deal. The buyer's entity may need to apply  for the necessary permits and licenses in its own name before it can operate the acquired business and assets. Transfer of employees would entail termination of the contracts with the seller and execution of new contracts with the buying entity. In an asset transaction, any existing obligations and liabilities of the target or restrictions on it generally remain the target's sole responsibility.