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INTRODUCTION

Mergers and acquisitions (M&A) and restructuring of companies play a key role in the market economy for the optimal allocation of resources, the adjustment of industrial structure and the enhancement of enterprise competitiveness. With the change of economic environment and the development of enterprises, its activities are becoming more and more complicated.2023 The new Company Law, which was revised and passed on 29 December, provides new rules for M&A and restructuring and brings opportunities as well as challenges. The study of these impacts will help enterprises to grasp the opportunities, regulate their behaviours and achieve sustainable development.

The positive impact of the new Company Law on M&A and restructuring of companies

(i) Broadening the funding channels for M&A and reorganisation

The new Company Law increases the ways of equity and debt contribution, breaking the single pattern. The acquirer can use the equity held to invest in the target company or swap shares for acquisition to optimise the equity structure. For example, in the technology sector, ByteDance owns numerous business segments and related equity. When making a strategic investment in a short video technology startup, ByteDance took out the equity of some of its non-core businesses and exchanged equity with the core technology team of the startup, which not only avoided a large amount of cash expenditure, but also realised business synergy and technological integration, and perfected the layout of ByteDance's ecological field of short video. In terms of debt contribution, when some small, medium and micro enterprises are facing difficulties due to tight capital chain, powerful enterprises can put their debts to third parties into the target company, solving the target company's financial difficulties and promoting the smooth progress of mergers and acquisitions and reorganisations, and at the same time, providing creditors with a new way to exit from investment.

(ii) Simplification of company merger procedures

The New Company Law stipulates that a company may merge with a company in which it holds more than 90 per cent of the shares, or if the price to be paid for the merger does not exceed 10 per cent of the company's net assets, it may be exempted from the resolution of the shareholders' meeting (unless otherwise stipulated). This shortens the decision-making cycle and reduces costs. Take Haier Group as an example, its many subsidiaries are closely related to each other, when integrating a 95%-owned smart home appliance manufacturing subsidiary, according to the new Company Law, there is no need for cumbersome shareholders' meeting resolution, and the merger process is quickly promoted. Not only did it integrate production resources and optimise the supply chain, it was also able to respond to market changes in a timely manner and launch a more competitive product portfolio, which enhanced the company's resilience and market share in the smart home appliance market.

(iii) Promotion of M&A market activities

The new Company Law provides more convenience in the establishment and operation of companies and stimulates the vitality of market players. For example, it allows joint stock companies to issue class shares, establish one-person joint stock companies, and abolish the restriction on the establishment of limited companies by one person, etc., which attracts more enterprises to participate in the market competition, and increases the number of potential participants and targets for M&A.

In the Internet industry, Tencent set up a one-member stock subsidiary for expanding its emerging meta-universe business after the implementation of the new Company Law. Through this subsidiary, Tencent has successfully acquired a number of small start-ups focusing on metaverse technology development and content creation. These start-ups possessed cutting-edge metaverse technologies and creative teams. Tencent utilised its capital, traffic and platform advantages to integrate these resources and quickly launched a series of metaverse-related products and services, such as virtual social platforms and immersive gaming experiences, setting off a metaverse investment and M&A boom in the Internet industry. According to relevant statistics, within six months after the implementation of the new Company Law, the M&A events involving the concept of meta-universe in the Internet industry have increased by 30% year-on-year, and many Internet enterprises have followed suit, which has substantially increased the activity of the industry's M&A market.

In the pharmaceutical industry, Hengrui Medicine was originally a one-person limited liability company focusing on the production of generic drugs. After the new Company Law cancelled the restriction on the establishment of a limited company by one person, Hengrui Medicine decided to introduce strategic investors, and attracted Gao Tiles Capital, a company focusing on the research and development of innovative medicines, through the issuance of class shares. Gao Tiling Capital invested in the company with capital and R&D technology, and with this investment and technical support, Hengrui Medicine rapidly expanded its innovative drug business and started to carry out mergers and acquisitions of some small R&D companies in the same industry. Like the acquisition of a Suzhou-based company focusing on oncology innovative drug R&D, its core technology and R&D team were incorporated into the company, which accelerated the layout of Hengrui Medicine in the field of innovative drugs. This not only promotes Hengrui Medicine's own business upgrading, but also triggers a chain reaction in the pharmaceutical industry, with many enterprises following suit, integrating resources and enhancing their R&D strength through similar equity co-operation and M&A restructuring, which greatly enlivens the M&A and restructuring market in the pharmaceutical industry.

Looking at the financial sector again, a bank, as a regional bank, has been hoping to expand its business scope and enhance its market competitiveness.

(iv) Optimising corporate governance structure to facilitate post-merger integration

The new Company Law comprehensively optimises the corporate governance structure, adjusts the terms of reference of the ‘three committees and one layer’, strengthens the obligations and responsibilities of directors and supervisors, and enhances the protection of shareholders' rights. After M&A reorganisation, a good governance structure can help integrate the management team and business processes, and reduce conflicts and contradictions. Taking Geely's acquisition of Volvo as an example, after the M&A, based on the improved governance structure of the new Company Law, Geely clarified the responsibilities of the management teams of both parties, strengthened the obligations and responsibilities of the directors and supervisors, and safeguarded the rights of shareholders in major decisions. Through a reasonable governance structure, the R&D, production and sales systems of both parties have been successfully integrated, which not only enhances Geely's own technical strength and brand image, but also realises Volvo's further expansion in the global market, improves operational efficiency and synergies, and becomes a successful model of M&A and integration in the automotive industry.

III. Challenges of Mergers and Acquisitions and Restructuring of Companies under the New Company Law

(i) Complexity of valuation and tax treatment of non-monetary contributions

While the new capital contribution method brings convenience, it also increases the complexity of the assessment and tax treatment of non-monetary capital contribution. The valuation of equity and debt is affected by a variety of factors and is prone to deviation. Tax treatment involves multiple tax types and varies by contribution method and transaction structure. Enterprises will be subject to VAT at 6% on the shares of listed companies, while individuals will be subject to different personal income tax rules for non-monetary asset investments. Enterprises are prone to face high costs and risks if they fail to grasp the tax policies.

(ii) Difficulty in connecting the old and new systems

When stock companies merge and reorganise, they need to take into account the requirements of the new Company Law and their own original governance structure and operation mode. In terms of governance structure adjustment, amending the articles of association and resetting the governance bodies involve details and coordination of interests, which are prone to problems. In terms of conversion of capital contribution, the original capital contribution structure may not be in line with the new regulations and needs to be adjusted, increasing the complexity and uncertainty of M&A and restructuring.

(iii) Uncertainty in the application of law

Some provisions of the new Company Law are ambiguous. There is no quantitative standard for ‘small scale’ and ‘small number of shareholders’, which may lead to disputes as to whether the simplified procedures are applicable. The newly introduced system of ‘de facto directors’ and ‘shadow directors’ in M&A and restructuring is unclear, and differences in understanding between enterprises and regulators may lead to doubts about the legality and compliance of transactions.

Fourth, the enterprise to deal with the new ‘Company Law’ strategic recommendations

(I) Strengthen the reserve and cultivation of professional talents

Enterprises should set up professional teams in various fields such as law, finance and taxation to gain a deep understanding of the new Company Law and related regulations, accurately grasp the key aspects of M&A and restructuring, comprehensively assess the risks, and design a plan to ensure that the activities are lawful and compliant, and to reduce the risks and costs.

(ii) Advance planning and full communication

Prior to M&A and restructuring, enterprises should plan in advance for the capital contribution method, transaction structure and governance structure adjustment programme in accordance with the new Company Law. Communicate fully with shareholders, management and creditors, etc., and inform shareholders in advance of changes in shareholding structure and risks if equity or debt capitalisation is involved; when adjusting the governance structure, consult with management on the division of responsibilities to reduce resistance and uncertainty.

(iii) Pay close attention to legal developments and policy interpretation

Enterprises should pay close attention to the judicial interpretation of the new Company Law and policy interpretation to keep abreast of the dynamics of the application of the law. Pay attention to the guidance cases and opinions of the regulatory authorities to grasp the legislative intent and practical requirements. Actively participate in seminars and trainings, communicate with peers, and also hire legal advisors to ensure legal compliance of M&A and restructuring.

V. Conclusion

The new Company Law affects the M&A and restructuring of companies in all aspects. Initiatives such as broadening the channels of capital contribution and simplifying the merger procedures have enhanced the activity of the M&A market and the efficiency of resource allocation, but the complexity of non-monetary capital contribution, the difficulty of connecting the old and the new regimes, and the uncertainty of the application of the law have also brought about risks. Enterprises should be fully aware of these changes, strengthen talent reserves, plan ahead, pay attention to legal developments, actively respond to the challenges and grasp the opportunities to achieve the strategic goals of M&A and restructuring, and promote the sustainable and healthy development of enterprises. As the new Company Law continues to be improved in practice, the M&A and restructuring market will become more regulated, active and efficient in the future.