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New Mergers and Acquisitions Rule Creates Tremors in the Business Sector
September, 29th 2016

State-run enterprises will have to deal with tighter regulations. (Photo : Getty Images)

The new guidelines released by the Chinese government for mergers and acquisitions (M&A) will penalize business managers by imprisonment for life in cases of grave violations.

Other punishments for violations and misdeeds include pay cuts, disciplinary sanctions or full judiciary hearings. Many state-owned enterprises will be affected by the new rule.

The new guideline is unique to China as many business managers in the U.S. and Europe are usually not held accountable. CEOs are usually asked to resign.

The rule will also punish managers and officers even if they are no longer connected with the company.

However, the state wants to send a message to managers of state-owned enterprises (SOEs) that complacency in their jobs will mean serious consequences. President Xi Jinping also called for reforms of SOEs.
Analysts react to the new policy and most of them are unconvinced that the new measure will bring in good effects.

Xiong Jin, an international partner at law firm King & Wood Mallesons in Beijing, said, "There's growing concern around SOE investments. The government has realized that many SOE assets have been lost through poor investments overseas, and now there's a sense of urgency to impose better controls. This also comes in the broader context of SOE reform."

A senior official at a state energy company said that the new rule will make managers less aggressive in developing the business for fear of being punished.

"The blanket reaction from senior company officials would be: be passive, making no suggestions or decisions on M&A opportunities," he said.

Andrew McGinty, partner at law firm Hogan Lovells in Shanghai, observed, "If you start looking through the lens of this document, an SOE manager will start to ask for every operational decision or small decision on every provision in a deal: 'could I be held accountable for this in 15 years' time.'"

He added, "They will either take the path of least personal risk, which may not be best for the business or keep going up the chain of command to make sure they have covered their position. This is slowing down deals."

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