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Chapter I. General Provisions
Article 1 For the purpose of regulating the operation of Mergers and Acquisitions (M&A) loans of commercial banks, improving their abilities of risk management of M&A loans, promoting fair competition in banking industry, strengthening the competitiveness of the industry and maintaining the legitimate and sound operation of the industry, the Guidelines are formulated in accordance with such laws and regulations as the Law of the People's Republic of China on Banking Supervision and Administration and the Law on Commercial Banks of the People's Republic China.
Article 2 The Commercial banks herein refer to the corporate institutions of commercial banks established according to the Law of the People's Republic of China on Commercial Banks.
Article 3 The M&A herein refers to the transaction where domestic acquiring enterprises merge or actually control the target enterprises that have been established and existed by the means including acceptance of existing equities or subscription of newly-added equities or purchase of assets or takeover of debts.
The M&A may be conducted by the acquiring party via its wholly-owned or holding subsidiary which is specially established and does not have other business activities (hereinafter referred to as the subsidiary).
Article 4 The M&A loans herein refer to the loans provided by commercial banks to an acquiring party or its subsidiary for paying the price of M&A transactions.
Article 5 Commercial banks shall comply with the principles of compliance, prudent operation, controllable risks and sustainable business to run their M&A loan business.
Article 6 Commercial banks shall formulate the strategy for the development of M&A loan business, including but not limited to the definition of the objectives of developing the M&A loan business, customer base of the M&A loan business and major risk features thereof as well as risk bearing limits.
Article 7 Commercial banks shall, in accordance with the principles of more efforts on the management of M&A loans than that of loans of other types, set up corresponding M&A loan management system and management information system to ensure their business procedures, internal control system and management information system can effectively identify, measure, monitor and control the risks of M&A loans.
Chapter II. Risk Assessment
Article 8 Commercial banks shall assess the risks of M&A loans on the basis of comprehensive analysis of risks related to the M&A such as strategic risks, risks of laws and compliance, integration risks and operational and financial risks.
In case any M&A loan of commercial banks involves cross-border transaction, country risk, exchange rate risk and the risks of transfer of capital abroad shall be analyzed.
Article 9 Commercial banks shall assess their strategic risks on the aspects of industrial prospects, market structures, operation strategies, management teams, corporate cultures and supports of shareholders of both parties, including but not limited to analysis of the following contents:
(1) Relevancy of industries and strategies of M&A parties as well as the potential synergistic effect;
(2) Opportunities of M&A parties to obtain additional return in strategy, management, technology and market integration;
(3) Expected efficiency of strategy after merger and drives for the value growth of the enterprise;
(4) Possibility of realization of new strategic objectives by the new management team after M&A;
(5) Speculation of the M&A and corresponding risk control countermeasures; and
(6) Possible risk control measures or withdrawal tactics of the acquiring party when synergistic effect is not reached.
Article 10 Commercial banks shall assess the risks of laws and compliance, including but not limited to the analysis of the following contents:
(1) Whether the parties of M&A transaction have the subject qualification for the M&A transaction;
(2) Whether the M&A transaction has been or to be approved according to the relevant provisions and necessary procedures of registration and announcement has been carried out;
(3) Whether there are any restrictive provisions in laws and regulations on the source of the fund for the M&A transaction;
(4) Whether the guarantee legal framework is legitimate and effective and necessary legal proceedings have been performed;
(5) Whether the control of the cash flow for repayment by the borrower is legitimate and compliant with the legal provisions;
(6) Whether there is any effective legal guarantee available for the rights of the lender; and
(7) Compliance in other aspects related to the legal framework of M&A and M&A financing.
Article 11 Commercial banks shall assess the integration risks, including but not limited to the analysis on whether M&A parties are capable to realize synergistic effect by integration on the following contents:
(1) Integration of development strategies;
(2) Organizational integration;
(3) Assets integration;
(4) Business integration; and
(5) Human resource and cultural integration.
Article 12 Commercial banks shall assess the operational and financial risks, including but not limited to the analysis of the following contents:
(1) Major operational risks of the enterprise after merger, such as the stability or growth of the industrial development and its market shares, the effectiveness of company governance, the stability and adequate capabilities of its management team, the maturity of its technologies and their role in improving the competitiveness of the enterprise and the effectiveness of financial management;
(2) Future cash flow of M&A parties as well as its stability;
(3) Risks of the price of acquired equities (or assets) higher than the reasonable appraisal of the equities (or assets) of the target enterprise;
(4) Dividend strategies of M&A parties as well as their impacts on the source of the fund for the payment of the M&A loan;
(5) Fixed income tools used in the M&A as well as their impacts on the source of the fund for the payment of the M&A loan; and
(6) The change of elements such as exchange rate and interest rate on the source of the fund for the payment of the M&A loan.
Article 13 Commercial banks shall, on the basis of comprehensive analysis of risks related to the M&A, set up a prudent financial model to measure the future financial data of M&A parties as well as indicators of key financial leverages and repayment capabilities which have crucial impacts on the risks of the M&A loan.
Article 14 On the basis of the measurements by their financial models, commercial banks shall take full consideration of the impacts of disadvantages circumstances on the risks of M&A loans.
The above-mentioned circumstances shall include but is not limited to:
(1) Failure of the business performances (including cash flows) of M&A parties to remain stable or show a tendency of growth within the repayment period;
(2) Unsoundness of the governance structures of M&A parties and instability or incompetence of their management team;
(3) Failure of the realization of synergistic effect between the acquiring party and the target enterprise after merger; and
(4) Existence of affiliated relationship between the acquiring party and the target enterprise, especially the acquiring party and the target enterprise with the same actual controller.
Article 15 Commercial banks shall, on the basis of assessment of the risks of M&A loans in all aspects, comprehensively estimate whether the fund source of the borrower for the payment of loans is sufficient; whether the source of capital for repayment and the repayment project are matching; and whether the borrower is able to pay the agreed interests and principal according to the contract, and propose countermeasures or retreat tactics when the quality of the M&A loans drops and form loan review reports.
Chapter III. Risk Management
Article 16 The percentage of the total balances of M&A loans of commercial banks shall not exceed 50 percent of the net amount of core capital of their banks in the same period.
Article 17 Commercial banks shall set up credit line control systems for concentration of M&A loans by individual borrower, corporation borrower and industry according to their development strategies of M&A loan business.
The percentage of the balances of M&A loan to the same borrower of a commercial bank shall not exceed 50 percent of the net amount of core capital of the bank at the same time.
Article 18 The percentage of the M&A loan shall not exceed 50 percent of the fund sources for the M&A.
Article 19 The term of M&A loan shall not exceed five years generally.
Article 20 Commercial banks shall have specialists familiar with the relevant legal, financial and industrial knowledge, the number of which shall be adaptable to the scale and complexity of the M&A loan business.
Article 21 Commercial banks shall strengthen their professional management and control of major business links such as the acceptance of M&A loan business, due diligence, risk assessment, execution of contracts, grant of loans and after-loan management, and in their internal control system.
Article 22 The M&A loan application accepted by commercial banks shall satisfy the following basic conditions:
(1) The acquiring party has a legitimate and compliant operation with good credit records and without any bad records of credit default or evasion of bank debts;
(2) The M&A transaction is compliant to laws and regulations, and if the M&A involves state industrial policies, industrial access permission, antimonopoly and transfer of state-owned assets, relevant approvals shall be obtained and relevant procedures shall be handled in accordance with the requirements of applicable laws, regulations and policies; and
(3) There are comparatively high industrial or strategic correlations between the acquiring party and the target enterprise and the acquiring party will obtain strategic resources including R&D abilities, key technologies and processes, trademarks, franchises and supply or distribution network from the target enterprise to improve its core competitiveness.
Article 23 Commercial banks shall organize their special teams for due diligence and risk assessment of M&A loans, conducting investigation, analysis and assessment of the contents stipulated from Article 9 to Article 15 herein and forming written reports.
The person-in-charge of the special team as mentioned in the preceding paragraph shall have more than three years of practice experience in M&A and the members of the team shall include but not limited to specialists of M&A, credit, industry, law and finance.
Article 24 Commercial banks may, according to the complexity and professional and technical degrees of the M&A transaction, invite intermediary institutions to conduct relevant investigations and use the investigation reports prepared by the intermediary institutions in risk assessment.
Where any commercial bank is under the circumstance as mentioned in the preceding paragraph, it shall set up corresponding intermediary institution management system and clarify the legal liabilities of intermediary institutions through written contracts.
Article 25 Commercial banks shall require borrowers provide sufficient guarantee for covering the risks of the M&A loans, which shall include but not limited to assets mortgage, equities pledge, third party assurance and other means of guarantee consistent with laws.
In principle, the conditions required for the guarantee of M&A loans shall be higher than that of other types of loans. If the equities of the target enterprise are used for pledge, commercial banks shall adopt more prudent measures to appraise the value of its equities and determine the pledge rate.
Article 26 Commercial banks shall prudently determine the contents of basic clauses concerning the amount of credit, term, interest rate, amortization plan and means of guarantee in the loan contracts according to the results of risk assessment of M&A loans.
Article 27 Commercial banks shall covenant on key clauses to protect the interests of the lenders in the loan contracts, which shall include but not limited to:
(1) Binding terms on the important financial indicators of the borrower or the enterprise after merger;
(2) Mandatory terms on the use of additional capital of the borrower obtained in specific circumstances for repayment in advance;
(3) Terms on the monitoring of the major or special accounts of the borrower or the enterprise after merger; and
(4) Terms on the commitments of the borrower on guaranteeing the information right or acknowledge right of the lender for material issues.
Article 28 Commercial banks shall, through the key clauses as mentioned in Article 27 herein, stipulate the risk control measures adoptable in the following circumstances:
(1) Changes of important shareholders;
(2) Changes of material investment projects;
(3) Abnormal changes of operational costs;
(4) Material adverse changes on aspects of brand, customer and market channel;
(5) Sale of material assets;
(6) Material changes of bonus distribution strategies; and
(7) Other material issues that have impacts on the continuous operation of the enterprise.
Article 29 Commercial banks shall stipulate the conditions for the withdrawal of deposit and terms relating to the payment and use of loan in the loan contracts, and the conditions for withdrawal shall include contents such as the receipt of self-funding capital of the acquiring party in full and the satisfaction of compliance conditions for M&A at least.
Article 30 Commercial banks shall stipulate in the loan contracts that the borrower bears the liabilities of submitting the financial statements of M&A parties and the guarantor as well as other relevant materials needed by the lender on a regular basis in the existing period of loan.
Article 31 During the existing period of loan, commercial banks shall regularly evaluate the predictability and stability of future cash flows of M&A parties and appraise whether the repayment plan of the borrower is matched with the source of its repayment.
Article 32 During the existing period of loan, commercial banks shall attach close attentions to the performance of key clauses stipulated in the loan contracts.
Article 33 Commercial banks shall conduct classification of M&A loans by risk and make provision according to the frequency and standards not lower than those of other types of loans.
Article 34 When any of the M&A loans turns to be bad, commercial banks shall adopt risk control measures such as recovery and preservation of loan, disposal of the mortgaged or pledged and takeover of the operational right of the enterprise in a timely manner.
Article 35 Commercial banks shall clarify the contents, path and frequency of the internal reports of M&A business, and shall carry out internal review and independent internal auditing of the compliance and the changes of asset value of M&A loan business and make a comprehensive assessment of risks thereof at least once a year.
When the M&A loans tend to be concentrated and the risk classification tends to decrease, commercial banks shall raise the frequency of internal report, review and assessment.
Article 36 Commercial banks shall enhance the report, review and assessment of the following contents when the non-performing M&A loan ratio increases:
(1) The situation of the guarantees of M&A loans in terms of their means, compositions and coverage of the principal and interest of the loan;
(2) Recovery and preservation measures for non-performing loans;
(3) Disposal of pledged equities;
(4) Situations of takeover of the operational right of enterprises according to law; and
(5) Write-off of bad M&A loans.
Chapter IV. Supplementary Provisions
Article 37 The M&A parties herein refer to the acquiring party and its target enterprise.
Article 38 The Guidelines shall be subject to the interpretation by China Banking Regulatory Commission.
Article 39 The Guidelines shall enter into force as of the date of promulgation.
(Source: www.fdi.gov.cn) | 
