By Ms Lynn Yang, Partner, and Ms Tong Ai, Associate, both at Norton Rose Fulbright.
On 21 March 2014, China Insurance Regulatory Commission (CIRC) issued the Administrative Measures on the Acquisition and Merger of Insurance Companies (the Insurance M&A Measures) which has taken effect since 1 June 2014.
The Insurance M&A Measures apply to M&A activities where an insurance company is the target for a merger or acquisition. The target insurance company may be either a domestic or a foreign invested insurer. The Insurance M&A Measures do not apply to equity investments by insurance companies in non-insurance companies in China or in overseas insurance companies.
General liberalisation
On the finance side, with CIRC’s approval, an investor involved in insurance M&A activities may borrow to finance such activities provided the amount borrowed does not exceed 50% of the total monetary consideration.
This substantially liberalises the existing legal regime under the Administrative Measures on Equity Interests of Insurance Companies and its supplements (the Equity Investment Rules), under which investors are not allowed to use bank loans or other external funds to finance their investments in Chinese insurance companies.
The Insurance M&A Measures also relax the tracking record requirement for the investor. The investor, if it contemplates holding more than a 20% equity interest in an insurance company, is no longer required to prove that it has invested in such insurer for at least three years.
Specific regime on acquisition
An acquisition under the Insurance M&A Measures means either of the following:
• the acquirer (including its associated parties in concert) acquires more than a one-third equity interest in the insurance company and becomes the largest shareholder of the insurance company; or
• the acquirer acquires no more than a one-third equity interest in the insurance company but becomes the largest shareholder of the company and may have controlling rights over it.
Under the Insurance M&A Measures, subject to CIRC’s approval, the acquirer is permitted concurrently to control two insurance companies which engage in the same type of business.
However, the acquirer, unless otherwise specified, remains subject to a three-year lock-in under the Insurance M&A Measures and is not permitted to transfer its acquired equity interests in the acquired insurer within that period.
Specific regime on merger
A merger under the Insurance M&A Measures refers to two or more insurance companies being merged into one insurance company by way of absorption or by the establishment of a new corporate entity, although the current business separation rule must be strictly complied with.
Within 10 days after the merger has been approved by CIRC, relevant parties such as creditors, policy holders, insureds, or beneficiaries must be notified. Within 30 days after the merger has been approved by CIRC, the merger must be announced in the press. After the merger, the surviving or the newly established insurance company succeeds to all credit rights, debts and policy liabilities of the merging entities automatically by operation of law.
Though M&A transactions constantly occur in the insurance sector, this is the first time that CIRC has formally promulgated regulations governing M&A activities. This may provide a legal basis and also serve as a guidance for insurers that are performing well to attract high quality capital and allow strong insurers to invest in weaker insurers.