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"Strategic Beachhead" of Foreign Investors to Occupy China's Architectural Decoration and Design Market

The Chinese Government’s policies for fulfilling its WTO commitments and the continual boom of China’s real estate market have provided ample opportunities for foreign investors. The architectural decoration and design market, an important link to the real estate industry, has garnered increasing attention from foreign investors.

It has become the biggest concern and most urgent need of foreign investors to get involved in China’s architectural decoration and design market and pre-empt their Chinese competitors to gain the first-mover advantage.

At our law firm, we have recently provided legal consultation for a Singaporean company on how to build its “strategic beachhead” for initiating its business in China’s architectural decoration and design market.

Direct Establishment Infeasible due to Lack of Access to Foreign Service Provider Qualifications

According to relevant Chinese laws, a foreign-invested construction enterprise refers to a wholly foreign-owned construction enterprise or a Sino-foreign equity construction joint venture or a Sino-foreign cooperative construction enterprise established within the territory of China in accordance with Chinese laws and regulations. After they have established a construction design enterprise, foreign investors should obtain corporate qualifications from relevant government departments in charge of construction affairs before they can conduct businesses.

In applying for corporate qualifications for construction design businesses, foreign investors should, as one of the legal prerequisites, ensure that they have the certified architects and engineers required by the regulations.

In view of the fact that the Chinese Ministry of Construction presently does not consider applications by foreigners to obtain certified architect or certified engineer qualifications, the direct establishment of foreign-invested construction design enterprise is not feasible.

With Merger and Acquisition: “Status” of the Target

Company Matters

Given the fact that direct establishment is not feasible and that the new company cannot obtain qualifications, acquisition of a company with adequate qualifications has become a preferred way to set up shop.

But, in using direct mergers and acquisitions, it is worth noting that there may be risks arising from the change of the legal status of the target company, which may lead to re-examination and re-approval of its qualifications. Therefore, when selecting the target company, foreign investors can choose a Sino-foreign joint venture or cooperative enterprise which has already obtained relevant qualifications. They can directly purchase the foreign stake in the target company or take over the foreign rights and obligations through contracts. This way, foreign investors can continue to keep the legal status of the target company unchanged as a Sino-foreign joint venture or cooperative enterprise to retain its qualifications.

After a merger and acquisition process is completed, foreign investors, in case they need to expand control of the target company, can reduce the proportion of the stake held by the Chinese shareholders by increasing capital, thus achieving the goal of controlling the target company.

Indirect Merger and Acquisition: A Creative Option

Given that the number of Sino-foreign joint venture or cooperative companies that satisfy the above-mentioned requirements is surely limited, indirect mergers and acquisitions have been put on the agenda of many investors. The main method is to first set up a foreign-invested enterprise by foreign investors and, through the new company, acquire the target company; thus the foreign investors can indirectly control the target company through the foreign-invested enterprise and get involved in the business of construction decoration and design.

In addition, foreign investors can also opt to purchase the target company with required qualifications by entering into strategic alliances with Chinese legal persons, co-operating with the Chinese legal persons or designating Chinese legal persons as independent buyers. In this way, they can complete the build-up of their strategic base for carrying out business in China.