Foreign Investment Series | Is MOFCOM Approval for "Connected M&A" Under Circular 10 Becoming History? Multiple HK/US Listed Cases Practice the "One-Step" Approach!

For companies seeking overseas listings, building a red-chip structure once faced a major hurdle — Article 11 of the so-called "Circular 10" promulgated in 2006 (revised in 2009). The requirement for MOFCOM approval for "connected mergers and acquisitions" (M&A) posed such practical difficulties that companies were forced to adopt a workaround "two-step" process: first, introduce an unconnected foreign investor to change the company's status, then complete the overseas acquisition. However, market practice has since quietly changed. The principle of "replacing approval with reporting" established by the Foreign Investment Law is gradually reshaping the regulatory environment. Recent listing documents of several companies listed in Hong Kong and the US show they have directly used a "one-step" process to complete their restructuring, skipping the traditional "two-step" process. 

I. The Classic "Two-Step" Approach: A Necessary Workaround 

To understand the significance of the current shift, it's essential to recall the context that gave rise to the "two-step" approach. The core obstacle stemmed from Article 11 of Circular 10, which explicitly required connected M&A to obtain approval from the Ministry of Commerce (MOFCOM). In 2008, MOFCOM issued the Foreign Investment Access Management Guidebook, which further clarified that the rules on foreign-invested M&A applied only to "domestic enterprises that are not foreign-invested enterprises." This interpretation provided clear operational guidance to the market, leading to the creation of the "two-step" workaround: First, introduce an unconnected foreign investor to transform the domestic enterprise into a Foreign-Invested Enterprise (FIE). Then, the overseas entity ultimately controlled by the actual owners could acquire the equity, as the target was now an FIE, theoretically circumventing the Circular 10 approval requirement. Although widely adopted and effective, this approach undoubtedly increased the complexity, time, and cost of restructuring. 

II. The Beginning of Change: The Foreign Investment Law Sounds the Clarion Call 

On January 1, 2020, the PRC Foreign Investment Law (FIL) came into effect, establishing new principles of pre-establishment national treatment plus a negative list management system and creating a foreign investment information reporting regime, replacing the previous case-by-case approval system. The FIL Implementation Regulations stipulated that where previous provisions were inconsistent with the FIL, the FIL would prevail. This sparked intense market debate: Had the connected M&A approval requirement of Circular 11 become automatically void as it contradicted the spirit of the FIL? 

III. Evidence from Practice: Multiple Listings Adopt the "One-Step" Approach 

Observing overseas listing cases since 2024, we see emerging examples of the "one-step" M&A model. For instance, Aux International (Stock Code: 02580), listed on the Hong Kong Stock Exchange on September 2, 2025, and Libang International (Stock Code: LBGJ), listed on the US stock market on October 23, 2024, both used a Hong Kong company or WFOE as the acquiring entity to directly purchase equity in their domestic operating entities, thereby completing the construction of their red-chip structure. This method eliminated the need to introduce an unconnected third-party foreign investor, simplifying the process and significantly saving time. Beyond listed companies, several prospective HK listing applicants, such as Kuse Intelligent, Jianbang High-tech, and Ronglian Renewable, have disclosed "one-step" plans in their application documents. Their PRC legal counsel opined in their legal opinions that, based on the FIL and its supporting regulations, the connected M&A no longer requires prior approval from the commerce authority. However, they emphasized ensuring the transaction price complies with fair value principles and fulfilling the foreign investment information reporting obligations. 

IV. Regulatory Trends: Why is the "One-Step" Approach Now Viable? 

Furthermore, replies to public inquiries on the MOFCOM website over the past year reveal a regulatory shift: while not explicitly stating Circular 10 is repealed, the replies consistently emphasize adherence to the FIL and require companies to fulfill their information reporting obligations accurately and completely. The focus of scrutiny has shifted from pre-event "approval" of whether a transaction canbe done, to post-event "supervision" of whether it was conducted truthfully and compliantly. Conclusion Given the emergence of successfully listed companies using this model, the "one-step" approach provides a new operational path for red-chip restructuring. When evaluating this model, companies should pay close attention to the following: Transaction pricing must be based on a compliant valuation report following fair value principles. Companies must also complete the change registration with the State Administration for Market Regulation and fulfill foreign investment information reporting obligations, ensuring information is true, accurate, and complete. It is also crucial to confirm the company's industry is not restricted by the Negative List for Foreign Investment. With the implementation of the FIL, foreign investment management procedures continue to be optimized, and the facilitation of cross-border investment is steadily improving.

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