PRC Bank Loans for M&A Transactions by Foreign Invested Companies in China

On December 31, 2025, the National Financial Regulatory Administration (“NFRA”) issued the Administrative Measures for Merger and Acquisition Loans of Commercial Banks (“2025 Measures”), which became effective on the same date. The 2025 Measures repealed the Guidelines for the Risk Management of Merger and Acquisition Loans Granted by Commercial Banks (“2015 Guidelines”) and comprehensively regulates the provision of loans to the Chinese acquiring companies for their merger and acquisition transactions (“M&A Loans”) by commercial banks.

In fact, as early as 2008, China issued a regulation (repealed by the 2015 Guidelines) granting the green light to eligible commercial banks to provide the M&A Loans. However, nearly 20 years later, the use of the M&A Loans by foreign invested companies to complete their M&A deals remains relatively uncommon, especially compared to the use of bank loans for their operations.

We set out key requirements under the 2025 Measures below, to briefly introduce the M&A Loans to foreign invested companies who may have such finance needs.

1. Eligible Banks

Under the 2025 Measures, domestic acquiring enterprises (including foreign invested companies) or their subsidiaries (a wholly owned or controlled subsidiary of the acquiring party that is primarily engaged in investment management) may apply for the M&A Loans from qualified banks and finance companies:

• PRC commercial banks with legal person status which meet certain conditions are permitted to provide the M&A Loans pursuant to the 2025 Measures, such as, sound operating conditions and well-established corporate governance, staffed with a professional team engaged in due diligence and risk assessment for the M&A Loans etc. Commercial banks are also required to formulate corresponding business procedures and internal control systems and file them with the NFRA or its local office.
• In addition to PRC commercial banks, policy banks, branches of foreign banks, and finance companies of enterprise groups are also permitted to provide the M&A Loans, as the 2025 Measures expressly provides that it shall apply mutatis mutandis to these entities that conduct M&A loan business. 

2. Eligible M&A Transactions 

Foreign invested companies may apply for the M&A Loans to support their acquisition of actual control of, merger with, or purchase of minority equity interest in established and continuously operating target companies or assets through means such as the transfer of existing equity interests, subscription for newly issued equity, acquisition of assets, or assumption of liabilities.

More specifically, foreign invested companies may apply for M&A Loans to support the M&A transactions:

1. Where a single acquiring party or multiple acquiring parties acting in concert obtain control over the target company/assets (loans for such transactions are known as “Control-type M&A Loans”);

   A single controlling shareholder of the target company may also apply for the Control-type M&A Loans when acquiring or subscribing for more equity interests in the target company (not less than 5% equity interest in a single transaction) in order to maintain or enhance its control.

2. Where a single acquiring party acquires a minority equity interest (not less than 20% in a single transaction) in a target company without obtaining control (loans for such transactions are known as “Minority-equity M&A Loans”). This is newly added in the 2025 Measures.

   A single minority shareholder already holding 20% or more of the equity interests in the target company may also apply for the Minority-equity M&A Loans when acquiring or subscribing for more equity interest in the target company (not less than 5% equity interest in a single transaction) in order to further increase its shareholding without obtaining control.

3. Application Requirements 

The 2025 Measures requires that applications for the M&A Loans accepted by commercial banks shall meet the following basic conditions:

1. The acquiring party operates in compliance with laws and regulations, has good credit standing, has no record of evading or defaulting on bank debts, and has no adverse credit records such as loan defaults in the preceding three years;
2. The target companies or assets have sound commercial value and are capable of generating reasonable economic returns for the acquiring party;
3. There is a relatively high degree of industrial relevance or strategic synergy between the acquiring party and the target enterprise, which is conducive to promoting integration and restructuring, optimizing industrial layout, or transforming and upgrading toward new quality productive forces; and
4. Where the M&A transaction involves matters such as national industrial policy, industry access, anti-monopoly, or transfer of state-owned assets, approvals from the relevant authorities shall be obtained and the required procedures completed.

Commercial banks are also required to conduct comprehensive due diligence on both parties to the M&A transaction, and to assess the strategic risks, legal and compliance risks, integration risks, and operational and financial risks following the completion of M&A transactions. In principle, commercial banks should require borrowers to provide guarantees sufficient to cover M&A Loans risk as well.

4. Replacement Mechanism 

In practice, the acquirers in M&A transactions are normally required to comply with strict timeline and may be also required to provide financing commitment letters from banks even during the binding offer phase. This could pose significant challenges for the acquirers as the commercial banks often struggle to complete their due diligence, risk assessments and internal approval procedures in a timely manner. 

The 2025 Measures provide a replacement mechanism to solve and regulate this issue. Pursuant to the 2025 Measures, the M&A Loans could be used to replace the M&A consideration paid in advance by the acquiring party, provided that: (i) all requirements under the 2025 Measures, including the minimum equity capital ratio, shall be satisfied; (ii) they cannot be used to replace the existing M&A Loans; and (iii) the interval between the initial loan drawdown and the completion of payment of all M&A consideration to be replaced shall not exceed one year. Such a mechanism addresses the need for bridge financing in transaction practices while effectively guarding against potential risks such as using new loans to repay old ones and indefinitely extending financing terms.

Accordingly, foreign invested companies may first use their own funds or other forms of bridge financing to pay the M&A transaction consideration to meet the timeline, subsequently replacing such funds with long-term M&A Loans.    

5. Basic Terms

Commercial banks are permitted to, based on the M&A Loans risk assessment results and taking into comprehensive account service costs and returns, reasonably determine the basic terms of the loan contract, including the loan amount, term, interest rate, installment repayment arrangements, and guarantee methods.

Regarding the loan term and amounts, the 2025 Measures further requires that: 

1. For the Control-type M&A loans, the loan amount shall not exceed 70% of the M&A transaction consideration (10% higher than the limitation set out in the 2015 Guidelines) whilst the equity capital shall not be less than 30%, and the loan term shall not exceed 10 years (extended by 3 years compared with the maximum 7-year loan term in the 2015 Guidelines); and  
2. For the Minority-equity M&A Loans, the loan amount shall not exceed 60% of the M&A transaction considerations whilst the equity capital shall not be less than 40% and the loan term shall not exceed 7 years.

6. Contract Clauses Potentially Impacting Business Operations

Compared with the 2015 Guidelines, the 2025 Measures shortened and simplified key clauses included in the loan contract. Pursuant to the 2025 Measures, commercial banks shall include at least the following key clauses in loan contracts to protect their interests:

1. The borrower’s obligation to regularly submit financial statements of the acquiring party, the target company, and the guarantor, as well as other materials required by the commercial bank, and to continuously comply with binding covenants on key financial indicators;
2. The commercial bank’s right to be informed of or to approve material changes relating to equity, operations, financial matters, investment and financing or other matters of the parties, and its right to take risk control measures in the event of material adverse changes; and
3. Conditions for loan drawdown and the use of loan funds, as well as necessary measures such as account monitoring and documentation collection to enable the bank to monitor fund flows.

Commercial banks are also required to strengthen post-disbursement management of the M&A Loan funds and take corresponding measures (such as requiring additional guarantees etc.) in case of abnormalities. Related clauses would thus be included in the loan contract as well. 

These clauses may have material impact on the foreign invested company’s business operations. It is advised that foreign invested companies should avoid being subject to excessive restrictive clauses.

Conclusions

Under the 2025 Measures, the M&A Loans may be applied by foreign invested companies for not only M&A transactions in China but also cross-border M&A transactions. Though the 2025 Measures provided strict requirements for such M&A Loans, the M&A Loans would still be an effective way for foreign invested companies to finance their M&A transactions. Foreign invested companies with financial needs are advised to take advantage of such M&A Loans to facilitate the successful completion of their M&A transactions.