Update: a distressed or special-situations acquisition in Greater China

Distressed and special-situations deals across Greater China are completing again – but the structural risks that derailed earlier cycles have not gone away. The alignment of acquisition vehicle, governing law and regulatory clearances across the deal perimeter remains the point where transactions fail. For any group running a cross-border process with Mainland Chinese assets and a Hong Kong or offshore holding layer, the sequence of steps matters as much as the headline price.

A distressed or special-situations acquisition in Greater China typically requires an adviser who can coordinate the acquisition vehicle, the governing law of transaction documents, and the clearance sequence across the Mainland, Hong Kong and any offshore centre involved – because a failure at any one of those three points can void the structure or delay enforcement of the buyer's rights.

This briefing sets out what has changed in the clearance and enforcement environment, who in the Greater China corridor is most directly affected, and what an incoming buyer should do now.

What Changed – and What Persists

The reciprocal enforcement regime between the Mainland and Hong Kong – the Mainland Judgments (Civil and Commercial Matters)(Reciprocal Enforcement) Ordinance (Cap. 645) – came into force on 29 January 2024. It materially broadens the class of Mainland judgments that can be registered in Hong Kong's Court of First Instance, and vice versa. The old requirement for an exclusive-choice-of-court clause was removed. A connection-based test now governs.

For distressed buyers, that matters directly. Where a seller entity or the target holds assets in both jurisdictions, a buyer who obtains a favourable judgment or arbitral award in Hong Kong now has a cleaner enforcement path against Mainland-situated assets – and the reverse is also true for the selling party. The strategic calculus around forum selection, governing law and the location of the acquisition vehicle has shifted.

At the same time, the basics have not changed. A holding company interposed above a Mainland operating entity still requires careful alignment between the offshore layer (commonly BVI or Cayman), the Hong Kong intermediate hold, and Mainland regulatory approvals. Economic-substance requirements apply in the offshore centres. The foreign-sourced income exemption (FSIE) regime – in force from 1 January 2023 and amended since – conditions Hong Kong-level tax treatment on those substance rules being met. An acquisition structure that ignores either point creates a post-closing liability.

In our cross-border M&A practice, we see a recurring error: an incoming buyer agrees on price and structure with the distressed seller without first verifying whether the acquisition vehicle can hold the relevant onshore assets under current Mainland foreign-investment rules, and whether the documents give the buyer effective enforcement rights at the Hong Kong level. The two questions are related and must be answered together, early.

Who Is Affected Across the Corridor

The groups most directly affected by these structural considerations are those running a process from outside Greater China – European, Middle Eastern and Southeast Asian sponsors and strategics acquiring distressed or undervalued Mainland assets, often through a Hong Kong or offshore vehicle.

They face a three-layer problem. First, Mainland foreign-investment rules determine what can be acquired and how. Second, the governing law of the transaction documents (often Hong Kong or English law) determines what remedies are available if completion fails or representations prove false. Third, the enforcement route for those remedies now depends on the interplay of Cap. 645 and the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region – the 1999 Arrangement and its 2020 Supplemental Arrangement.

A buyer who has chosen arbitration as its dispute-resolution mechanism – and specifically a Hong Kong-seated arbitration under the Arbitration Ordinance (Cap. 609) – has access to interim measures in Mainland courts under the arrangement that has been in effect since 1 October 2019. That is a meaningful advantage in a distressed scenario, where asset dissipation is a live risk. But the mechanism only works if the arbitration agreement is properly drafted and the seat is expressly designated. We review these provisions as a matter of course at the term-sheet stage, not after signing.

Domestic-to-domestic transactions – a Mainland buyer acquiring a distressed Mainland target – raise a different set of questions, principally around insolvency proceedings, restructuring approvals and the treatment of offshore bonds or guarantee instruments. Where an offshore keepwell deed (a parent-company support undertaking common in PRC offshore bond structures) or cross-border guarantee is part of the capital structure, the enforceability question runs through Hong Kong courts. That is a separate analysis and is addressed in our disputes and arbitration practice; see the related practices block below.

The Immediate Action

Three steps apply before a distressed or special-situations process moves past indicative offer stage.

First, confirm the acquisition vehicle and its capacity to hold the relevant assets under current Mainland foreign-investment rules. The permissible structures depend on the sector, the assets' location, and whether the target carries licences that cannot be transferred to a foreign-owned entity. This is not a one-size answer; it turns on the specific deal perimeter.

Second, align the governing law of transaction documents with the dispute-resolution and enforcement route. A Hong Kong-law governed share purchase agreement (SPA) combined with a Hong Kong-seated HKIAC arbitration clause gives the buyer the benefit of the interim-measures arrangement and the Cap. 645 enforcement path. That combination is not automatic; it must be structured into the documents.

Third, verify substance and tax-position implications at the Hong Kong intermediate holding level. Where the acquisition generates income that would otherwise be foreign-sourced, the FSIE regime's economic-substance conditions apply from the outset. Retrofitting substance after closing is harder and more expensive than building it in at the structure stage.

The sequence above describes the standard position. Your transaction turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. If the process has already moved past term sheet without these alignments, a second read can identify the gaps and the routes still available.

For a structured assessment of your distressed or special-situations acquisition across the relevant jurisdictions, write to us at info@lockhartyip.com.

For further detail on cross-border M&A processes through Hong Kong, see our M&A & Transactions practice. For joint-venture structuring considerations that arise in parallel to a special-situations acquisition, see our guide on joint ventures between foreign investors and regional partners. On the merger-control and regulatory-clearance layer, see our analysis of merger control and regulatory clearances in Asia.

Related practices

• M&A & Transactions – cross-border acquisitions, deal structuring and transaction documents across Greater China and offshore centres
• Disputes & Arbitration – Hong Kong-seated arbitration, interim measures and cross-border enforcement of awards and judgments

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.