How to approach a distressed or special-situations acquisition in Greater China

A distressed or special-situations acquisition in Greater China involves purchasing assets, equity or debt in a target that is insolvent, restructuring or otherwise under financial stress – typically through a process governed by Mainland Chinese insolvency rules, Hong Kong court proceedings, or a hybrid of both. The governing instruments include the Enterprise Bankruptcy Law of the People's Republic of China (for Mainland-registered debtors), the Companies Winding-Up and Miscellaneous Provisions Ordinance and the related common-law insolvency jurisdiction of Hong Kong courts, and the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645, in force 29 January 2024), which now governs recognition of Mainland civil and commercial judgments in Hong Kong. The decision facing an incoming acquirer is almost never simple: the right entry point, the right vehicle and the governing law of the acquisition agreement all determine whether the purchase is clean or carries legacy exposure.

This guide sets out the decision logic, the sequence of steps, the gates at each stage and the common error that derails otherwise well-structured deals.

What is a distressed or special-situations acquisition in Greater China, and why does the cross-border interface matter?

A special-situations acquisition is any transaction where the seller is under constraint – insolvency, regulatory pressure, covenant breach, or a forced divestiture – and the buyer is seeking to extract value from that constraint. In Greater China, the constraint almost always spans more than one legal system.

A Mainland operating company may be restructuring under Mainland bankruptcy supervision while its offshore holding entity – typically incorporated in the Cayman Islands or the British Virgin Islands – remains technically solvent. A Hong Kong court may be hearing a winding-up petition against a Cayman-incorporated group company at the same time that the Mainland enterprise restructuring plan is proceeding before a people's court in Shanghai or Shenzhen. The two proceedings do not automatically communicate. The buyer who does not map both before making an offer risks acquiring an entity that is clean in one system and encumbered in the other.

Hong Kong sits at the centre of this because it is the common-law forum closest to the Mainland, because its courts have long experience with cross-border insolvency and because, since 29 January 2024, the reciprocal-enforcement regime under the Mainland Judgments Ordinance (Cap. 645) gives Mainland civil and commercial judgments a registration route in the Hong Kong courts, and vice versa. For buyers, this matters: a Mainland judgment against the target entity can now be brought to Hong Kong far more readily than before.

Our cross-border M&A desk sees this pattern regularly. The winning strategy is almost always the one that maps the full perimeter of the distress – Mainland, Hong Kong offshore – before deciding on a vehicle.

What are the options on the table, and how do you choose?

The three principal entry routes in a Greater China distressed situation are an asset acquisition, an equity acquisition and a debt-to-equity conversion, each with materially different risk profiles and governing-law implications.

An asset acquisition (purchasing identified assets rather than shares in the distressed entity) offers the cleanest separation from legacy liabilities, but in a Mainland insolvency context it requires court or administrator approval and may trigger transfer restrictions, including on land use rights and regulatory licences. Licences rarely follow assets automatically; a buyer acquiring a manufacturing facility without the production licence has acquired an empty building.

An equity acquisition (purchasing shares in the distressed entity or a holding entity above it) preserves licences and contracts but brings all undisclosed liabilities. In the Mainland context, undisclosed tax obligations and social-insurance arrears rank with priority and survive a change of control. In the offshore context, a Cayman or BVI holding entity may carry claims from creditors that an asset acquisition would have avoided.

A debt-to-equity conversion involves purchasing distressed debt at a discount and converting it to equity through the restructuring process. This route gives the buyer a negotiating position in the restructuring plan and, where the plan is confirmed by the people's court, typically produces a cleaner entity. The gate here is the restructuring plan itself: the plan must be approved by creditor classes, confirmed by the court, and – where the entity has offshore holding layers – recognised or at least accommodated in the offshore jurisdiction.

The choice turns on three variables: the nature and location of the assets, the nature and priority of the claims against the target, and the availability of a court-supervised process that can produce a clean title. Where the assets are predominantly Mainland, asset deals tend to be cleaner. Where licences and contracts are the core value, equity or debt conversion into a reorganised vehicle is usually the right path.

How do you sequence the steps, and what is the gate at each one?

The sequence below applies to a mid-market cross-border distressed acquisition where the principal assets are in the Mainland and the acquisition vehicle is structured through Hong Kong or an offshore centre. It is illustrative; specific situations will vary.

Step 1 – Perimeter mapping. Before any approach, the buyer's counsel maps the full distress perimeter: which entities hold which assets, which courts have jurisdiction, whether any insolvency or restructuring proceedings are already filed, and what claims are in play. This is not conventional due diligence; it is a jurisdictional audit. Skipping it is the single most common error on our desk.

Step 2 – Provisional deal structure. Based on the perimeter map, the buyer selects the entry route (asset, equity or debt conversion) and the acquisition vehicle. For a Mainland-asset acquisition by an international buyer, the vehicle is typically a Hong Kong company or a Cayman/BVI entity with a Hong Kong subsidiary. The choice of vehicle affects the governing law of the acquisition agreement, the stamp duty position, and the ability to enforce arbitral awards against the seller. The gate at this step is confirmation that the proposed vehicle is eligible to hold the target assets under Mainland foreign-investment rules and that no prohibited-sector restrictions apply.

Step 3 – Parallel due diligence (Mainland and offshore). Due diligence in a distressed context differs from a normal M&A process. The financial statements may be unreliable. The question is not "what are the earnings?" but "what are the claims, in what priority, and can the buyer obtain title free of them?" Priority claims on Mainland assets include employee wages and social-insurance arrears (super-priority), secured creditors, and tax obligations. The gate at this step is a claims matrix that categorises every known liability by priority, jurisdiction and enforceability.

Step 4 – Engagement with the insolvency process or distressed seller. If a Mainland court-supervised reorganisation is in progress, the buyer engages with the court-appointed administrator. The administrator's role under the Enterprise Bankruptcy Law is to evaluate proposals and recommend one to the creditor committee and court. A buyer who approaches the administrator with a credible, funded proposal – supported by evidence of financial capacity and regulatory eligibility – is in a far stronger position than one who appears at a late stage. If no court process is running, the buyer negotiates directly with the distressed seller or its principal creditors, typically under a signed term sheet with a lock-up and an exclusivity window.

Step 5 – Regulatory clearances. Every cross-border acquisition by an international buyer involving a Mainland operating entity requires assessment of the applicable foreign-investment catalogue and, where applicable, national-security or merger-control review. In a distressed context, timelines are compressed and clearances do not wait. Counsel should file early and manage the review process actively. The gate at this step is receipt of all required clearances, including the market-regulator filing where the target has listed securities or a regulated business.

Step 6 – Documentation and closing mechanics. The acquisition agreement in a distressed deal typically contains a narrower set of warranties than in a normal M&A transaction – sometimes none from the seller – and an expanded set of conditions to closing tied to the insolvency process milestones. The governing law and dispute-resolution clause require particular care: for a cross-border distressed acquisition with Mainland assets and an offshore holding structure, an HKIAC-administered arbitration clause seated in Hong Kong gives the buyer access to interim-measures relief in the Mainland under the Arrangement on Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings (in effect since 1 October 2019). That mechanism is not available for ad hoc arbitration or for non-Hong Kong-seated arbitrations. The gate at this step is a complete, executed closing bundle that accounts for the Mainland and offshore elements in the correct sequence.

Step 7 – Post-closing title confirmation and integration. In a Mainland context, title to equity or assets is confirmed by registration with the relevant authority: the State Administration for Market Regulation (SAMR) for equity changes, the land registry for real property, the intellectual-property registry for patents and trade marks. Until these registrations are complete, the buyer holds beneficial interest only. Registrations should be pursued as a condition of, or simultaneously with, closing rather than as an afterthought.

The sequence above describes the standard position. Your matter turns on the specific documents, the jurisdictions actually engaged and the order of steps – which is where the route is won or lost. To discuss the perimeter and structure for a specific acquisition, write to us at info@lockhartyip.com.

What do foreign and offshore counsel most commonly get wrong?

Three errors recur on distressed Greater China acquisitions. They are not exotic; they are structural, and they follow from treating the deal as either a pure Mainland transaction or a pure offshore transaction.

The first error is selecting the acquisition vehicle before mapping the asset perimeter. A BVI or Cayman special-purpose vehicle is the default structure for many offshore M&A practitioners. In a Mainland-asset acquisition, however, the eligible-investor rules, the foreign-investment catalogue and the tax position of the vehicle all depend on the nature of the assets being acquired. A holding structure that works for a clean acquisition may be ineligible or inefficient in a distressed context where certain licence categories require a specific vehicle type or a minimum paid-in capital.

The second error is failing to engage with the Mainland administrator or court process at the right time. Distressed processes in the Mainland have defined windows. An administrator operating under the Enterprise Bankruptcy Law is working to a court-imposed timetable. A buyer who arrives after the creditor-vote window has closed, or who submits a proposal without adequate funding evidence, is unlikely to be accommodated. We have seen well-capitalised international buyers lose their preferred position to a less well-funded domestic buyer simply because the latter engaged two months earlier.

The third error is treating the arbitration clause as boilerplate. In a distressed cross-border deal, the arbitration clause is a substantive risk-management tool. An HKIAC clause seated in Hong Kong gives the buyer access to interim measures in the Mainland courts – a powerful preservation tool if the seller (or a post-closing obligor) moves assets pre-award. An ad hoc clause or a foreign-seated clause does not. The difference is material, and the clause is negotiated at term-sheet stage, not after heads of terms are signed.

If an earlier filing, structure or enforcement attempt has produced an adverse or stalled result, a second read can identify the strategic error and the routes still open. To discuss a situation that has already encountered difficulty, write to us at info@lockhartyip.com.

How does the Hong Kong reciprocal-enforcement regime affect a distressed acquirer?

Since 29 January 2024, the Mainland Judgments Ordinance (Cap. 645) has materially changed the enforcement landscape for cross-border transactions. Under this regime, an effective Mainland civil or commercial judgment – including a judgment confirming the outcome of an administrator's reorganisation plan – can be registered with the Court of First Instance in Hong Kong. The registration mechanism replaces the prior regime, which required an exclusive-jurisdiction clause in favour of the Mainland courts, a significant practical constraint that Cap. 645 removes.

For a distressed acquirer, the implications run in two directions. First, a buyer who acquires assets or equity through a Mainland court-supervised process and then faces a residual creditor claim has a cleaner route to enforcing the Mainland court's confirmation order in Hong Kong. Second, a buyer who has obtained a Hong Kong court order – for example, an injunction or a judgment against a guarantor – has a registration route in the Mainland under the reciprocal arrangement. The regime does not cover every category of claim: insolvency-specific judgments, certain intellectual-property matters and matrimonial matters are excluded. Parties should verify the current scope of the exclusions before relying on the regime in a specific transaction.

For acquirers with assets on both sides of the boundary, the practical question is: which court should confirm the restructuring outcome, and in which order should enforcement steps be taken? The answer depends on where the valuable assets sit and where the residual creditor risk is concentrated. Our desk regularly works through this sequencing question with the acquirer's in-house team before the deal is structured.

What does an objection-handling checklist look like for this deal type?

A common assumption among buyers approaching their first Greater China distressed deal is that the Mainland insolvency process is too opaque or too slow to produce a commercially usable result. That assumption is increasingly out of date.

The Enterprise Bankruptcy Law, in operation for nearly two decades, has produced a body of administrator practice and court precedent that experienced Mainland counsel can map with reasonable precision. The courts hearing major reorganisations in the principal commercial cities have developed consistent procedures. The risk is not opacity; it is unfamiliarity. Buyers who approach the process without counsel experienced in Mainland reorganisation practice consistently underestimate the speed of creditor-vote windows and overestimate the flexibility of the court timetable.

A second common assumption is that the offshore holding structure protects the buyer from Mainland claims. It provides a degree of separation, but not absolute protection. Where a Mainland judgment is now registrable in Hong Kong under Cap. 645, and where the buyer's principal assets are held through Hong Kong entities, that separation is thinner than it was before 29 January 2024. Structuring the offshore holding layer with this in mind – including the governing law of inter-company arrangements and the location of charged assets – is part of the pre-deal structural work.

A third assumption is that distressed pricing compensates for structural risk. It does not. A discounted price for an asset that carries undisclosed tax arrears or an unregistered pledge still leaves the buyer exposed to the full claim. The price discount and the due-diligence investment are separate calculations.

Decision checklist before approaching a Greater China distressed target

The following checklist is not exhaustive, but it covers the threshold questions a buyer should be able to answer before making a formal approach or signing a letter of intent.

• Have you identified every legal entity in the target group – Mainland, Hong Kong, offshore – and determined the insolvency status of each?
• Is any Mainland court-supervised reorganisation or bankruptcy proceeding already filed? If so, what is the current stage and the remaining window?
• What assets are you actually acquiring, and in which jurisdiction are title and registration confirmed?
• Are the target assets in a sector subject to foreign-investment restrictions or national-security review?
• Have you mapped the priority-claims stack – employee arrears, tax obligations, secured debt – against the target's balance sheet?
• Is your proposed acquisition vehicle eligible to hold the target assets under the applicable foreign-investment rules?
• Does your proposed dispute-resolution clause give you access to interim measures in the relevant Mainland courts?
• Have you assessed the stamp duty and tax position of the vehicle in both the acquisition jurisdiction and the holding jurisdiction?
• Is there a Mainland judgment or arbitral award already in existence against the target that could be registered in Hong Kong under Cap. 645?
• What are the post-closing registration steps, and can they be completed as a condition of or simultaneously with closing?

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

Related practices

• Disputes & Arbitration – enforcement routes and interim measures across Mainland China and Hong Kong
• Holding Structures – vehicle selection and offshore layering for Greater China acquisitions

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