Life Sciences Horizons Brochure 2025 - Flipbook - Page 58
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2025 Horizons Life Sciences and Health Care
How to navigate demergers in China
Demerger is an attractive option for multinational life
sciences sector companies to rationalize business
portfolios and achieve strategic growth. Whether
through a split-off or a spin-off, these transactions
require careful planning to navigate China’s complex
legal, regulatory, and tax landscape. Several factors
drive the popularity of demergers in pharmaceuticals
and medical devices sectors in China:
Market positioning: Standalone companies focused on
innovative drugs or devices are more attractive for public listings.
M&A readiness: Acquirers often require pre-closing restructuring
to remove non-core assets.
Strategic growth: Separating core businesses can improve
operational efficiency and valuation.
Tax advantages: Properly structured demergers can achieve
tax efficiency, such as being eligible for the High and NewTechnology Enterprise status, which offers a reduced corporate
tax rate.
Below we summarize the four key considerations for demergers.
Financial & Tax Structuring:
Alternative Structures:
Capital allocation: Shareholders have flexibility in allocating
registered capital between the original company and the new
company; provided that the total registered capital and paid-in
capital of the two companies after the demerger are equal to
the corresponding amounts of the original company before
the demerger.
Instead of a formal demerger, companies might consider:
Asset transfers: Moving assets to a new company, though this
requires capital injections and triggers various taxes.
Asset assignment: Transferring assets to a wholly owned
subsidiary in exchange for increased registered capital, though
this comes with a one-year freeze on M&A activity after closing.
Regulatory and procedural hurdles:
Chinese law imposes strict procedural requirements, including
creditor notifications and public disclosures, which some
companies may find sensitive. Additionally, regulated sectors like
pharmaceuticals face complex approval processes, making early
regulatory engagement crucial.
Manufacturing & real estate: Many life sciences companies
operate multiple plants on shared land. Transferring facilities
requires careful handling of land use rights, regulatory
approvals, and potential negotiations with local governments.
Employee transfers: A key advantage of demergers is that
employee contracts transfer automatically, but labor union
consultations may still be necessary.
Key considerations for life
sciences demerger deals in China
Demerger deals in China’s life sciences sector offer compelling
strategic benefits but demand thorough advance planning.
Engaging experienced advisors can provide valuable guidance
throughout the process, ensuring a successful outcome.
Operational and legal complexities:
Licensing & permits: Drug and medical device marketing
authorizations are currently not transferable; instead,
companies (but see “Chinese draft medical devices law
unveiled” for forthcoming developments in this regard
on page 76) must obtain new permits, potentially causing
operational delays.
For further details, please refer to
Debt & contracts: Creditors must be consulted, as demerger
rules in China impose joint liability on the new and original
entwities, unless negotiated otherwise.
Andrew McGinty
Partner
Hong Kong
Wensheng Ren
Counsel
Hogan Lovells Fidelity
Jessie Xie
Counsel
Beijing
