CHINA Law and Practice Contributed by: Jeff Liu, Jeanette Wang, Yulong Lai and Yun Bi, Shihui Partners
7.4 Interim Operating Covenants and Gun- Jumping Risk In PRC M&A transactions, interim operating covenants are structured to facilitate lawful integration planning while strictly avoiding gun jumping and related regula - tory risks. Aligned with applicable PRC law and trans - action agreements, these covenants generally require the target to operate in the ordinary course of busi - ness during the interim period. Material actions, such as asset disposals, entering into significant contracts or key personnel changes, typically require the buyer’s prior consent, thereby preserving deal value without transferring operational control. To prevent gun jumping, operational covenants are typically designed as protective veto rights rather than affirmative control mechanisms. Buyers should avoid exercising de facto control over daily operations, pric - ing or production before closing. Legitimate integra - tion planning is permitted through structured channels such as clean teams and third-party advisers, which allow necessary information exchange (eg, data shar - ing for due diligence) while preventing direct sharing of competitively sensitive information between busi - ness units. In practice, parties balance planning and compliance by relying on phased integration approaches and clean team protocols, ensuring the target operates independently until clearance is obtained. The SAMR has strengthened enforcement of the AML, making careful design of interim covenants and strict adher - ence to conduct rules essential to avoid violations while advancing post-closing integration. 7.5 Multi-Jurisdictional and Multi-Regulator Co-Ordination Co-ordinating PRC merger control with multi-jurisdic - tional reviews raises issues such as overlapping time - lines, conflicting remedies and data sharing restric - tions: • Conflicting timelines: Varying review periods across jurisdictions prolong uncertainty, as the overall timeline depends on the slowest authority. • Divergent substantive standards: Regulatory bod - ies apply distinct criteria in their reviews. Remedies required in one jurisdiction (eg, a divestiture) may
conflict with another’s industrial or national secu - rity policy, leading to inconsistent outcomes from unconditional approval in one region to blockages or onerous conditions in another. • Conflicting submission: Arguments or disclosures made to one regulator can undermine the parties’ position before another authority. Furthermore, remedies imposed by different authorities may also be mutually incompatible. Transaction documents manage these risks through (a) Listing key approvals: Specify “must-have” approvals (eg, merger clearances in the multi - ple jurisdictions involved) as conditions prec - edent. (b) Material adverse effect qualifiers: Approvals may be conditioned on not receiving “burden - some conditions” that would constitute a mate - rial adverse effect. • Efforts/co-operation obligations: Define the required effort level (eg, “reasonable best efforts”) to obtain approvals and include covenants for co- operation and information sharing. • Risk allocation for divergent outcomes: (a) Divestiture/remedy obligations: Specify which party must bear the cost and responsibility for implementing remedies. several key provisions: • Conditions precedent: (b) “Drag” and “pull” rights: Allow one party to terminate the entire transaction if a key juris - diction blocks the deal or permit the buyer to waive approval in a problematic jurisdiction (if legally feasible) and proceed with closing elsewhere. (c) Reverse break fees: Provide compensation and a clean exit if a key approval fails. • Long-stop date/split closing: (a) Long-stop date: Provide a final deadline for satisfying all conditions precedent to closing. Failure to obtain all required approvals by this date will trigger termination rights for one or both parties. (b) Split closings: In some cases, parties may negotiate a “split closing”. However, this is legally complex and risky regarding gun-
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