Poly Investments has carried out the first share swap in China under new M&A rules, but uncertainty still surrounds the treatment of acquiring equity interest.

Poly’s Hong Kong-listed company acquired the equity interest of its sister company, Shenzhen Poly Investments. While the deal is a welcome first since the introduction of China’s M&A laws, it is yet to test one undefined article on the statute.

Under Chapter 4 of the law, share swaps can only occur if the acquiring offshore company is listed in a “recognized stock exchange”. What “recognized” means is so far unclear and the well-respected Hong Kong exchange (where Poly is listed) is unlikely to raise any eyebrows among the regulators.

Only when a company listed on a smaller, less developed exchange attempts a share swap will the Ministry of Commerce’s interpretation be tested.

It is unlikely that the share swap will be used as a defence measure in China, a practice common in Japan. Instead, its allure is the ability to acquire a Chinese company on a cashless basis, something that will appeal to the Chinese government, with its glut of foreign exchange reserves.

“Five years ago this sort of deal would be unthinkable, but now the surplus means a cashless transaction appeals,” said Chau Ho, partner at Paul Hastings Janofsky & Walker.

While Paul Hastings advised Poly in Hong Kong, Beijing Alliance represented Shenzhen Poly Investment.