Ten things to know about Chinese acquirers
June 2015 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Completed Chinese cross-border M&A deals have maintained an annual aggregate value of over $40bn since 2012. Most of these deals are in the energy and power, materials and financial services industries. The top three favourite target regions are the United States, Canada and the European Union. With more and more Chinese companies seeking overseas acquisition targets, foreign companies find themselves as potential acquirees, as opposed to being the acquirers some 10 years ago. Failure of foreign acquirees to understand their differences with the Chinese acquirers and to address issues arising from the differences appropriately can often lead to a failed deal, failed expectation or unfortunate delay. We discuss here what we believe to be the 10 most important differences that foreign companies should be aware of when faced with the possibility of being a potential target of a Chinese acquirer.
Negotiating with state-owned enterprises can be very different from negotiating with private companies
Negotiating with private Chinese companies about possible acquisition is much easier compared with negotiating with state-owned enterprises. In the former case, the negotiator is often the chairman of the company or someone who only needs to report to the chairman of the company, which makes the negotiation process straightforward. However, because state-owned enterprises have complex reporting lines, negotiators representing a state-owned enterprise have to consult with more decision-makers before reaching a deal with the other party, and the consultation process is almost always coupled with extensive government involvement, including evaluation of target companies, additional layers of examination and approval, and a balancing act among different decision-makers with different interests and expectations.
Is it only flirting? Do your due diligence
The Chinese acquirers may talk to you for months before they decide whether to make a deal. In some cases, the acquirer may use a potential deal as a way to obtain information for some other purposes. Also, just because the potential acquirer looks big does not mean it is big, and even if it is big in fact, it may not be able to deploy resources to do your deal. You should make inquiries politely about the seriousness of the potential acquirer and its resources before spending months negotiating the details.
It is not unusual that Chinese acquirers have their hidden agendas
Foreign acquirees often find the negotiation strategy of their Chinese acquirers mysterious and, sometimes, illogical. Unlike domestic transactions where the expectation of the other party is often predictable and, therefore, manageable, foreign acquirees sometimes have great difficulties understanding what really drives the desire of their Chinese acquirers to want to do the deal, and this often results in foreign acquirees making compromise in things about which the Chinese acquirers couldn’t care less and insisting on things that are dear to heart of the Chinese acquirers. This is usually because the Chinese parties have their hidden agendas which they either are not willing to share or don’t know how or whether it is appropriate to share. That the PRC parties may have hidden agendas does not mean they have malicious or improper intent, as it may be something as simple and innocuous as the chairman’s son starting college in Stanford, so the chairman wants to acquire a company in Silicon Valley.
Deals can be made over the dinner table
One of the ways to unearth the underlying agendas of the Chinese party is to establish a personal relationship with them and build trust. Foreign entrepreneurs find time spent on dinners very unproductive, while Chinese businesspeople consider it the best way to know your counterparty; foreign entrepreneurs are inclined to cut to the chase and get right to the point, while Chinese businesspeople feel their way around by chit-chatting and seemingly useless dinner parties. It is not unusual that the essential terms and conditions of a deal can be agreed over the dinner table, although it is advisable to document the oral agreement as soon as possible after the handshake.
The PRC parties’ lawyers often come in at a later stage of the transaction
Western entrepreneurs consider lawyers and advisers part of the deal team and various professionals are involved and consulted from the outset. This is not the case with Chinese businesspeople. They often start negotiation without consulting any professionals and only bring lawyers in when they need to document the agreements already reached; in a sense, lawyers are viewed only as pen-pushers. Do not be lured into thinking that you can take advantage of this, because oftentimes you will find that when lawyers are brought in by the other party, the deal you thought you had will be materially changed due to many reasons, such as noncompliance with Chinese law or an undesirable deal structure from the Chinese legal perspective. Asking your Chinese acquirers to consult with their lawyers at the very beginning of the deal will be a smart way to save you time and effort.
At least one party should be represented by a bilingual lawyer who is also familiar with Chinese law and the law of the foreign acquiree’s home country
Cultural differences between western entrepreneurs and their Chinese counterparties are surprisingly vast, which is further complicated by the differences in the legal systems between two countries. Then there is the language barrier, which creates difficulties in translating what one means from one language into the other. It is very important to find a bridge that can connect both parties – an agent that speaks and thinks in both languages and understands the way business is done in both countries. Lawyers can often function as such agents and it is advisable that at least one party engages a bilingual lawyer who is also familiar with Chinese law and the law of the foreign acquiree’s home country.
Deals agreed by the Chinese party will be subject to examination and approval of the Chinese government
Outbound investment by Chinese companies is subject to examination and approval of Chinese government authorities, which normally include the Ministry of Commerce or its local counterparts, the State Administration of Foreign Exchange or its local branch, and the National Development and Reform Commission or its local counterparts. Although the Chinese government has gradually loosened its control over Chinese companies’ outbound investment activities, it is still not unusual for government authorities to ‘request’ the parties to make substantial changes to the transactional terms before granting approval. It is important to take this into consideration when setting the transaction timeline.
Explain to your Chinese acquirer that a CFIUS filing or EU merger review is not as scary as they think
Because some high profile deals involving PRC acquirers were derailed by national security review in the US, many PRC companies worry about CFIUS and EU merger review. They seem to be less concerned about merger review in Canada. If you are a potential target in the US or the EU, it is advisable to evaluate, at an early stage, whether CFIUS and Hart-Scott-Rodino filings, or EU merger filings, are necessary and to explain to the PRC acquirer that these filings are manageable with fore-planning and good advisers.
Always use arbitration if possible
Enforcement of a foreign judicial judgment in China can be very troublesome, if possible at all. China only has bilateral treaties with a limited number of countries regarding recognition and enforcement of foreign civil judgments, and those countries do not include the United States, Britain, Japan and Canada, among others. However, since China is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a foreign party has a better chance of enforcing an arbitration award made by a foreign arbitration tribunal.
Negotiation extends beyond the closing of a deal
‘Retrading’ is common with Chinese entrepreneurs. They expect that a lot of things can be left to ‘later discussion’, even if the parties have agreed to the terms and documented the terms in writing. Frustrating as it may be, try not to consider it as dealing in bad faith – just remember that the chairman of your acquirer has to deal with a very different government and business environment in which his company mainly operates. Talking with your Chinese acquirer and, if appropriate, offering to help may get you a long way.
Woon-Wah Siu is the managing partner of the Shanghai office and Julian Zou is an associate at Pillsbury Winthrop Shaw Pittman LLP. Ms Siu can be contacted on +86 21 6137 7924 or by email: firstname.lastname@example.org. Mr Zou can be contacted on +1 (650) 233 4057 or by email: email@example.com.
© Financier Worldwide
Woon-Wah Siu and Julian Zou
Pillsbury Winthrop Shaw Pittman LLP