Developments in China's Tsinghua Unigroup's bid for HKSE-listed RDA Microelectronics show the immediate impact of December's relaxation of outbound investment regulations in China. However, uncertainty remains around the application of the "one Chinese bidder" policy.
Tsinghua Unigroup entered into a merger agreement with semiconductor producer RDA for US$18.50 per American Depository Share in November 2013. The deal was struck between the parties despite the fact that the powerful National Development and Reform Commission (NDRC) had already granted preliminary approval to rival state owned bidder Shanghai Pudong Science and Technology Investment (SPSTI) for its September offer of US$15.50 per RDA American Depository Share.
Reports from China at the time suggested that NDRC was unlikely to grant preliminary approval to Tsinghua even though Tsinghua expressed confidence it would secure NDRC approval and committed to pay RDA a $70 million termination fee if it could not. However on 2 December, in a move designed to reduce and decentralise approval powers, the Chinese government announced that only investments over US$1 billion or involving sensitive countries, regions or industries will require NDRC approval. Investments valued between US$300 million and US$1 billion will still need to file with NDRC and obtain a filing receipt.
Tsinghua and RDA moved quickly on the Chinese government's announcement and amended their deal to be flexible enough in case the NDRC approval condition to the RDA deal is no longer required.
This highlights the immediate impact of the changes to outbound investment regulation. However, it leaves unclear the question of whether Chinese regulators will allow more than one Chinese company to bid on an outbound investment at the same time. Whilst it is the market's perception that NDRC will only grant one preliminary approval in relation to a deal at any time, with the result that Chinese companies are not able to bid against each other, examples in recent years show that this is not always correct.
The NDRC approval regime
The outbound investment project approval regime administered by NDRC has two broad aspects: (i) the "preliminary review" regime; and (ii) the (final) "project approval" regime.
Project Approval Regime
Certain Chinese outbound investment is subject to a number of key regulatory approvals by Chinese government ministries, including NDRC, Ministry of Commerce (MOFCOM) and State Administration of Foreign Exchange (SAFE). NDRC approval is considered to be the most important approval and essential to obtaining other approvals.
Following the 2 December announcement, NDRC approval will only be necessary for investments of over US$1 billion or in the case of sensitive countries, regions or industries. The NDRC has not yet released revisionary or implementation rules, but those are expected to be released in the coming weeks.
Preliminary Review Regime
Under the NDRC's "preliminary review" regime, certain Chinese investment requires a "project information report" to be submitted to the regulator before substantive work on an overseas investment can be undertaken. Substantive work is generally taken to include signing binding documentation, making binding offers and commencing foreign investment review processes in the relevant jurisdiction. The NDRC will then issue a project confirmation letter – generally known or dubbed as a "road pass" in the market.
This "preliminary review" regime is designed to manage project risk and avoid Chinese investors competing against one another for the same assets, at the ultimate cost to the Chinese state. For these reasons, whilst not expressly stated by NDRC, the market's perception has been that NDRC will only issue one road pass at a time for any given deal.
Early indications from NDRC suggest that a filing receipt is still required to be obtained for deals valued between US$300 million and US$1 billion, and that the process and documents required to file with NDRC are substantially the same as the previous approval regime. It remains to be seen whether the NDRC policy will be to only allow one deal to be filed at a time thereby preventing multiple Chinese companies from undertaking substantive work on the same project and so be unable to bid against each other.
Tsinghua and RDA are waiting for clarity, having amended their agreement to reflect two alternative possibilities:
- the deal is no longer subject to NDRC approval as it is under $1 billion in which case the NDRC approval condition is effectively waived, and
- the NDRC revisionary or implementation rules, are released showing an NDRC approval is still required for some reason. This second alternative highlights a possibility market watchers are interested to understand – does the one Chinese bidder policy remain and if so, how is it implemented for deals under $1 billion.
Multiple road passes – a growing trend?
Some examples indicate that multiple NDRC road passes are possible.
In early 2012, Chinese concrete pumping giant Sany Heavy Industry Co., Ltd obtained a NDRC road pass for the acquisition of German company Putzmeister only weeks after Sany's biggest rival, Zoomlion, had received a road pass in connection with its own bid for Putzmeister. Sany – which was accused by Chinese press of not "playing by the rules" – gazumped Zoomlion by signing a binding agreement with Putzmeister before it had even obtained a NDRC road pass.
When asked to comment on the issue of road pass "exclusivity" in the context of the Sany/Putzmeister deal, an NDRC official was quoted as saying that it was "not necessarily the case" that a Chinese company should have exclusivity by virtue of a road pass.
Early stage outbound investment saw Shanghai Automotive Industry Corp (SAIC) trump China National Blue Star Corp's bid for Korea's Ssangyong in 2004, arguing SAIC alone had received approval to bid for Ssangyong. In 2012, unusually Beijing Enterprises Group intervened in Sinopec's and ENN's unsolicited joint bid for Hong Kong listed China Gas Holdings, increasing its stake and undermining the Sinopec/ENN bid.
A return to exclusivity?
In the case of Tsinghua Unigroup's bid for RDA, media reports had suggested the NDRC would return to the exclusive approach of only one road pass per deal. The regulator had reportedly sent a letter to Tsinghua University, the owner of Tsinghua Unigroup, expressing its discontent that the bidder had entered into a definitive merger agreement with RDA before consulting with NDRC.
Media reports suggest that NDRC had also been in contact with SPSTI, reassuring the Shanghai-based company that it will not be moved by Tsinghua's argument that failure to approve its deal will trigger a US$70 million termination fee payable to RDA. Media reports also suggest SPSTI was not expected to make an improved bid while the RDA-Tsinghua deal remained on foot and if Tsinghua was unsuccessful in securing a road pass immediately from the NDRC, it would have waited for SPSTI's road pass to expire and then re-applied. The uncertainty remains and market observers will be waiting to see how the NDRC treats this bid, in particular if it allows Tsinghua to proceed, despite having initially given SPSTI the road-pass. RDA shareholders approved the Tsinghua deal shortly after the announcement indicating they did not expect SPSTI to make an improved bid.
Not yet clear
The NDRC's decision in relation to Tsinghua's RDA bid is expected to provide greater clarity to assist target boards and their advisors to navigate competitive situations where multiple Chinese bidders participate by ensuring the best outcome for shareholders, without sharing confidential information with suitors who are not authorised to seal a deal. It is possible that the 2 December regulatory change removed the need for an approval in that deal. Until the NDRC clarify, it remains unclear whether multiple "road passes" may be issued by NDRC, and so whether a competitive bid requires the NDRC to show its hand in relation to competing Chinese bidders.
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