Against the backdrop of the recent market volatility and a weak
global economic outlook, it is interesting to note that outbound
acquisitions by Chinese corporations reached a new record for the
first half of 2011. Chinese acquisition activity in the U.S. will
likely further intensify, as recent European monetary instability
and increases in commodity prices and currency exchange rates in
the Asia-Pacific region make U.S. targets comparatively more
attractive to Chinese investors.
Although several high-profile deals involving Chinese companies
have been blocked on national security grounds, the vast majority
of Chinese investments in the U.S. have obtained regulatory
clearance, and, in recent days, the U.S. government has
emphatically reiterated its commitment to making the U.S. the top
target of Chinese global investments.
Most transactions undertaken by Chinese companies in the U.S. can
be successfully implemented through a combination of a careful
analysis of relevant local and national political implications, the
identification of the most appropriate transaction structure, and a
timely review of all legal issues that could complicate the
negotiations.
Below is a brief discussion of several major issues affecting
Chinese strategic investments in the U.S.
National Security Review
Chinese acquirers and U.S. targets must pay significant
attention to the national security review of the Committee on
Foreign Investment in the United States ("CFIUS"), which
could result in the disapproval or divestiture of any substantial
Chinese investments in the U.S. (excluding greenfield investments).
Although applicable statutes do not define "national
security," the factors that CFIUS considers in making its
assessments are often problematic for Chinese companies.
Nevertheless, by following some useful basic guidelines when
dealing with CFIUS — including engaging in early
discussions with U.S. Treasury officials and CFIUS experts, making
advance voluntary filings with CFIUS when appropriate, and, if
necessary, offering methods of mitigation early in the review
process — Chinese acquirers will likely be able to
mitigate against possible risks inherent in a U.S.
acquisition.
Other Regulatory Approvals
Where targets are U.S. public companies, in addition to the risk
of derivative securities' litigation, parties to the
transaction should take note of the detailed disclosure and
approval requirements imposed by U.S. corporate and securities
laws. To the extent that a Chinese acquirer is active in the same
industry as the target company, the proposed transaction may also
trigger a premerger notification requirement and be subject to
federal antitrust review. Finally, acquisitions in certain
sensitive industries — including banking,
telecommunications, defense, mineral resources and energy
— often require separate approvals by federal and state
regulators.
Chinese investors and their U.S. counterparts should also be aware
that prior approval of the Chinese Ministry of Commerce may be
required for certain Chinese investments in the U.S., based on the
size of the transaction and the jurisdictions and industries
involved.
M&A and Corporate Issues
While special considerations apply to acquisitions of publicly
traded companies, the choice of the most efficient acquisition
structure (e.g., stock or asset purchase or a merger) is usually a
function of the parties' mutual goals and the specific facts of
each particular transaction. Key among these are the desire
to maximize tax efficiency, the buyer's desire to minimize
exposure to the target's liabilities, the need to obtain
required corporate consents and third-party approvals, and other
statutory issues. As CFIUS often closely examines what the
Chinese investor's ongoing role will be in the target business
post-closing, certain Chinese acquirers may need to consider
alternative transaction structures, including settling for a
minority investment or a joint venture; investing in preferred
stock or debt securities; making the acquisition in collaboration
with a U.S. lender, private equity firm or co-investor; or
employing a U.S. acquisition vehicle with U.S. involvement in the
management.
It is also essential that due diligence and negotiations be
conducted by experienced U.S. advisors in line with local custom
and practice. The advice of seasoned professionals is key in
helping to identify critical issues (e.g., current or threatened
litigation; potential employment, labor, environmental concerns;
and intellectual property matters) and, especially in a competitive
auction situation, achieving a negotiated deal and outmaneuvering
potential competitors.
Post-Closing Considerations
Chinese acquirers should recognize, and attempt to deal from the
outset with, any post-closing integration issues that could
complicate the successful implementation of a transaction. Special
emphasis should be placed on ongoing compliance issues, including
U.S. securities rules relating to director independence, internal
control reports and loans to officers and directors; licensing
restrictions on the exports of certain items; and any potential
issues arising under the Foreign Corrupt Practices Act.
Conclusion
The U.S. remains a particularly attractive destination for
Chinese investors. In addition to the traditional lure of the rich
public and private capital markets, opportunities for investment
abound in a wide variety of industry sectors, including
infrastructure, information technology, media and entertainment,
life sciences, pharmaceuticals, real estate, natural resources,
power generation and consumer products. Although regulatory
oversight, as in most countries around the world, is a fact of life
in the U.S., as participants in China's fast-growing economy
begin to ponder expansion beyond the lands of the Middle Kingdom,
they will likely find the U.S.'s entrepreneurial spirit and
decidedly pro-business environment a very compelling
proposition.
For a greater in-depth discussion of the critical issues touched
upon above that should be considered in advance of any strategic
investment by Chinese companies in the U.S., please
click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
