How to obtain ChinaCo/US merger approval

Author: Ashley Lee | Published: 20 Sep 2012
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Chinese companies have proposed several high-profile acquisitions of US companies this year. But the US foreign investment and antitrust regimes are challenging for those unfamiliar with US law.

Political opposition to deals such as China National Offshore Oil Corporation’s (Cnooc) $15 billion acquisition of Nexen, and even expansion of Chinese telecommunications companies ZTE and Huawei, mean that Chinese companies are looking at Europe and Australia for less-troublesome acquisitions.

Lawyers experienced in cross-border M&A agree, however, that with careful planning and a commitment to cultural understanding the US is not a difficult place to do business.

“Chinese investors shouldn’t feel that they’ve been targeted unfairly,” said Sean Tai, partner at Paul Hastings in Shanghai. He stressed that the US legal system is different to China’s, and professional guidance with US investments is a necessity.

“Some areas may have more rules and regulations so they might require a longer time and more legal and financial advisors to get things done, which can frustrate people,” he added.

Charles Ching, a Hong Kong-based partner at Freshfields Bruckhaus Deringer, said it is important to plan each transaction’s work stream ahead of time – in particular, the various regulatory processes on both sides of the Pacific. He recommended early assessments of potential regulatory concerns and how to address them from the legal, commercial and even political perspectives.

Political opposition in sensitive sectors

While most industries are open to foreign investment, there are exceptions for strategically important areas such as military or telecommunications. “The US’s investment regime is comparable to that of Canada or Australia,” Tai added.

The Committee on Foreign Investment in the US (Cfius) can investigate a transaction’s impact on national security. For any problematic transactions the Committee can require changes or, if it thinks the deal should be blocked, refer it to the US President . Cfius will first receive a formal notice of a proposed transaction, after which it has 30 days to determine whether it will carry out a full investigation.

Cfius has occasionally blocked deals, and recently ordered a construction halt on a wind farm in Oregon owned by senior executives of Chinese company Sany Group. In February 2011, Cfius informed Huawei that it should unwind its purchase of certain assets from 3Leaf Systems, a California-based cloud computing company.

But a larger concern is the US political environment. Sources agree that these transactions are especially polarising in an election year, and that politics play a significant role in high-value deals. For example, US politicians condemned Cnooc’s 2005 acquisition of Unocal, which Cnooc called off before the completion of Cfius’ review. Cnooc’s acquisition of Nexen is under Cfius review but has already been criticised by legislators.

Again, counsel recommend planning ahead. “It’s essential to manage, as part of the Cfius process, how the deal is perceived as a matter of political and public opinion, which could in turn affect the Cfius process for the particular deal,” said Ching. “Perception and politics matter, and it is better to tackle the issues upfront and be proactive in addressing them.”

Auction processes and government notifications

Acquisitions via auction can be difficult for Asian corporates because of the requirement for speed and certainty. Counsel involved in inbound US deals have cited auctions as being particularly challenging in deals such as Marubeni’s acquisition of Gavilon.

Marubeni’s auction process was challenging because of its fast pace. But Chinese corporates looking towards outbound investments must contend with the speed of the transaction as well as numerous Chinese government approvals.

Ching warned that US targets don’t necessarily understand the various PRC approvals – National Development and Reform Commission (NDRC), Ministry of Commerce of the People’s Republic of China (MOFCOM), State Administration of Foreign Exchange (SAFE), State-owned Assets Supervision and Administration Commission (SASAC) for SOEs and others – a PRC investor needs to obtain before closing its US acquisition.

“US targets’ initial instinct may be to view these approvals as political outs that give the PRC investor too much optionality, which may push them to do a deal with another investor at lesser value but with greater deal certainty,” added Ching.

His advice follows the same theme of being prepared. He advised that PRC investors bridge the differences in perception on both sides by being upfront with US targets early on, and educating them about various approval processes. Moreover, they should be transparent on how they intend to approach the approval processes to minimise targets’ concerns on deal certainty.

Many issues regarding Chinese companies’ inbound US M&A transactions stem from a lack of planning and cultural understanding, although deals are also affected by uncontrollable factors such as political will.

But it’s important to note that many large deals complete in less-sensitive sectors. Dalian Wanda Group’s acquisition of AMC Entertainment Holdings, which created the world’s largest cinema chain, is one example. In those areas, the US approval process is generally relaxed.

Despite a few high-profile transactions being derailed, Tai said the US remains an attractive target for Chinese investors: “I don’t think the legal or political environment, in general, is turning away foreign investors at all.”

See here for IFLR’s coverage of Ralls v Cfius, and what it signals for US security review

And here for our coverage of how Cnooc structured its bid for Nexen to obtain Investment Canada Act approval