Asia M&A Forum - key takeaways from day two

Author: Danielle Myles | Published: 4 Mar 2016
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Trading considerations in outbound dealmaking by Chinese buyers

  • The government has been trying to reform large state-owned enterprises by reducing them to around 60, while the others will be divided into two categories: commercial and public interest.
  • Chinese buyers are focused on provisions that are very much catered to them, for instance, much higher break-up fees.
  • Foreign investors are often required to deposit a huge amount of money upon signing to protect against forex risks. This is in light of capital controls issues making it impossible to take the money offshore.
  • For SOE buyers in particular, CFIUS is a real concern – including because it’s not always clear how the regulator works. CFIUS receives a mixed reception, as some believe that it targets Chinese buyers.
  • A 2014 reports show that the number of CFIUS investigations has grown dramatically. One argument is that Chinese buyers that have been targeted because the industries that focus on, namely technology.
  • There has been more onshore financing structures, with funds later moved into an SPV offshore structure.

Representation and warranty insurance: the deal counsel’s guide

  • Over 2014 and 2015, rep and warranty insurance in Asia has more than doubled amid an uptick in awareness.
  • Escrow is still a rarity. There are a number of currencies which have fluctuated substantially, around 20% back and forth, in the last couple of years.
  • If money is placed into escrow in Asia, there is no guarantee that the value you are getting out of escrow is anything like you predicted.
  • Hong Kong is top of the list for cross-border investment, followed by Japan, Singapore and Korea. In emerging markets in Southeast Asia, more cross-border investments have gone into areas, such as education, healthcare and agriculture.
  • Most deals out of Japan recently have involved cash-rich, conservative corporate buyers, who see little worth buying in their own market.

FOCUS: India M&A

  • India has largely been a service-based country and this is the first time the national focus has centered on manufacturing.
  • Until recently, foreigners were only allowed to own 26% of an Indian insurance company, so they were entering the market through a joint venture. The cap has now been increased to 49% but along with it came a requirement that all insurance companies be Indian-owned and controlled.
  • There is a lot of questions about what 'Indian-owned and controlled’ means. Indian companies can either increase their shares or change other arrangements to comply with foreign ownership rules. 
  • Indian shareholders have to nominate a majority of the board, the chairman and CEO or managing director. They can no longer be nominated by a foreign party, they must be approved by the board.
  • Key management personnel can be nominated by foreigner, but they still needed to be approved by the board. The chairperson of the enlisted foreign party could not have a casting vote, the significant policies of the company needed to be controlled by the board.
  • Before foreign investors agree to arbitrate a dispute in India, there are a number of options that Indian parties an avail themselves of to frustrate or challenge the proceedings.
  • The Supreme Court has made a landmark decision encouraging foreign investors to seek their arbitration outside of India, thereby shielding them from court interference.

Shareholder activism: opportunities for Asia’s M&A players

  • For boards with a track record of a lack of transparency, Hong Kong institutional investors are increasingly voicing their concerns.
  • Large companies are now no longer necessarily getting mandate resolutions passed at their annual general meeting; previously these would have been expected to be passed without any doubt.
  • Institutional investors in China have come together to go against companies since as early as 2002.
  • There have been incidences where a group of institutional investors have voted down board members, as has happened in the US, for re-election, but shareholders have voted for re-election.

Fair game: crackdown on antitrust practices

  • Information exchange is highly controversial, and it’s very important to make sure that people in your organisation are aware of the sensitivities of such an infringement.
  • Information conveyed through a third party is a potential issue and is very common.
  • More cases have cropped up in recent years, particularly in China where the NDRC has increased penalties for price-fixing in the auto sector. 
  • In Korea, the Supreme Court recently clarified an insurance case that information exchange could not constitute a violation; it had to be hooked to a price-fixing case.
  • Most people and organisations in the region keep information to themselves, with very few of them having an in-house manual guide on antitrust.
  • Awareness remains low among corporates of the fact that you can be held liable for having only exchanged sensitive information without having engaged in price-fixing or come to an agreement.