Best practices in addressing corruption risk
- Corruption risk is on the rise in Asia, with over 100 pending FCPA investigations in the region compared with 40 in Africa;
- But the US has seen relatively few M&A related enforcement actions since 2014. Connected hires and corporate hospitality featured prominently in 2015 actions;
- FCPA remains the most feared of the international frameworks. The UK Bribery Act has not lived up to expectations in terms of enforcement, even though its prohibitions are wider than the FCA;
- There has been a seachange in the last few years insofar as business people realising the risk and engaging outside counsel more, as personal liability increases;
- Companies’ counsel are increasingly spending up to six months on anti-corruption diligence in red flag countries China and Indonesia.
The art and science of post-merger integration
- As M&A volumes continue to rise, acquirers are dedicating more time and resources to post merger integration;
- But a one-size-fits-all approach won’t work, and bidders should prioritise the process;
- Planning should include attempts to retain talent within the target company and pure financial incentives are often not enough;
- Sometimes the best solution is to treat the two companies as separate entities with separate HR strategies and different remuneration strategies;
- Some companies, especially serial acquirers, have dedicated post-acquisition integration teams. But in other cases the local teams are left to manage the process themselves.
Tech M&A: key issues in today’s convergence-driven TMT market
- Tech M&A is on the rise. It’s driven by consolidation, with a large number of smaller players. Also driven by private equity interest in the industry;
- Asia is still difficult to acquire in the TMT sector. Regulatory restrictions are high, especially in Indonesia.
- Employment restrictions are also holding acquirers back;
- Cfius arises frequently. It’s a difficult hurdle to get over. Some deals expected to be caught by it end up sailing through, while others are unexpectedly caught by the US rules.
- Data security regularly features on operational lists for risk registers, but doesn't feature heavily on due diligence which tend to be quite high level.
- Look at what other approaches successful acquirers took, especially when investing from the US to Asia. Don't’ be afraid to follow the same principles and practices.
Vietnam and TPP: A new wave of M&A
- The inflation rate now being kept at one percent, while the Vietnamese dong is stable. There has been a huge accumulation of non-performing loans;
- The government is focusing more on the private sector by working with Asian Development Bank;
- Historically they didn’t regulate the IT sector, but this has seen the strongest growth.
- The new Investment Law and New Enterprise Law exempt foreign investors from applying for an investment certificate;
- The new investment regime allows foreign corporates to get a controlling stake in local companies in various sectors, such as insurance and manufacturing, with registration for sensitive sectors taking 15 days and five for less important ones;
- There is huge diversification in the Vietnamese market and foreign investors, mainly from China, are looking how they can diversify in the country.
Developments in outbound M&A into Europe
- Chinese companies are increasingly looking to buy international brands to enhance their own image and competitiveness;
- New investment in private equity funds from finance buyers is showing such a huge increase, which has totaled $192 billion in deals and 1062 transactions, a 69% change from 2014;
- Targeted areas in Europe remain TMG, consumer healthcare and real estate;
- China’s One Belt One Road will offset the country’s slowing growth domestically and it will give rise to investment opportunities. It will close the gap between the coastal regions and the rest of China;
- There is no framework or a blueprint for the execution of this initiative, but it will have a big impact and will be felt across Europe.
Privacy and data security issues in M&A deals
- A lot companies’ data assets are digital so due diligence involves trade secrets and intellectual property;
- The EU set up a data protection framework in 1995 and a lot of countries have followed, with Hong Kong’s modelling the EU’s;
- The fines for breaching data protection laws now reach up to four percent of your global turnover;
- Foreign organisations headquartered in the EU will still be fined even if even the breach has been committed in Hong Kong.
Distressed M&A: Leveraging opportunity in a down market
- In some areas of China, political jurisdictions cannot be relied upon because they aren’t predictable and, on top of that, they are organs of the local governments;
- The distress situation often lacks transparency; it’s not unusual to see subsidiaries disappear due to an accumulation of debt;
- There is a host of regulatory issues arising from governments with large ownership stakes in public companies that have made it difficult to deal with issues relating to corporate structure;
- There is a lot of activity in the non-performing loan space and a shift from offshore debt to onshore debt, which has created a need for regulators to step in.
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
Other articles related to the forum:
- 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.