Virtual Round Table: Mergers & Acquisitions
2013
1.
Have there been any recent regulatory changes? If so, how will they impact
M&A activity?
New Anti-Trust Review in China: There
have been some developments in the anti-trust review area which are applicable
to huge mergers and acquisitions. A
common criticism of the anti-trust review conducted by the PRC Ministry of
Commerce (“MOFCOM”) is that it has taken more time to complete its review than similar
anti-trust authorities in other countries, thus delaying the progress of major
M&A activities.
In April 2013, the MOFCOM released Tentative Provision on the Criteria
Applicable to Simple Cases of Concentrations of Business Operation (Draft for
Comments)(“Draft Provisions”) to solicit public comments. By using market share as the standard, the
Draft Provisions set out the conditions for the simplification of review for
(a) a horizontal merger; (b) a vertical merger; and (c) a merger that is
neither horizontal nor vertical. If the
conditions are met, the merger will be classified as a “simple case”. In addition, an acquisition of an off-shore
target which does not conduct business in China will be classified as a “simple
case”. However, the MOFCOM explicitly
reserves discretion to re-categorise cases apparently satisfying the criteria
of simple cases as non-simple cases.
Although the Draft Provisions do not
explain how the simple cases will be treated,
it is expected that these simple cases will be subject to a simplified
and expedited review process, and consultations with other governmental
authority will no longer be required or at least simplified. A fast-track review can shorten the waiting
period for anti-trust regulatory clearance.
The public consultation period has ended and the MOFCOM has not issued
its formal provisions or released more information.
Another noteworthy case is Wal-Mart’s
proposed acquisition of shares in Yihaodian, an online supermarket in
China. In the anti-trust review decision
made in August 2012, the MOFCOM
prohibited Wal-Mart from operating value-added telecommunication
business through a variable interest entity (“VIE”) structure in China. However, the MOFCOM’s decision was based on
anti-competition concerns and did not draw any conclusion on the legality or
validity of the VIE structure itself. It
is unlikely that the Chinese government would promulgate rules or take
enforcement actions banning or dismantling the VIE structures in the near
future. However, the Wal-Mart case may
illustrate that financial investors engaging in projects that rely on a VIE
structure may wish to avoid structuring a transaction that would trigger
MOFCOM’s anti-trust review.
2.
What jurisdictions currently offer interesting opportunities?
We expect to
see continuous strong M&A interest both inside China and Hong Kong and
increasing outward M&A acquisitions from Chinese and Hong Kong
companies. China aims in its 12th
Five Year Plan for Renewable Energy to generate 11.4% of total primary energy
from non-fossil sources by 2015 and 15% by 2020. The country’s craving for developing
renewable resources will make new energy sectors in China a prime attraction
for foreign investors. Contrary to the
traditional energy sectors, foreign investment in new energy sectors in China
is encouraged and foreign-invested high-tech companies in new energy sectors
can enjoy preferential tax treatment, adding to their appeal to foreign
investment.
Apart from M&A
into China, it is expected that outbound M&A acquisitions from China in the
U.S., Canada, Australia and Latin American countries will continue to be
attractive as they are rich in natural resources and energy. For countries like Sudan, Libya and Syria,
although they have abundant natural resources, their volatile domestic
political situations and undeveloped legal systems are the main obstacles for
Chinese investors who have an interest in investing in these countries. With the further development of the
China-ASEAN Free Trade Area, outbound investment from China is also increasing
in Southeast Asian countries such as Malaysia, Vietnam, Indonesia and
Cambodia.
3.
What are the key risks and challenges that first time acquirers must be aware
of when conducting cross-border M&A?
Gaining a
complete and accurate grasp of the local business environment, including its
laws and labor and environmental practices, as well as understanding the value
and liabilities of the target company is a major challenge for a first-time
acquirer, particularly when the target company is located in a jurisdiction
where its legal system is different from that of the acquirer. The acquirer may
have to learn new accounting standards and business practices. A comprehensive due diligence questionnaire
cannot guarantee that all problems and red flags will be identified. Often, the
first-time acquirer will face unknown issues after closing. In addition, an
analysis of the potential risks arising from domestic corruption, bribery,
money-laundering and fraud is needed to reduce exposure to reputational damage
and regulatory liabilities.
The
first-time acquirer should be aware of foreign exchange risks associated with
cross-border M&A , particularly when the acquirer or the seller is located
in a jurisdiction where foreign exchange is highly regulated, such as
China. It is advisable for the parties
to state in the transaction documents how the foreign exchange risks should be allocated
between them.
Further, first-time
acquirers often lack experience in managing post-merger integration, resulting
in the departure of many valuable managers and employees post-merger because of
differences in corporate culture, seriously undermining the synergies effect of
the transaction.
4. How can
you help to alleviate tension during cross-border M&A when companies from
different cultural or corporate backgrounds merge?
Before
documentation or formal negotiation begins, we should research the cultural and
corporate backgrounds of the counter party.
Often, it will tell us the dos and don’ts in the documentation and
negotiation stages. Based on the
research, we may predict the behavior of the counter party during negotiation
and propose solutions and avoid behavior which could delay the overall process
of the negotiation.
At the
beginning of negotiation, we should convey the message that both parties are
here for the purpose of consummating the deal and it is necessary to make
reasonable compromises to find common ground and avoid deadlock. During negotiation, it is important to listen
carefully to the concerns of the other party and try to address the concerns
that is least objectionable from every party’s standpoint. Learning from the other party’s behavior
during negotiation, we should adjust our negotiation strategy.
5.
When representing a business in a takeover, what ranks highest on your due
diligence check-sheet?
The
focus of due diligence may differ according to the industry in which the target
operates. For any M&A transaction, examination of the target’s shareholding
structure and legal title of shareholding and assets (including existing and
potential encumbrances, registered or otherwise), should be at the top of a
legal due diligence review.
If
the target is a public company, efforts will be needed to clear regulatory requirements
and make public disclosures. If the
target is incorporated in the PRC, due to the relatively tight registration
and/or approval requirements on doing business under PRC laws, the due
diligence review should aim to find out whether the target has satisfied all applicable
registration or approval requirements, both local and national.
A
major new area of focus in the due diligence review is the potential risks and
liabilities arising from anti-trust clearance, anti-corruption and anti-bribery. During due diligence review, the acquirer,
through its legal, financial and accounting advisers, should review unusual
payments and patterns of discounts to ensure that there are no money laundering
and bribery problems. The parties can
negotiate appropriate risk allocation, protection and compensation if the
issues are not major and can be quantified.
6.
What methods can be implemented to ensure the Post Merger Integration (PMI)
transition operates smoothly?
·
Preparing an integration plan: the acquirer should begin formulating a
post-merger integration plan before the deal closes, taking into consideration
different corporate cultures and practices.
For example, if the target is less organized and more entrepreneurial,
which the acquirer treasures, care must be taken to assimilate the target’s
practices and needs. The acquirer needs
to understand the target’s current operating style, determine the future
operating style of the post -merger organization and develop a plan to narrow
gaps and retain valued employees and managers .
·
Effective communications:
management of the acquirer and the target often wonder how they can fit
into the post-merger organization.
Communications in the forms of face-to-face meetings, regular official
letters, memoranda, emails and newsletters from top management to all staff are
needed to help them understand the value of the merger to both the acquirer and the target and
reassure them of a bright future.
·
Someone acting as an intermediary: a senior executive should be selected
as an intermediary between the acquirer and the target. Having someone to bridge the gap can help the
target to understand why specific changes are adopted after the merger and can
help the acquirer to phase the integration process at an appropriate pace.
