Pleased to share views with everyone here re cross border investment and M&A, particularly the linked risks and measures to avoid such risks.
Entrepreneres, investors and fund managers are more concerned of expansion and profits of the business operation, while our lawyers pay more attention on compliance and risks of our clients and their projects, particularly how to prevent risks to really occur.Today we discuss 5 points:
China supports and is active in cross border investment and M&A.
China welcomes foreign investors. The State Council of PRC issued Opinion of Further Well Utilizing Foreign Investment on November 7, 2019, call for further opening for foreign investment and quicken the implementation of open policy. The Opinion states that, support new areas open for foreign investment, speed up financial sector open for foreign investment, better policies in automobile sector with foreign investment, create a fair operation environment for foreign investment.
China promotes the building of an open global economy, maintain multilateralism, go along the way of peoples in the world consult together, construct together and get rich all together.
"One Belt & One road" policy as China initiated, not only cover 65 countries and regions along with the belt and road region, it is a concept of globalization. OBOR policy adheres to 5 linkages, which are, policy link, infrastructure link, trade link, fund link and peoples’ hearts link.
Major risks lawyers advice our clients in cross border investment and M&A.
Political and legal risks.
The Chinese commercial legal system so far is well established to guide the PRC domestic commercial transactions, however, when the Chinese enterprises go abroad, the biggest risk is lacks of well understanding on the legal environment in the targetd countries where the investment and M&A to go to.
Cross border investment and M&A is not only the issue of market and the action of the enterprises, but also need to follow the laws, regulations of both the home country of the investor and the country the investment targets locate. High attention must be paid on the review and prohibition of the countries where the target locates regarding country security issues or high tech linked projects. There exist serious political and legal risks.
Strategy and decision making risks.
Different investors may have different strategies, and the investment decisions are different accordingly. Industrial investors normally view the cross border investment and M&A should follow the strategy of sustainable development, while financial investors or the investment funds normally expect to have shorter period of investment due to the investment fund itself has the duration requirement at the time of its establishment.
Foreign exchange risks.
Forex issue is a very headache topic we lawyers doing cross border transaction normally face. For instance, the guarantor agrees to provide guarantee for repayment of loan, pay interest and fees, however, can only guarantee the local currency repayment or payment, instead of providing the repayment or payment in hard currencies.
Asset appraisal and pricing risks.
Asset appraisal and pricing are the fundermental issues in cross border investment and M&A projects, directly relavant to the success or failure of the projects, which are the most concerned and sensitive topics during the business negotiation.the value of the assets highly depends on how our lawyers conduct the legal due diligence among many other vavulation pre actions,as well as the project structure which must be legally correct.
Risks after the closing of cross border investment and M&A transactions.
Statistics shows roughly 40% M&A transactions are successful and almost 60% M&A transactions are in failure, most of such failures are due to after-M&A integration.
After project closing integration risks mainly include: management integration risks, culture integration risks, human resources integration risks, taxation compliance risks, applicable law compliance risks, product sales compliance risks, local residents compensation compliance risks, employment warefare compliance risk, anti-monopoly investigation risks, environment protection compliance risks, IP protection risks、anti-corruption rule compliance risks.All need lawyers intensive input.
How to avoid various risks in cross border investment and M&A.
China need more lawyers experienced in cross border practice.
Xi Jinping, the president of China said, participating in the global governance we need a lot of professionals who are familiar with the PRC government policies, understand our country’s national conditions, with global vision, well use foreign languages, familiar with the international rulings, and with experience of cross border negotiation. In order to promote the influence of China overseas, China need to have a big team of talented professionals in the area of cross border business transaction legal practice.
Training program for Chinese cross border legal professionals.
Among variety of methods Chinese lawyers upgrade the legal service abilities and capacities, Training Program for Chinese Cross Corder Legal Professionals began in 2012, this program has been arranged and consistently has been supported by PRC Ministry of Justice (MOJ) and All China Lawyers Association (ACLA), with the intention of training legal professionals to be familiar with the cross border transaction rules, with global vision, understand law, economy, foreign languages so as to promote Chinese legal professionals in the global markets. Up to the present, the Program has trained over 1000 Chinese lawyers, the training courses are conducted in China, Germany, UK, US, Spain, and other commercially most active locations.
Measures facing political and legal risks.
A significant risk inherent in making cross border investment and M&A is political risk which includes the risks of war, civil unrest, and expropriation of assets by the host government, and restrictions on the transfer of funds out of the host country.
Two ways of mitigating or managing political risks are: 1. Through the use of Bi-lateral Investment Treaties, and 2. purchase of Political Risk Insurance.
China has signed more than 100 BITs. There are lawyers who specialize on bilateral investment treaties (BITs) entered into between the host country and other countries, and will suggest incorporating the SPV in the country that has the most preferential BIT with the host country. However, some BITs entered into between the host country and another country may contain terms that are more preferential than the BIT signed by the host country with the PRC. Hence, to mitigate political risks, the PRC investor can be advised to set up the SPV (for making the investment) in the country that has the best BIT with the host country. BIT will protect the foreign investor or SPV incorporated in the treaty country from expropriation risk and risk of the host government imposing discriminatory practices on the foreign investor.
Political risks insurance can be purchased from public and private insurance companies to cover risks of expropriation of project assets by the host government, political violence, and risk of restrictions imposes on currency transfers outside the host country. Political risk insurance can be purchased from public bodies like the Multilateral Investment Guarantee Agency (MIGA) or China Export & Import Insurance Corporation (Sinosure）.
Different projects adopt different suitable and worldwide recognized financial models for cross border investment and M&A, for instance, infrastructure projects such as power plants,highway,subway, etc., normally project financing or BOT are the typical financing models, we lawyers need to really understand the structure of such models, however,following such models does not mean there is no flexibilities, for instance, Chinese investors may consider a way of sustainable practice, in other words, when the project construction is completed, the investors may manage or operate the facilities if operating such facilities is more profitable based on our lawyers advice that the local country government has issued more preferential treatment if the foreign investors remain operation in their country.
The last issue is that never forget our own lawyers’practice law risks.
Lawyers as retained by clients to provide legal advice for their specific cross border investment and M&A transactions.
Lawyers are the practitioners on law only but not on any other areas such as financial, accounting or specific industry areas, our liabilities are only limited to legal issues we opion.
In the process of advicing clients on legal issues, lawyers need to work harmoniously with other advices like financial advisors, accounting firms, tax advisers, assets appraisals, specialists in particular industries, commercial banks, fund managers,etc..most importantly, our lawyers are only formally touch legal issues.
The jurisdiction limitation for lawyers practice is strictly within the jurisdiction where the lawyers are licensed to practice, legal advice or opinion must be given by the proper lawyers licensed in their particular jurisdiction.