Control legal risks in overseas acquisitions
Chinese enterprises’ overseas acquisitions have witnessed a remarkable increase during the past several years, especially after the 2008 financial crisis. Many Chinese enterprises are acquiring high quality European and US companies and assets to enhance market position and core competence such as technology, brands, and distributions network. Technology, media, telecommunication, automobile and transportation, and financial services are the main target industries.
These acquisitions face legal risks different from those involved in acquisitions in developing countries. In developing countries political stability risks and policy risks such as nationalization and foreign exchange may be of major concern for Chinese enterprises. In the US and Europe, Chinese enterprises more often face legal risks involved in foreign investment scrutiny and anti-trust examination. Special attention should be paid to legal risks relevant to the target company, and opposition from interested parties, such as labor and environmental protection organizations.
To address and control the relevant legal risks involved in overseas acquisitions, especially in the US and Europe, Chinese enterprises need to pay attention to the following:
They need to change their mentality from relying more on government and relationships to paying more attention to the requirements of laws, rules and contracts. Recently, a Chinese enterprise complained that when the company it acquired in a European country was found to have some health, safety and environment permit issues, it tried to approach the local government to solve the problem. But the local government refused to make an exception. Finally it had to pay additional money to get the permit issue resolved according to the local laws. This is a good example of Chinese enterprises needing to follow the local game rules when doing overseas acquisitions.
Chinese enterprises should be alert to risks and engage good outside consultants to advise on various aspects of the acquisitions, including financial, legal, tax and technical. Thorough due diligence on all aspects of the target company and target assets is of particular importance. Thorough due diligence could reveal the defects and problems of the target company and assets and provide a basis for the decision of the Chinese acquirer to proceed or not.