Con­trol le­gal risks in over­seas ac­qui­si­tions

China Daily (Canada) - - RAILWAY -

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.

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