M&A Transaction with Chinese Buyers, Observation and Challenges

Xiaoyu Liu

Supervisor: Mr. Dr. Klaus W. Riehmer

Shanghai, 16 August, 2018

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Table of Content List of Abbreviations

Sources

Introduction

I. Development of Chinese Outbound M&A Transactions

A. Overview of Chinese Outbound M&A Developments

1. The Embryonic Stage from 1982

2. The Steady Progress from 1992 to 2001

3.The Rapid and Diversified Development from 2002 to the present

B. Key Features of Chinese Overseas M&A Development in Recent Years

1. Policy Guidance

2. Market Features of Chinese Outbound M&A Deals from 2015

a) Explosive Growth in 2016

b) Comparison of M&A transactions in 2016 and 2017

c) Latest Performance in 2018 H1

II. Challenges with Chinese Buyers in M&A Transactions

A. Regulatory Barriers from Target Regions rooting in the Complexity Nature of the

Chinese Buyer

1. Types and Features of Chinese Acquirers in outbound M&A

a) State Owned Enterprise (“SOE”)

b) Privately Owned Enterprise (“POE”)

c) Consortiums

d) Funds

2. National Security Concern from Target Country/Region

a) CFIUS review and FIRRMA in US Context

b) Draft Regulation for Investment Screening

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3. Anti-Monopoly Review

a) A case in US context

b) A EC decision on Chinese and French cooperation for construction of nuclear

power plant in UK

B. Policy Orientation and Regulatory Control in PRC

1. Overview of regulatory development of PRC Administration on Overseas Direct

Investment (ODI)

2. National Development and Reform Commission (NDRC)

a) Supervision Competence

b) Removal of the “Small Pass” in Decree No. 11

3. The Ministry of Commerce (MOFCOM) and its Provincial Competent Commerce

Department (PCCD)

a) Regulatory Measures for Managing Overseas Investment

b) ODI Rules 2016

4. State Administration of Foreign Exchange (SAFE)

a) Overview of China’s foreign exchange system

b) Restriction of overseas capital transfer for outbound investment

5. Specific Regulatory Requirements

a) SASAC

b) Listed Companies

c) Antitrust Scrutiny - SAMR

C. Unpredictability and Mechanism for Risk Mitigation

III. Cultural Divergence in Deal-Making with Chinese Companies

IV. Summary and Outlook

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V. Appendix

Statement

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List of Abbreviations

BRI The Belt and Road Initiative

BAT Baidu, Alibaba and Tencent

CGOE Central Government-Owned Enterprises

CSRC China Securities Regulatory Commission

CFIUS Committee on Foreign Investment in the United States

EDF French Energy Company

FIRRMA Foreign Investment Risk Review Modernization Act of 2018

FDI Foreign Direct Investment

FINSA Foreign Investment and National Security Act of 2007

M&A Merger and Acquisition

MOFCOM The Ministry of Commerce of PRC

NDRC National Development and Reform Commission

ODI Overseas Direct Investment

POE Privately Owned Enterprises

PBoC People’s Bank of China

PDRC Provincial Development and Reform Commission

RTF Reverse Break Fees

SASAC State-owned Assets Supervision and Administration Commission

of the State Council

SAMA State Administration for Market Regulation

SOE State-Owned Enterprises

SAFE State Administration of Foreign Exchange

SGCC State Grid Corporation of China

TMT Technology，Media，Telecom

WTO World Trade Organization

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Sources Mergermarket: H1 2018 Global M&A Report with Legal Advisor League Tables https://s3.eu-west-2.amazonaws.com/acuris-live/MergermarketLegalLeagueTableReport.H12018.pdf Regional overview: H1 2018 China & Hong Kong M&A Trend Report (Chinese version: 中国内地及香港并购趋势报告 2018年上半年), co-author: Ken Chan and Melissa Yan https://s3.eu-west-2.amazonaws.com/acuris-live/China_Hong_Kong_MA_activity_during_H1_2018(Chinese)_0.pdf Rising Tension: Assessing China’s FDI in Europe and North America, Baker McKenzie, p.6, April 3, 2018 https://www.bakermckenzie.com/en/insight/publications/2018/04/rising-tension-china-fdi Special Report on China Cross-Border M&A 2017, Deal Globe http://en.dealglobe.com/doc/2018/06/2017%20DealGlobe%20Special%20Report%20on%20China%20Cross-Border%20M&A.pdf 2018 Global M&A Outlook by J.P. Morgan’s M&A team, Jan 14, 2018 https://www.jpmorgan.com/jpmpdf/1320744801603.pdf A Review of Chinese Outbound M&As in 2017-2018 and Outlook, Morning Whistle Group, March 1, 2018 http://image.morningwhistle.com/files/e1c4f11f-78ff-4983-a578-f82d5f442c001518834077060.pdf Policy Challenges in Implementing National Development Plans: China, an extract from the Economic Outlook for Southeast Asia, China and India 2015: Strengthening Institutional Capacity http://dx.doi.org/10.1787/saeo-2015-en The 13th Five-Year Plan China’s transformation and integration with the world economy. (KPMG: October 2016) https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2016/10/13fyp-opportunities-analysis-for-chinese-and-foreign-businesses.pdf China Outward Investment Report, NDRC, October 30, 2017 http://www.ndrc.gov.cn/gzdt/201711/t20171130_868903.html China - Key Points Of NDRC Guidelines For Preparing Application For Overseas Investment Projects, ZhengYun, 11 May, 2018 http://www.conventuslaw.com/report/china-all-you-need-to-know-about-the-application/ China Mergers Antitrust Enforcement Agencies into One, as its Anti-Monopoly Law Approaches 10th Anniversary, Noah Brumfield, J. Mark Gidley, Z. Alex Zhang, Yi Ying https://www.whitecase.com/sites/whitecase/files/files/download/publications/china-merges-antitrust-enforcement-agencies-into-one-samr.pdf Embarking on the journey to a new era of opening-up, 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group, June 2018 https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-ibs-2018-china-outbound-investment-guide-en-180604.PDF

6

2018 Special Report on China Cross-Border M&A, DealGlobe http://en.dealglobe.com/doc/2018/06/2018%20DealGlobe%20Special%20Report%20on%20China%20Cross-Border%20M&A.pdf Action plan on the Belt and Road Initiative,March 30, 2015. http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm. Boffa, Mauro. 2018. Trade linkages between the belt and road economies (English) Policy Research working paper; no. WPS 8423. Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/460281525178627774/Trade-linkages-between-the-belt-and-road-economies The Mergers & Acquisitions Review - Edition 11, Editor: Mark Zerdin China Chapter, Authors: Wei (David) Chen, Yuan Wang, Kai Xue https://thelawreviews.co.uk/edition/the-mergers-acquisitions-review-edition-11/1148626/china China’s Most Ambitious Global M&A Deals of 2016: HNA, Wanda, ChinaChem Lead Buying Spree https://www.chinamoneynetwork.com/2017/01/23/chinas-most-ambitious-global-ma-deals-of-2016-hna-wanda-chinachem-lead-pack Recent trends and issues in outbound acquisition by Chinese companies, by By Fang Xue, Yuefan Wang and Qi, The M&A Lawyer, Volume 20, Issue 10, 2016 Thomson Reuters Reutershttps://www.gibsondunn.com/wp-content/uploads/documents/publications/Xue-Recent-Trends-and-Issues-in-Outbound-Acquisitions-by-Chinese-Companies-MA-Lawyer-December-2016.pdf James K. Jackson, Congressional Research Service, The Committee on Foreign Investment in the United States (CFIUS), Oct. 11, 2017 at 6 EU-China FDI: Working towards reciprocity in investment relations, Thilo Hanemann and Mikko Huotari, April 17, 2018. https://www.merics.org/en/papers-on-china/reciprocity Cross-Border Mergers & Acquisitions, Scott C. Whitaker, China Machine Press, 2018, June, first edition, page 273 Chinese M&A deals face wall as US and Europe guard tech, Nikkei staff writers, June 19, 2018 https://asia.nikkei.com/Politics/International-Relations/Chinese-M-A-deals-face-wall-as-US-and-Europe-guard-tech Repatriation of funds from a foreign-invested company (FIC) in the PRC, Authors: Peter Zaman Katherine Yang Jeffrey Yang. https://www.reedsmith.com/en/perspectives/2017/06/repatriation-of-funds-from-a-foreign-invested-company-in-the-prc

Pre-investment Capital Planning for China’s Foreign Exchange Control http://www.china-briefing.com/news/2018/02/13/pre-investment-capital-planning-for-chinas-foreign-exchange-control.html

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China as a 'National Strategic Buyer': Towards a Multilateral Regime for Cross-Border M&A, Jeffrey

N.Gordon & Curtis J. Milhaupt, May 17, 2018

https://corpgov.law.harvard.edu/2018/05/29/china-as-a-national-strategic-buyer-towards-a-multilateral-reg

ime-for-cross-border-ma/

Corporate Governance in China, Bob Tricker, May 16, 2017

https://corporategovernanceoup.wordpress.com/category/communist-party/

Germany Blocks Two Transactions Involving Chinese Investors on National Security Grounds, August

2018.https://www.jonesday.com/germany-blocks-two-transactions-involving-chinese-investors-on-national

-security-grounds-08-08-2018/#

Europe puts the brakes on Chinese outbound acquisitions

https://www.bloomberg.com/news/articles/2018-03-04/amid-china-m-a-drive-eu-rushes-for-investment-scr

eening-deal

Jonathan Stearns: Amid China M&A Drive, EU Rushes for Investment-Screening Deal

https://www.bloomberg.com/news/articles/2018-03-04/amid-china-m-a-drive-eu-rushes-for-investment-scr

eening-deal

Hinkley Point C project proceeding well: CGN, Xinhua | Updated: Feb.11, 2018

http://www.chinadaily.com.cn/a/201802/01/WS5a72892ca3106e7dcc13a2fa.html.

NDRC Clarifies the Scope of Sensitive Projects in ODI FAQs, Wang Kaiding, Huang Mengting and Tang

Xinran, July, 9, 2018

http://www.kwm.com/en/knowledge/insights/for-sensitive-class-explain-the-applicable-scope-of-the-projec

t-20180709.

Completing M&A Transactions Successfully with Chinese Companies in a Swiss Context, Niederer Kraft

& Frey Ltd.

https://www.nkf.ch/wAssets-nkf2/docs/publikationen/philippe_a_weber/Completing-M-A-Transactions-Suc

cessfully-with-Chinese-Companies-in-a-Swiss-Context_2016.pdf

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Trump bars Chinese-backed firm from buying U.S. chipmaker Lattice, Liana B. Baker, September 14,

2017

https://www.reuters.com/article/us-lattice-m-a-canyonbridge-trump/trump-bars-chinese-backed-firm-from-

buying-u-s-chipmaker-lattice-idUSKCN1BO2ME

European Commission clears EDF, CGN partnership, 11 March 2016, World Nuclear News

http://www.world-nuclear-news.org/C-European-Commission-clears-EDF-CGN-partnership-1103165.html

NDRC releases directory of sensitive industries for outbound investment (2018 edition)

http://www.ndrc.gov.cn/zcfb/zcfbtz/201802/t20180211_877272.html

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Introduction

In this global economy, companies are always seeking investment opportunities to expand

businesses and gain sustainable profits. Mergers and Acquisitions (M&A) strategy has also

increasingly become a primary mode of entering new markets to supplement the underlying

growth profile. China, as one of the booming emerging markets, has recorded impressive growth

incentivized by its “Going Out” policy, “The Belt and Road Initiative” and “Made in China

2025”. The overseas M&A can be instrumental to the road of globalization for Chinese

multinationals to expand their businesses to foreign markets. Deal-makings with Chinese buyers

bring huge opportunities as well as challenges arising from cultural background and unique

regulatory mechanism in China which continues to change rapidly. Also, the increasing

supervision of Chinese investments in the targeted investment regions may remain uncertain and

challenging for transaction with Chinese acquirers. This paper aims to illustrate the observation

of M&A transactions initiated by Chinese buyers in recent years and challenges that Western

companies may commonly encounter in cross-border M&A transactions with Chinese buyers

from political, business and cultural dimensions.

This paper is structured as follows: Section I reviews the Chinese outbound M&A transactions,

in particular the latest trends in 2015 - 2017. Section II, examining the main challenges faced by

Chinese acquirers, is divided into three parts, namely: regulatory barriers from target regions

rooting in the complexity nature of the Chinese buyer, policy orientation and regulatory control

in PRC, unpredictability and mechanism for risk mitigation are analysed. Cultural Divergence

for deal-makings with Chinese buyers, in particular the Chinese jargon “GuanXi” is to pervade

Section III. In the final Section, summary and outlook are made regarding future development of

Chinese overseas M&As.

I. Development of Chinese Outbound M&A Transactions

A. Overview of Chinese outbound M&A Developments

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Overseas mergers and acquisitions by Chinese buyers have now expanded on a large scale, and

these achievements have gone through three stages of development : 1

1. The Embryonic Stage from 1982

In the early 1980s, there were mainly large-scale and well-funded enterprises owned by the state

engaging in overseas M&A, such as China International Trust & Investment (CITIC) and

Shougang Corporation (首都钢铁公司). The focus was mainly concentrated in the machinery

and equipment, transportation and communication industries. The overseas mergers and

acquisitions of these Chinese enterprises at this stage does not only set the direction of demand

and development for themselves, but also lay a solid foundation promoting national development

in the next decades.

2. The Steady Progress from 1992 to 2001

In 1999, the Chinese government put forward the ‘Going Global’ strategy to promote Chinese

overseas investments and provided active support in both inward and outward Foreign Direct

Investments (“FDI”). The overseas M&A activities during 1992 - 2001 were very much goal-

oriented. For example, the M&As of minerals and energy industries in developing countries were

mainly to reduce China's energy costs and ensure China's energy security; the M&As in the

financial sector were mainly designed for accelerating the internationalization process of China's

financial market; the M&As of the telecommunications industry and the transportation industry

mainly aimed to obtain advanced technology from the West. The overseas M&As at this stage

were still dominated by central and state-owned enterprises with a strong governmental

background. At the same time, although the industry tended to be diversified, it was still

concentrated in the heavy industry and financial fields that are more related to stability of the

1 The current situation and development trend of Chinese companies' overseas mergers and acquisitions, LiHe, August 5,2017, http://www.fx361.com/page/2017/0805/2140404.shtml.

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national economy and the people's livelihood issues such as commodities prices, housing

expenses, limited access to medical resources and the gap of wealth. 2

3. The rapid and diversified development from 2002 to the present

Since the beginning of the 21st century, especially after China’s accession to the WTO (World

Trade Organization), more and more Chinese private enterprises have participated in

cross-border M&As attributed to policies relaxations, which enabled the diversity and the

expansion scale of China’s overseas investments. The deal volumes of Chinese outbound M&A

deals have risen by 40- 50 times since the year 2000. The increasing deals of overseas M&As

have drawn more and more attention to this field. Especially after having experienced the secular

stagnation worldwide during the financial crisis, China is surfacing in the drastic wave of

cross-border M&As. A large number of Chinese private enterprises seized the opportunity and

took the initiative to step into the outbound M&A activities, as oversea assets devalued. The

Chinese buyers have moved towards a diversified investment scheme expanding the business to

the cultural and social aspects. For example , in 2016 Wanda acquired Hollywood production 3

company Dick Clark Productions for $1 billion; Tencent acquired supercell for $8.6 billion and

became a game giant; Suning Group paid 270 million Euro to become the largest shareholder of

A.C. Milan. Chinese outbound M&A is no longer an abstract business concept, but has gradually

entered into the public vision and business fields that closely related to the life of ordinary

people.

Table: Greater China Outbound M&A overview: 2005- 2017

2 China Going Global Observer, “The Belt and Road” CGGT, China Machine Press, January 2017 (1th edition). 3 China’s Most Ambitious Global M&A Deals of 2016: HNA, Wanda, ChinaChem Lead Buying Spree, January 23, 2017, https://www.chinamoneynetwork.com/2017/01/23/chinas-most-ambitious-global-ma-deals-of-2016-hna-wanda-chinachem-lead-pack.

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B. Key Features of Chinese Overseas M&A Development in Recent Years

1. Policy Guidance

“Going Out” has been the compelling force for China’s economic transformation and the

steering guidance for Chinese enterprises’ expansion overseas since 2000. In 2013, the “One Belt

and One Road Initiative" (BRI) was proposed as one of the most important policies of President

Xi Jinping. The concept of the BRI is to enhance the connectivities of the countries along the

BRI coverage, and to strengthen the regional cooperation and ultimately achieve sustainable

development. By August 17, 2017, according to Chinese National Reform and Development 4

Commission the BRI involved 69 countries , covering 63% of the world's population and with a 5

4Action plan on the Belt and Road Initiative,March 30, 2015, http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm. 569 countries and international organizations sign contracts with China Work together to create a “Belt and Road” cooperation agreement, (69个国家和国际组织与我国签署共建“一带一路”合作协议),http://www.gov.cn/xinwen/2017-08/17/content_5218453.htm.

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total GDP of $21 trillion which together account for 29% of global output. The BRI also 6

forms a key strategy of the 13th Five-Year Plan which lays down the strategy and sophisticated

approaches for China’s development in 2016- 2020 with the top priority to achieve the GDP

growth rate of 6.5- 7% per annum.

The comprehensive concept of the BRI is guided by six key principles, which are ‘Cooperation

Priority’, ‘Policy Coordination’, ‘Facilities Connectivity’, ‘Unimpeded Trade’, ‘Financial

Integration’, ‘People-to-People Bond’, amongst which the transport infrastructure construction is

a priority area for implementing the BRI. With the exports of infrastructure projects certain 7

sectors and countries are expected to benefit from the expansion efforts of Chinese companies.

The government promotes outward investments in the form of better foreign exchange rates,

decentralization and deregulation of administrative measures, lower interest for financing the

projects and tax reduction. Despite some confusion and suspect from the Western concerning the

national threat and reshuffling the world trade caused by BRI, it is evident that the BRI has been

one of the driving force behind the growth of Chinese outbound M&A activity since 2013.

6 2018 Special Report on China Cross-Border M&A, DealGlobe, June 2018, http://en.dealglobe.com/doc/2018/06/2018%20DealGlobe%20Special%20Report%20on%20China%20Cross-Border%20M&A.pdf. 7Action plan on the Belt and Road Initiative,March 30, 2015, http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm.

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Notably, despite the overall M&A activities of Chinese buyers cooled down in 2017 due to the

Chinese government’s capital outflow control of irrational investments by Chinese entities, the

Chinese outbound M&As in regions along the Belt and Road remained steady at the level of that

in 2016. According to the survey, 69 deals were confirmed (signed & closed deals) and 41 deals

with a total value of approximately USD 8.723 billion were disclosed, reflecting board-based

momentum that suggests the impetus of BRI has not yet run out of fuel. 8

8 A Review of Chinese Outbound M&As in 2017-2018 and Outlook, Morning Whistle Group,March 1, 2018, http://image.morningwhistle.com/files/e1c4f11f-78ff-4983-a578-f82d5f442c001518834077060.pdf.

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2. Market Features of Chinese Outbound M&A Deals from 2015

a) Explosive Growth in 2016

The outbound M&A activity has experienced a rapid growth between 2014 and 2016. Especially

in the record-breaking year of 2016, the number of M&A transactions grew by 21% by

year-on-year increase with the accumulated transaction amount reaching US$215.8 billion. The 9

notable ChemChina-Syngenta deal, the country's largest outbound deal so far, fueled the overall

deal value in 2016 with US$43 billion. The total deal value of Chinese outbound M&As saw an

annual growth rate of 246% compared to 2015 according to PwC China. 10

In 2016, manufacturing, financial services, energy, computer software and leisure are the top five

sectors by deal number where the Chinese buyers were keen to focus on. US, Hong Kong,

Germany, Australia, UK, France, Italy, Singapore, South Korea and Canada were the top ten

9 Special Report on China Cross-Border M&A 2017, Deal Globe, http://en.dealglobe.com/doc/2018/06/2017%20DealGlobe%20Special%20Report%20on%20China%20Cross-Border%20M&A.pdf. 10 Rising Tension: Assessing China’s FDI in Europe and North America, Baker McKenzie, p.6, April 3, 2018, https://www.bakermckenzie.com/en/insight/publications/2018/04/rising-tension-china-fdi.

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attractive destinations . Hong Kong features highly due to its unique offshore function for 11

facilitating overseas acquisition via Hong Kong Special Purpose Vehicles.

According to the statistics of DealGlobe 2016 , private enterprises have become the main 12

driving force for Chinese companies' overseas mergers and acquisitions. The number of

transactions led by private companies have tripled from the previous year and exceeded the

transaction amount of state-owned enterprises. The Chinese conglomerate giant HNA became

the most ambitious buyer of global assets in 2016 with at least nine major deals announced

covering the travel, aircraft and supply chain sectors , such as HNA Tourism becoming the 13

biggest shareholder of the international hotel operator Hilton Worldwide Holdings after

acquiring 247.5 million shares at the purchase value US$6.5 billion, its acquisition of Swiss

airline catering company Gategroup Holding AG, British foreign currency exchange operator

International Currency Exchange (ICE), and 13% share purchase of Virgin Austria.

In 2016, the number of transactions involving financial investors represented by private equity

and asset management company funds exceeded $38.1 billion, more than twice of the figure in

2015. Private equity funds have also played a pivotal role in overseas M&A transactions and

have become frequent visitors in the trading structure, such as Everbright Capital, IDG Capital

and Orient Securities Capital etc. 14

11 Rising Tension: Assessing China’s FDI in Europe and North America, Baker McKenzie, p.25, April 3, 2018, https://www.bakermckenzie.com/en/insight/publications/2018/04/rising-tension-china-fdi. 12 Special Report on China Cross-Border M&A 2017, Deal Globe, http://en.dealglobe.com/doc/2018/06/2017%20DealGlobe%20Special%20Report%20on%20China%20Cross-Border%20M&A.pdf. 13China’s Most Ambitious Global M&A Deals of 2016: HNA, Wanda, ChinaChem Lead Buying Spree, https://www.chinamoneynetwork.com/2017/01/23/chinas-most-ambitious-global-ma-deals-of-2016-hna-wanda-chinachem-lead-pack. 14 Globe Deal 2017, page 15. The most active overase Chinese M&A PE funds 2017:光大资本、IDG资本、东证资本、凯辉基金、赛领资本、中信资本、汉德资本、弘毅投资等。

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b) Comparison of M&A transactions in 2016 and 2017

In 2017, the Chinese outbound M&As remained dynamic despite the regulatory headwinds for

outbound M&As. The overall volume of outbound M&A deals slightly dropped by 13% 15

attributable to the decline of mega-deals (those with value exceeding US$1 billion) from 39 in

2016 to 29 in 2017. Due to the capital outflow control and new measures to curb “irrational” 16

outbound investments, in some restrictive fields like culture, entertainment and clubs, the

downtrend was obvious (no new projects by Chinese Mainland investors) . However, the 17

Chinese companies’ appetites to invest overseas remained strong with some different features in

comparison with 2016.

Compared with financial investment, strategic investment is still encouraged, and M&As with

technology and supply chain as the main target will maintain rapid development. Mergers and

acquisitions related to smart manufacturing, digital economy and consumer upgrades have

become the highlights of overseas mergers and acquisitions in 2017. Western Europe and North

America remain the most important target countries for Chinese companies' overseas mergers

and acquisitions.

Boosted by the largest Chinese outbound deal in 2017 (China Vanke GLP deal), the M&A

transactions in Asia hit a new record with a deal value amounting to US $44.5 billion. (EY),

while the overseas M&As in Europe fell by 50% and in Americas dropped by more than 60% . 18

Southeast Asia was the most favorite destination region in terms of deal value over US$33

billion worth of Chinese deals announced. Besides, companies specialized in innovative

15 2018 Global M&A Outlook by J.P. Morgan’s M&A team, Jan 14, 2018, https://www.jpmorgan.com/jpmpdf/1320744801603.pdf. 16 2018 Deloitte Outbound Investment Guide for Chinese Businesses. (p.9) 17 2018 Global M&A Outlook by J.P. Morgan’s M&A team, Jan 14, 2018. 18 China Go Abroad (7th Issue) Belt and Road - exploring a blueprint for steady growth in overseas investment, EY, April 2018, p 11, https://www.ey.com/Publication/vwLUAssets/ey-china-overseas-investment-report-issue-7-en/$FILE/ey-china-overseas-investment-report-issue-7-en.pdf.

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technology and consumer products sectors are becoming attractive to Chinese buyers. While a

number of small deals were announced in 2017, there were two notable deals with aggregated

value of over US$8 billion announced in 2016, namely the US$4.5 billion acquisition of Israeli

social game developer Playtika by a Chinese consortium led by Giant Network Group and the

acquisition of ADAM Agricultural Solutions by Hubei Sanoda with US$3.9 billion.

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China overseas M&As by sectors for 2016 and 2017, by value (US$ billion ) and by volume

respectively:

Emerging Internet companies represented by Baidu, Alibaba and Tencent (BAT) played

significant roles in TMT (Technology，Media，Telecom) sector M&A by their investment

expansion into Silicon Valley in search of high quality startups. They are initiating a third wave

of investment boom, following the ones started by SOEs and private enterprises. Such Internet

companies lay great emphasis on strategic blueprint of investment, such as Baidu’s acquisition of

mobile security company TrustGo, Tencent's investment in online design retailer Fab, Alibaba's

investment in Mobile App Search Engine Quixey, Messaging App Tango and Smart Remote

App Peel etc. All those deals reflect the change of "Made in China" from cheap commodities to

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innovative products. The caricature of sweatshop manufacturing and low-end assembly is 19

woefully out of date.

c) Latest Performance in 2018 H1

During the first half year of 2018, the M&A activities in the technology industry recorded a total

deal number of 24, corresponding to a total deal value of $3.2 billion, which saw a decline of

50.6% from the total value of $6.5 billion (in 26 deals) in the first half of 2017. According to

exclusive information from Mergermarket, this significant downward trend indicates the

investment restriction and the expanding concerns from foreign regulators, especially in the areas

of technology and cybersecurity. In this context, coupled with the negative impact of Sino-US

trade war, some Chinese companies’ acquisition plans were rejected by the CFIUS, including

Ant Financial’s intent to acquire US-based global money transfer service provider MoneyGram,

and the plan of Hubei Xinyan Equity Investment Partnership to acquire semiconductor

manufacturer - Xcerra Corp. (NASDAQ:XCRA) for $580 million.

19 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group, June 2018,https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-ibs-2018-china-outbound-investment-guide-en-180604.PDF.

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Source: Mergermarket, Regional Overview of 2018 H1

Protectionism has pushed dealmakers to look internally, with the influence of cross-border M&A

falling in the first six months of 2018. Chinese investors appear to be more cautious over

pursuing high-profile cross-border deals with the majority of this year’s increase being driven by

domestic M&A . Despite a fall in the number of deals, the M&A initiated by Chinese buyers are 20

continuing its upward trajectory in 2018, reflecting broad-based momentum that suggests the

second-longest expansion on record isn’t yet running out of fuel.

On July 17 2018, the Ministry of Commerce (MOFCOM) released statistics on FDI and overseas

cooperation projects carried out by Chinese investors in the first half of 2018. During the period,

Chinese investors conducted non-financial direct investments in 3,617 foreign enterprises in 151

countries and regions across the world, with the combined value grew by 18.7% year-on-year to

US$ 57.18 billion. Foreign construction project contracting totaled US$ 72.76 billion in turnover,

20 Mergermarket: H1 2018 Global M&A Report with Legal Advisor League Tables, https://s3.eu-west-2.amazonaws.com/acuris-live/MergermarketLegalLeagueTableReport.H12018.pdf.

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up 8.1% year-on-year; the value of new contracts fell by 13.8% to US$ 106.74 billion. Some

218,000 people were assigned to work abroad under international labor service cooperation

arrangements, and contract workers working overseas totaled 996,000 as of the end of June, an

increase of 78,000 compared with the same period of last year. In particular, outbound

investment methods were substantially innovated, with cross-border M&As serving as the main

method. Over the six months, Chinese investors carried out overseas investments in the form of

greenfield investment, M&As, joint investment, investment in-kind, equity swap and round-trip

investment. Specifically, 140 cross-border M&A projects worth a total of US$ 26.11 billion in

41 countries and regions, covering 16 primary sectors (mostly manufacturing and mining

businesses). 21

II. Challenges with Chinese Buyers in M&A Transactions

A. Regulatory Barriers from Target Regions rooting in the Complexity Nature of the

Chinese Buyer

The active Chinese acquirers in global M&A transactions are mainly divided into the four types,

namely state-owned enterprises (“SOE”), privately owned enterprises (“POE”), funds and

consortiums with a mixed form of private and strategic Chinese investors.

21MOFCOM summary on Chinese ODI in the first half year of 2018, July 17, 2018, http://www.mofcom.gov.cn/article/ae/ag/201807/20180702766855.shtml.

23

Table: 2015-2017 Chinese Investors in “One Belt One Road” (by Investor types)

Source: DealGlobe, edited by Author

1. Types and Features of Chinese Acquirers in outbound M&A

a) State-owned Enterprise (“SOE”)

As stipulated in Article 7 of the Chinese Constitution, “The State-owned economy, namely, the

socialist economy under ownership by the whole people, is the leading force in the national

economy. The State ensures the consolidation and growth of the State-owned economy.”

Therefore, it’s no doubt that the SOEs still remain central to China’s economy. Despite the lack

of clear and uniform definition of SOE among the laws and regulations of different governmental

departments, it is widely accepted that an SOE shall be an enterprise with the majority of the 22

company's shares (above 50%) controlled or owned by the State.

Based on the administrative authority of the state-owned assets, the SOEs are divided into two

types: central government-owned enterprises (“CGOE”), and those controlled by local

22 http://blog.sina.com.cn/s/blog_621583480102wn5r.html.

24

governments. SOEs, both central and local, account for 30 to 40 percent of the total GDP and

about 20 percent of China’s total employment in 2018 January. 23

The central government directly controls and manages 96 strategic CGOEs through its 24

supervisory organs, of the State-owned Assets Supervision and Administration Commission

(SASAC) and the China Securities Regulatory Commission (CSRC). CGOEs usually play the

leading force in the key sectors of the economy, from heavy industries to financial sectors

covering oil, telecoms, steel, finance, and other major sectors. It is also quite common that a 25

minority of their shares have been listed on the Hong Kong, Shenzhen, or Shanghai stock

exchanges. Well known names of CGOEs include the Bank of China (中国银行), China

National Chemical Corporation (中国化工集团有限公司), State Grid (国家电网公司), China

Telecom Group Corporation (中国电信集团有限公司)，China First Automotive Group

Corporation (中国第一汽车集团有限公司) etc.

In the 2017, there were 115 Chinese companies listed in Fortune Global 500, among which the

number of SOEs counted 80. State Grid (国家电网公司), SINOPEC Group (中国石油化工集团

公司) and China National Petroleum (中国石油天然气集团) were placed in No.2, No.3 and No

4. Despite a slight fall in the deal value over the past threes years, SOEs have always been the 26

most active and leading player in Chinese outbound acquisitions. 27

23China - 7-State Owned Enterprises,https://www.export.gov/article?id=China-State-Owned-Enterprises (last published 07/25/2017). 24Lists from http://www.sasac.gov.cn/n2588035/n2641579/n2641645/c4451749/content.html. 25 Chinese Government re-asserts control of state owned enterprises (SOEs), Bob Tricker, October 31, 2016.https://corporategovernanceoup.wordpress.com/2016/10/31/chinese-government-re-asserts-control-of-state-owned-enterprises-soes/ 26 List of Global 500 2017, http://fortune.com/global500/list/. 27 State-owned Enterprise, still a major force in the Chinese economy and abroad, by Antonio Graceffo, p.6 Guanxi,https://www.slideshare.net/AntonioGraceffo/chinese-state-owned-enterprise-baogao.

25

The corporate governance of these SOEs mirrors Chinese characteristics with two personnel

systems existing in parallel in the management system of the SOEs, namely the corporate

management system for serving the same corporate functions as those in normal western

enterprises, and the party management system which has been closely linked to the Chinese

institutions of the central government and the Chinese Communist Party. The complex 28

organizational structure and sophisticated corporate governance mechanisms led to opacity

between senior managers and mid-level managers. Usually, only top managers of the SOEs are

allowed to attend and speak in the negotiations, even he or she has limited English language

skills.

The figure of transaction values below may be able to show the role shift from SOEs to POEs.

POE acquisitions are becoming increasingly important but acquisitions by SOEs remain

significant as well.

Source: Thomson-Reuters Database, calculated by Jeffrey N. Gordon & Curtis J. Milhaupt

28 China as a “National Strategic Buyer”: Towards a Multilateral Regime for Cross- Border M&A (o.15-17); Corporate Governance in China, Bob Tricker, https://corporategovernanceoup.wordpress.com/category/communist-party/.

26

Since the party’s 18th National Congress, especially after the introduction of the “1+N”

document of state-owned enterprise reform, the pace of state-owned enterprise reform has been

accelerated. On April 24, 2017, the general office of State Council issued a “Guiding Opinions

on Further Improving the Corporate Governance Structure of State-owned Enterprises” 29

requiring the completion of the reform of the state-owned enterprise system before the end of

2017, marking the transformation of state-owned enterprises into a new stage of tackling.

However, in the aforementioned Guiding Opinions, the governance of SOEs has a deep print of

“Chinese characteristics”. For example, the board of directors shall fully communicate with the

competent organization of Communist Party to strengthen the administration and supervision of

company management; The SOEs shall stick to Communist Party's leadership and brining 30

political advantages into play. 31

b) Privately Owned Enterprise (“POE”)

With the demonstrative effect led by SOEs in the “One Belt and One Road” construction, since

the end of 2013, POEs have participated in overseas acquisition more actively and the number of

transactions completed by them has skyrocketed. The driving force behind their overseas M&A

is commonly to gain access to infront technology and expand market share. Examples of active

POEs in are Hainan Airlines, Wanda, Geely etc.

Unlike SOEs, however, private and foreign-funded enterprises put more investments into the

developed regions such as the US and European countries owing to the relatively low risks

involved, the maturity of the markets available, as well as the sound legal systems operating in

these countries. In addition to these rapid growth of overseas M&A initiated by POEs, another 32

29 [2017] No. 36 Guiding Opinions of the State Council on further improvement of the Corporate Governance Structure of State-Owned Enterprises (国务院办公厅关于进一步完善国有企业法人治理结构的指导意见). 30 II.2 (1) of the Guiding Opinion. 31 II.5 of the Guiding Opinion. 32 2018 Deloitte Outbound Investment Guide for Chinese Business.

27

noteworthy phenomenon is that listed companies have become the main force in launching

cross-border M&As. According to PricewaterhouseCoopers data, 47% of the total overseas

M&A transactions were carried out by listed companies in 2016, and of those transactions by

listed companies, 59% were performed by companies whose shares were traded in China’s

domestic main board or small or medium sized board. The reason why listed companies are keen

on overseas investment lies in their desire to acquire high quality assets in order to be more

competitive in the process of company’s technology transformation and restructuring reform.

Listed companies also have advantages in their financing channels. Coupled with the influx of

various social capitals, many POEs have become direct investors of M&A entities or become

important investors in the M&A portfolio of listed companies, providing sufficient financial

support.

Figure below shows that the pace of POEs in cross-border acquisitions measured by deal number

now far outstrips SOEs in overseas acquisitions.

Source: Thomson-Reuters Database, calculated by Jeffrey N. Gordon & Curtis J. Milhaupt

28

Despite of the relative transparent and modern structure of SOEs, it is always highly suspected

the inherent political ties are still bound to the SOEs due to some social and historical reasons.

c) Consortiums

One of the most notable changes over the past few years in China’s overseas M&As is the

increasing participation of consortiums - joining forces between Chinese enterprises and strategic

and financial investors in China. A large number of Chinese outbound M&A transactions are

conducted by funds established as a consortium of private and strategic Chinese investors. 33

Among the top 100 deals in 2017 surveyed by DealGlobe, consortium accounts for 92% of the

total value of China’s outbound investments and M&A activities, in which 52% (measured by

value) were made by consortiums consisting of strategic and financial investors from China and

other countries, 26% by Chinese private companies, 17% by Chinese state-owned enterprises and

5% by financial investors. In the announced top 10 deals in 2017, three were completed in the 34

form of Consortiums.

Source:Dealogic as of 12/31/17, edit by J.P Morgans

33 DealGlobe 2017 p15. 34 DealGlobe special report 2018.

29

As SOEs are often engaged in key projects with large investment scales and have also faced

tougher risk controls for overseas investments, however, certain sovereign and qualified

state-owned are able to serve as better players navigating the complex political environment. The

consortium has also become the main way to implement overseas M&A activities along the “Belt

and Road”. The major transactions completed by the consortiums in 2017 included cooperation 35

between US private equity firm Global Infrastructure Partners and China Investment Corporation

to jointly acquire the Singapore's renewable energy giant Equis.

Source: MergerMarket

35 Boffa, Mauro. 2018. Trade linkages between the belt and road economies (English), Policy Research working paper; no. WPS 8423. Washington, D.C.: World Bank Group, http://documents.worldbank.org/curated/en/460281525178627774/Trade-linkages-between-the-belt-and-road-economies.

30

d) Funds

McKinsey data shows that in the past five years, China has set up more than 5,500 funds with a

total capital of more than $300 billion, many of which are interested in supporting cross-border

mergers and acquisitions. In 2017, the momentum of traditional private equity and venture 36

capital fund financing remained strong, the statistics of the China Fund Industry Association

reveals that the management scale of private equity investment funds has increased nearly 7

times in the past three years and reached a total asset value of 1.5 trillion US dollars by the end

of 2017. The strong momentum was boosted by record-breaking fundraising successes, 37

availability of leveraged financing, and less competition from Chinese domestic buyers due to

capital controls. Another new outbound trend is the vigorous presence of state-backed global

investment funds as part of the Belt and Road initiative.

2. National Security Concern from Target Country/Region

a) CFIUS review and FIRRMA in US Context

The dominance of the state in China’s business sphere and the blurry distinction and structure

between SOEs and POEs, as well as the strategic decisions in the corporate governance

permeated by the Chinese government’s policy “Made in China 2025” (MIC20125)” with

priority on cutting-edge technologies for state interests, raise the suspicions towards Chinese

companies seeking to invest in or acquire their American counterparts. The Committee on 38

Foreign Investment in the United States (CFIUS) chaired by the U.S. Department of the Treasury

is an inter-agency of the U.S. federal government with authority to initiate review or

investigation, and eventually exercise the power to block the proposed transaction to acquire and

36 海外并购变奏民企唱“主角 去年中企海外并购额超万亿 (En:POEs play a leading role in outbound M&A with transaction amount over trillion), http://silkroad.news.cn/invest/tzzx/42712.shtml. 37 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group, June 2018,https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-ibs-2018-china-outbound-investment-guide-en-180604.PDF. 38Fordham Law Review,https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=5306&context=flr.

31

control a US company by a foreign investor if the deal could raise national security concerns.

The current CFIUS regime is codified by the Foreign Investment and National Security Act of

2007 (FINSA) and implemented by the executive order in 2008. CFIUS is not a judicial court, 39

but it directly reports to the U.S. President and is often viewed as political instrument to

scrutinize the acquisition and control of US companies by those foreign state-backed enterprises

that have more than just ordinary commercial intentions. The scrutiny can be especially sensitive

during the moment of the current Sino-US trade war.

For example, in September 2017, US President Donald Trump signed a presidential decree

vetoing a Chinese-backed PE firm - Canyon Bridge Capital Partner - to acquire Lattice

Semiconductor with planned $1.3 billion due to the risk of national security, as the same concern

was expressed by CFIUS. Canyon Bridge and Lattice had to terminate the deal after more than 40

eight months’ campaign in vain to persuade CFIUS to clear the deal, and despite Canyon

Bridge’s efforts to introduce a series of risk mitigation mechanism such as doubling the number

of Lattices employee. 41

Steven Mnuchin, the U.S. Treasury Secretary, made the statement following the decision in

which he addressed that “CFIUS and the president assessed that the transaction poses a risk to

the national security of the United States that cannot be resolved through mitigation”. As further

stated by Mnuchin, the key concerns were derived from the potential intellectual property

transfer, the support from the Chinese government behind in this deal, and the significant

39 China's outbound M&A & National Security, https://www.kapronasia.com/china-capital-markets-research-category/item/928-payments-national-security.html. 40Trump bars Chinese-backed firm from buying U.S. chipmaker Lattice, Liana B. Baker, September 14, 2017,https://www.reuters.com/article/us-lattice-m-a-canyonbridge-trump/trump-bars-chinese-backed-firm-from-buying-u-s-chipmaker-lattice-idUSKCN1BO2ME. 41Trump bars Chinese-backed firm from buying U.S. chipmaker Lattice, Liana B. Baker, September 14, 2017,https://www.reuters.com/article/us-lattice-m-a-canyonbridge-trump/trump-bars-chinese-backed-firm-from-buying-u-s-chipmaker-lattice-idUSKCN1BO2ME.

32

importance of Lattice products in the semiconductor supply chain being integral to the US

government. As a result, “CFIUS was transformed from an administrative body with limited

authority to review and analyze data on foreign investment to an important component of U.S.

foreign investment policy with a broad mandate and significant authority to advise the President

on foreign investment transactions and to recommend that some transactions should be

suspended or blocked.” 42

As the Chinese buyers are becoming increasingly active in the TMT sector, CFIUS is perceived

by Chinese buyer as an increasingly major barrier to the acquisition of US company as the

CFIUS review can either block the deal or impose significant regulatory and optional costs for

adjusting the proposed M&A plan required for the purpose of mitigating the concern of national

security threat. Over the last five or six years, it is estimated that about 20% of CFIUS reviews

have targeted the Chinese buyers. Sometimes the mere threat of CFIUS review may trigger the 43

withdrawal of the bidding offer by Chinese buyers and the rejection of the bid by the seller.

According to Bloomberg News, from the time when Trump took office until the beginning of

April this year, 10 foreign M&A transactions had been terminated due to CFIUS reviews, and

China buyers accounted for 8 cases. 44

Apart from the deals in TMT sectors, sometimes it becomes increasingly difficult to predict

which transactions will set off major CFIUS problems, as the detailed consideration or outcome

of the specific transaction will not be revealed. For example, it was surprising that the 45

acquisition of Smithfield Food Inc. by Shanghai International Holdings Limited with US$7.1

billion would be under intensive congressional scrutiny. Although this deal ultimately passed the

42 James K. Jackson, Congressional Research Service, The Committee on Foreign Investment in the United States (CFIUS), Oct. 11, 2017 at 6. 43 China -U.S. Crossborder Deal Risks and Mechanics, Paul/Weiss, October 2016. 44 Recent trends and issues in outbound acquisition by Chinese companies. 45 China-U.S. Crossborder Deal Risks and Mechanics (Paul/Weiss).

33

CFIUS review after undertaking a second-round of 45 days investigation, a wider range of

business sectors tend to fall into the broadening sphere of CFIUS review.

“The tech world has bristled at the expansion of CFIUS. China has deep pockets and has thrown

money at many budding Artificial Intelligence startups. China has aspirations to lead the world

in AI, robotics, and aerospace; and has invested heavily in those areas. However, Chinese

investment in the U.S. in the first half of 2018 have dropped 90% compared to the same period in

2017. Some of this is due to CFIUS and some of this is a reflection of the budding trade war that

the Trump administration has hinted about since the campaign.” 46

In addition, on May 11, 2018, the U.S. Senate Committee on Banking, Housing and Urban

Affairs ("Committee") released a "discussion draft" of the Committee's amendment to the

FIRRMA, which was introduced in November 2017 to provide additional authority to CFIUS.

On June 18, 2018, the US Senate passed its version of FIRRMA in the form of an attachment to

the National Defense Authorization Act for fiscal year 2019. On June 26, the House passed its 47

version of FIRRMA (H.R. 5814).

The Senate and House versions of FIRRMA encompass the following key provisions that may

notably extend the scrutiny power of CFIUS:

● It broadens the sensitive list of the “covered transactions” by addressing the security

concern of investments in core infrastructure and technology companies to expand the

jurisdiction of CFIUS, as well as the access to personal information and broader authority

for review of real estate transactions;

46 The AI Column: How To Think About China, Silicon Valley And CFIUS, https://taskandpurpose.com/silicon-valley-google-china-ai-cfius/. 47FIRRMA Is Coming: How to Get Ready, Posted by Randall H. Cook, Rosanne Giambalvo, and Steve Klemencic, Ankura Consulting, on Thursday, June 28, 2018, https://corpgov.law.harvard.edu/2018/06/28/firrma-is-coming-how-to-get-ready/.

34

● FIRRMA establishes new abbreviated “Declaration” fillings which allows for a shorter

filling time, and compared with a traditional notice this would bring more transactions to

the attention of CFIUS;

● The initial review time limit is extended from 30 days to 45 days.

It is believed that rise of Chinese outbound M&A in US is one the main driver and catalyst for

the CFIUS reform. All those changes above will further increase the difficulties of the Chinese

companies investing in the United States as well as the uncertainties to the sellers while dealing

with Chinese buyers. According to statistics, compared with 2016, the M&A deals of Chinese

companies in almost all industries in the United States (except the medical and health industry)

has been greatly reduced in 2017. 48

b) EU: Draft Regulation for Investment -Screening

Recently, a proposed transaction initiated by the State Grid Corporation of China ("SGCC") to

acquire a 20 percent minority stake in 50 Herz --- one of the four companies in Germany

providing high-voltage transmission system --- has been blocked by Germany due to the

concerns of public order and national. Same concern for another recent acquisition of a German

specialist in high-strength metal by a French/Chinese consortium also resulted in cancellation of

the deal. 49

The explosive pursuit of Chinese acquisitions in Europe has fostered the political unease among

European countries due to the intransparency of the corporation's ownership, ultimate

beneficiary, as well as the blurred boundary of the mixed partnership between SOEs and POEs.

48 2018 Global M&A Outlook by J.P. Morgan’s M&A team, Jan 14, 2018, https://www.jpmorgan.com/jpmpdf/1320744801603.pdf. 49 Germany Blocks Two Transactions Involving Chinese Investors on National Security Grounds, August 2018,https://www.jonesday.com/germany-blocks-two-transactions-involving-chinese-investors-on-national-security-grounds-08-08-2018/#.

35

China is perceived by the West as a “National Strategic Buyer” as a lot of the cross border

transactions mainly serve for the national interests rather than maximizing the wealth of the

shareholders in normal business aspects.

Franck Proust, a French member of the European Parliament who was leading the deliberations

over an unified investment-screening law proposal, was eager to speed up the EU legislation

process to prevent further expansion of Chinese buyers in the European market. He also alerted

that Chinese are advancing openly and eager to be the master of the world in some strategic

sectors by 2025. Obviously, the Chinese acquisition of companies in Europe is the main driving 50

force behind the EU Law reform.

The two cases rejected by Germany above mentioned are likely to arouse the public attention on

the draft EU Regulation on Establishing a Framework for the Screening of Foreign Direct

Investments into the European Union. The investment screening proposal has been identified by

the European Union as a legislative priority and is expected to be adopted by the end of this year.

In addition, it is reported that a few weeks ago, France, Germany, and Italy launched an 51

initiative to accelerate the approval of an EU law which would tighten rules for acquisitions of

European firms by foreign investors. Currently, pending and rumored Chinese acquisitions in

Europe that could fall under regulatory scrutiny amount to a total deal value exceeding $40bn. 52

3. Anti-Monopoly Review

50 Jonathan Stearns: Amid China M&A Drive, EU Rushes for Investment-Screening Deal, https://www.bloomberg.com/news/articles/2018-03-04/amid-china-m-a-drive-eu-rushes-for-investment-screening-deal 51 Germany Blocks Two Transactions Involving Chinese Investors on National Security Grounds https://www.jonesday.com/germany-blocks-two-transactions-involving-chinese-investors-on-national-security-grounds-08-08-2018/# 52 Europe puts the brakes on Chinese outbound acquisitions. https://www.bloomberg.com/news/articles/2018-03-04/amid-china-m-a-drive-eu-rushes-for-investment-screening-deal

36

While dealing with Chinese buyers, another hurdle that the seller may face is the anti-monopoly

review in the relevant jurisdictions.

a) A case in US context

A typical case is the acquisition of Carmike Cinemas by AMC - a subsidiary of the Chinese

business giant Wanda. The U.S. Department of Justice filed a civil lawsuit in federal court

against the transaction mentioning the key points below : 53

(1) AMC's acquisition of Carmike Cinemas competed with AMC's 15 local markets

in the United States, and the merger of the two companies may curb the price

competition and reduce viewing experience of the consumers in these local

markets, so AMC needed to divest relevant assets;

(2) The merger of AMC and Carmike Cinemas would reduce competition in the

movie advertising market, as AMC would hold a majority stake in Screenvision

and National Cinemedia after the completion of the merger, and the market shares

of the movie advertising market holding by those two companies would be more

than 80%. Therefore, M&A transactions would significantly reduce competitions

in the movie advertising market.

While filing the lawsuit, the U.S. Department of Justice also provided a remedy plan to AMC:

(1) AMC needed to transfer 24 theaters containing 384 movie screens to

Screenvision;

(2) National Cinemedia needed to transfer its controlling shareholder and abandon its

governance rights within National Cinemedia;

(3) AMC must establish a firewall to ensure that it would not receive sensitive

competitive information from Screenvision and National Cinemedia.

53 Facing cross-border M&A Antitrust Scrutiny (in Chinese: 迎击跨境并购反垄断审查, )June 27, 2017 http://www.sohu.com/a/150802699_184153.

37

In the end, AMC and the U.S.Department of Justice agreed on the settlement conditions for

antitrust approval and completed the acquisition of Carmike Cinemas.

Besides, some Chinese companies have concerns to discuss the company's ultimate ownership

structure. Once the ultimate beneficial owner is found to be the Chinese government (even a

small listed SOE), but if its controlling shareholder behind is a large SOE group, considering the

size of these potential transactions that may form the business integration inter the group or even

at the national level), such deal may also trigger the antitrust reviews. 54

b) A EC decision on Chinese and French cooperation for construction of nuclear

power plant in UK

Another noteworthy case is the partnership between French Energy Company (EDF) and China

General Nuclear (CGN) - a major Chinese nuclear power operator for the construction and

operation of three new nuclear power plants in the UK, where the attitude of the European

Commission (EC) is decisive on whether Chinese companies' cross-border M&As had reached

the regulatory boundaries. The EC made it clear that in the cross-border M&A transactions by 55

Chinese SOEs in the energy industry, if there was no documents submitted to EC could prove the

independence between the declared Chinese SOE and other SOEs controlled by SASAC, the

turnover of all SOEs controlled by the SASAC should be accumulated to determine whether the

combined turnover has reached the EU threshold. The EC exercised the standard of turnover

testing for antitrust jurisdiction. This EC decision reflects that the risk of anti-monopoly review

faced by Chinese SOE is increasing in cross-border M&A transactions. 56

54反垄断调查正成为中企 海外并购首个“拦路虎” (In En: Antitrust review is becoming a huge barrier for Chinese companies’ outbound M&A )April 25, 2016, http://business.sohu.com/20160425/n445911792.shtml. 55 Hinkley Point C project proceeding well: CGN, Xinhua | Updated: 2018-02-01 11:27, http://www.chinadaily.com.cn/a/201802/01/WS5a72892ca3106e7dcc13a2fa.html. 56 European Commission clears EDF, CGN partnership, 11 March 2016, World Nuclear News http://www.world-nuclear-news.org/C-European-Commission-clears-EDF-CGN-partnership-1103165.html.

38

Also, the anti-monopoly security can significantly affect the timeline of the transaction, which

the seller should take into account while dealing with Chinese buyers.

B. Policy Orientation and Regulatory Control in PRC

1. Overview of regulatory development of PRC Administration on Overseas Direct

Investment (ODI)

In the context of outbound M&A transactions by Chinese acquirers, the regulatory environment

in China demonstrates a dynamic change which fueled the rise of the Chinese overseas M&A

transactions. Three main governmental agencies involved for reviewing and monitoring the

outbound M&A activities are NDRC, MOFCOM and SAFE. Depending on the type and nature

of the Chinese acquirers, the target industry and specific issues implicated in different deals, the

requirement and procedure for M&A transaction are subject to different set of laws and

regulations. The deregulation development of outward investment has witnessed the following

stages : 57

In the early era of reform and opening up in 1990s, due to China’s insufficient foreign exchange

reserve, and the Chinese enterprises’ lack of international business management experience,

outward investments were subject to government examination and approval.

From the end of 1990s, with continuous economic strength and the significant increase of foreign

exchange reserves, the administration of overseas investment has been simplified. On July 16,

2004 the State Council promulgated “Decision of the State Council on Investment System

Reform” , a sign of official employment of ratification and recording system by Chinese 58

57China Outward Investment Report published on Nov. 30, 2017. 58 Guo Fa [2004] No. 20 《国务院关于投资体制改革的决定》.

39

government in outward investment. NDRC is responsible for managing overseas investment

projects and the Ministry of Commerce is responsible for managing the enterprise set up abroad.

In August 2008, the State Council issued the “Regulation of the People’s Republic of China on

Foreign Exchange Control” , which changed from the obligatory foreign exchange control to the 59

implementation of voluntary foreign exchange trading.

2014 NDRC released “Administrative Measures for the Verification and Approval and

Record-Filling of Outbound Investment Projects” (Decree No.9) , and Ministry of Commerce 60

promulgated “Administrative Measures for Outbound Investment” , which changed the policy 61

orientation from “approval-centered” to “recording centered”. This new policy drastically

simplified the review process and imposed reform top down. On December 26, 2017, NDRC

Decree No.9 was revised by the Decree No.11, which came into force from March 1, 2018.

2. National Development and Reform Commission (NRCD)

The outbound investment shall refer to the investment activities whereby an enterprise within the

territory of the People's Republic of China (hereinafter referred to as the "Investor"), directly or

via overseas enterprises under its control, acquires ownership, controlling power, rights of

operation and management and other relevant rights and interests overseas by making asset or

equity investments, providing financing or guarantees, etc.. All such activities shall be carried

out in accordance with Chinese laws. NRCD or the local departments of NRCD - Provincial 62

Development and Reform Commission (PDRC) shall be the first regulatory agency for reviewing

overseas investment. According to the newly revised Decree No.11, depending on the nature of

59 Decree No. 532 of the State Council of the People's Republic of China 《中华人民共和国外汇管理条例》. 60 Order No. 9 of the National Development and Reform Commission《境外投资项目核准和备案管理办

法》. 61 Order 2014 No. 3 of the Ministry of Commerce 《境外投资管理办法》. 62 (企业境外投资管理办法) According to Article 2 “Administrative Measure for Outbound Investment by Enterprise”.

40

the projects, the project formalities may be subject to three different administration categories:

approval, filing or reporting.

a) Supervision Competence

● Approval

According to the Decree No. 11 if the investment projects involve sensitive sector or sensitive

countries/regions, regardless of the investment amount, the investment project shall be approved

by NRDC.

As defined by NDRC in its notice on release of the "Directory of Sensitive Industries for

Outbound Investment (“Sensitive Catalogue”) on Jan. 31, 2018 , in addition to “weapon 63

development”, “production and maintenance”, “cross-border development” and “utilization of

water resources” and “news media industries”, the “sensitive sector” also refers to “real estate”,

“hotel”, “movie theaters”, “entertainment industry”, “sports club” such oversea investments and

setting up equity investment funds or investment platforms without specific industrial project

overseas are all subject to the approval regime. 64

Notably, in June 2018, NDRC released the Answers to Frequently Asked Questions Concerning

Outbound Investment by Enterprises (“Answers to FAQs”) on the official website , providing 65

further interpretation to 61 frequently asked questions regarding the application of the new

Decree Regulation No. 11. It’s particularly worth noting that, the NDRC made detailed

restrictive explanation with respect to the scope of sensitive sector. In particular, echoing the

spreading market concern and heightened uncertainty on the restrictions in “Real estate”,

63 Notice on Release of the "Directory of Sensitive Industries for Outbound Investment 2018 (“Sensitive Catalogue”) (Fa Gai Wai Zi [2018] No. 251) on Jan. 31, with effect on March 2018. 64 NDRC releases directory of sensitive industries for outbound investment (2018 edition), http://www.ndrc.gov.cn/zcfb/zcfbtz/201802/t20180211_877272.html. 65China Oversea Development Association http://www.ciodpa.org.cn/zh/node/1474.

41

“Hotel”and “setting up offshore equity investment funds or investment platform without specific

industrial project oversea”, the scope of the aforementioned three sensitive sectors has been

narrowed down in NRDC’s interpretation. However, the sensitive sectors “movie theaters”

“entertainment industry”and “sports club” are not included in this restrictive interpretations of

NRDC.

Table: Overview of the required procedures of the NDRC for outbound investments in the

sensitive sectors based on the Answers to FAQs:

Source: KWM 66

66 NDRC Clarifies the Scope of Sensitive Projects in ODI FAQs, Wang Kaiding, Huang Mengting and Tang Xinran, July, 9, 2018, http://www.kwm.com/en/knowledge/insights/for-sensitive-class-explain-the-applicable-scope-of-the-project-20180709.

42

● Filling

For oversea investments which do not involve sensitive industries and sensitive countries/regions

but the investment value is above $300 million, such investments shall be filed with NDRC. If

such non-sensitive overseas investments are carried out by the central government-owned

enterprise and do not involve sensitive industries, a filing receipt shall be obtained from NDRC;

If the non-sensitive overseas investment is below $300 million and is initiated by an non-

government-owned enterprise, the investment project only needs to be filed with the PDRC at

the place where the Chinese entity is registered.

● Reporting

Chinese Investors indirectly carry out large-scale (more than $300 million) in non-sensitive

sector through the enterprise they controlled overseas shall submit an information reporting form

for large-amount non-sensitive Projects via the online platform of overseas investment

management and service network system (“Network System”) of NDRC prior to the

implementation of the project.

● No Approval, Recording or Reporting

Furthermore, for minority investments into a foreign (and with no financing or guarantee from

Chinese entity), such overseas investment is not captured by Decree No.11 and therefore no

approval, filling or reporting is necessary.

Overall, among the above three administration regimes, approval is the most demanding way.

According to the observation of King & Wood Mallesons , in the past two years the sensitive 67

67 NDRC Clarifies the Scope of Sensitive Projects in ODI FAQs, Wang Kaiding, Huang Mengting and Tang Xinran, July, 9, 2018, http://www.kwm.com/en/knowledge/insights/for-sensitive-class-explain-the-applicable-scope-of-the-project-20180709.

43

projects that needed to be approved accounted for about 1% of overseas investment projects

only, therefore the impact of restriction on the sensitive projects is thus limited.

Source : compiled by DealGlobe

b) Removal of the “Small Pass” in Decree No. 11

It is worth mentioning that the “small road” system in Decree No.9 has been cancelled in the

Decree No.11. In the previous procedure, preliminary reports of project information for all

overseas acquisition or bidding projects in which the amount of the Chinese investment reaches

$300 million or above must be submitted to NDRC before carrying out substantive work with

foreign parties. If the proposed deal is confirmed by NDRC, a return information (small pass)

was issued to the Chinese investors within 7 working days of the receipt of the preliminary

report. The original intention of the “small road” system was designed to prevent the vicious

competition among Chinese investors in overseas M&As. In practice it has affected the certainty

and timetable of the transaction, especially in bidding process. In some cases the Chinese

investors had to pay the so called “China premium” to attain a more advantage position

44

compared to other bidders, in case the “small pass” was obtained in delay not granted at all. The

cancellation of “small pass” signals the Chinese government reform towards decentralization and

simplified administration; but on the other hand, some insiders expressed different views because

the abolition of the “small road” may raise the uncertainty to the sellers before the signing, as in

the bidding or negotiation process the seller will not see any documents issued by the regulatory

authorities on the proposed transactions. It tends to believe from the seller’s standpoint that 68

without the “small pass” the uncertainty and regulatory risk on the proposed transaction will

increase, since the supervision and intervention of NRDC at a later stage or in the substantive

stage will raise risks and costs for both parties to make new adjustments if any. 69

3. The Ministry of Commerce (MOFCOM) and its Provincial Competent Commerce

Department (PCCD)

a) Regulatory Measure for Managing Overseas Investment

Another main legislation governing foreign investment is the “Administrative Measures for

Outbound Investment 《境外投资管理办法》(the “Measures”), which was issued by the

Minitry of Commerce in October 2014（Order 2014 No.3 of the Ministry of Commerce). The

Measures provide a detailed procedure and requirement for overseas investment management

which marks a significant change with the priority of recordation.

According to the Measures, the verification and approval by MOFCOM are only necessary

where an overseas investment project involves “sensitive countries/regions” or “sensitive

industries”. In all other circumstances, regardless of the investment value , the projects shall only

68 Analysis of Order .11 http://www.kwm.com/zh/cn/knowledge/insights/analysis-on-no-11-circular-on-crossing-border-investment-20171226. 69Chinese Oversea M&A 2017：Turning point and hope:, http://epaper.21jingji.com/html/2018-01/15/content_78613.htm.

45

be subject to administration by record-filling.

Besides, on Jan 18, 2018, an Interim Measures for the Record-filing (Verification and Approval)

and the Reporting of Outbound Investment Projects (“Interim Measures”) was jointly issued by

MOFCOM and other six authorities to further improve the outbound investment management 70 71

regime, to effectively guard against risks, ensure a healthy development of outbound investment,

and to facilitate the smooth implementation of the BRI. A domestic investor shall, in accordance

with the principle that all record-filed (verified and approved) outbound investment projects need

to be reported on a regular basis. The report information shall include key link of outbound

investment to the competent departments that have handled record-filing (verification and

approval) procedures. According to this Interim Measures, MOFCOM shall take the lead in 72

summarizing the information on the record-filing (verification and approval) and the reporting of

outbound investment projects in a unified manner. Outbound investment in which the value of

Chinese investment reaches or exceeds $300 million, or investment in sensitive sectors/regions,

and outbound investments suffering from heavy operating losses etc. shall be supervised under

strict control.

Following the execution of the transaction agreement related to the outbound investment, the

Outbound Investment Application Form, the photocopy of the buyer’s business license and a

written application shall be submitted via the Outbound Investment Management System online

(hereinafter referred to as the "Management System"). The aforesaid written application shall

mainly cover the profile of the investor, the name, equity structure, investment amount, business

70 Shang He Fa [2018] No.24: Notice of the Ministry of Commerce, the People's Bank of China, the State-Owned Assets Supervision and Administration Commission of the State Council and Other Departments on Issuing the Interim Measures for the Recordation (or Confirmation) and Reporting of Outbound Investment (对外投资备案（核准）报告暂行办法). 71 People's Bank of China; State-owned Assets Supervision and Administration Commission of the State Council; China Banking Regulatory Commission; China Securities Regulatory Commission; China Insurance Regulatory Commission; State Administration of Foreign Exchange. 72 Article 10 of the “Interim Measures”.

46

scope and term of operation of the proposed overseas enterprise, the sources of investment funds,

details of the investment to be made. A Certificate of Outbound Investment by Enterprises

(hereinafter referred to as the "Certificate", see Appendix 1) is issued by MOFCOM/PCCD to

the Chinese entity if the veracity of the proposed outbound investment is accepted by

MOFCOM/PCCD. The Certificate shall serve as the proof of the record-filing or verification and

approval of the outbound investment. To receive the Certificate, it takes usually 15 business days

from the date that all filed documents are in line with the requirements of MOFCOM.

Despite the simplification of the formality procedure, there still remains uncertainty in the

regulation itself. For example clauses such as “major outbound investment under any other

circumstances” need to be closely scrutinized, because it leaves certain leeway for 73

governmental decision.

b) ODI Rules 2016

Since November 2016, China has taken more measures in its scrutiny of outbound direct

investments (ODI) made by Chinese companies. Consistent with that trend, a regulatory pathway

Opinions on Further Guiding and Regulating Outbound Investment (关于进一步引导和规范境

外投资方向的指导意见) (“the Guiding Opinions”) was jointly issued on August 18, 2017 by 74

the State Council, NDRC, MOFCOM, the People’s Bank of China (PBoC). specifying which

kinds of overseas investments would be banned, restricted or encouraged, with emphasis on

enhancing the oversight on the so-called“irrational” foreign investment: 75

The encouraged category investments includes infrastructure investments under the BRI, 76

73 Article 18 (6) of the “Interim Measures. 74 (Guo Ban Fa [2017] No.74). 75 China Issues Formal Guidance for Outbound Direct Investments, https://www.lexology.com/library/detail.aspx?g=5afdd6e7-a8cf-429b-8608-c52b6013047d. 76 http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201701/20170102503092.sht.

47

investments promoting the development of high-tech and advanced manufacturing, and those in

agriculture, trade, culture, logistics, energy and resources, which will promote the strategic

importance to China. Such overseas investments will also enjoy additional support from the

government in terms of tax reliefs, foreign exchange, insurance subsidies, customs assistance,

information, etc. The overseas investment which do not align with China foreign policy and 77

national interest will be be redirected by the government to be carried out ‘in a cautious way’. 78

Table: Three categories for outbound investments (page 19, JP Morgan)

4. State Administration of Foreign Exchange (SAFE)

a. Overview of China’s foreign exchange system

77 China Issues Formal Guidance for Outbound Direct Investments, https://www.lexology.com/library/detail.aspx?g=5afdd6e7-a8cf-429b-8608-c52b6013047d. 78 New rule on ODI is in the pipeline, ZHONG NAN/REN XIAOJIN, China Daily, http://english.gov.cn/policies/policy_watch/2017/03/22/content_281475603367262.htm.

48

Unlike other countries, the Chinese government still imposes strict measures on the inflow and

outflow of foreign capital. SAFE and PBoC are the main agencies tasked with the control of

foreign exchange and the cross-border flow of funds between China and other countries.

Under the PRC foreign exchange control regime, each route for inflow or outflow of funds

to/from the PRC must be based on a specific type of transactions. Transactions shall either fall

into the types of “current account transactions” or “capital account transactions”.

Current account transactions is generally applicable for ordination recurring business

transactions, including without limitation to payment for import and export of goods and

provision of cross-border services, payment of interest on foreign debt. In practice, foreign

exchange payments and receipts for “current account transactions” is to be made without SAFE

approval or registration, provided that the authentication of the transaction is accepted by the

settlement bank after reviewing the supporting documents. 79

Capital account transactions deal with direct investments, including green-field investments,

M&As, and investments in equity securities and bond markets, cross border loans and securities

etc. The aforementioned investments are subject to the prior approval of SAFE or registration

with SAFE. 80

Furthermore, if the enterprise fails to comply with SAFE requirements, the capital account

information can be taken over by the foreign exchange bureau and foreign exchange business

under capital account can be refused by the bank.

79 Pre-Investment Capital Planning for China’s Foreign Exchange Control posted on/by China Briefing, by Dezan Shira & Associates. 80 Repatriation of funds from a foreign-invested company (FIC) in the PRC, Authors: Peter Zaman Katherine Yang Jeffrey Yang, https://www.reedsmith.com/en/perspectives/2017/06/repatriation-of-funds-from-a-foreign-invested-company-in-the-prc.

49

b. Restriction of overseas capital transfer for outbound investments

According to official data, China's foreign exchange reserves fell after reaching a high point of

nearly 4 trillion US dollars in June 2014. As of the end of June 2017, foreign exchange reserves

were about 3 trillion US dollars, shrinking by nearly 1 trillion US dollars. In late 2016, in the 81

rise of government’s concerns about capital outflow under pressure from the stronger dollar,

increase of U.S. interest rates and a decrease in China's foreign exchange reserves as well as

corruption, Chinese authority took a series of actions in response to curb the capital outflow in 82

addition to the already existing regulatory controls (see Appendices). 83

81 从四万亿到三万亿 引导中国外汇储备的正向预期 (Positive forecast of China’s foreign exchange reserves from 4 trillion to 3 trillion), http://finance.people.com.cn/n1/2017/0113/c1004-29022369.html. 82 China Reins in Investors With New Rules, An analysis by Michael Lelyveld, https://www.rfa.org/english/commentaries/energy_watch/china-reins-in-investors-with-new-rules-01082018111106.html 83 Notice on Further Simplifying and Improving Direct Investment of Foreign Exchange Administration 《关于进一步简化和改进直接投资外汇管理政策的通知》; Provisions on Foreign Exchange Administration for Overseas Direct Investment of Domestic Institution 《境内机构境外直接投资外汇管理规定》; Notice of the State Administration of Foreign Exchange on the Administration of Foreign Exchange Involved in Overseas Investment, Financing and Return on Investment Conducted by Residents in China via Special-Purpose Companies 《国家外汇管理局关于境内居民通过特殊目的公司境外投融资及返程投资外汇管理有关问题通知》.

50

Notice of the SAFE on Further Promoting the Reform of Foreign Exchange Administration and

Improving Authenticity and Compliance Review was published on in Jan. 2017. As a part of 84

this notice, the authenticity and compliance review are to be strengthened for ODI. When going

through the procedures for registration of outbound direct investment and outbound remittance of

funds, a domestic entity shall, in addition to submitting relevant materials for review as required,

also explain to the bank concerned the sources of the funds for investment and the purposes (use

plan) of such funds, and provide the relevant resolution of the board of directors (or the relevant

resolution of partners), the relevant contract or other materials in proof of transaction

authenticity. Banks shall strengthen authenticity and compliance review in accordance with

business principles.

Recently, the Chinese banking regulatory authority requested major banks in China to investigate

the financing activities of four Chinese conglomerates—An Bang, Wanda, HNA, and

Fosun—that have actively participated in overseas acquisitions in the past two years. These

investigations have been highly publicized and demonstrated the Chinese government's desire to

send a message to public that the compliance with the ODI Rules is a priority. A prime example

of irrational outbound was the transaction proposed by Wanda Investment to acquire Dick Clark

Productions, which was terminated due to the insurmountable barrier set by SAFE. 85

China's regulators have also urged banks to be cautious about lending to the biggest buyers of the

2016 gold rush, including HNA, Wanda, Fosun International and Anbang Insurance Group. 86

Groups including HNA and Anbang have been criticized for aggressive oversea M&A, paying

high premiums for real estate and other assets oversea, raising the potential risk of meltdown if

or when they are sold in future. Indeed, to reduce its debts HNA has paid the price for its 87

84 (Hui Fa [2017] No.3) 《国家外汇管理局关于进一步推进外汇管理改革完善真实合规性审核的通知》. 85 The Merger and Acquisition Review - Edition II, Mark Zerdin.(p.112). 86 DealGlobe report 2017. 87 China Reins in Investors With New Rules, An analysis by Michael Lelyveld.

51

aggressive overseas acquisition since last year through selling companies, properties and other

investments amassed in places including Hong Kong, Australia, Brazil, the U.S. and Europe. 88

It has been widely reported (although not announced publicly）that on 28 November 2016, the

Shanghai Branch of the State Administration of Foreign Exchange ("SAFE") held an internal

meeting with regard to the administration of cross-border receipts and payments. During the

meeting a practice guidance aiming to control and reduce the outbound flow of foreign currency

from China was established. The banks shall report all capital account payment in an amount

equivalent to or more than USD 5 million in any single purchase or payment of foreign exchange

of Renminbi to SAFE central bank in Beijing. In addition, a stricter review on overseas

remittances reaching $50 million or more shall be implemented to verify the authenticity of the

transactions. It is also addressed by Shanghai SAFE that transactions can not be split up into

smaller components in order to circumvent large amount transaction reporting. As a result, bank

serves as a monitor for balancing the capital inflow and outflow. 89

Furthermore, tighented security measures were also imposed for fundraising of Chinese

investorer. NeiBaoWaiDai (internal insurance loan) is a commonly used loan method for

Chinese-funded enterprises. In the funding structure of NeiBaoWaiDai once the foreign

borrower is unable to repay the foreign debt, then the domestic guarantor is obliged to remit

funds abroad for repayment of the offshore debt to overseas lenders. On December 5, 2017

SAFE issued a Notice on Improving Foreign Exchange Management of Bank Internal Insurance

Foreigners (Hui Zongfa [2017] No. 108, hereinafter referred to as “No. 108”), in which SAFE

88 Death of HNA co-founder clouds asset sale drive, https://asia.nikkei.com/Business/Death-of-HNA-co-founder-clouds-asset-sale-drive. 89China Tightens Regulatory Approvals for Outbound Investments by Charles Ching and Jian Liuon March 17, 2017, https://privateequity.weil.com/insights/china-tightens-regulatory-approvals-outbound-investments/#page=; China's new foreign exchange controls create fresh Concerns, by Hogan Lovells, https://www.hoganlovells.com/~/media/hogan-lovells/pdf/chinas-new-foreign-exchange-controls-create-fresh-concerns-for-foreign-investors.pdf?la=en.

52

has put forward a number of new regulatory requirements for handling internal insurance and

foreign loan business. A striking one is to refine the review of the possibility of guarantee

performance in internal insurance foreign loan transactions. Also, SAFE further stipulates the

authenticity, commercial rationality, compliance and performance of the guarantee contract. The

issue of No.108 reflects SAFE’s determination in strengthening the management of internal

insurance and foreign loans in the context of capital outflow. The fact that some banks were not

prudent in handling internal insurance loans has been also noticed by SAFE.

However, private companies with a healthy balance sheet and no history of highly-leveraged

aggressive overseas expansion were still able to get approval for overseas transactions in their

core areas of business, especially acquisitions intended to modernize technology and increase

competitiveness. Private companies with access to funding outside China (e.g., listed in Hong

Kong, previously active in “real economy” expansions abroad) are also weathering the storm

better. 90

5. Specific Regulatory Requirements

a) SASAC

Where the outbound investment projects is initiated by central governed enterprises falling into

the special category of projects subject to the Measures for the Supervision and Administration

of the Outbound Investment by Central Enterprises, it shall go through the corresponding

procedure as required by SASAC performing the duties as an investor.

b) Listed Company

Furthermore, Chinese listed companies face some challenges when acquiring foreign assets. For

example, supervised by China Securities Regulatory Commission (“CSRC”), listed companies

90 《上市公司信息披露管理办法》Measures for the Administration of Information Disclosure by Listed Companies, Order No. 40 of CSRC issued on Jan.30, 2017.

53

are obliged to disclose significant information in a truthful, accurate, complete and timely

manners. Often an announcement shall be made and the company’s shares is to be suspended 91

while the transaction is still in the process of negotiating, which may make the deal problematic.

If the transaction satisfied the conditions for being a “material asset reorganization”, more

onerous investigation by the regulators and information disclosure requirements are involved. 92

Therefore, due to the complexity and strict measures in different layers, the listed companies

prefer to make overseas acquisitions via an M&A fund or in the name of a major shareholder,

rather than through the listed company directly. 93

c) Antitrust Scrutiny- SAMR

The overseas M&A may also trigger the antitrust scrutiny by the Chinese authority - State

Administration for Market Regulation (SAMR) which is a new agency established on March 21,

2018 consolidating the previously existing three antitrust bodies into one body. Merger control

can have significant implications for the timing and structure of any M&A transaction. Where a

transaction is subject to the Chinese merger control regime the parties need to factor a

considerable clearance time frame into the transaction. From the past record, the Chinese

antitrust agency was less active in Chinese outbound M&A than other cross-board deals.

A recent example is the rejection of SAMR on the acquisition of NXP by Qualcomm. As until

the deadline of 11:59 pm (New York time) on July 25th 2018, having already passed the merger

91 Art 2 of Measures for the Administration of Information Disclosure by Listed Companies. 92 Measures for the Administration on Acquisition of Listed Companies《上市公司收购管理办法》issued on Oct.23, 2014; 《上市公司重大资产重组管理办法》Measures for the Administration of Material Asset Reorganization of Listed Companies (Order No.127 of the China Securities Regulatory Commission) issued on August 8, 2016, revised on October 9, 2008； 《上市公司证券发行管理办法》（Order 30 of CSRC）Measures for the Administration of Issuance of Securities by Listed Companie issued on June 5, 2006； 《上市公司非公开发行股票实施细则》 Detailed Implementation Rules on Non-public Issuance of Stocks of Listed Companies (order 73), revised on Feb.15, 2017. 93 Deal Globe 2017, p15.

54

control of other major countries, Qualcomm has not obtained the last “yes” from SAMR, the

world's largest semiconductor acquisition which lasted 21 months had to come an end -

Qualcomm officially abandoned the $44 billion acquisition of NXP in the Netherlands. It seems

that in the Chinese authority tend to impose stricter control on cross-border M&A in repose to

the progressive boosting of pressure from foreign authorities barring Chinese outbound M&A.

Especially, in the current trade tension between US and China, the competence of SAMR in

merger control may be interpreted as a soft power institution.

C. Unpredictability and Mechanism for Risk Mitigation

Facing the Chinese regulatory changes and newly enacted controls on capital outflows, sellers

are becoming more prudent while dealing with Chinese buyers. Another set of risks particular to

the Chinese buyer is the receipt county’s regulation ranging from national security review to

merger control. As many Chinese companies counted on onshore funding for deal, Chinese

bidders are often requested to provide assurance that can they can bring funds offshore. In the 94

current climate, sellers frequently put reverse break fees (RTF) in place to safeguard their

transactions To alleviate enforcement concerns, escrow deposit in an account outside of China is

often employed to secure the payment obligation. In many decent deals if Chinese buyer fail to 95

pass the national security scrutiny and anti-monopoly of the sourcing country, the payment

obligation of RTF will be triggered. 96

Taking the acquisition of GNC by Harbin Pharmaceutical Co., Ltd. in February 2018 as an

example, according to public disclosed information, the total transaction value was

approximately $300 million and the RTF paid by Chinese buyer was $18 million, accounting for

94 Chinese capital constraints send shock through global M&A, Don Weinland and Javier Espinoza, https://www.ft.com/content/a4130914-1465-11e7-b0c1-37e417ee6c76 95 解读海外并购协议中的政府审批风险分配条款------简述Hell or High Water及反向分手费条款, 中国国际经

济合作学会,http://cafiec.mofcom.gov.cn/article/tongjipeixun/201612/20161202331363.shtml. 96 Chinese Outbound M&A: Execution Risks and Consequences, Lexology.

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6% of the total transaction value. The scenarios to trigger RTF did not only include CFIUS

approval and anti-monopoly approval in the US, but also the Chinese government's approvals.

From 2016 to 2017, the proportion of RTF encountered by Chinese buyer was about 1.5%-5%

of the transaction value. In the second half of 2017, the RTF paid by Chinese buyers gradually

rose to 5%-10%, not only higher than 3% - the international practice level, it also showed a clear

growth trend, reported by Ren Xiaoqiang, deputy general manager of the high-end liability

insurance division of China Ping An Property Insurance Co., Ltd. 97

III. Cultural Divergence in Deal- Making with Chinese

In the majority of cases, M&A activities are based on human interactions. Cultural differences

can also bring conflicts between overseas companies and Chinese buyers. These cultural

differences affect the business behaviours of both parties to certain extent, which are reflected in

the pre-deal negotiations and the execution after the transaction.

Influenced by Confucianism, negotiation manners of Chinese people demonstrate indirect

approach and less straightforward. The majority of Chinese people are implicit and mild, in the

negotiation it is advisable not to make the Chinese party have the feeling of losing their faces,

otherwise it will have adverse impact on building trust between the dealmakers.

The importance of GuanXi (personal/business relationship) is less valued by Western by

comparison to Chinese party. GuanXi (关系) is a unique and subtle personal relationship that 98

the Chinese invest a lot of energy to build and maintain. In some grey zone, GuanXi even

becomes the golden pass for a smooth business operation. Also, the senior political figures are

often involved as a way to enhance the image of the Chinese parties. Therefore, it is quite

97 Cross boarder practice - Reverse Break Fees (RTF) (跨境并购实务 | 解密新兴的海外并购保护措施：反向分手费保险), http://www.sohu.com/a/234156904_610982. 98 Cross-Border Mergers & Acquisitions, Scott C. Whitaker, China Machine Press, 2018, June, first edition, page 273.

56

common that politicians are present at the signing ceremony of significant transaction. 99

Acknowledging possible cultural difference is often thought of as “soft”, but a failure to do so

could result in significant “hard” in the deal-making with Chinese buyers.

IV. Summary and Outlook

As elaborated in this paper, while dealing with Chinese buyers in cross-border M&As, the sellers

may face various challenges and uncertainty due to the peculiarity of Chinese model during their

economic deepening. The unique state-capitalist pattern has created on one side unprecedented

economic growth, but on the other side also brought political uncertainty and growing concerns

of “national strategic buyers” who align with or navigated by the State to foster and carry out

grand policies such as “The Belt and Roald” and “Made in China 2025”. Therefore, the sellers

may face stricter scrutiny such as CFIUS and merger control from their country/region attributed

to opaque corporate ownership and inestimable motive of the acquiring company. Also

considering the rapid change of PRC regulatory requirements and fundraising uncertainties,

target companies are concerned with the feasibility of deal competition despite the employment

of risk mitigation mechanisms such as reverse break fees and non-refundable deposits. A

growing tension over tariffs and protection of intellectual properties between China and the U.S.

has already sent a signal reflecting a slight drop of cross-border M&As, which may also cause a

surge of protectionism.

However, challenges always coexist with chances. Chinese dealmakers will continue to embrace

the hunt for prime assets overseas even though the pace would be slowed down to certain extent.

We nevertheless believe that China’s economic transformation still has the potential to usher in a

golden age of cross-border transactions. The political, economic and cultural barriers will be

99 Completing M&A Transactions Successfully with Chinese Companies in a Swiss Context, Niederer Kraft & Frey Ldt, https://www.nkf.ch/wAssets-nkf2/docs/publikationen/philippe_a_weber/Completing-M-A-Transactions-Successfully-with-Chinese-Companies-in-a-Swiss-Context_2016.pdf.

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ultimately overcome through the humanity’s wisdom, as openness, liberalization and

compatibility are the indispensable foundation of the path towards the wellbeing of global

society.

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V. Appendix：Overview of Major Chinese Regulations

1. Decision of the State Council on Investment System Reform issued on July 16, 2004

（Guo Fa [2004] No. 20 《国务院关于投资体制改革的决定》）

2. Regulation of the People’s Republic of China on Foreign Exchange Control issued in

August 2008 (Decree No. 532 of the State Council) 《中华人民共和国外汇管理条例》

3. Administrative Measures for the Verification and Approval and Record-Filling of

Outbound Investment Projects” 《境外投资项目核准和备案管理办法》issued on

December 26, 2017

4. Administrative Measures for Outbound Investment ( Order 2014 No. 3 of the Ministry of

Commerce) 《境外投资管理办法》

5. Notice on Release of the "Directory of Sensitive Industries for Outbound Investment

2018 (“Sensitive Catalogue”) (Fa Gai Wai Zi [2018] No. 251) issued on Jan. 31 taking

effect on March 2018.

6. Interim Measures for the Record-filing (Verification and Approval) and the Reporting of

Outbound Investment Projects (Shang He Fa [2018] No.24)《 对外投资备案（核准）

报告暂行办法》

7. Opinions on Further Guiding and Regulating Outbound Investment （Guo Ban Fa [2017]

No.74) 《关于进一步引导和规范境外投资方向的指导意见》

8. Notice on Further Simplifying and Improving Direct Investment of Foreign Exchange

Administration 《关于进一步简化和改进直接投资外汇管理政策的通知》

9. Provisions on Foreign Exchange Administration for Overseas Direct Investment of

Domestic Institution 《境内机构境外直接投资外汇管理规定》

10. Notice of the State Administration of Foreign Exchange on the Administration of Foreign

Exchange Involved in Overseas Investment, Financing and Return on Investment

Conducted by Residents in China via Special-Purpose Companies

《国家外汇管理局关于境内居民通过特殊目的公司境外投融资及返程投资外汇管理

有关问题通知》

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11. Notice of the SAFE on Further Promoting the Reform of Foreign Exchange

Administration and Improving Authenticity and Compliance Review was published on in

Jan. 2017 (Hui Fa [2017] No.3)《国家外汇管理局关于进一步推进外汇管理改革完善

真实合规性审核的通知》

12. Measures for the Administration of Information Disclosure by Listed Companies （Order

No. 40 of CSRC） issued on Jan.30, 2017 《上市公司信息披露管理办法》

13. Detailed Implementation Rules on Non-public Issuance of Stocks of Listed Companies

(order 73), revised on Feb.15,《 2017上市公司非公开发行股票实施细则》

14. Measures for the Administration on Acquisition of Listed Companies《上市公司收购管

理办法》issued on Oct.23, 2014

15. Guiding Opinions on Further Improving the Corporate Governance Structure of

State-owned Enterprises, [2017] No. 36 《 国务院办公厅关于进一步完善国有企业法

人治理结构的指导意见》

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Statement I hereby declare - that I have written this paper without any help from others and without the use of documents and aids other than those stated above, - that I have mentioned all the sources used and that I have cited them correctly according to established academic citation rules, - that I am aware that my work can be electronically checked for plagiarism and that I hereby grant the University of St.Gallen copyright in accordance with the Examination Regulations in so far as this is required for administrative action. Location, Date: Shanghai August 16, 2018 Signature:..............

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