China’s outbound investment faces greater scrutiny

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China’s outbound investment may reach US$1.5-US$2.5 trillion in the next 10 years, as forecast by a recent Linklaters’ report, but investors must be ready to face tougher regulatory scrutiny overseas.

The Linklaters report titled The road to success: completing outbound investment in an increasingly regulated world identifies that about US$170 billion of Chinese outbound investment was announced in 2017. This is below the US$230 billion announced in 2016, but still the second- highest figure on record.

However, several high-profile deals were blocked or delayed due to regulatory and political concerns in 2017 and at the start of this year, although those deals may not have caused any real harm. Attaching more importance to the overseas regulators’ concerns is hence more necessary than ever.

徐宏 JOHN XU
徐宏 JOHN XU

Linklaters’ report highlights that foreign governments and regulators are concerned about investments into an ever-widening set of activities that have expanded from traditionally sensitive defence and critical infrastructure to businesses significantly related to technology, data and cybersecurity.

“There is a whole cluster of concerns that could be addressed that would increase regulatory comfort with acquisitions of potentially sensitive assets,” John Xu, a corporate partner at Linklaters in Shanghai, told China Business Law Journal.

For example, he said increasing transparency with regard to ownership and stakeholders can be important – a lesson learned from reports relating to the failed acquisitions of the Chicago Stock Exchange and of Fidelity & Guaranty Insurance.

“Undertakings with regard to data security may be helpful, though no guarantee of success as seen in reports relating to the attempted acquisition of MoneyGram,” said Xu. “Finally, using appropriate professional advisers and deal structures may reduce the regulatory risk of a deal not completing.”

Linklaters’ report stresses the need to work with the right partners and use the right deal structures, but also asks investors to be aware of the timing of any particular approach, as political and regulatory environments can change.

“Simple outright acquisitions are not the only way that Chinese businesses can succeed in achieving their goals in the global market,” he said. “Deals might be structured as licensing deals, joint ventures, or other commercial arrangements in order to avoid regulatory blockages to ownership and investment. Involvement of a strategic local business partner may also help to explain the commercial rationale.” For example, in 2016, US chipmaker Advanced Micro Designs (AMD) announced a joint venture with a Chinese partner to license microchip designs in a US$293 million deal.

Xu also warned investors that “new regulations being contemplated in the US in particular may make using such approaches more difficult in future”.

As suggested by Linklaters’ report, increasing transparency in relation to Chinese regulatory and business processes will also be helpful to Chinese outbound investors.

Xu said that two big areas where transparency would improve the perception of a bid are: (1) clarity on the source and conditionality of funding attached to a bid; and (2) the internal business consents, as well as regulatory consents, that a bidder would need to secure in order to close a transaction. “Where a consortium is formed, it will be helpful to clearly identify who is the decision maker,” he said.