Inbound investors seeking to make a killing may find themselves targeted by regulators. Richard Li lays out the compliance risks they should be aware of before swooping on any bargain acquisition in China

With Chinese authorities stepping up their hunt for irregular business activities, compliance has become critical to the success of almost all business activities in China – and mergers and acquisitions (M&A) are no exception.

The stakes have never been higher. Inbound M&A activity in China has already surpassed the value of every other year on Mergermarket’s record, notes Kirsty Wilson, a UK-based global research editor for the intelligence service company. “It is clear that larger deals are being announced more often. In 2014 so far, there have been four inbound deals valued higher than US$1 billion, that’s double the number compared to the same time in 2013,” she says.

“The most active sector by both deal count and deal value is energy, mining and utilities,” Wilson adds. “Technology M&A also seems ripe for activity during 2014 with 15 deals valued at US$2.4 billion already over double the value of 2013’s annual total.” (See ‘Hot inbound activity’, page 27.)

Hunting the hunter-Wu Peng

But while foreign investors are busy hunting for attractive acquisition targets, they would be wise to keep a wary eye on whether they also are being tracked. Otherwise they may find themselves targeted by both domestic and overseas regulators scrutinising their every move for improprieties, in one jurisdiction or another.

The American Chamber of Commerce found that almost half of multinationals responding to a recent survey think they are targeted for unfair enforcement of anti-monopoly, food safety and other rules in China.

Among various compliance issues, anti-monopoly and anti-corruption stand out as two of the most active areas in China. In terms of antitrust enforcement, China seems to have become a key jurisdiction that no multinationals can afford to trivialise if their M&As are related to the China market. One reason is that the Ministry of Commerce (MOFCOM) decision is likely to be different from antitrust authorities in developed markets.

Hunting the hunter-Top PRC law firms by the number of inbound M&A deals

“In merger reviews, MOFCOM will scrupulously analyse the features and status quo of the China market, and may apply stricter standards compared to other important jurisdictions,” says Wu Peng, the Beijing-based managing partner of Zhong Lun Law Firm.

Michael Gu, a Beijing-based partner at AnJie Law Firm, says “with increasing enforcement experience, MOFCOM has become more confident in giving independent decisions different from Europe and the US authorities”.

In April 2014, with restrictive conditions, MOFCOM approved Microsoft’s acquisition of Nokia’s devices and services business, a transaction unconditionally cleared by the EU earlier. “MOFCOM reckons the deal may eliminate or restrict competition in China’s smartphone market,” Wu says.

Another recent example is MOFCOM’s decision to prohibit the proposed alliance of the world’s three largest container shipping lines – Maersk Line, Mediterranean Shipping and CMA CGM (the P3 alliance).

Before MOFCOM’s decision, Gu says the US Federal Maritime Commission had approved the P3 alliance and the European Commission had decided not to launch an antitrust investigation into it. He says MOFCOM has blocked a high-profile global transaction for the first time.

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