Chinese companies have sped up their pace of overseas takeovers in the past couple of years. In sharp contrast to overseas M&A transactions carried out by ordinary domestic companies, apart from compliance with general regulatory requirements of the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the State Administration of Foreign Exchange (SAFE) and the State-owned Assets Supervision and Administration Commission (SASAC), usually overseas M&A transactions implemented by domestic listed companies also have to observe regulatory requirements of the China Securities Regulatory Commission (CSRC) and stock exchanges (i.e., securities regulators in China) in connection with the overall transaction scheme and issuance of legal opinions.
Consequently, Chinese lawyers will play an increasingly crucial and leading role in matters that include, but are not limited to, the establishment of a transaction timetable, the design and demonstration of a transaction structure, identification of highlights in legal due diligence on the targets and counterparties it is conducted by, as well as the format of legal opinions to be issued by both Chinese and local lawyers and, last but not least, the drafting of core clauses for M&A agreements.
In other words, the role of Chinese lawyers goes beyond designing transaction schemes efficiently, focusing on possible review risks, co-ordinating various efforts involved in the M&A deals, and providing guidance to local lawyers on how to assist in these efforts. This means that the Chinese lawyers must be very capable. In addition to extensive experience in material asset restructuring of listed companies, they need to have experience in, and abilities to co-ordinate, overseas projects.
The authors’ firm has acted as lead counsel for overseas M&A transactions of more than a dozen domestic listed companies. Based on that experience, the authors will look at the highlights of these types of projects and how Chinese lawyers can deal with them.
Eligibility of the counterparty and non-existence of the related-party transaction. Article 11 of the Measures for the Administration of Material Asset Restructurings of Listed Companies requires that “the ownership of assets involved in the material asset restructuring is clear, there is no legal obstacle to the transfer of assets or title to the assets, and the relevant claims and debts have been properly handled”.
Due to variations in the legal systems of jurisdictions across the world, overseas targets may have different requirements on legal capacity of their shareholders. Take the asset acquisition and fundraising project of Genimous Technology (formerly known as Genimous Investment) for instance. The counterparties holding equity in its target, Spigot, included some personal trusts. The asset acquisition deal of Aerospace Hi-Tech Holding Group is another example, where the actual controller of Ascend Capital Partners, the counterparty, was a trust plan. In practice, in view of the fact that the actual beneficiaries of trust plans are not registered shareholders of the targets, the CSRC review focuses on checking whether shareholders of the targets are entitled to dispose of their equities in the targets, and whether the actual beneficiaries of trust plans are related parties of the listed companies.
In consideration of these issues, Chinese lawyers should focus on ensuring the following details when conducting due diligence on overseas targets. First, incorporation or inception of the counterparty should meet relevant requirements of laws and regulations in the jurisdiction where the target is located. The Genimous case, where counterparties involved included personal trusts, and the Aerospace case, where the actual controller of the counterparty involved was a trust plan, are in sharp contrast to domestic M&A deals, where counterparties involved are usually natural persons, corporations or partnerships.
Therefore, in addition to basic details of the targets, Chinese lawyers need to pay special attention to counterparties of a similar nature, as well as applicable laws in the jurisdiction of the target. To sum up, as a priority they need to confirm that incorporation or inception of the counterparty meets relevant requirements under local laws and regulations.
Second, the counterparty is entitled to dispose of its equity in the target. After confirming eligibility of the counterparty, Chinese lawyers have to ascertain that the counterparty is entitled to dispose of its equity in the target. Normally they have to look at ordinary issues that include: (1) mortgage, pledge or other encumbrance; (2) significant disputes such as litigation, arbitration or judicial enforcement, or any other circumstances that may pose obstacles to transfer of title; and (3) actual or potential ownership disputes.
In a case where the registered counterparty is not the beneficiary of a trust plan, they also have to check whether the counterparty has been duly authorized or entrusted by the beneficiary. Therefore, in the course of due diligence, trust contract, escrow contract, power of attorney or any other valid written authorization evidencing the counterparty’s power to dispose of equity in the target should be requested from the counterparty. When necessary, lawyers may ask the counterparty to arrange for the beneficiary to provide response to these questions through written documents or field interviews.
Third, the counterparty and beneficiary are not related parties of the listed company. Particular attention should be paid to this issue to ensure authenticity, accuracy and completeness of information disclosure. Apart from requesting regular incorporation documents and beneficiary’s authorization documents from the counterparty, the Chinese lawyers should take the following steps to ascertain that the counterparty and beneficiary are not related parties of the listed company:
- Provide a list of related parties of the listed company for the counterparty and beneficiary to confirm they are not related parties of the entities on the list;
- Request the counterparty and beneficiary to provide proof of capital in their possession immediately before investment in the target, with the aim of proving that the capital being invested in the target is not from the listed company or its related parties; and
- Request the listed company and its related parties to issue commitments confirming that they are not related parties of the target, counterparty or beneficiary.
Author: Wang Guan is a partner and Meng Wenxiang is a salary partner at Grandway Law Offices. Xie Yijie, a paralegal at Grandway, contributed to this article
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