Legal practice in listed companies’ overseas M&A

By Wang Guan and Meng Wenxiang, Grandway Law Offices
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An offshore acquisition by a domestic listed company is a systematic project. As it usually involves multiple jurisdictions, the establishment of, and changes to, legal entities, demonstration and optimization of the plan at the compliance level, approval level and tax planning level, as well as the conduct of due diligence and the issuance of conclusions, can require the close cooperation of lawyers in multiple countries.

Wang GuanPartnerGrandway Law Offices
Wang Guan
Partner
Grandway Law Offices

In the course of such a project, based on Chinese securities regulatory requirements, the Chinese lawyers bear the key responsibilities of coordinating the review and issuance of a legal opinion by the foreign lawyers. Not only are the Chinese lawyers required to assist the listed company in terms of study of the regulatory environment, analysis of the strategic requirements, the decision-making procedure and risk control, but also, from the perspective of Chinese securities regulation, are required to organically coordinate the various work segments domestically and abroad, achieve seamless integration and thereby assist the listed company in completing the transaction, guarding against risks, and moving the transaction forward. This is specifically manifested in the following:

Plan demonstration

The plan demonstration stage requires effective cooperation between the domestic and foreign intermediary firms. The demonstration of the reasonableness of the plan mainly involves tax planning for the payment method. The compliance demonstration is mainly dependent on the approval requirements of the various countries in respect of the transaction. It will usually involve two broad aspects: a national security review and an anti-monopoly review.

Firstly, the domestic and foreign parties to the transaction and their intermediary firms need to fully exchange information on and understand the design of the plan. On this basis, the foreign lawyers need to demonstrate whether the plan would involve an anti-monopoly review and national security review in the relevant country. The national security review usually requires determination based on the industry in which the target company is involved, namely whether it is a sector in which foreign investment is restricted or prohibited by the country in question.

Attention also needs to be paid to whether a threshold for an anti-monopoly filing has been reached. If a filing threshold is reached, legal teams in the relevant foreign jurisdictions need to carry out the anti-monopoly filing and approval procedures, and domestic lawyers need to cooperate with them. For example, in the asset purchase deal of Aerospace Hi-Tech Holding Group (the transaction counterparty being Ascend Capital Partners), during demonstration of the plan at the outset of the project, the foreign lawyers issued a clear cut opinion that the project did not reach the threshold for a foreign business-concentration filing, and did not require an anti-monopoly review.

Meng WenxiangSalary partnerGrandway Law Offices
Meng Wenxiang
Salary partner
Grandway Law Offices

Due diligence

It could be said that the due diligence and issuance of the legal opinion play a decisive role in an acquisition project. The Chinese lawyers need to expressly specify the due diligence requirements to the foreign lawyers based on Chinese laws, regulations and the requirements of the regulatory authorities, and keep in constant touch with them during the due diligence so as to be able to effectively complete a high quality due diligence. Based on our experience, particular attention needs to be paid to communicating with the foreign lawyers on the following aspects in the preliminary stage of cooperation.

Firstly, the targets and key points of the due diligence need to be expressly stated. Usually, the targets of the due diligence conducted by the foreign lawyers will be limited to the subject matter of the transaction itself. However, due to Chinese domestic review and regulatory requirements, due diligence also needs to be carried out on the seller, in order to confirm its suitability and whether it has an affiliate relationship with the listed company. Accordingly, from the very outset of the project, the Chinese lawyers need to expressly designate the targets of the due diligence and provide a clear list of the due diligence items, so as to avoid a situation where the scope of the due diligence is expanded only at a later time, impeding the smooth progress of the project.

Secondly, the means of due diligence, the issuance of the opinion and the domestic disclosure and citing requirements need to be expressly stated.

(a) Means of due diligence: during due diligence, the foreign lawyers will usually rely on the database provided by the subject of the investigation and the interviews with the relevant responsible personnel. The Chinese lawyers should demand from the target enterprise the same authority to access the database as the foreign lawyers so as to facilitate joint review of the relevant factual documents. Where the conditions permit, it is also recommended that the Chinese lawyers go abroad to conduct interviews and investigate in person. Furthermore, the Chinese lawyers also need to discuss with the foreign lawyers the means of due diligence commonly used by Chinese lawyers as well as the additional ones used by the foreign lawyers so as to increase the means available to them to the greatest extent possible.

(b) Issuance of the opinion: the legal opinions issued by foreign lawyers are usually terse, concise, brief and to the point, without a detailed listing of the legal facts. This usually fails to satisfy the disclosure requirements and practice in China. Accordingly, during the early stages of preparing the opinion, the Chinese lawyers need to amply communicate with the foreign lawyers on the method of preparing an opinion, and as the project progresses, revise the opinion with the foreign lawyers to ultimately satisfy the domestic disclosure requirements. Also, since an acquisition by a listed company is a time consuming process, on the one hand, the foreign lawyers need to continuously update the legal facts to keep up with the domestic timetable, and, on the other hand, the Chinese lawyers need to expressly impress on the foreign lawyers that due diligence is an ongoing process. It is not just the issuance of a legal opinion, but also requires them to carry out further investigation and express opinions in respect of the issues raised by the domestic regulators.

(c) Citing: as the work product of the foreign lawyers involves a series of confidentiality requirements, the parties need, at the outset of the project, to communicate clearly on such technical issues as the method of citing the opinion and authorizations, so as to avoid a passive situation where the domestic intermediary firms cannot cite or disclose the same.

Wang Guan is a partner and Meng Wenxiang is a salary partner at Grandway Law Offices. Xie Yijie, a paralegal at Grandway, also contributed to this article

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