Despite recent unprecedented market volatility, M&A transactions involving businesses spanning multiple jurisdictions remain a notable feature of the global marketplace.
For many Chinese businesses, cross-border deals offer an opportunity to expand internationally, access synergies and diversify operations, hopefully at bargain prices.
Accordingly, notwithstanding current conditions, they remain an important business tool for those able to manage the challenging processes involved.
Managing cross-border deals
As with any complicated process, careful management is key to successful execution. We set out below certain common considerations that will be critical for a Chinese purchaser to consider on any cross-border deal:
Information/planning. Quickly identifying and accurately assessing key areas of legal risk is an important start to any M&A process. In cross-border deals, the ability to do this in multiple jurisdictions and accurately focus attention on the most significant risks (usually through a “red flag” report) is of key importance.
These risks should be communicated in a clear and precise manner to the purchaser and its local counsel so that they can be considered properly and the overall level of risk assessed. Making such rapid assessments is largely dependent on having the experience to know the correct questions to ask in the first place.
In addition, as global regulation becomes more complex (and sometimes inconsistent across borders) quickly identifying regulatory issues will be critical.
Regulators, many of whom were criticised following the financial crisis for being too lax, are now significantly more cautious in their decision-making behaviour, and recent times have also seen a marked increase in protectionism manifested through regulatory action.
Because regulatory processes, such as antitrust or exchange control, can significantly impact timing, understanding their scope and assessing options for engaging effectively with regulators early, through pre-notification and similar processes in all relevant jurisdictions, should form a key part of the overall strategy on more complex deals.
Good relations with the relevant regulators can add significant value, and these should be utilised wherever possible.
Negotiations. Advisers will need to interact effectively with the vendor across multiple time zones and in multiple languages. The co-ordinating exercise that this requires can be challenging, but is essential in delivering smooth execution.
Cultural differences can abound in these situations, particularly relating to negotiating style or approach to documentation.
These differences in approach should be expected and handled in a sympathetic fashion. The ability to read the vendor’s behaviour accurately will enable a more effective engagement on key issues and make quicker overall agreement possible.
Execution. Due to current market volatility, efficiency of execution will be critical once the deal has been negotiated.
Advisers will need to understand the purchaser’s approval processes and be able to work flexibly within those frameworks (e.g. allowing lead time for production of translations where required and producing headline summaries of main transaction documents). They will also need to work efficiently with the purchaser’s local counsel to ensure that approvals are secured and that funds can be remitted promptly for closing.
Post closing. Given the complexity of many cross-border M&A processes, closing the transaction can prove comparatively easy when compared to the difficulties resulting from subsequent business integration.
These are generally business-related or cultural, but they can be highly disruptive.
Anecdotally, integration processes that work best are those that are carefully planned from the outset, where the purchaser has met with key persons within the target business to clearly convey and agree on post-acquisition expectations.
Selecting the right adviser
Due to its sheer size, few law firms (if any) can credibly claim expertise across the entirety of the global M&A market.
Accordingly, selecting a firm with access to the deepest global network of legal talent is vital to ensuring that you have the very best, appropriately experienced representation available in each relevant jurisdiction. Having access to the very best local contacts, connections and relationships with governmental and regulatory authorities is also of decisive importance.
The best firms will be accustomed to doing high volumes of cross-border deals and should therefore be well attuned to differing local approaches to business. This should allow them to rapidly grasp issues as they arise and communicate effectively with local advisers, and the purchaser’s local counsel.
In our view, better firms will demonstrate the ability to assimilate complex information from a number of jurisdictions and regulatory systems, across a range of time zones and languages. They will rapidly distil that information into easily comprehensible, simple advice and guidance, helping the purchaser to understand and manage the risks involved.
This is a key area where value can be added, through focus on the risks that are most significant, and on how best to deal with them, and on not allowing the process to be side-tracked (and time and money wasted) on issues that are not important.
Speed of execution will usually be critical. Having advisers that are able to mobilise rapidly to conduct due diligence and deal with local regulatory issues should be a basic requirement.
As English law is often chosen as the governing law for cross-border deals, many English law firms have considerable experience in this area. Accordingly, an English law firm with an excellent track record in executing cross-border deals may be ideally qualified to assist, if you are considering a transaction of this type.
Paul Davies is a partner at Macfarlanes in London. He can be contacted on +44 (0)20 7849 2536/+86 10 8519 2792 or by email at [email protected]
David Harrison is a senior solicitor at Macfarlanes in London. He can be contacted on +44 (0)20 7849 2680 or by email at [email protected]