The biggest difference between cross-border and domestic M&As lies in that the former involves two or more jurisdictions. An acquirer of cross-border M&A, therefore, needs to be prepared for an increasing number of, and much more challenging, risks. Having a good understanding of the legal and policy environment in the target country, and in the world, identifying significant potential risks in a timely manner, and implementing proper risk controls accordingly is the precondition to a successful overseas M&A. Key considerations in this regard include, but are not limited, to the following:
Foreign investment review system. After decades of globalization and economic internationalization, many countries/regions have established a policy and legal system for foreign investment review. Explicit provisions are formulated and specialized agencies are designated to undergo foreign investment review procedure. Restrictions on foreign investment are internationally recognized as reasonable exceptions to national treatment. Generally, foreign firms are restricted from entering infrastructure and other industries of vital importance to the nation’s economy and the people’s livelihood, such as military projects, banking, telecoms, railways and airports. Instead, they are encouraged to enter sectors conducive to economic development, especially emerging industries and sectors that help improve the international balance of payments and boost exports.
“National security review” is a typical foreign investment review system. In the US, for example, foreign investment review is implemented mainly for ensuring national security. The Exon-Florio provision of the Defense Production Act, which is the most important legislation related to foreign investment review, authorizes the US president to prohibit, from a “national security perspective”, mergers, acquisitions and takeovers by foreigners of any US companies engaging in interstate business.
The scope of review was broadened by the Foreign Investment and National Security Act enacted in 2007 by the US Congress, which focuses on the broader national security of the US. A deal is surely subject to stringent review if it involves core assets, such as core infrastructure, technology or energy, which relates to US national security. In the review procedure, questions such as whether the country of the foreign acquirer actively co-operates with the US in fighting against terrorism, and whether the foreign acquirer poses any regional military threat to the US, are also asked. Similar systems are implemented in almost all foreign countries. However, reviewers usually have a lot of discretion due to the lack of definition or standard description of “national security”. Many overseas M&A proposals fail because of national security concerns.
Antitrust review system. The advantageous market position of multinationals, a result of expanding cross-border investment, has also brought about concerns over economic security and monopolistic behaviour, as well as possible restraints on competition. In response, many countries have taken action to control and prevent such negative impacts. Large takeover deals could face antitrust scrutiny. Antitrust compliance has become a worldwide concern, as regulators are paying increasing attention to whether two companies, if allowed to combine, would breach antitrust rules. It’s predicted that antitrust compliance will be one of the great challenges Chinese companies have to overcome when they seek to acquire foreign assets.
Labour employment system. Most countries have labour protection laws requiring that a certain proportion of the workforce at companies to be acquired by foreign firms must be locals, and setting restrictive provisions for job reductions and compensation. Some developed countries/regions have rolled out stringent regulations about job cuts and wage reductions against foreign acquisitions of local businesses. If Chinese companies do not have a full picture of their labour protection rules, they might break the law when reorganizing human resources at the foreign subsidiaries they have acquired.
Environmental protection system. The world is facing more serious environmental issues caused by rapid economic development. In addition to international accords on environmental protection, most countries/regions have introduced increasingly strict laws to regulate sectors that damage the environment. Hefty fines on environmental pollution and huge costs for repairing the environment should be taken into consideration when a company prepares an offer to buy a foreign business. In the meantime, commitment to environmental protection is one of the social responsibilities companies should assume, and it is also helpful for Chinese enterprises to build good reputations in foreign markets.
Expropriation and nationalization. There were times when expropriation of foreign capital took place generally in developing countries. To ensure that foreign investors regain the confidence of investing in their countries again in the new historical context, many developing countries, on the precondition of protecting local economic sovereignty, warrant in their foreign investment codes that nationalization and expropriation will not happen to foreign-invested enterprises except in very limited circumstances.
However, the past couple of years have seen some Latin American and African countries, such as Colombia, Honduras, Peru, Bolivia, Venezuela, Zambia and Zimbabwe, raising royalties and taxes in the mining industry to strengthen control over mineral resources and take a share in the rise of commodity prices. Ecuador, who demanded renegotiation of investment contracts in 2010, even went further to expropriate relevant projects when negotiations failed.
Laws and policies in the target country have a direct impact on the outcome of an overseas M&A. Therefore, it is important to hire a highly specialized, reliable local counsel to identify and prevent potential legal and policy risks that may arise in the target country. Besides, it is also necessary to have a counsel familiar with international laws who serves to safeguard the acquirer’s overseas M&A by taking advantage of international investment protection mechanisms under bilateral and multi-lateral treaties.
Lin Zhong is a partner at EY Chen & Co. Law Firm
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