Jiang Xiaochuan, author of Tencent Finance and Economics
Chinese companies investing overseas will become more cautious about cross-border mergers and acquisitions. M & An experts say that against the backdrop of the Chinese government's tightening of overseas investment, overseas sellers are beginning to worry about policy risks and explicitly link reverse break-up fees to the Chinese government's potential ban.
The latest case comes from companies listed on the HKEx. "Lenovo Holdings"(3396.HK), the company announced on September 1st that it will acquire about 90 percent of the shares of the International Bank of Luxembourg at a base price of 1.48 billion euros. Zhang Weihua, an M & An expert, noted the change in the terms of the deal: unlike the previous practice of using only general government approvals as a prerequisite, the announcement made special reference to the policy risks of the Chinese government.
Zhang Weihua worksUnited Energy GroupIs the deputy general manager and general counsel of the group
As the Chinese government tightens regulation of overseas M & An investment, Zhang Weihua expects "this writing will become a market practice for some time".Lenovo HoldingsIt is mentioned in the announcement that if the Chinese or Hong Kong governments issue relevant laws restricting or preventing the completion of the transaction before delivery.Lenovo HoldingsAnd the International Bank of Luxembourg may terminate the transaction.Lenovo HoldingsA reverse break fee of about 44.5 million euros will be paid to the latter.
In the M & A transaction, if some events agreed by both parties make it impossible for the buyer to complete the transaction, the buyer shall pay the reverse break fee to the seller to compensate the seller for the loss. Previous provisions involving government approval usually appear as prerequisites for transactions, but "there is little clarity about the Chinese government's prohibition order," Mr. Zhang said.
The tighter approval of China's overseas investment has become the main trigger for reverse breakup fees, according to senior cross-border trading lawyers. Xiong Jin, an international partner at Jindu Law firm, said the implementation of the restrictive policy "has caused a lot of concern among foreign sellers about the certainty of the Chinese buyer completing the transaction".
Especially in deals where acquisition funds need to leave China, most sellers require that "unable to obtain approval from the Chinese government" be used as a trigger for reverse breakup fees. Under the background that the seller is becoming more and more powerful, the reverse breakup cost is increasing. In an observation article, Xiong Jin said that in order to successfully complete the deal, more and more Chinese investors are trying to raise money abroad in order to circumvent the Chinese government's approval for overseas investment.
On August 18, the General Office of the State Council forwarded the "guidance on further guiding and standardizing the Direction of overseas Investment" jointly formulated by the National Development and Reform Commission, the Ministry of Commerce, the people's Bank of China and the Ministry of Foreign Affairs, clearly restricting Chinese companies from investing in real estate, hotels, cinemas, entertainment industries and sports clubs overseas, as well as restricting Chinese enterprises from "setting up equity investment funds or platforms without specific industrial projects".
Private equity investment companyBlackstone Group Inc GroupZhang Liping, managing director and chairman of Greater China, predicted at the end of 2016 that the volume of cross-border M & A transactions in China could fall to half of that in 2016. "due to foreign exchange controls, China's overseas mergers and acquisitions will be suspended or delayed indefinitely, causing a large number of defaults."
At that time, the Chinese government had not yet issued a document clearly restricting overseas investment, only in the form of a joint interview with Xinhua by four government departments on outbound investment, saying that the government would "standardize the market order." verify some enterprises' outbound investment projects in accordance with relevant regulations.