Cross-border transactions of Chinese companies, while accounting for only about 3% of the world’s cross-border transactions, have attracted global attention amid the increasingly complex international political situation, the pandemic’s impact on the economy and strategic adjustments of various countries to development of science and technology. Under the new circumstances, such transactions will face more stringent investment review by foreign governments than previously.
This article focuses on key points of the FDI review of a German share acquisition transaction, and discusses preparations that companies should make before embarking on cross-border investment and M&A projects.
The client intends to acquire 51% shares (voting rights) of the target company, which belongs to one of the industries listed in Section 55a of the Foreign Trade and Payment Ordinance. According to the Foreign Trade and Payment Act and Foreign Trade and Payment Ordinance, this transaction is subject to “cross-sectoral review”.
In mid-2021, the client started the filing process. According to requirements of the Federal Ministry for Economic Affairs and Climate Action (BMWi), the parties to the transaction should separately collect and submit information concerning the transferor, acquirer and target company. At the end of 2021, the client was notified that this transaction would enter the second stage of its FDI review.
During this review process, BMWi organised the first online hearing, with additional participants including representatives from the Federal Office for Economic Affairs and Export Control, Federal Office for Information Security, Federal Foreign Office, relevant EU departments, and representatives of other member states related to this transaction.
As of now, according to BMWi’s latest notification, the review period for the second-stage FDI review will be extended by three months – given the transaction is “particularly complex and difficult”.
KEY POINTS OF FDI REVIEW
As to why the transaction is “particularly complex and difficult”, BMWi explains in its latest notification that: (1) the acquirer’s shareholding structure is complex and the acquirer is connected with the Chinese government; (2) the acquirer’s transaction purpose needs to be carefully considered; and (3) it is difficult to perform a technical evaluation on the products of the target company.
Concluding the above three assessments will therefore take considerable time.
To determine the relationship between the acquirer and the Chinese government – and the government’s influence on the transaction – the local government pays special attention to whether there is any Chinese state-owned enterprise among the shareholders of the acquirer in this transaction, and whether the state-owned enterprise, if any, has actual control over the acquirer.
When submitting filing materials, BMWi requires disclosure of the direct or indirect ultimate actual controller holding 10% or more shares of the acquirer, including its shareholding proportion, Chinese and English names, and whether it is a state-owned enterprise.
During the first hearing, representatives of various departments learned from other channels that the acquirer had previously established a joint venture R&D company with a large state-owned enterprise in the same industry; and that the actual controller of the acquirer disclosed in the filing materials had worked in a state-owned enterprise. The acquirer was required to explain the circumstances in detail in court.
PURPOSE OF ACQUISITION
The client stated in the filing materials the purpose of the transaction was to obtain investment income and return, presented its analysis report on the development of the industry and target company, and emphasised the future development plan of the target company (such as retention of management and keeping the R&D centre in Germany), to prove that the transaction was a normal business practice.
However, representatives of the local government found through public news that the major shareholder of the acquirer was being sued by a local minority shareholder in a third country for illegal transfer of intellectual property rights; and decided, based on findings, that the ultimate purpose of this transaction might also be a transfer of technology. In this regard, the client specially provided the legal memorandum issued by the major shareholder and the lawyer of the invested company in the above-mentioned case, respectively, explaining the context of the case, and hoped to dispel the concerns of the representatives to a certain extent.
TARGET COMPANY’S PRODUCTS, POSITION
BMWi’s filing form requires the target company to fully explain its history, product type, product category, industry status, competitors, supplier list, customer list, and why it chooses the acquirer as a partner. The local government uses this to determine whether the target company has an irreplaceable and important position in the industrial chain, and within Germany and even the EU. The client is still waiting for the Federal Office of Economics and Export Control in Germany to determine the product attributes of the target company and its importance to the local industry.
Based on these concerns of local governments, the EU and other governments in the FDI review, the author recommends that:
- Before a Chinese enterprise conducts a cross-border transaction, in-house counsel of the enterprise should lead the investment department and outside counsel to conduct a comprehensive review of the acquirer’s shareholding structure and the target company’s products;
- Before setting up the transaction structure, the enterprise should prepare for the possibility of being required to conduct an FDI review, comprehensively consider the shareholding structure, actual controller, company reputation, partners, pending disputes, etc., and evaluate whether the proposed acquirer is suitable;
- The in-house counsel should communicate with the investment department and business department, and jointly formulate a post-investment management plan from commercial and legal perspectives on the investment purpose and method, as well as post-investment management – including the arrangement of management personnel, location of R&D centre and production plant, and source and use of investment amount;
- Considering that it may be impossible to travel to the local area during the pandemic, the acquirer needs to be very careful when selecting managers to ensure their interests and goals are consistent with those of the acquirer, and that they can play their role to the maximum extent in the FDI review and post-investment integration and management of the target company; and
- A local lawyer should be hired as early as possible to analyse and predict whether the transaction is subject to FDI review, and the possible outcome of the review. The time required for the FDI review should be an important consideration in arrangement of the closing date of the transaction agreement.
Zhou Jiaolu is a partner at Dentons China. She can be contacted on +86 139 0173 2076 or by email at email@example.com