Legal outlook for outbound mergers & acquisitions in 2017

By Lin Zhong, EY Chen & Co. Law Firm
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The number and value of outbound investments by Chinese enterprises have been rising exponentially in recent years. According to statistics announced by the Ministry of Commerce (MOFCOM), domestic Chinese investors spent about RMB1.07 trillion (US$154.63 billion) in overseas investments between January and November 2016, up 55.3% year on year. Outbound M&A has been adopted by more and more Chinese companies as a common means of overseas investment.

In the meantime, however, deglobalization has become a powerful trend across the world, evidenced by the Brexit vote and the victory of Donald Trump in the US presidential election, and it has complicated the international political and economic landscape. Chinese enterprises are facing drastically changing internal and external circumstances as they prepare to splash out in foreign markets.

Lin Zhong Partner EY Chen & Co. Law Firm
Lin Zhong
EY Chen & Co. Law Firm


The most prominent change in 2016 must be growing populism around the world. In general, populism is a political style of action that challenges the authority of the mainstream under the pretext of protecting the interest of the ordinary public. Populists in many countries are blaming their economic stagnation on globalization, claiming economic globalization has brought little benefit to the lower class, but instead widened the wealth gap and caused job losses. Their strong opposition to trade liberalization and globalization has exposed some investment liberalization treaties to more uncertainty.

The bilateral investment treaty (BIT) between China and the US is an international accord that provides high levels of protection to foreign investments. If both countries sign and ratify the treaty, it not only offers an enormous boost to investment in the other country, but, given the most favoured nation clause, will benefit some 130 countries and regions that have established bilateral investment agreements or arrangements with China.

The treaty is of great significance to improve the legal environment for Chinese enterprises to make overseas investments. Both governments are making good efforts to advance the BIT, but its prospect is now overshadowed by the election of Donald Trump as the next US president. As a result, an improving legal climate for Chinese buyers of assets in the US and other countries may not take place as early as we had expected.


As Chinese companies snap up assets worldwide, more M&A deals are subject to tough regulatory scrutiny targeting a wide range of sectors, from energy (natural resources, transport, power generation and distribution), transportation (shipping, port and wharf, and aeronautical maintenance), financial services, key infrastructure and core technologies. Foreign governments usually refer to “national security” to restrict foreign investment, and many Chinese firms have been forced to drop their outbound M&A bids due to pressure from national security examinations.

The EU and US are required to stop using the “surrogate country system” to investigate dumping claims 15 years after China’s accession to the WTO, that is, from 11 December 2016. This sunset clause, however, might not be enforced, because the US and Japan have announced they would not recognize China as a market economy, while the EU has said it would take a different approach to investigating dumping claims. In the investment community, China’s state-owned enterprises (SOEs) are more likely to face tougher examination, as foreign regulators do not take SOEs as independent business entities when they address antitrust concerns. SOEs are an important force of China’s outbound acquisitions, and their efforts to expand overseas investments will be hindered by advanced nations’ refusal to grant China a market economy status, as well as the stringent examinations on asset purchases by the SOEs.


The renminbi is facing greater depreciative pressure after the US Federal Reserve’s December rate hike. In order to stem capital outflows from domestic companies by falsifying business transactions to offset the risk of RMB devaluation, Chinese authorities may impose tighter controls to block attempts from domestic enterprises to move their money out of the country through foreign asset acquisitions.

To dispel market concerns, the National Development and Reform Commission (NDRC), MOFCOM, the People’s Bank of China, and the State Administration of Foreign Exchange (SAFE) have reportedly said they would continue to adopt a registration-based approach to manage outbound investment, balance the desire to facilitate outbound investment and the need to prevent risks, regulate the market order, and examine outbound investment projects according to the law. However, unless expectations of renminbi devaluation are substantially muted, Chinese enterprises will continue to face obstacles to move capital across the border to fund their foreign acquisitions. These obstacles might prompt foreign asset sellers to demand higher premiums to dissipate their concerns.


Despite the above-mentioned challenges, the “One Belt, One Road” (OBOR) strategy is moving ahead. The central government has rolled out a raft of favourable policies to encourage outbound investment, and domestic enterprises are gearing up to embrace unprecedented opportunities to scoop up foreign assets.

Corporate China’s continued interest in outbound investment is driven by its growing business strength, its intrinsic desire for business transition, as well as the attractive value of premium foreign assets. The quickening pace of “going global” indicates Chinese businesses are stepping up their presence in the international market and spotting overseas investment opportunities. To that end they must make full preparations in legal risk assessment and prevention, and legal practices, and make good use of domestic and foreign policy tools to ensure their overseas investments are successful.

In future issues, the author will analyze the domestic and foreign legal issues associated with outbound M&A, such as foreign regulatory measures, investment risk prevention, foreign government examinations, special questions concerning overseas acquisitions by listed Chinese companies, due diligence investigation, documentation, as well as dispute resolution. It is hope this analysis is helpful for readers to get a deeper understanding about legal issues in this field.

Lin Zhong is a partner at EY Chen & Co. Law Firm



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