Prevention, relief measures for risk in outbound M&A

By Echo Liu, Boss & Young

PRC enterprises, especially state-owned enterprises (SOEs) or state-backed SOEs, started outbound mergers and acquisitions (M&A) a long time ago, after China’s President Xi Jinping put forward the “One Belt, One Road” (OBOR) strategy, and in the meantime there has been an “asset shortage” in mainland China. PRC enterprises, especially listed companies, are keen to find quality overseas assets to expand the depth of their production, or the width of their product category.

Echo Liu Boss & Young
Echo Liu
Boss & Young

A lot of PRC private equity (PE) funds are also looking for overseas investment opportunities, either for financial investment or assisting listed companies to look for strategy investment targets. But there are not a lot of successful outbound M&A cases, and the reasons for the failures are varied. The most significant macro risks are the host country risks, which include: (1) national security reviews; (2) nationalization and expropriation; (3) social unrest, regime instability and war; (4) breach of government policy; and (5) political and legal risks. Let’s take a look at some cases.


A lot of outbound M&A projects have failed because of national security reviews, including the CNOOC merger with Unocal, the Chinalco acquisition of Rio Tinto, and so on. Sany Group purchased four windfarms in the US state of Oregon with its US subsidiary Ralls Corp, which was stopped by the committee on foreign investment in the United States (CFIUS) because Ralls Corp had already installed wind turbines on the windfarms, but had not submitted a review to the committee. Following this, then US president Barack Obama issued an order to prevent Ralls from buying the windfarms, citing national security risks, possibly because the wind turbine installations were near a naval weapons systems training facility. Ralls Corp immediately sued Obama after receiving the order.

But we have also seen successful M&A projects, including the Yangkuang merger with Felix, where one of Felix’s assets was near a prohibited military area. Yangkuang had conducted communications with the US Foreign Investment Review Board (FIRB) and hired local government PR agents to help during the procedures. Yankuang also decided to strip its sensitive assets to avoid a national security review, and the success of the project shows this was a smart move. Here are some suggestions for PRC enterprises to avoid a national security review:

(1) Make thorough and comprehensive plans regarding possible national security review points of contention;

(2) Keep an active attitude to communicating with the approval authority;

(3) Hire local lawyers and PR people to give practical advice;

(4) Bring up solution plans to address any concerns of the approval authority and put them into effect once obtaining internal consent of the authority.

Although PRC companies have made comprehensive plans, hired professionals to conduct due diligence, etc., some political and legal risks still cannot be avoided. After Pingan Insurance invested in Fortis Holding, the Belgian government stripped the Belgian and Luxembourg business of Fortis through exchanging shares during the financial crisis without a shareholder vote, which is equivalent to nationalization. Fortis had a strong insurance and banking business before the stripping, and now only has international insurance, part of an equity credit asset portfolio and no banking business. As Belgium had signed an investment protection agreement with China, Pingan claimed losses from the Belgian government through international arbitration. PRC enterprises can conduct some legal prevention as per below:

1) Before investing in some developing countries, request the signing of a “stability protocol” with the government, which requires the government to guarantee relief measures in case of instability;

2) Adding a “Modification of Law” article to investment agreements means that if the local laws and policies have changed and have significantly influenced an M&A project, the enterprise has the right to terminate the investment contact;

3) Purchase political risk insurance, which covers nationalization and expropriation, exchange rate and event risk, war, and government default, with China Export & Credit Insurance Corporation underwriting as a policy insurance company;

4) Try to choose an investment target in countries that have signed the Investment Protection Agreement with China. There are now more than 130 countries that have signed, not including the US. The benefit of signing this agreement is that a PRC enterprise can claim for losses incurred from political risk through international arbitration, or can sue the relevant authority in a local court, which may protect its own authority.

If PRC enterprises adopted more methods to protect their own interests, more successful outbound M&A projects would result.

ECHO LIU is a partner and director with the financial and corporate department of Boss & Young in Shanghai


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