Simplifying government and delegating authority has driven a boom in overseas investment by Chinese enterprises. So how should Chinese and foreign counterparties allocate Chinese government approval risks, asks Leslie Zhang
How to allocate and handle central government approval risks in cross-border M&A transaction documents has consistently been one of the core issues in negotiations on transaction documents between Chinese buyers and foreign sellers. Of most concern to foreign sellers are three things: (1) whether the Chinese buyer can promptly pay the transaction price; (2) the foreign government approval risks in the course of the transaction, e.g. the US national security review of the foreign investment, the US and EU anti-trust reviews, etc.; and (3) the Chinese government approval risks in the course of the transaction.
The main reason why the central government approval risks are listed separately is that foreign sellers have concerns with respect to the transparency of the government approval procedure and approval deadlines, and worries that the Chinese buyers may withdraw from the M&A transaction on the grounds that the government has not given its approval. Against this background of foreign sellers being concerned about government approvals, how to handle and allocate the government approval risks in the cross-border M&A transaction documents has become one of the focal points of negotiations and arguments between foreign sellers and Chinese buyers.
This was particularly evident before the central government’s vigorous delegation of authority for the administration and approval of offshore investment projects to lower levels. Particularly when the buyer was a state-owned enterprise (SOE), the foreign seller vigorously opposed the demand by the Chinese buyer that the securing of government approvals be set in the M&A transaction documents as a condition precedent.
Leslie Zhang Weihua is director at the projects management division of the legal department of China National Offshore Oil Corporation (CNOOC). He is also a member of the model contract drafting committee of the Association of International Petroleum Negotiators, and is the author of Cross-border mergers and acquisitions: a legal and practical guide