Steady as she goes through tough challenges of overseas acquisitions

By Marvin Min and Xue Qingjian, Zhonglun W&D Law Firm
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An overseas acquisition is a huge systemic project, involving complex transaction structure design, detailed investigation and negotiations, domestic and foreign government approvals, and requiring close co-operation among the acquirer, financial advisers, law firms, accounting firms, industry consultants, etc. The role of Chinese lawyers is extremely important.

Marvin Min Senior Partner Zhonglun W&D Law Firm Beijing
Marvin Min
Senior Partner
Zhonglun W&D Law Firm

Transaction design

With a view to minimising the tax burden involved in an acquisition and simplifying the approval procedures, the acquirer needs to research and design the best transaction structure with its financial advisers, lawyers, accountants and tax accountants. This requires a comprehensive analysis and consideration of the national approval procedures and timelines, tax break policies between countries, international accounting standards, etc. In our experience, in a cross-border acquisition the acquirer will generally establish a multi-level subsidiary structure overseas, with the overseas subsidiary on the lowest rung acting as the acquiring entity.

Due diligence

Data room. Due diligence in a cross-border acquisition is generally effected via a data room. The transferor will place the information pertinent for the due diligence in a data room, with the acquirer’s advisers participating in the due diligence entering the data room as authorised to access and analyse the information. Generally, there will be a time limit within which the data room is open, and information cannot be downloaded or printed without special authorisation from the transferor.

The acquirer may, at the time of final execution of the sale and purchase contract, require the transferor to give warranties as to the truthfulness and completeness of the information in the data room.

Q&A. When studying the information in the data base, the acquirer’s advisers should submit to the transferor a list of the issues requiring explanation. The transferor should promptly reply to the questions on the list or place additional information in the data room for review by the acquirer.

Due diligence report. A due diligence report is commonly divided into two parts: the main text, including the definitions, background, general overview and report, and a review opinion on such matters as the historical evolution of the target company, its equity situation, assets, liabilities, insurance, personnel, contracts, disputes and litigation, intellectual property, environmental protection, competition and anti-monopoly issues, and taxation; and the annexes, including the scope of the due diligence and the procedure, the assumptions and limitations, and unanswered questions. Of this information, personnel and environmental protection matters are of extreme importance in foreign legal environments, but are easily overlooked by Chinese companies.

The acquirer’s advisers will frequently make a list of the problems found in the course of due diligence, their implications and the actions to be taken, and will additionally list in particular the key issues and key findings for reference by the acquirer in its decision making.


Overseas acquisitions frequently require financing from a financial institution. Standard loan contracts are divided into two parts – the main text and the annexes. The main text needs no further explanation, but the annexes will normally include the conditions precedent for drawdowns and conditions subsequent, the format of drawdown requests, and the repayment schedule.

A bank will require the borrower to provide security for a loan. In practice, unless a third party provides security in the form of a joint and several guarantee, a bank will sometimes additionally require the pledging in its favour of all of the equity of multiple overseas subsidiaries of the acquirer, and that of the target company. When an overseas subsidiary of a domestic Chinese enterprise provides security for a third party, such matters as overseas asset oversight, approval of security provided for foreign parties and foreign debt will be involved, and will require the carrying out of necessary domestic approval procedures.


Domestic anti-monopoly reviews. Pursuant to China’s Anti-Monopoly Law (2008), if the Ministry of Commerce (MOFCOM) deems that an enterprise would constitute a monopoly in the market (principally the domestic market) after an acquisition, it can prohibit the acquisition.

Nevertheless, intensity has been lacking in enforcement of the Anti-Monopoly Law to date. From the implementation of the law in August 2008 to August 2011, MOFCOM accepted 332 anti-monopoly cases involving business operator concentrations. Of the cases concluded, the great majority passed unconditionally, only one has been prohibited (the acquisition of Huiyuan Juice by Coca-Cola), and seven cases have been approved conditionally.

Xue Qingjian Associate Zhonglun W&D Law Firm Beijing
Xue Qingjian
Zhonglun W&D Law Firm

Foreign anti-monopoly reviews. The real challenge facing overseas acquisitions by Chinese enterprises is posed by the anti-monopoly reviews of foreign governments. The overseas acquisition projects that we have been involved in recently faced anti-monopoly reviews by such countries and regions as the EU, Brazil and Russia, with the EU review being most important. Responsibility for the anti-monopoly review work of the countries of the EU rests with the European Commission under certain conditions. Faced with an acquisition application by a Chinese state-owned enterprise (SOE), particularly one under the central government, the major questions that the European Commission will consider include: is the SOE independent?; and is there suspicion that the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council is manipulating the SOE into carrying out the overseas acquisition? If the doubts are found to be substantiated, the European Commission will deem all the SOEs in a certain industry in China to be one acquirer and rule that a monopoly is constituted.

Accordingly, when effecting overseas acquisitions, Chinese enterprises should attach a great deal of weight to foreign anti-monopoly review procedures. The acquirer’s advisers, in particular its domestic lawyers and the lawyers in the place where the anti-monopoly review is conducted, should co-operate closely and fully explain that the SOE is independent, and that the overseas acquisition by the SOE is not being orchestrated or controlled by Chinese authorities or organisations. The legal opinions of domestic lawyers will normally cover the following four aspects: (1) the relationship between SASAC and SOEs; (2) the relationship between SOEs and other state authorities; (3) the relationship between SASAC and local state-owned assets commissions; and (4) the competitive relationship between enterprises under the central government and other enterprises.

Marvin Min is a senior partner and Xue Qingjian is an associate at Zhonglun W&D Law Firm in Beijing

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