In the second article of a two-part series, Richard Li looks at Europe’s upmarket neighbourhood and the hard sell that the bloc’s elite nations are pitching to attract Chinese investment.
In our last issue, we analysed those European nations mired deep in financial morass. Their future under some form of euro is far from assured and the problems arising from any reversions to a national currency and subsequent revisions of euro-denominated repayment contracts is enough to sound a very large alarm for those Chinese buyers interested in seemingly irresistible fire sale prices.
But enough of the down-and-outs in this neighbourhood. What other opportunities have the debt crises pushed up for those who would invest elsewhere, in strongholds of Northern and Western Europe
The good news for Chinese buyers is most European countries, whether euro zone members or not, are hurting. Banks in most of the bloc’s nations have moderate or even high exposure to the debt of their poorer brethren – Greece, Portugal, Italy, Ireland and Spain. This inevitably affects the financial stability of those banks, and their funding capabilities.
Couple this with sagging demand in debt-ridden countries that are saddled with fierce austerity measures and high unemployment, and the pressure on exports of European producer economies is considerable. Take Denmark. “Many Danish companies are feeling the effects of the crisis in terms of weaker demand and credit challenges, making them attractive partners for Chinese companies looking for technologies, know-how or market access in Europe,” says Søren Meisling, a partner at the Copenhagen office of Bech-Bruun.
It’s not an isolated observation, and although asset prices are not as attractive as a Greece or an Italy undergoing forced privatisation programmes, investment North and West has other merits. And as the focus of Chinese outbound investment gradually shifts from the energy and resources sector to acquisitions of high-tech and strong international brands, companies in stronger developed economies are turning the eyes of buyers.
For openers, they provide some of the best transparency for business and associated legal operations in the world. By natural progression from this, countries in Northern Europe also have far less corruption. Denmark, Finland, Sweden, Norway, the Netherlands and Switzerland are all in the top 10 least corrupt countries on Corruption Perceptions Index 2011, issued by Transparency International. Other features include good infrastructure, favourable tax regimes and treaties, and wide networks of trade. That all said, there are some broad items to consider before your exploratory flight to the Fjords.
Breaking up is hard to do
In part one of our inspection of the European showroom last month, we analysed situations in which countries may withdraw from the euro zone. Hypothetical? Perhaps, but several countries’ central banks are already preparing for the possibility of a complete breakup, with individual states reverting to separate currencies.
To recap, the consequences of partial breakup for countless contracts globally that are denominated in euro would be profound. But legally, there are other potential scenarios. The most extreme is that the non-existence of the currency in which payment under a contract is denominated may be an event rendering the contract “commercially impossible” or “impracticable”. Generally, these doctrines apply where an intervening event outside the control of the parties prevents performance of the contract, or where as a result of an unforeseen event, contractual obligations are rendered so different from what was originally contemplated that the contract should be terminated. Parties able to establish a case on these grounds would be able to escape their contractual obligations altogether, with potentially chaotic consequences.
Most commentators see such an outcome as unlikely, however. There are two reasons for this. First, as Gregory Fernicola, a partner of Skadden, Arps, Slate, Meagher & Flom in New York (New York law is used as the governing law of many international financing contracts) says, “because the legal criteria to show impracticability, impossibility or frustration are extremely difficult to satisfy. Given the serious market disruption of such a result … courts would likely seek to impose some sort of equitable remedy”. Second, as Michael Schwartz, a counsel of Skadden, continues, “it’s likely that legislatures will act to head off any questions about the validity of euro-denominated debt obligations”. This belief is fortified by the fact that before the euro was introduced, both EU and US authorities issued rules stating that conversion to the euro would not allow parties to unilaterally withdraw from contracts unless they otherwise agreed to do so. It seems probable that similar legislative provisions would follow a breakup of the union.
Problems back home
Thorny issues on the bloc aside, governments in Europe welcome foreign investment. But Chinese investors should not ignore the approvals that their own government requires. Many lawyers interviewed by China Business Law Journal refer to the miscellaneous approval requirements as a major obstacle for the completion of a deal. Hartmut Krause, a partner of Allen & Overy in Frankfurt, says even if an agreement is concluded, “the deal is still a long way from being completed. Chinese investors require separate authorisation by individual authorities for almost every step of the process”.
It’s something that Europeans are not quite up to speed with. “In China the regulatory process is far more complex than what we are used to in Europe,” says Geert Potjewijd, a resident partner of De Brauw Blackstone Westbroek in Beijing. Potjewijd says regulatory requirements are easier to tackle with a presence in China. “By having an office in Beijing we can maintain good relationships with the local authorities and more easily get into contact with the higher officials.”
Bearing the above cautionary issues in mind, Chinese investors need to know the unique investment environment in each country before rushing to the continent for the bargains.
Germany (currency: euro)
“The slogan ‘Made in Germany’ stands for high quality and reliability,” says Philip Martinius, a partner in the Munich office of Gibson, Dunn & Crutcher, adding the German economy “is still doing remarkably well”. This confidence is justified – the country maintains the highest ratings warranted by both Standard & Poor’s and Moody’s, with a ‘stable’ outlook.
Germany may not have many cheap assets for sale, but due to the country’s well-educated workforce and emphasis on developing high-tech, “[It is] attractive for Chinese investors to start manufacturing and R&D operations in Germany to upgrade their manufacturing skills and gain access to new technologies,” says Christoph Seibt, a partner of Freshfields Bruckhaus Deringer in Hamburg.
Labour costs in Germany are also lower than most other European countries. “Germany did not increase net salaries for a period of about 10 years, and has advanced in its competitiveness,” says Burkard Göpfert, a partner in the Munich office of Gleiss Lutz.
Christoph von Einem, a partner of White & Case in Munich, says one of the most important legal developments in Germany is the new insolvency law (ESUG). ESUG permits major creditors of a distressed company to have significant influence in selecting an insolvency administrator, and this “may avoid the unnecessary destruction of the valuable assets”, says von Einem. He adds that debt-to-equity swaps can be more easily carried out by major creditors, and potential investors “may use a three-month waiver period (Schutzschirm) to structure their deal in order to find the support of major creditors without the intervention of other creditors”.
Krause thinks previous media portrayals of Germany as protectionist are wrong. “The German Federal Ministry of Economic Affairs has not taken a single decision prohibiting foreign investment in German businesses,” he says. But although Chinese investors are welcome, Göpfert reminds them not to underestimate the strict bidding timeframe in Germany. “If Germans set a deadline for a bid, it means a deadline, not just an invitation to wait for better opportunities.”
This can create problems for Chinese investors unfamiliar with the formal rules in a standard European sale process. “Chinese parties seem to take things in a much more informal way,” says Philipp Grzimek, a partner in the Frankfurt office of Hogan Lovells, adding Chinese investors sometimes request information directly from the sellers, and often take much more time for decision-making than expected.
Problems in the French economy are largely a result of the huge exposure of French banks to sovereign bonds from other euro zone countries, rather than debt owed by the public and private sectors. In fact, large French companies are “sitting on piles of cash”, according to Arnaud Pérès, a partner of Davis Polk & Wardwell in Paris. He says they are now “keen to capitalise on new growth opportunities in emerging markets to compensate for the faltering economy in Europe”.
At the same time, France remains attractive for foreign investors. “French tax regulations facilitate the creation of new businesses,” says Pierre Servan-Schreiber, partner and head of the Paris office of Skadden, partly because France has the most favourable R&D tax credit system in Europe, designed to reduce company tax on the basis of R&D expenditures incurred by companies established in France.
According to Thomas Perrot, tax counsel at Linklaters in Paris, France has “a number of tax incentives which effectively permit tax planning and the reduction of tax bills, including French tax consolidation, tax losses carried forward, thin-capitalisation, preferential tax treatment for mergers, and spin-offs of French companies under certain conditions”.
Administrative red tape has been cut considerably. Start-up costs are among the lowest in the euro zone and “the lead time for setting up a business in France is now among the shortest in the world”, says Ghislain de Mareuil, head of the China-Europe desk at De Pardieu Brocas Maffei. He says many international investors have chosen France as their headquarters for operations in Africa and the Middle East, partly because so much of the continent is French-speaking and has a France-inspired government and legal system.
Sweden (Swedish krona)
Sweden ranks third in The Global Competitiveness Report 2011-2012 issued by World Economic Forum, which “confirms Sweden’s status as an attractive market for investments”, says Anders Söderlind, a partner in the Stockholm office of Setterwalls. In the current harsh financial climate, “Sweden can be treated as a safe haven”, adds Carl-Fredrik Hedenström, a partner in the Stockholm office of Magnusson.
According to Jon Ericson, a partner of Ashurst in Stockholm, Sweden provides foreign and domestic companies with a level playing field. “The absence of restrictions on foreign direct investment, foreign ownership thresholds or other protectionist policies make Swedish corporates an attractive target for mergers and acquisitions,” he says.
Sweden’s corporate tax system is also favourable to foreign investors. “Sweden does not impose withholding tax on interest and generally not on dividends paid to foreign shareholders,” says Thomas Lagerqvist, a senior counsel of Mannheimer Swartling. It’s ideal for setting up a holding company because, as Lagerqvist says, “dividends and capital gains on non-listed shares – for example, in subsidiaries – are tax exempt, without any holding period or minimum shareholding requirements”. He adds the country’s tax authority does not impose any thin capitalisation rules, and Sweden “also has an extensive tax treaty network with 80 countries, including China”.
According to Invest Sweden, the country’s official investment promotion agency, innovation and technology are Swedish industrial strengths. Among the most noteworthy industries are clean technology, communication technologies, life science, automotive and materials science.
The Swedish government conducted a review of Invest Sweden’s China office in late 2011 to enhance its service and, as Söderlind observes, this “indicates an interest of the Swedish government to maintain strong trade links with China”.
Norway (Norwegian krone)
“With the opening of the Arctic shipping lane, Norway will be the closest European country to China by sea. The potential between our two countries is tremendous,” says Geir Sviggum, a managing partner in Wikborg Rein’s Shanghai office.
Oil is one of the big attractions, and 2011 saw significant discoveries by Norwegian companies in the Barents Sea and the North Sea – notably the Skrugard and the Aldous/Avaldsnes discoveries. “The number of foreign companies operating on the Norwegian shelf has increased from about 20 – 10 years ago – to more than 70 today due to Norwegian incentives for exploration,” Sviggum says.
In terms of the ease of doing business, Norway ranked sixth in Doing Business 2012, a report issued by the World Bank, up from seventh in the 2011 report. The overall ranking averages a country’s percentile rankings on 10 topics, with Norway ranked in the top 10 for registering property and trading across borders, and in the top five for enforcing contracts and resolving insolvency.
One significant Sino-Norwegian transaction is China National Bluestar’s acquisition of 100% shares in Norway’s Elkem from the hands of Orkla in January 2011 for US$2 billion. Elkem is one the world’s leading suppliers of materials such as silicon and special alloys.
The Norwegian law firm Selmer advised ChemChina, Bluestar’s holding company, in this deal. According to Camilla Magnus, a partner of Selmer, ChemChina was required by the European Commission to submit an in-depth and extensive market analysis and testing for the phase one clearance of this deal.
Considerable work was involved in order to avoid a ruling by the commission stating that all Chinese state-owned enterprises (SOEs) are part of the same undertaking and hence regarded as one market participant. “The case was unique in a European competition law context, as it was the first case where the EU Commission took a stand on Chinese public ownership,” says Magnus.
Denmark (Danish krone)
Denmark ranked fifth in The World Bank’s Doing Business 2012 Report. In October 2011, Denmark’s new government came into power, together with the country’s first-ever woman prime minister. “The new government has continued and further expanded on the previous policy of openness towards Chinese investors,” says Søren Meisling, a partner of Bech-Bruun in Copenhagen.
Denmark passed a new R&D incentives bill at the end of 2011, allowing a company to get up to 1.25 million krone (US$220,000) from the tax authority as a subsidy to cover its R&D costs.
Subsidy is not the only enticement. “Unlike other European countries that have similar rules, Denmark allows the Chinese companies to hold the IPR ownership,” says Meisling.
Phase two of the Danish Companies Act came into effect on 1 March 2011. According to Anders Worsøe, a partner in the Copenhagen office of Magnusson, the Act “entails that companies wishing to found themselves as either Public or Private Limited Companies can do so with a partial payment amounting to 25% of the capital requirement”.
Besides new legislation, the Danish legal system has been traditionally hospitable to foreign investment. According to Ulrik Fleischer-Michaelsen, a partner of Rønne & Lundgren, a company can be established in Denmark online within a few hours, and there is neither local shareholder requirement nor prohibition on full control by foreign management.
Fleischer-Michaelsen says Denmark also has a unique tax rule. “A Danish company is generally not subject to tax of income from foreign branches,” he says, so there will be “no double taxation” between a Danish company and its foreign branches. Therefore, a company established in Denmark is “perfect for expansion into Europe”. To scale down a company in Denmark is also quite easy, because Danish labour laws offer a high degree of flexibility. “Compared to our neighbouring countries, it is very easy to hire and dismiss employees [in Denmark],” says Søren Jørgensen, a partner of Bruun & Hjejle.
“Helsinki is the closest European business hub to China,” says Juha Koponen, a partner of Castrén & Snellman. “The flight connections from China to Helsinki are very convenient and constantly improving.” The two sides also have a good tax treaty connection. A new treaty came into force at the beginning of 2011. “In the new treaty, the maximum rate of withholding tax on dividends is reduced from 10% to 5% if the parent company receiving the dividends directly holds at least 25% capital of the company paying the dividends,” says Wang Sha, an associate lawyer with Attorneys at law Borenius Ltd, a law firm in Finland.
Wille Järvelä, an associate in Roschier’s Helsinki office, says most legal developments with regard to trade and investment “are based on the policies laid down in the Trade Policy Programme established by the Finnish Ministry for Foreign Affairs”. According to the programme, “the dismantling of barriers to trade and investment will continue in the future,” he says. Like its neighbours, Finland emphasises development of the high-tech and innovation sectors. According to Wang, about 3.5% of the country’s GDP goes into R&D. “The collaboration opportunities between Finland and China in sectors like clean-tech are enormous,” she says, because China needs advanced technology to deal with pollution and energy recycling.
Finland’s mining industry is another promising sector. “Currently there are a significant number of newly-opened mining projects in Finland that are looking for financing,” says Wang. Unlike many other countries where governments exercise strict control over natural resources exploration, she says Finland “is very open and friendly towards foreign investment in its mining sector”.
Järvelä also sees the environment and energy sectors as promising areas for bilateral co-operation. To further internationalise those sectors, the Finnish Environment Cluster for China was founded in 2006.
Switzerland (Swiss franc)
“The legal and institutional framework in the field of investment between China and Switzerland is based upon the revised Agreement on the Promotion and Reciprocal Protection of Investments,” says Beat Brechbühl, one of the managing partners of Kellerhals in Berne.
The agreement came into effect in April 2010. According to Felix Egli, a partner of Vischer in Zurich, this agreement can protect Chinese investments from non-commercial risks such as impediments to relevant payment and capital transfers, expropriations without legal basis or compensation, governmental discriminations, etc.
Switzerland and China have concluded several important agreements including a double tax treaty concerning income tax and an agreement on air transportation. Last year, the two countries started negotiations on a bilateral free-trade agreement.
Switzerland is famous for its advanced technology. Except for technology export control regulations relating to war material and dual-use goods, there are “no restrictions on outbound technology transfers”, says Egli.
In international trade, a company may face technical barriers set by the differing technical standards of another country, but a company establishing in Switzerland has less to worry about. “Switzerland has also established a network of mutual recognition agreements (MRA) avoiding such technical barriers to trade,” says Egli. The Swiss MRA network now covers all 27 EU members, as well as Norway, Iceland and Liechtenstein. It also covers Canada in North America.
Jakob Höhn, a partner of Pestalozzi in Zurich, points out that listed Swiss companies can be taken over by a foreign investor quite easily. “There are virtually no restrictions, and the consent of the board of the target company is not required,” says Höhn.
Like other non-euro countries, the relative strength of the Swiss franc weakens the competitiveness of the country’s export industry. In order to tackle this issue, Brechbühl says, the independent Swiss National Bank has fixed the lower limit of the exchange rate at 1.20 francs per euro. Other noteworthy points include Switzerland’s flexible labour laws and, of course, its low taxation.
The Dutch legal system has virtually no barriers to foreign investment. “There are generally no restrictions on foreign ownership and participation in joint ventures,” says Mark Ziekman, a partner of CMS Derks Star Busmann in Amsterdam. Ziekman says the country’s corporate governance rules also allow for the possibility of Chinese management of a Dutch company.
Chinese companies have been active in the Netherlands. The country has a favourable tax regime for incoming and outgoing dividends, interest and royalties. According to Ziekman, key elements include: the participation exemption, as a result of which dividends and capital gains received from qualifying participations are tax exempt; no withholding tax on outgoing interest and royalties; no, or low, withholding tax rates on incoming and outgoing dividends as a result of the EU Parent-Subsidiary Directive and a large tax treaty network with about 80 countries.
The Dutch tax treaty network “provides for, among others, reduction of or exemptions for applicable withholding taxes on dividends, interests and royalties,” says Carola van den Bruinhorst, a partner at Loyens & Loeff’s Hong Kong office. She says the Netherlands also has an extensive bilateral investment treaty (BIT) network, which “provides for protection against unjust state actions such as nationalisation of key assets”, an important factor for Chinese companies investing in overseas natural resources.
The double tax treaty between the Netherlands and Hong Kong entered into force in the Netherlands at the beginning of 2012 and will come into effect in April 2012 in Hong Kong. “The double tax treaty will further improve the economic ties between Netherlands, Hong Kong and Mainland China, and offers tax planning opportunities in all three jurisdictions,” says Geert Potjewijd, the resident partner in the Beijing office of De Brauw Blackstone Westbroek.
The government also seems to serve Chinese investors well. “The Dutch government has created a one-stop-shop for Chinese investors,” says Jaap Jan Trommel, a partner of NautaDutilh in Amsterdam. This one-stop shop helps Chinese investors and their workers apply for work and residence permits, a Dutch driving licence, and find proper international schools for their children.
In December 2011, Elio di Rupo was appointed prime minister of Belgium, ending the country’s long absence of a government since April 2010. Belgium has come back on the right track.
Like China, Belgium has also built up an extensive BIT network. “It is however interesting to note that both networks are very complementary,” observes Peter Callens, a partner of Loyens & Loeff in Brussels. Callens suggests that Chinese investors could set up an intermediate corporate structure in Belgium for investment in a third country, with which China has signed either no BIT, or a BIT that has not come into force. In particular, Belgium’s BIT network covers African countries such as Algeria, Benin, Burkina Faso, Burundi, Cameroon, Egypt, Gabon, etc., and Latin American countries such as Bolivia, El Salvador, Mexico and Paraguay.
In October 2009, Belgium and China signed a new income tax treaty, expected to come into effect in 2012. Under this new treaty, profit generated by direct investment in Belgium “can be repatriated to China free from Belgian dividend withholding tax, subject to certain conditions as to size and holding period”, says Jan Meyers, a partner in the Brussels office of Cleary Gottlieb Steen & Hamilton.
Good opportunities are present in Belgium. According to Callens, many family-owned medium-sized companies with Belgium as their home base are now facing generational issues, and “often a sale of the company to a third party will be the only solution”. He adds there are also many listed companies looking for financial partners to help them organise a delisting.
In 2011 Delvaux, a well-known Belgian manufacturer of luxury leather bags, was acquired by Fung Brands, a subsidiary of Fung Capital, owned by Victor and William Fung, the chairman of Li & Fung Group and the executive deputy chairman of Li & Fung Limited respectively. Loyens & Loeff advised Fung Brands in that deal. Callens mentions one challenge the firm often faces when advising on Sino-Belgian deals. A Belgian party may require the other party to provide a bank guarantee or other bonds to protect against late payment. “A Belgian negotiator does not find this offensive but rather an expression of good business practice,” says Callens, “[but] a Chinese party may view this as a sign of distrust and take offence, especially where a security is sought for relatively minor amounts of money.”