This is the second instalment of my observations on China M&A and how it can be very different from doing deals in the West. In this instalment, I focus on the approvals process, which begins once the contracts are signed and submitted to the relevant authorities for approval.
6. Government approvals: The approval itself is one of the key things about Chinese deals that are different from the West. It takes some getting used to. Any entry you make into China as a foreign investor, and many other changes thereafter that you make to the structure, requires the substantive approval of the Chinese government. This was one of the first issues that I had to appreciate about China and it never got easier. In many other jurisdictions, you understand that regulatory approvals are necessary, such as anti-trust clearances, but in China, they are integral to the deal. Actually, after just one deal in China, you don’t forget it. It contributes significant delays and stress to the outcome of any deal in China. Be warned.
7. Feasibility study reports: Very much a feature of the approval process, the feasibility study report has traditionally been viewed as a necessary evil, but not too problematic. The aim of the document, as the name suggests, is to present a business case to the government authority responsible for approving the transaction. It used to be the case that a feasibility study report was a document that was very much modelled on a precedent. This is changing to some extent, especially as the policies of the Chinese government have also changed in the last 2-3 years and are favouring certain sectors and technologies (e.g. renewable energy) as well as homegrown innovation and developing export markets. As a result of these changes to policy, a little more creativity is required in preparing FSRs to show how deals will satisfy these new policies.
8. The government has a seat at the table: This can be a little traumatic for some foreign clients to deal with. Once you have completed negotiations with the Chinese counterparty, the government approving authority can request (or require, it depends on how you look at it) that particular changes be made to the contracts. It can seem that, suddenly, the government is trying to renegotiate the deal that has already been agreed between the parties, after long months of bilateral negotiations. At this point, it’s important not to panic. So long as the parties have rational answers to the authority’s questions and you can present those responses, you should be OK. There have been rare examples where approval was never received (like the Carlyle-Xugong deal). In most cases, there will be some give and take, but you will be assisted if you have a Chinese counterparty and that counterparty gives you support. Tthe person at the government end is just trying to do their job. In my experience, they will accept reasonable answers to their queries.
9. Buffers: If you are establishing a wholly foreign owned enterprise in China, you will need to employ a State-appointed agency to liaise with the government on your behalf, when it comes to securing approvals. If you are negotiating a joint venture, your Chinese partner will be the liaising party. As a foreign investor, it can be frustrating not to be able to deal with the authorities yourself. As far as you can, you should ensure therefore that you have within your circle a Chinese national who will be able to visit with the authorities, along with the agency or the Chinese counterparty. That person should ideally get along with your Chinese agency or partner and they should be closely involved in the process. Only then will you be able to understand and really help resolve what issues might surface within the approving authority. So it is important to appreciate that, as a foreign investor, if you just go along with the process without trying to proactively contribute to it, buffers will exist between you and the government authorities. (I apologise for using this expression but I just can’t help but think of the scene in Godfather II, where the goon informs the Senate hearing that the Corleone family had “a lot of buffers” when it came to giving directions. I’m not saying the Chinese government is like a Mafia family but the expression appealed to me. I hope you get the picture. What you need to do is reduce the buffers between you and the government so you get a clear appreciation of what is going on.)
10. Foreign exchange regulations: The foreign currency exchange angle can be neglected in the excitement of getting a deal signed and approved, but it is sometimes the last and trickiest obstacle to completing an investment. The basic approach is that currency exchanges on current account (i.e. trade payment flows) don’t require approval from the State Administration for Foreign Exchange (SAFE) but trades on capital account (i.e. investment payment flows) do. SAFE approval is, generally speaking, therefore required for foreign investments. It is best to try and sort out the requirements as early as possible. You also need to be prepared for particular requests to come from the bureau you are dealing with. SAFE requirements can differ from province to province and city to city in the actual paperwork required. Don’t forget this. If you get SAFE approval for the relevant currency transfer on your M&A deal, then, and only then, has the fat lady sung.
If you have some different things you have come across that I haven’t added, let me know. This is a subjective list, so I make no claims to having covered everything important. Besides, I love hearing from others with experiences to share.