Private investors must closely watch targets
October 13, 2010 | BY
clpstaff &clp articles &New Opinion encourages trans-regional M&As and private investor participation
To mitigate post-acquisition risks, private companies need to consistently stay attentive to the target company, be cautious when selecting assets, and keep a close eye on the market, say counsel.
The State Council issued an Opinion on September 6 that lifts regulatory restrictions on trans-regional M&A activities in certain industries. In addition to offering preferential policies to encourage participation from private investors, the new regulations allow local governments to negotiate agreements on allocating revenue.
Although private companies may face difficulties when buying into state-owned enterprises (SOEs), Orrick Herrington & Sutcliffe's China corporate partner Neal Stender says that there are ways to reduce “negative surprises” in such acquisitions.
“In general, the longer that an acquirer is actively attentive to the picture, the more information will be discovered, and the fewer surprises will remain to be discovered,” said Stender. He also suggests that risks could be reduced by “acquiring carefully selected and defined assets, rather than a company, or a line of business or even an entire operation facility”.
Private enterprises are being encouraged to invest into the infrastructure construction, financial services and social service sectors.
A main problem facing private investors is bearing the target company's non-financial liabilities, which may not have been reflected transparently in the accounts of the target enterprise. An SOE may have informal obligations to provide services or provide asset access to employees, former employees, local communities and other governmental organisations.
Furthermore, such cross-regional M&A activities might cause a loss of tax-type revenue for the target company's local government. According to Stender, the risk of this loss may explain why a local government might resist a proposed merger.
“The same analysis can apply for a non-merger purchase if the target's local government suspects that the new owner will reduce reinvestments, and divert more resources, activities and tax revenues to its own locality,” he said.
State media have reported that the government's purpose with these new rules is to improve efficiency and eliminate outdated operations that are not environmentally-friendly and consume excessive amounts of energy and resources.
Shanghai-based Philips Ding of Run Ming Law Office notes that the Opinion only states the principles and guidelines that the government would like to work on. No detailed arrangements have been made, and he points out that sectors which welcome private investments in SOEs are “competitive” sectors, but not monopolised industries.
“Private investors will be very cautious to step into competitive sectors, unless the preferential policies are significantly favourable, for which they need to keep close watch on the implementation of the guidelines,” said Ding. “Do not rush into these sectors, but focus on the market.”
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now