Looking outward: Q&A with State Grid

How many lawyers work in-house at State Grid, and how do you see this developing over the next 12 months?

The Legal Department of SGID consists of 11 lawyers. Most of the lawyers have an international educational or working background. We are trying to recruit three to four more lawyers to support our international business by this year.

What firms do you outsource work to and what are you looking for from external counsel?

We always look for law firms that can provide high quality service, especially in the area of cross-border M&As. For complicated transactions, we tend to use reputable international law firms, with support from local counsel in the destination jurisdictions, if needed. In addition to deal experience and technical skills, from external counsel, we also look for a good understanding of and strong communication with Chinese companies, as well as their familiarity with the local regulatory framework and networking with the local regulatory regime in the destination jurisdictions.

What are some of the major legal challenges related to doing outbound deals for your company at the moment and how are you addressing these?

The major challenges, from my personal perspective, are mainly:

First, although this is rapidly increasing, the receptiveness of Chinese investors. More particularly, I'm referring to those investors controlled by the Chinese government, by local shareholders, the government and the public .To address this, we have learned that (i) attention to public relations (PR) work is needed from an early stage; (ii) early communication or pre-consultation with local government is helpful; (iii) a clear strategy for the transaction and development plan, taking into account different interest groups and stakeholders, should also be formed as early as possible so that a convincing story can be presented and positive image can be built up while the transaction goes on, and (iv) trust with the counterparty and all stakeholders is very important for a smooth transaction, and Chinese companies may try to earn trust from them by showing a willingness of understanding different cultures, and a professionalism in terms of transaction strategy and dealings with major issues, etc.

Second, forming a deeper understanding of transaction rational, legal and regulatory requirement and culture by Chinese companies is quite challenging too. While Chinese companies are very interested in “going international”, after years of bumpy experiences, Chinese companies now tend to make investment decisions on a more rational and prudent basis, taking into account strategic value, economic return, synergies, transaction-ability and difficulties of integration, etc. In addition to high-level considerations, the management of Chinese companies are starting to focus more on details such as the negotiation of terms and conditions of transactions, the design of strategy and tactics, developing a more in-depth understanding of local regulatory requirement and culture, and improving closer communications and better coordinated work among parties with more involvement of their in-house teams. This is a very good trend, but still a learning process. It takes time and patience, and we still have a long way to go.

From your perspective, how receptive are overseas companies to interest from Chinese SOEs and how have you seen this change over recent years?

The receptiveness of Chinese SOEs [state-owned enterprises] is certainly improving. With more Chinese SOEs going international and trying to adapt to local requirements and culture, more overseas companies are actively looking for investments from Chinese SOEs. Such an improvement of receptiveness is not only reflected in terms of a trend, in each particular transaction, receptiveness can also be increased through continued efforts by Chinese companies to build up trust with other relevant parties and stakeholders, wise self-positioning and effective communication.

Can you provide an update on how your investment into the Brazilian power sector is doing (CLP's Outbound Deal of the Year 2011) and how your legal team was involved in the post-merger integration?

Our Brazilian transaction has achieved a smooth transition and expected returns. The operation, management and employees are very steady after our takeover. Through such a base, we are looking for more opportunities in Brazil and Latin America to realise our long-term strategy in this area. For the legal team, in line with our overall strategy of localisation, we rely very much on our local team and try to increase our local team's capabilities by providing more training opportunities and recruiting new lawyers. We have sent one lawyer to Brazil as the major coordinator and his main responsibility is to help bridge the communication between our local team and the team at headquarters, monitor and report the development of any major legal events and bring our resources from headquarters to Brazil.

CLP's Outbound Deal of the Year 2011

State Grid's successful bid and acquisition of seven power transmission projects in Brazil marked the largest completed Chinese investment into the country to date. It was also the largest Chinese acquisition of power transmission assets outside China and the first time a Chinese company had acquired complete control of a foreign electricity grid asset. Here are some of the hurdles State Grid faced and how it triumphed:

Being a first-time acquirer in Brazil: The Spanish sellers were initially very doubtful of the Chinese as bona fide and credible buyers as State Grid had no previous experience or connections in Brazil. Despite competing against domestic Brazilian companies that had homegrown advantages, State Grid's sophisticated and experienced legal and deal teams managed to structure a bid so attractive, the Spanish sellers couldn't refuse.

Control of assets: A strategy had to be crafted to deal with the rights of first offer with the sellers. Negotiations around this were challenging and had to be extended. Agreeing on the control of the assets between the deal signing and closing was tricky, but both parties managed to find a middle ground to their opposing views.

Financing and local approvals: This was expected to be a challenge, but the Brazilian National Bank unexpectedly stepped in and offered funds to State Grid, spurring on Brazil's regulatory approvals. In the end, all the required approvals came through from both countries and this significant deal was completed within the timeframe of a year.