Managing Regulatory Risks in U.S.-China Mergers and Acquisitions

Credit: ALM

Summary

• U.S. acquirers of PRC target companies must consider investment restrictions, sanctions, and export controls from both jurisdictions
• Pre-acquisition due diligence should include risks-based, open-source investigation on the target's ownership chain and business counterparties
• Acquirers may consider carving out problematic business lines or using alternative acquisition structures such as licensing and technical services arrangements
• An acquirer can mitigate its exposure to sanctions risks by securing contractual exit options and requiring the seller to provide comprehensive representations and warranties along with a full indemnity
• Parties should set out in contract how they intend to deal with enforcement action, including whether the terms of the agreement can be adjusted, whether a break fee is payable, and how costs are to be apportioned
• PRC blocking statutes may render certain contract terms unenforceable

China and the United States, like many jurisdictions worldwide, have in recent years adopted or overhauled mechanisms for screening foreign investment on national security grounds. Heightening geopolitical tensions are leading the two global superpowers to further impose stronger sanctions, export controls, and other forms of trade restriction. Lawyers say dealmakers must therefore acquaint themselves with the everchanging regulatory landscape as well as ways to effectively mitigate and allocate associated risks.