White Paper: Acquisitios by Chinese companies in US

By Andrew M. Ross: 0 Comment(s)Print E-mail China.org.cn, February 20, 2012

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U.S. Deal Practices: Procedures, Strategies and Pitfalls

Perhaps one of the most important points regarding engaging in transactions in the United States is to recall the reaction of many Chinese businesses when foreign companies came to China and sought to dictate that deals in China be done in the same manner as in those companies' respective homelands. This generated ill feelings and often did and can easily result in failure in a deal. The same is true in the United States. Companies from many different countries make acquisitions in the U.S. all the time, and one of the accepted norms is that the deal will be done in "U.S. style."This paper will not provide extensive details of how U.S. deals are done, or even suggest that this is the best way to do deals, but it will highlight a few key points and a few considerations relevant to Chinese companies and stress the importance of this approach in the U.S. in order to be successful.

First, while not successful on occasion, the advisor for the U.S. company looking to be sold (especially a "hot" company) may seek to create an auction for the company, thus seeking to maximize the price and otherwise obtain the most favorable terms. Even if they do not succeed in doing this, they will generally seek to have the process move as rapidly as possible. Prospective buyers who are unwilling to follow an auction process when established or move too slowly are simply left behind. An important aspect in dealing with this is to be prepared. This means having done industry and market analysis in advance so as to be able to readily determine one's interest and willingness to devote the necessary resources to explore the deal, and have ready or be able to quickly assemble a team of qualified Chinese and U.S. advisors.

Second, as in dealing with any foreign country, accept that there are cultural differences and look to adapt to or bridge them. For example, whether or not this is a fair comment, many U.S. businessmen object to the alleged slow deal pace of foreign businessmen (and not just Chinese), thus often giving U.S. buyers an advantage. Timing delays are, of course, a tactic to be considered; however they should only be used as deemed appropriate, such as to express reservations or concerns so as to try and enhance one's bargaining position. However, a buyer should not allow its perceived slowness to cost it a deal it otherwise wants.

Third, while most people properly say "a deal is not done until it is done," in many U.S. negotiations the same often is not true of individual issues. Once an issue is resolved, it is generally not renegotiated absent special circumstances. A party which acts contrary to this undercuts its counter-party's trust in it.

Fourth, there is great significance in the U.S. placed on the transaction contract, as each party seeks to maximize its benefits and protections. As a general rule, legal counsel for a U.S. party, will seek as much protection for its client and clarity in the terms of an agreement as possible. This can be especially important for a buyer or investor. This often means lengthy detailed contracts, and also emphasizes the need for the parties to make decisions relatively quickly with respect to the many points involved. In fact, one view is that many U.S. business persons and their lawyers will only encourage ambiguity in an agreement if they think that addressing the ambiguity in the negotiations would result in it being resolved contrary to their interests or if they think they will have greater negotiating leverage on the point once the agreement is signed or the deal is consummated.

By having a contract be as detailed and precise as possible, the likelihood of a dispute is reduced.This is augmented by the fact that in the U.S. there is a very substantial body of court rulings and laws which help determine what a particular contractual phrase will mean in a particular context, thus creating even greater potential certainty. Finally, it should be recognized that other than private arbitrators and mediators and the courts – all of which are objective but the last of which is slow – no governmental entity or person such as a governmental beauracrat plays a meaningful role in resolving contractual disputes. Thus, a party generally will be best served and seeks to know at the time the contract is signedto the maximum extent possible exactly what rights and obligations it has and does not have and what risks it bears.

If the target company is a "public company", i.e., has securities registered under the U.S. securities laws, there are significant additional legal requirements and procedures, most of which are the responsibility of the target. These procedures can include the target company obtaining the approval of its stockholders, and for this purpose its preparation and distribution of a proxy statement. However, an acquisition of a portion of the business of a public company which is not substantial relative to the public company's total business would not generally trigger these requirements.

Most potential U.S. sellers and many of their advisors are not experienced in engaging in transactions in the United States with Chinese companies. Therefore, the U.S. parties are likely to have the concerns common to any deal they engage in involving a non-U.S. party, and potentially even additional ones... This should not be viewed as any type of negative perception of China itself or the particular Chinese buyer, but rather as pragmatic concerns based on the U.S. parties' limited experience in this context and their desire to be certain that whatever they agree to, they will obtain its benefits.Therefore, for example, it is to be expected that most U.S. sellers will insist that the English version of the transaction documents govern (regardless of whether there even is a Chinese version), that U.S. law apply, that any dispute be resolved exclusively in the U.S.and in many instances they are unlikely to accept any consideration other than cash in full at closing.

It is true that the unfamiliarity of U.S. sellers and some of their advisors with many Chinese companies may disadvantage a Chinese buyer in comparison not only with U.S. buyers, but also relative to buyers from regions such as Europe, with established histories of U.S.acquisitions. In part, a Chinese company can address this by retaining experienced U.S. professionals from the very beginning. This not only assists the Chinese buyer in the process but adds credibility regarding its interest. Moreover, it is particularly important that while developing transactional experience in the U.S. market, Chinese buyers have expert help in understanding upfront the U.S. deal-making process, including being advised as to what at any given time are customary business terms and the legal implications of issues and decisions. They will also need guidance in taking appropriate actions and obtaining appropriate protections.These include conducting due diligence and obtaining satisfactory contractual terms, such as adequate seller representations and warranties and indemnities. Demonstrating this knowledge will further enhance credibility.