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Overseas mergers and acquisitions: regulation and inspection procedures

Overseas mergers and acquisitions: regulation and inspection procedures

Bridas Corporation, in which the China National Offshore Oil Corporation (CNOOC) indirectly owns a 50 percent stake, signed a deal with BP on November 28, 2010 to acquire a 60 percent stake in Pan American Energy (PAE) from BP. 

The total value of the deal would be US$7,059,250,000, according to a statement by CNOOC whose proportion of the payment would amount to US$2,470,737,500. At that time PAE was the second largest oil and gas producer in Argentina, holding the world best portfolio of oil and gas assets. Successful acquisition of PAE would have greatly lifted the oil reserves and the average daily production of CNOOC.

Though CNOOC had pinned much hope on the acquisition of PAE, BP said in a statement on November 7, 2011 that the Bridas Corporation had unilaterally stopped the acquisition due to a failure to get approval from China regulatory bodies and Argentina anti-monopoly regulator. BP statement showed that CNOOC efforts to acquire a stake in PAE through a subsidiary had failed due to regulatory obstruction. The article will briefly introduce the impact of regulatory inspection procedures on overseas merger and acquisition (M&A).

Inspection of overseas mergers and acquisitions

Generally speaking, Chinese companies will encounter two levels of inspection when conducting overseas mergers and acquisitions: (i) China domestic regulatory bodiesinspection of overseas M&As (domestic inspection), and (ii) the host country inspection on Chinese companies M&As activities within the host country (host country inspection)

1. Domestic Inspection

According to China laws and regulations, Chinese companies attempting overseas mergers and acquisitions should (i) apply for approval from/ file to the overseas investment project to the National Development and Reform Commission for approval, (ii) apply for approval from the commerce department, (iii) follow the inspection procedures including registration with forex regulatory bodies for overseas investment. If the relevant companies are state-owned, they must additionally undergo an inspection by the State-owned Assets Supervision and Administration Commission, including but not limited to preparing an overseas M&A report, approval/filing of significant investment projects, and filing/ registration of asset assessment.

Within current domestic inspection practices, Theng Heavy Engineering announced on February 25, 2010 that it would cancel its proposed deal to acquire GM Hummer Brand, trademark and ownership of the product name, because it failed to get approval from China domestic regulatory bodies.

2. Host Country Inspection

Proposed mergers and acquisitions are also subject to stringent inspection in the host country:

(1) During overseas mergers and acquisitions, the regulatory bodies of the host country will conduct an inspection on the foreign investors, according to foreign investment regulations, which will generally focus on the deal negative impact on the country safety (including but not limited to national securities and economic securities). For example in the US, if an overseas investor proposed merger or acquisition relates to sensitive areas, such as national securities or military technologies, it will be subject to inspections of Committee on Foreign Investment in the United States (CFIUS). In previous cases, China largest telecommunication equipment manufacturer Huawei has been forced to cancel several proposed mergers and acquisitions targeting US telecommunication technology companies after failing to get approval from CFIUS

(2) Anti-monopoly inspection

An anti-monopoly inspection by the regulatory bodies of the host country can be triggered if an M&A deal proposed by a foreign investor will result in concentration of market players, and give the buyer monopoly status in a certain product or service market. In 2006, China International Marine Containers (CIMC) proposal to acquire Netherland Burg Industries BV was inspected by European Union anti-monopoly institutions as the completion of the deal could lift CIMC share of the tank container market to above 50 percent. CMIC was forced to cancel the proposed M&A deal on allegation of amaging the interests of customers and other competitors, and preventing effective competition on the common market or a substantial part of it

(3) Forex control inspection

A foreign investor will usually have to undertake a currency control inspection by the host country forex regulator when the company attempts a merger or acquisition with a company not belonging to a free exchange market. For example, many countries and regions in Africa and Latin America have strict regulation and restriction on cross-border capital flow. A foreign investor needs to sufficiently estimate potential risks from forex control inspections, and the consequent effects on time scale and budgets.

Reaction to inspections on overseas M&A

In respect of the complex inspection procedures for overseas mergers and acquisitions, a Chinese company attempting an overseas M&A should carry out a legal due diligence report of a proposed deal in advance, anticipate the possible inspection procedures (both from the domestic and host country), assess potential problems and the risks of relevant inspection procedures, and adopt proactive, effective and reasonable solutions, such as structuring the deal reasonably to avoid unnecessary inspections, and to carefully drafting contract documents and setting up effective risk management system, so as to facilitate completion of the deal

This article is for general reference and does not constitute legal advices, nor is it a substitute for legal advice. It is not intended as a thorough study of the topic matters. If there are any further questions on this article, please contact the author.

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