Legal Risks And Countermeasures For Chinese M&A Transactions In America

Cross-border merger and acquisition is a commercial activity of enterprises which emerged in western countries and has developed rapidly in recent years. Western countries experienced five waves of cross-border M&A in over a century since it appeared. Along with the strengthening trend of economic globalization, enterprises speed up the pace of cross-border merger and acquisition. With the accumulation in more than thirty-year reform and opening up and ”going out” policy, Chinese enterprises has taken an active part in globalization and has an increasing number of overseas mergers and acquisitions in which the United States accounts for a high proportion. In 2013, China’s direct investment to the United States reached a record of $14 billion, and it will continue to maintain a certain amount of growth in the next few years. Accordingly, it serves to show that China’s direct investment to the United States still have great potential. The proportion of cross-border mergers and acquisitions is large in such investment activities. In recent years, Chinese enterprises has implemented a lot of big-scale overseas M&A in the US. However, for Chinese enterprises, overseas mergers and acquisitions are still in the initial stage and do not have sufficient conditions. As a result, a lot of overseas M&A fails every year. In terms of success rate and M&A quality, Chinese enterprises have a long way to go so that China can become the truly top investment country.In the process of M&A, opportunity and risk are the two sides of the coin. The legal risks which domestic enterprises face involving overseas M&A has become a major conundrum. Overseas M&A legal risks refers to the uncertainty of returns and other legal effects brought to enterprises due to violating related laws and regulations when conducting overseas merging and acquisitions. Risks may occur throughout the whole transaction process, and arise from various aspects. Because of the fact that domestic companies have conducted business locally for years, they have become fairly familiar with the local legal environment. However, when it comes to entering a relatively unfamiliar environment, companies need time to adapt to the new legal system, legal environment and law enforcements. It is difficult to adjust effectively to the host country’s law, and therefore information asymmetry arises between the two parties of M&A, and generates possible legal risks. When domestic enterprises deal with M&A in the US, they have to go through national security review, anti-monopoly investigation, and listed companies even have to face the investigation of SEC. The process involves various faucets of legal issues. If not familiarized with local legislature, business will face delay in the transaction and more cost will incur, causing certain economic loss.It is of great significance to do comprehensive studies on the legal risks of overseas M&A, analyze the factors for risks, and come up with strategies for Chinese enterprises because it can improve the rate of success of our overseas M&A in the US, and it fits the requirement of our nation’s “Going-out Policy”. Besides, it also has positive influence on domestic economic growth, economic mode transition, and industrial structure upgrade. This essays aims at analyzing the US economic environment and related national security review, anti-monopoly investigation and SEC investigation using the approaches of literature review, historical research, inductive analysis and case study. Features of the US legal system will be drawn from these analyses, and effective risk preventing measures will be suggested as regards to domestic companies’ overseas M&A transactions.The US National Security Review System is the major legislature involved in overseas M&A transactions in the US, it has two degrees: voluntary censorship and compulsory censorship. The US National Security Review System is executed by the CFIUS, and the process involves four core procedures, which are the startup phase, the review phase, the investigation phase, and the final decision stage. CFIUS requires companies to submit information including intangible assets like business system, trademark, trade secrets, Internet database system, Data acquisition and management control system. Beside they also need information about the corporations’ commercial operation, product development, energy resources exploitation and other information concerning national security. In recent years, the censorship has expanded in its scope, procedural law and substantial law has merged into one, and combined autonomic review and national regulation. Informal negotiations before declaration and danger eliminating contract system have improved. In China, state-owned enterprises are likely to encounter legal risks due to lack of understanding of M&A transaction risks. To cope with the legal risks from the national security review system, enterprises need to make adjustments and compromises; they also need to look for business partners and do well in publicity. What’s more, they need to come up with a reasonable and plausible exit strategy.U.S. antitrust law system is another major legal system involving cross-border M & A transactions. It is reviewed primarily by the Department of Justice Antitrust Division or Trade Commission. In order to determine the existence of monopolistic behavior, it uses substantial lessening of competition standard to define the relevant market and market concentration. It also provides efficiency standards in the review process and a double standard for particular industries. In the development process of the U.S. antitrust law regime, it reflects three characteristics, which are three changes: from structuralism to behaviourism, from per se rule to rule of reason and from efficiency offence to efficiency defense. If the companies can’t understand these three features and take specific risk prevention measures, they may be faced with the review of unfair competition risk, antitrust investigation and corresponding litigation risk. Therefore Chinese enterprises must be aware of the content and links explicitly restricted by the U.S. law to avoid unnecessary trouble. They should carefully select the methods of M&As, properly handle the relevant litigation problems, establish a trust relationship with the Judiciary and pay attention to so-called “American interests”.The stipulation of the cross-border M&A transactions is a significant part of the U.S. securities laws and systems. Tender offer, open to buy and transnational merger agreement, which are three main ways of cross-border M&A, are bound by the legal system. There is also a relevant information disclosure obligation stipulated by the classification method of tender offer and non-tender offer. Besides, in order to protect the interests of shareholders from listed companies, the laws empower the shareholders to have same price right, sell stocks proportionally and withdraw accordingly. The U.S. Federal Securities and Exchange Commission is a main administrative department to be responsible for implementing the "Federal Securities Exchange Act". As the supreme body of the U.S. securities industry established by law, it is also responsible for maintain the order of the securities and exchange capital markets. There is no requirement of mandatory tender offer in American system, which is different from the European market economy countries. So the American securities law system is more complete and more neutral, which highlights the position of Securities and Exchange Commission. China’s listed companies, if not respond properly, will be faced with special legal risk, information disclosure risk and legal risk in the process of M&A. In addition, Chinese companies listed in the U.S. should be aware of financial legal risks according to the relevant provisions of "Sarbanes-Oxley". When Chinese listed companies take the strategy of going global, they should select safe and appropriate acquisition payment, fulfill the obligation of information disclosure obligations and do enough publicity for their acquisition purposes and business plans. At the same time, they need to adjust and improve internal governance structure to reach the goal of localization operations.In addition, labor issues and environment protection are easily caused by legal risks for Chinese enterprises during their cross-border M&As transactions in the U.S. As a result, companies must make the adjustment of localization and change bad habits accumulated in domestic business development process. In the process of M&As in America, Chinese enterprises often encounter previously unimaginable legal risks, which to some extent show Chinese enterprises lack necessary knowledge and awareness of the legal risks during overseas M&A. In fact, the key links for Chinese enterprises are to improve their awareness of legal risks, understand the difference between domestic and American legal environments and actively adopt targeted measures.