Assessing the legal risks involved in PE companies’ M&A deals

According to a research agency’s statistics, 406 deals were completed in the Chinese mergers and acquisitions (M&A) market during the first half of 2013, 383 of which were cases with disclosed amounts involving a total transaction amount of US$40.34 billion.

In particular, private equity (PE)/venture capital (VC) funds participated in 163 M&A deals, involving a total transaction amount of US$17.52 billion, nearly nine times more than in the same period last year. These deals covered 21 primary industries such as biotechnology/healthcare, energy and mineral resources, real estate, machinery manufacturing and the internet. In PE M&A deals, PE investors and target companies are often faced with the problem of how to cope with various kinds of legal risks, boundaries between rights and obligations, as well as remedies.

A PE investor gains a stake in an investee or target company by making an equity investment in it. Such investments can be divided into two types by method of operation: capital increase investment and equity M&A investment. In the equity M&A investment, a PE investor acquires all or part of the registered capital of the target company’s shareholders, who will then retire or have their percentages of shareholding reduced. Taking into account other things such as legal risks associated with PE involvement in M&A deals – such as the independence of a fund and the protection of the investor’s rights to information about the target company – and problems regarding the legal effect of some clauses – such as the determination of a PE party’s rights of priority and the implementation of legal remedies – the parties to an M&A deal may seek to spread and balance risks by designing some clauses, as described below, in a series of agreements with relevant parties and financial regulators.

Ye Wen is a partner and Zuo Kun is a lawyer at Concord & Partners