Prevention, relief measures for risk in outbound M&A

PRC enterprises, especially state-owned enterprises (SOEs) or state-backed SOEs, started outbound mergers and acquisitions (M&A) a long time ago, after China’s President Xi Jinping put forward the “One Belt, One Road” (OBOR) strategy, and in the meantime there has been an “asset shortage” in mainland China. PRC enterprises, especially listed companies, are keen to find quality overseas assets to expand the depth of their production, or the width of their product category.

A lot of PRC private equity (PE) funds are also looking for overseas investment opportunities, either for financial investment or assisting listed companies to look for strategy investment targets. But there are not a lot of successful outbound M&A cases, and the reasons for the failures are varied. The most significant macro risks are the host country risks, which include: (1) national security reviews; (2) nationalization and expropriation; (3) social unrest, regime instability and war; (4) breach of government policy; and (5) political and legal risks. Let’s take a look at some cases.

NATIONAL SECURITY REVIEW

A lot of outbound M&A projects have failed because of national security reviews, including the CNOOC merger with Unocal, the Chinalco acquisition of Rio Tinto, and so on. Sany Group purchased four windfarms in the US state of Oregon with its US subsidiary Ralls Corp, which was stopped by the committee on foreign investment in the United States (CFIUS) because Ralls Corp had already installed wind turbines on the windfarms, but had not submitted a review to the committee. Following this, then US president Barack Obama issued an order to prevent Ralls from buying the windfarms, citing national security risks, possibly because the wind turbine installations were near a naval weapons systems training facility. Ralls Corp immediately sued Obama after receiving the order.

ECHO LIU is a partner and director with the financial and corporate department of Boss & Young in Shanghai