Recognizing M&A risks in the target country

The biggest difference between cross-border and domestic M&As lies in that the former involves two or more jurisdictions. An acquirer of cross-border M&A, therefore, needs to be prepared for an increasing number of, and much more challenging, risks. Having a good understanding of the legal and policy environment in the target country, and in the world, identifying significant potential risks in a timely manner, and implementing proper risk controls accordingly is the precondition to a successful overseas M&A. Key considerations in this regard include, but are not limited, to the following:

Foreign investment review system

After decades of globalization and economic internationalization, many countries/regions have established a policy and legal system for foreign investment review. Explicit provisions are formulated and specialized agencies are designated to undergo foreign investment review procedure. Restrictions on foreign investment are internationally recognized as reasonable exceptions to national treatment. Generally, foreign firms are restricted from entering infrastructure and other industries of vital importance to the nation’s economy and the people’s livelihood, such as military projects, banking, telecoms, railways and airports. Instead, they are encouraged to enter sectors conducive to economic development, especially emerging industries and sectors that help improve the international balance of payments and boost exports.

“National security review” is a typical foreign investment review system. In the US, for example, foreign investment review is implemented mainly for ensuring national security. The Exon-Florio provision of the Defense Production Act, which is the most important legislation related to foreign investment review, authorizes the US president to prohibit, from a “national security perspective”, mergers, acquisitions and takeovers by foreigners of any US companies engaging in interstate business.

Lin Zhong is a partner at EY Chen & Co. Law Firm