Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

CHINA UPDATE – Stricter enforcement of environmental regulations in China

Editors’ Note: Lodewijk Hijmans van den Bergh and Geert Potjewijd are partners at De Brauw Blackstone Westbroek, resident in Amsterdam, and Adam Li is a partner at JunHe LLP, resident in Shanghai and Silicon Valley. They are members of XBMA’s Legal Roundtable.  As leading M&A lawyers, they have broad expertise handling significant cross-border transactions.

Last year’s Party Congress made clear China’s commitment to environmental protection: in his opening speech, President Xi Jinping mentioned “environment” 89 times, while “economy” stopped at 70. The new environmental zeal has led to a surge in relocations and shutdowns, impacting companies active in China or heavily reliant on Chinese suppliers. This was illustrated by a recent Bloomberg article reporting that environmental action had resulted in a sudden shortage of raw material in the solar panel industry, driving up costs and crushing margins for scrambling manufacturers.

Companies active in China should comply with China’s new environmental regulations and assertively engage with authorities to prevent potential problems. In addition, companies heavily reliant on China-based suppliers, especially in highly-regulated areas or industries, should actively monitor risks and put precautionary measures in place to mitigate potential disruptions in their production and supply chains.

Changes in environmental policy enforcement 

Where previously China’s environmental enforcement authorities have been accused of lacking teeth due to the government’s unwillingness to interfere with economic growth, this notion has shifted since China’s new environmental protection law entered into force on 1 January 2015. In the past, environmental authorities reported to local government heads, who (for various reasons) might use their power to block environmental penalties interfering with their economic goals. Under the new law, however, these local environmental authorities can report directly to superior environmental authorities, removing this potential conflict of interest. Additionally, the new law enables environmental NGOs to pursue legal action – which could cause legal and reputational damage – against companies violating national environmental regulations.

The 2015 developments led to much stricter environmental enforcement in the following years. Since July 2016, four rounds of dawn raids and on-site inspections have penalised some 18,000 polluting companies. Moreover, shutdowns and relocations resulting from enforcement of environmental regulations have drastically increased since May 2017, affecting industries such as textiles, chemicals, plastics, coating, paper, rubber, metals, dyeing, painting and printing.

This trend is set to continue in the coming years as numerous new regulations and guidelines come into force. On 20 September 2017, China’s State Council released its ”Opinion Concerning Establishment of a Long-Term Mechanism for Early-Warning and Monitoring of Environmental and Natural Resources Carrying Capacity”. This opinion gives government authorities the power to suspend major projects in heavily-polluted areas. The opinion also states that companies responsible for damage to the environment, and local officials that fail to uphold the ban, may face criminal liability. Another development is China’s new environmental tax law, which came into force on 1 January 2018. This law increases the tax burden on entities that emit air, water, solid waste, or noise pollution, while granting preferential tax treatments to polluters which drastically reduce their emissions. Finally, the State Council issued ”Instruction 77 for Relocation of Hazardous Chemical Enterprises in Heavily Populated Areas” in August 2017, which addresses the relocation of hazardous chemical entities at a local level. Entities that create significant potential risks to the population must relocate by 2020, while larger entities need to move by 2025.

Assessment and outlook

Given the wide discretion of the enforcement actions, assertive engagement is crucial in dealing with China’s local government and environmental authorities. The increased importance of environmental protection will not only result in more inspections and enforcement, but is likely to have an impact on all regulatory approval. A satisfactory environmental narrative might very well become a key driver in establishing any form of government cooperation. For this reason, it is essential for companies to be proactive when addressing environmental protection. Proactive communication will not only help drive the conversation, but will also make the authorities more willing to collaborate.

From an operational perspective, China’s environmental crackdown has hit companies at every level, resulting in serious disruptions to supply chains, including for foreign multinationals. In addition to the example provided above, the SCMP recently reported that as a result of a forced shutdown of a Chinese supplier of a global car parts manufacturer, the production of more than 200 car models of 49 brands were affected. As this new enforcement trend is set to become the new norm, it is essential for companies to ensure that they not only comply with relevant regulations and guidelines themselves, but also audit their business partners’ compliance. In doing so, companies should be aware that even if they (or their business partners) comply with all existing legal requirements, they may still be subject to relocation; especially if a company operates in a highly-regulated area or industry, as relocation can sometimes be driven by unrelated (and thus more unpredictable) policy considerations. In this respect, supply chain management is key. As a sudden shutdown of a business partner can disrupt an entire production chain, it is crucial to carefully screen the complete supply chain for environmental compliance at both national and local levels and to ensure that any business partners have all the required licences. Depending on the standing of a company’s suppliers, contingency planning might be necessary.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CHINESE UPDATE – China’s NDRC Issued New Outbound Investment Rules

Editors’ Note: This article was written and contributed by Wang Kaiding, corporate partner at King & Wood Mallesons. Mr. Wang focuses on cross-border mergers and acquisitions, foreign investment in China, corporate governance and general corporate law matters. He has worked on a range of transactions, including domestic and cross-border merger and acquisition transactions, private equity transactions, reorganizations, joint ventures and divestitures. He was joined by Huang Mengting and Tang Xinran in writing this article.

On 26 December 2017, the National Development and Reform Commission (“NDRC”) issued the Administrative Measures for Enterprise Outbound Investment[1] (“Regulation No. 11”) which will come into force on 1 March 2018.

Regulation No. 11 contains six chapters and 66 articles. Compared to the 2014 Administrative Measures for the Verification and Record-filing on Outbound Investment Projects[2] (“Regulation No. 9”), there are several significant changes. The change of the regulation’s title indicates that monitoring of outbound investments will no longer be limited to pre-transaction “verification” and “record-filing”, but will also cover the periods during and after transactions.

For a summary of pre-transaction administrative measures required under Regulation No. 11, please refer to the end of this article.

Key points to note about Regulation No. 11 are:

“Road-pass” regime eliminated, time costs reduced, and more deal certainty

Article 10 of Regulation No. 9 states that:

When undertaking outbound acquisitions or bidding projects with total investment exceeding USD300 million (inclusive), Chinese investors shall submit a project information report to NDRC before carrying out any substantive work.”

This article drew great market attention. Dubbed the “road-pass”, it meant Chinese investors involved in outbound bidding transactions exceeding USD300 million (inclusive), had to obtain confirmation letter from the NDRC before making a binding offer.

Regulation No. 11 eliminates the “road-pass” regime, which evidences NDRC’s intention to “further streamline administration and delegate power”.

Covered transactions expanded

1. Outbound investments are categorized into two types: those conducted directly by domestic investors; or through overseas enterprises controlled by domestic investors.

Regulation No. 9 applies to outbound investments conducted by domestic investors (i.e. domestic legal persons) or through their overseas enterprises or institutions if a domestic investor provided financing or guarantees.

According to Article 2 of Regulation No. 11, the scope of application of Regulation No. 11 covers outbound investments conducted directly by domestic investors (i.e. domestic enterprises) or through controlled overseas enterprises.

(1) Outbound investments conducted directly by domestic investors

Article 2 of Regulation No. 11 does not elaborate on outbound investments conducted “directly by domestic investors” or “through controlled overseas enterprises”.

Based on Article 14 of Regulation No. 11, outbound investments conducted “directly by domestic investors” refers to outbound investments relating to which domestic investors directly invest assets, interests or provide financing or a guarantee. The definition covers outbound investments conducted by domestic investors as the investing entity, or through their overseas enterprises (regardless of whether or not the domestic investor controls the overseas enterprise) with financing or a guarantee provided by a domestic investor.

(2) Outbound investments conducted through overseas enterprises controlled by domestic investors

Under Regulation No. 11, outbound investments conducted “through controlled overseas enterprises” refers to outbound investments conducted by overseas enterprises controlled by domestic investors in which the domestic investors do not directly invest assets, interests or provide financing or a guarantee.

Domestic investors conducting outbound investments through their overseas enterprises are not governed by Regulation No. 9 unless they have provided cross-border financing or guarantees. In practice, many investors used this loophole to avoid the verification and record-filing procedures required by Regulation No. 9. Outbound investments conducted by domestic natural persons are not governed by Regulation No. 9 either.

All outbound investments conducted by domestic investors through their controlled overseas enterprises (regardless of whether the domestic enterprise provides cross-border financing or guarantees or not) will now fall within the scope of Regulation No. 11. In addition, under Article 63 of Regulation No. 11, outbound investments conducted by domestic natural persons through their controlled overseas enterprises are also covered by Regulation No. 11, although Regulation No. 11 still does not apply to outbound investments conducted directly by domestic natural persons.

The wider coverage of Regulation No. 11 will not substantially increase compliance costs for domestic investors. With respect to domestic enterprises and domestic natural persons who conduct outbound investments through their controlled overseas enterprises (domestic investors do not directly invest assets, interests or provide financing or a guarantee):

  • Sensitive projects will be subject to a verification procedure.
  • For non-sensitive projects:
    • if the total investment amount from Chinese parties exceeds USD 300 million (inclusive), investors shall submit a “situation report for a non-sensitive project with a large amount” to NDRC before the project is implemented through an online system. Verification and record-filing procedures are not required;
    • if the total investment amount from Chinese parties is less than USD300 million, then no pre-transaction verification, record-filing or reporting is required.

2. Outbound investments made by financial enterprises are also regulated by NDRC

Regulation No. 9 did not explicitly exclude financial enterprises, but, in practice, some market players were unclear about whether it applied to outbound investments made by domestic financial enterprises.

Under Regulation No. 11, NDRC has specified that Regulation No. 11 applies to outbound investments made by domestic financial enterprises.

Sensitive projects clarified, focusing on national interests and security

“Sensitive projects” under Regulation No. 11 include projects involving sensitive countries, regions or industries.

1.  Sensitive countries and regions

Regulation No. 11 defines “sensitive countries and regions” as including countries and regions:

  • without diplomatic relations with China;
  • experiencing war or internal strife;
  • where investment by enterprise is restricted by international treaties, or agreements China concluded or acceded to.
  • other sensitive countries and regions.

With respect to the newly-added category “other sensitive countries and regions”, investors may consult with NDRC through the procedure stated in Article 15 of Regulation No. 11.

2.  Sensitive Industries

Regulation No. 11 defines “sensitive industries” as including:

  • research on, manufacture and repair of weaponry;
  • cross-border water resources development and utilization;
  • news media;
  • industries to be restricted from outbound investments according to laws, regulations and relevant macro-control policies.

A Sensitive Industry Directory will be released by NDRC separately.

3.  Outbound Investment Guidelines

On 4 August 2017, the State Council promulgated the Guidelines on Further Guiding and Regulating the Directions of outbound Investments[3] (“Guidelines”), formulated by NDRC, Ministry of Commerce, People’s Bank of China and the Ministry of Foreign Affairs. The Guidelines divides outbound investments into “encouraged,” “restricted” and “prohibited” categories.

           (1) Prohibited category

Outbound investments that jeopardize (or may jeopardize) national interests and security are prohibited under the Guidelines. These include (a) outbound investments in relation to unauthorized export of Chinese military core technology and products; (b) outbound investments utilizing technologies, crafts, and products which are banned for export; (c) outbound investments in the gambling and pornography industries; (d) outbound investments prohibited by the international treaties China concluded or acceded to, and (e) other outbound investments that jeopardize or may jeopardize national interest or national security.

Under Article 5 of Regulation No. 11, outbound investments may not violate Chinese law and regulations or jeopardize national security or interests. Therefore, we understand that the category of prohibited outbound investments specified by the Guidelines should be regarded as outbound investments that violate Chinese laws and regulations.

           (2) Restricted category

Outbound investments which are inconsistent with foreign policies regarding peaceful development, mutually beneficial strategies and macro-control are restricted under the Guidelines. These include (a) outbound investments in any sensitive country and region without diplomatic relations with China, experiencing war or strife, or where investment by enterprise is restricted by international treaties, or agreements China concluded or acceded to; (b) outbound investments in the real estate, hotel, cinema, entertainment and sport club industries; (c) formation of equity investment funds or investment platforms without specific industrial projects; (d) outbound investments that utilize obsolete manufacturing equipment which cannot satisfy the technology standard of the destination country; or (e) outbound investments in violation of the destination country’s environment, energy efficiency and security standards.

The Guidelines specify that verification of relevant authorities is required for outbound investments falling under categories (a) to (c).

We understand that outbound investments under category (a) above are to sensitive countries and regions, while outbound investments under categories (b) and (c) are to sensitive industries, all of which are subject to verification under Regulation No. 11. Outbound investments under categories (d) and (e) are not subject to verification but will be closely supervised by authorities.

Verification and record-filing as an implementation condition– to comply with international practices and market conditions

Under Regulation No. 9, verification approval documents or record-filing notices issued by NDRC were a condition for transaction agreements to become effective.

In the international market, government approval is usually a condition for closing but does not affect a contract’s validity. In reality, many cross-border M&A’s conducted by domestic enterprises also regard government approvals as closing conditions. Therefore, there is a gap between Regulation No. 9 and market practice.

Under Regulation No. 11, domestic investors are required to obtain verification approval documents or record-filing notice prior to the “implementation” of a project. Prior to “implementation” means prior to when a domestic investor or its controlled overseas enterprise invests assets or interests into[4], or provides financing or guarantees for a project.

Explicitly stating circumstances and procedures where ‘change’ applications are required

Under Regulation No. 11, circumstances that require a ‘change’ application include:

  • Any change to the number of investors;
  • Any material change to the investment destination;
  • Any material change to main content and scale;
  • Any change to the amount of a Chinese party’s investment, equal to or greater than 20% (compared to the verified and filed amount) or of more than USD 100 million (inclusive);
  • Other circumstances where substantial changes are needed with respect to verification approval documents or record-filing notices.

Strengthening interim and ex post supervision

Articles 43, 44 and 45 of Regulation No. 11 provide mechanisms for reporting material adverse conditions, project completion, and inquiry and reports about material matters.

Under Article 44 (for projects subject to verification and record-filling requirement), the investor shall file a completion status report through the online system within 20 working days after the completion of a project (for example, after construction project completed, target shares or assets transaction closed, or investment amount paid).

Regulation by NDRC is no longer limited to pre-transaction regulation, with reporting and regulation mechanisms added for during the deal and after its closing. It is worth stressing that under Regulation No. 11, investors are only required to provide information to the authorities – not to perform verification and record-filing procedures.

The above changes to administrative measures demonstrate the clear direction of the reform — to streamline administration and delegate power, combine liberation with regulation, and improve services. The outcome will be a more transparent and predictable outbound investment administrative system.

In conclusion, we have summarized the pre-transaction administrative measures required under Regulation No. 11 for different types of outbound investment.

*****

[1] (企业境外投资管理办法)

[2] Issued by NDRC in April 2014 and as amended in December 2014 (境外投资项目核准和备案管理办法)

[3] 《关于进一步引导和规范境外投资方向的指导意见》(国办发〔2017〕74号)

[4] Excluding preliminary expenses for verification and record-filing in accordance with Article 17 of the Measures

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

GLOBAL M&A STATISTICAL UPDATE – XBMA Annual Review for 2017

Editors’ Note: The XBMA Review is published on a quarterly basis in order to facilitate a deeper understanding of trends and developments. In order to facilitate meaningful comparisons, the Review has utilized generally consistent metrics and sources of data since inception. We welcome feedback and suggestions for improving the XBMA Review or for interpreting the data.
Executive Summary/Highlights: 
  • Global deal volume in 2017 exceeded US$3.6 trillion, just US$80 billion shy of 2016’s volume. 2015, 2016, and 2017 have been the three strongest years of deal-making since the financial crisis, with 2015 representing the high water mark of US$4.4 trillion.
  • Consistent with the trend over the previous two years, global M&A accelerated in Q4, as deal volume exceeded US$1.1 trillion, an increase of almost US$300 billion (or approximately 33%) versus Q3. The acceleration of M&A activity in Q4, driven by robust global economies, tax reform in the United States, and strategic responses to disruptive technologies, provides momentum for continued robust deal-making in 2018, including cross-border M&A.
  • Cross-border M&A activity exceeded US$1.2 trillion in 2017, accounting for approximately 35% of global M&A volume, consistent with recent historical proportions, and accounted for five of the 10 largest deals of 2017.
  • The United States continued to claim the largest share of global deal volume in Q4 and in full-year 2017. Over 46% of global M&A volume (more than US$500 billion) in Q4 consisted of deals involving U.S. targets. For full-year 2017, U.S. targets accounted for $1.4 trillion (40%) of deal volume, with approximately 18% of U.S. deals involving non-U.S. acquirors.
  • Deals for European targets remained the second most active segment in Q4, constituting almost 20% of global M&A volume (but less than the recent historical average of 24%). The market for Chinese targets also continued to demonstrate strength, accounting for more than 17% of global deal volume in Q4 (up from its recent historical average of 15%).
  • For each year since 2012, Q1 has had the lowest quarterly volume of M&A globally (and in North America, excepting 2017, when Q2 was the year’s least active quarter).
  • Global M&A volume in 2017 was led by the Real Estate sector, which topped US$525 billion for the year, driven by a strong Q4. The Energy & Power and High Technology sectors were also among the most active sectors in 2017, with US$482 billion and US$462 billion in deal volume, respectively.
  • Cross-border deals were an especially large component of activity in the Telecommunications sector and the Consumer Products sector, in which cross-border deals accounted for nearly 51% and 45% of global M&A volume, respectively, in 2017. In other sectors, the shares of global M&A volume attributable to cross-border deals ranged from 24% to 39%.

Click here to see the Review

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

AUSTRALIAN UPDATE – Deal Landscape, Origin of Bidders and Deal Structures

Editors’ Note: This report was contributed by Philip Podzebenko, a member of XBMA’s legal roundtable. Mr Podzebenko is a partner at Herbert Smith Freehills in the Corporate Group. This paper was based on research conducted by other Herbert Smith Freehills staff, Paul Branston, Partner and Michael Denny, Solicitor.

Highlights

  • The Australian public M&A market has seen relatively steady activity levels, with a modest increase in number of deals, but lower total deal value, in the 12 months to 30 June 2017 (FY17).
  • Success rates were down on FY16, with 66% of deals announced in FY17 being completed.
  • The level of contested bid activity was also subdued in FY17 with only 3 targets attracting multiple bidders.
  • The consumer and industrials sectors featured more strongly in FY17, with deals in those sectors comprising 38% and 41% of total deal value respectively.
  • Deal activity in the information technology and software services sectors increased notably.
  • Inbound public M&A remained steady, with bid activity originating from Asia dominating deals by value.

Deal landscape

Levels of public M&A activity in FY17 remained relatively steady, with 59 deals announced (up from 50 announced in FY16), but with total deal value decreasing to $23 billion in FY17 from $33 billion committed in the previous 12 months. Consistently with the decline in total deal value, with only 4 deals exceeding $1 billion and deals in this category and deals in this category accounting for 67% of all deal activity by value (down from 6 deals exceeding $1 billion , representing 80% of total deal value in FY16).

Success rates also declined moderately in FY17 to 66% relative to 73% in FY16.

Overall, the proportion of bids launched in FY17 without support from the target board from the outset (34%) was lower than in previous years (FY16, 44%). Of the unsolicited bids, 45% were ultimately successful (as compared with a 79% success rate for friendly deals). All of the unsolicited bids which were successful only 63% were recommended by the target board either in the board’s initial response, or following negotiations (down from 100% in FY16).

The number of contested bids in FY17 was subdued, with only 3 targets the subject of multiple bidders (none involving targets with a value exceeding $1 billion), down from 7 targets attracting competing bids in FY16. A number of targets received non-binding competing proposals, but they did not proceed to a stage where they could be considered by shareholders. In all 3 contested scenarios, the underbidder was unsuccessful. Encouraging competing bids remains an effective means for target boards to defend against undervalued or opportunistic bids.

Success rates in hostile and friendly deals

 

Merger and acquisition activity in the consumer and industrials sectors featured strongly in FY17, representing 38% and 41% of overall deal value respectively. While there was significant private M&A activity in the energy and resources sectors, public M&A activity volumes in that sector were subdued with most deals involving small-cap targets (average deal size of $27.6 million) and total deal volume of only $606 million (FY16, $1.1 billion).

Private equity participation in public M&A in FY17 was subdued, with only 6 private equity backed deals announced (and only one of them exceeding $1 billion). Of the 6 private equity backed deals, 3 involved targets in the resources sector.

Origin of bidders

Foreign bidders accounted for a majority (53%) of all deals in FY17, by value. Foreign bidders were active across all sectors.

Asia-based bidders were more dominant in FY17, with 11 of the 26 foreign bidders being Asia-based and $9.6 billion committed by bidders based in Asia (representing 41% of deals by value). North American bidders also featured strongly representing 9 of the 26 foreign bidders but only 6% of deal value.

Percentage of deals by origin of bidder

 

Deal structure

The preference for schemes of arrangement increased moderately in FY17, with 49% of all deals involving schemes, compared with 44% in FY15. The use of schemes continued to dominate transactions exceeding $1 billion, with 75% of deals in this category implemented by scheme.

Cash consideration remained he dominant form of consideration in FY17, and was the sole form of consideration in 64% of transactions (up from 62% in FY15). There was a strong preference for cash consideration in unsolicited deals, with 85% of all unsolicited bids being cash-only or having an all-cash alternative. The form of consideration did not have a marked impact on success rates for deals, other than in relation to hostile bids, where all-cash deals were more likely to succeed than all-scrip deals.

Success rates by consideration offered in hostile deals

 FY17 saw an overall decline in premiums offered by bidders, with an average initial premium offered in FY17 of 22% relative to 36% in FY16. The percentage of deals with an initial premium below 20% markedly increased relative to FY16 for both hostile and friendly deals.

Success rates in FY17 continued FY16’s and FY15’s trend, showing a positive correlation between size of premium and bid success, with bids involving an initial premium in the 20-40% range having a 71% success rate, and those with an initial premium exceeding 40% having a 92% success rate.

The use of conditions in takeover bids requiring a minimum percentage of acceptances to be received by the bidder decreased substantially in FY17 with under 50% of acquisitions conducted by way of takeover bid having a minimum acceptance condition (compared with 80% in FY16).

Consistently with previous practice, material adverse change conditions continued to be included in the majority of public M&A deals. However the continued increase in the use of carve outs from the material adverse change conditions for external factors such as changes in law or accounting policy, general economic conditions, industry conditions and stock markets reflect that bidders continue to be willing to accept commercial risk when making a bid.

Deal protection mechanisms continued to feature in negotiated transactions, with use of deal protection mechanisms in FY17 relatively consistent with previous years. The use of toe-holds (where the bidder has a stake in the target before announcement) and reverse break fees increased moderately relative to previous years. ‘Truth in takeovers’ statements (being public statements of intent to accept or otherwise support a bid by target shareholders) remained the preferred form of lock-up, with 68% of lock-ups taking the form of truth in takeovers statements only.

Consistent with previous years, notification and matching rights remained popular with notification and matching rights being found in 90% and 77% respectively of negotiated deals. Use of break fees decreased moderately with 77% of negotiated deals including a break fee (down from 86% in FY16). The use of reverse break fees increased significantly with 49% of negotiated transactions including a reverse break fee (FY16, 32%).

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CHINESE UPDATE – NDRC New Regulation Simplifies its Approval/Filing Procedures over Outbound Investment Projects

Contributed by: Adam Li (Li Qi), Jun He Law Offices (Shanghai)

Editors’ Note: Contributed by Adam Li, a partner at JunHe and a member of XBMA’s Legal Roundtable. Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies. This article was authored by Mr. Yi Wang, and Ms. Fang He, both partners at JunHe. Fang is also a member of XBMA’s Legal Roundtable.  Mr. Wang has broad experience in capital markets and private equity, and Ms. He is specialized in cross-border M&A, private equity, trust and assets management.

Highlights

  • NDRC launches new regulations, which indicates further relaxation measures on PRC outbound investment.
  • The controversial “road-pass” requirement has been removed.
  • The NDRC approval and filing requirement has been changed from a condition for effectiveness of the acquisition contract to a condition for closing.

Main Article

On December 26, 2017, the National Development and Reform Commission (“NDRC”) formally promulgated the Administrative Measures for Outbound Investment by Enterprises (“Order No. 11” or the “New Measures”) in lieu of the Administrative Measures for the Verification and Approval and Record-Filing of Outbound Investment Projects promulgated in April 2014 (as amended in December 2014) (“Order No. 9” or the “Old Measures”).  Order No. 11 will come into effect on March 1, 2018.  It largely adopted the provisions of the Administrative Measures for Outbound Investment by Enterprises (Draft for Comments) promulgated by the NDRC on November 3, 2017.

Compared with Order No. 9, Order No. 11 is less regulated in NDRC’s reviews of outbound investment, and has simplified the process and requirements of review. Overall, it will be conducive to outbound investment projects.

In the New Measures, the major simplified procedures include:

1. The “confirmation letter” is no longer required.

The Old Measures provided that the investor of an outbound investment or bidding project with the investment amount reaching or exceeding USD 300 million was required to submit a project information report to and obtain a confirmation letter (also known as “Road-Pass”) from the NDRC. This provision has been removed in the New Measures.  This simplification removal is one of the most welcome signals for market players in the area.  In China’s outbound investment practices, what troubled and concerned overseas sellers the most has been whether the Chinese investors had obtained and when they would obtain the confirmation letters from the NDRC, because the Chinese investor could not submit a binding offer to the overseas seller or sign a binding contract until the confirmation letter was obtained.  The abolishment of confirmation letters will undoubtedly increase the flexibility of Chinese bidders in overseas investment bidding.

2. The verification and approval by or record-filing with the NDRC has changed from a condition for the contract to take effect to a condition precedent to closing.

The Old Measures provided that prior to signing any final and legally binding document with an external party, the Chinese investor should obtain the verification and approval document or the record-filing notice issued by the NDRC; alternatively, the investor could specify in the document signed that it should come into effect on the condition that the verification and approval document or the record-filing notice issued by the NDRC was obtained. It was relatively difficult to meet this requirement in practice.  Sellers are unwilling to accept that provisions on break-up fee, security deposit, and many other seller protection mechanisms ultimately would not take effect until NDRS approves it, so in some projects it was stipulated in the contract that the NDRC’s verification and approval document or record-filing notice was only a condition for closing of the transaction.  However, this is certainly not in line with Order No. 9, and its validity was questionable.  In the New Measures, amendments have been made to only require that Chinese investors shall obtain the verification and approval document or the record-filing notice prior to the implementation of the project (i.e., the actual payment of funds to overseas sellers or the actual investment of funds in overseas projects), which reflects and meets the practical needs of the parties.

3. Making applications via the NDRC’s local counterpart is no longer required, and direct online applications are encouraged.

The Old Measures required investors to submit applications via the NDRC’s local counterpart, which was unnecessary in practice and delayed the review and approval process. The New Measures have removed this requirement and encourage direct online applications.  Previously, although the local counterpart of the NDRC provided great support, some clients had experienced delays before their applications were successfully submitted to the NDRC via its local counterpart.  Now making applications directly to the NDRC is indeed more simplified and takes less time, which will accelerate the response by Chinese investors in overseas bidding procedures.

4. Less time is needed for project assessment.

The New Measures slightly adjusted the time limit for project assessment. As for most projects, the time limit for assessment is reduced from 40 working days to 30 working days, while it can be extended to 60 working days for major projects if it is appropriate.

In general, the New Measures as compared with the old ones have optimized and simplified the NDRC review and filing procedures for outbound investment projects. To a certain extent, they can improve the transparency of the Chinese government’s regulations over outbound investments and reduce the confusion and worries of overseas sellers over the approvals by the Chinese government, so it should be good news for Chinese outbound investment.

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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