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  • Cai Hongbin
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  • Peter Clarke
  • Barry Diller
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  • Richard J. Gnodde
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  • Liew Mun Leong
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  • Liu Mingkang
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  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
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  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
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  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

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  • Nigel P. G. Boardman
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  • Kenichi Fujinawa
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  • Manuel Galicia Romero
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  • Vladimíra Glatzová
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  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
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  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
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  • Sameer Huda
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  • Masakazu Iwakura
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  • Christof Jäckle
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  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
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  • Wang Junfeng
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  • Tomasz Wardynski
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  • Xiao Wei
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  • Alvin Yeo
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  • Ernst & Young

Monthly Archives: October 2012

Canadian Update: Government Rejects Petronas-Progress Transaction: Is Rejection the New Reality for Foreign Investors?

Editors’ Note:   This article was contributed by Christopher Murray, a partner of Osler and leader of Osler’s Asia-Pacific initiative whose practice focuses on public company M&A as well as corporate finance principally involving REIT Income Funds, mining and energy businesses.  The article was authored by Osler partners, Peter Glossop, a leading advisor on foreign investment review in Canada, and Frank Turner, National Co-Chair of Osler’s Corporate Group and an expert in advising sovereign wealth funds and state-owned enterprises all over the world on acquisitions and investments in Canada.


  • Recently, the Canadian federal government has been particularly solicitous of foreign investment involving state-owned enterprises (SOEs), so it was a surprise when the governmental rejected, for the first time, a proposal by an SOE in the oil and gas sector.
  • The process for such approval is not transparent, but it would be prudent to assume that the ICA process is becoming more difficult. If the rejection stands as a reflection of federal policy, it could have a chilling effect on foreign investments.
  • The test for obtaining approval under the Investment Canada Act is whether the investment is likely to be of “net benefit to Canada” considering factors including employment, resource processing, exports, Canadian participation, productivity, and whether SEO investors can demonstrate that their governance and commercial orientation is compatible with certain published criteria.
  • PETRONAS’ initial commitments were considered insufficient to establish net benefit, it was unable to obtain approval within a short review period of approximately 90 days and PETRONAS was unable or unwilling to extend such period thus forcing the federal government to either reject the bid or accept undertakings that it was yet unconvinced achieved the “net benefit to Canada” test.  The Minister’s decision may reflect a more difficult approval hurdle for SOEs without a public float.
  • The PETRONAS/Progress arrangement agreement imposes a relatively low standard on PETRONAS for obtaining ICA approval and a relatively short time deadline for achieving such approval.  SOEs can expect that their approval process will take longer than that of privately held commercial enterprises.
  • The PETRONAS approval process is occurring at the same time as the ongoing CNOOC/Nexen approval process and CNOOC has publicly stated it will list on the Toronto Stock Exchange and establish a regional HQ in Calgary responsible for Nexen’s global business and CNOOC’s North and Central Americas’ business.

Main Article:

At three minutes to midnight on Friday, October 19, 2012, Industry Minister Christian Paradis advised Malaysian state-owned PETRONAS that it had not demonstrated that its proposed acquisition of Calgary-based Progress Energy Resources Corp would be of “net benefit” to Canada. “Net benefit” is the standard that must be met under the Investment Canada Act (ICA) in order to receive government approval of a reviewable transaction.

This announcement caught many observers by surprise and appears to be inconsistent with recent approvals of investments involving state-owned enterprises (SOEs) in the energy sector, as well as statements and actions by the Canadian federal government.


Although the PETRONAS/Progress deal is the third disapproval in the last four years, it represents the first time that Canada has turned down a proposal by an SOE in the oil and gas sector. If the PETRONAS decision stands, and truly reflects current federal policy, it could have a significant chilling effect on foreign investors (especially SOEs) that may be contemplating investments and acquisitions in the Canadian resource sector. Ultimately this could affect the flow of much needed foreign capital into the capital intensive resource sector.

PETRONAS has thirty days in which to make representations and submit undertakings in order to convince the Minister to change his mind. The Minister has to respond with a final decision “within a reasonable time”. The Minister is obliged to give reasons only for a final negative decision. Since the ICA approval process is confidential, and no reasons for the Minister’s decision were released, we do not know the basis for the decision of October 19. There may well be factors underlying Minister Paradis’ decision that are unique to the situation and may limit its application to other transactions. However, for the moment, it would be prudent to assume that the ICA approval process is becoming more difficult.


Despite the existence of the ICA, Canada is a jurisdiction that has historically enjoyed a reputation of being open to foreign investment. In recent months, the federal government has been particularly active in courting such investment. Government officials, such as Prime Minister Harper and federal Minister of Natural Resources, Joe Oliver, as well as Alberta Premier, Alison Redford, have made numerous public statements in support of foreign investment in the resource sector, including Premier Redford’s statement in Beijing that “foreign investment has assisted us in growing our economy so we are encouraging that”. Further, federal and provincial officials have participated in numerous trade missions in the last few months, many of which have focused on Asia. Some of these efforts culminated in the signing of the Canada-China Foreign Investment Promotion and Protection Agreement in September of this year. Such initiatives are intended to assist the resource sector in accessing the capital it requires to fully realize the potential of Canada’s resources as well as expanding Canadian export markets for resource products. The federal government has stated publicly that further development of the Canadian resource sector can be the “catalyst for a new era of jobs, growth and prosperity for Canadians”. In this respect, the PETRONAS/Progress transaction is emblematic of the type of investment Canada is trying to foster.>


On June 28, 2012, PETRONAS announced that it had reached agreement to acquire Progress for approximately C$5.5 billion by way of plan of arrangement. Completion of the transaction is subject to receipt of certain approvals such as Progress shareholder approval (which was received on August 28th), court approval (received on August 29th) and approval under the ICA.

Progress is a Calgary-based energy exploration and development company with a focus on unconventional resources. To date, Progress’ activities have focused primarily on the exploration and development of shale gas assets in the Montney formation in the Foothills region of northeast British Columbia. Its securities are listed on the Toronto Stock Exchange. PETRONAS is Malaysia’s national oil and gas company. PETRONAS has a significant focus on LNG projects.

In 2011, PETRONAS and Progress formed a joint venture to develop shale gas assets in the North Montney formation in British Columbia. Subsequent to its formation, PETRONAS and Progress discussed expanding the scope of the joint venture as well as the possible participation of third parties. In this regard, the PETRONAS – Progress joint venture announced plans to develop an LNG export facility in Prince Rupert, British Columbia.

Ultimately, PETRONAS determined to acquire Progress and commenced acquisition discussions in May of this year. Those discussions led to the June 28th announcement. PETRONAS filed its application for review under the ICA in mid- July. On October 5, 2012, Progress announced that PETRONAS and the Minister had agreed that the review period for the acquisition would be extended until October 19, 2012.


Under the ICA, a foreign investor must obtain approval of the Minister of Industry before directly acquiring control of a Canadian business with at least C$330 million book value of assets. The test under the ICA is whether the investment is likely to be of net benefit to Canada, considering various factors including employment, resource processing, exports, Canadian participation and productivity. In addition, SOE investors must satisfy the Minister that their governance and commercial orientation is compatible with certain published criteria.

Many observers have criticized the net benefit test as being too vague, and subject to political interpretations which do not provide investors with sufficient guidance as to what is required to demonstrate “net benefit to Canada”. The process itself is not transparent. There are no public hearings. In addition, no published reasons are required for net benefit determinations (except a final negative determination).

Once an investor has applied for review, there is an initial review period of up to 45 days, which may be extended by the Minister for an additional 30 days. Further extensions may be negotiated between the Minister and the investor; significantly there is no limit on the number or duration of such extensions. Before the end of the review period (or agreed extension) the Minister makes a decision on whether the investment is likely to be of net benefit.


It is difficult to draw general conclusions from this decision based on the limited information available, or to interpret the decision as a shift in policy having negative implications for future foreign investment. In light of different facts, it also not possible to say at present whether the PETRONAS decision makes it more or less likely that the government will approve the CNOOC/Nexen transaction which is also being reviewed under the ICA. Nevertheless, the PETRONAS/Progress Energy case is notable in a number of respects:

  • PETRONAS’ initial commitments were considered insufficient to establish net benefit. We do not know the nature of these commitments. On deal announcement, PETRONAS announced its intention to retain Progress employees, but no other proposed commitments. No new commitments in relation to its existing joint ventures with Progress were announced beyond the LNG project, noted above, and nothing was said with respect to governance. The SOE guidelines published under the ICA set out special commitments that should be addressed by SOEs concerning transparency and disclosure such as independent members of the board of directors and independent audit committees, as well as commercial orientation factors such as Canadian participation in the operations in Canada and elsewhere, capital expenditures, etc. Whether these factors were addressed in the review process is unknown. (In contrast, on announcement of the Nexen transaction, CNOOC outlined a number of proposed commitments, including making Calgary one of its international headquarters, which will manage Nexen’s global operations and CNOOC’s existing operations for North and Central America (comprising approximately US$8 billion of CNOOC’s existing assets); retention of Nexen’s current management team and employees; maintaining and enhancing capital expenditures on Nexen’s assets; and intending to list CNOOC Limited shares on the TSX.)
  •  PETRONAS was unable to obtain approval within a relatively short review period of approximately 90 days. A review period in excess of 90 days is not unusual, particularly for an SOE investment. However, PETRONAS apparently was unable or unwilling to extend the review period further. A longer review period might have given PETRONAS the opportunity to establish a positive net benefit case.
  • In addition to the parties involved, the Minister’s decision sends a message to other foreign investors, and may influence the commitments they are prepared to give in order to obtain approval.
  • ·         The Minister’s decision may reflect a more difficult approval hurdle for SOEs without a public float. Meeting the governance and transparency criteria of the SOE guidelines is simpler where an SOE has securities that are publicly traded.
  • The PETRONAS/Progress arrangement agreement set out a relatively low standard for obtaining ICA approval. Pursuant to the arrangement agreement entered into with Progress, PETRONAS is not required to provide any undertakings to the Minister, or to meet any requirements “that are not as to commercial matters and, in any case, are not commercially reasonable” to PETRONAS. Moreover, PETRONAS cannot extend the October 31, 2012 outside date for closing the transaction if it fails to cooperate in obtaining a regulatory approval.


Until the PETRONAS/Progress decision is clarified by way of further efforts by PETRONAS to obtain approval and/or the release of Ministerial reasons for a final negative decision, it would be prudent to assume that the ICA approval process is becoming more difficult. The ultimate outcome of the PETRONAS case and the pending CNOOC/Nexen transaction could well provide material guidance to foreign investors on obtaining ICA approval. In the meantime, however, investors should expect to commit to substantial undertakings, allow adequate time for the process to unfold and, if they are not prepared to do so (or to run the risk of a negative decision by the Minister), consider a minority investment that is not an acquisition of control under the ICA.

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 Update: Federal Reserve Chairman Ben S. Bernanke on International Implications of U.S. Monetary Policy

Editors’ Note:   On October 14, 2012, Federal Reserve Chairman Ben S. Bernanke gave a speech at the “Challenges of the Global Financial System: Risks and Governance under Evolving Globalization,” a seminar sponsored by Bank of Japan-International Monetary Fund, in Tokyo.  The speech addressed the international implications of U.S. monetary policy and sought to rebut arguments about negative effect of U.S. policy on emerging economies.


  • Fed Chairman Bernanke argued that the U.S. Federal Reserve’s accommodative monetary policy not only helps the U.S. economic recovery, but also helps support the global economy, including emerging economies. 
  • The speech sought to counter arguments that the Fed’s monetary policy encourages excess capital flows into emerging market economies, which some have argued causes undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows.  Bernanke made the case that the linkage between advanced-economy monetary policies and international capital flows is looser than is sometimes asserted.
  • Bernanke expects the economic recovery to proceed at a moderate pace in coming quarters, with the unemployment rate declining only gradually and with significant downside risks including the potential for an intensification of strains in Europe and an associated slowing in global growth.

Main Article:

U.S. Monetary Policy and International Implications

 Thank you. It is a pleasure to be here. This morning I will first briefly review the U.S. and global economic outlook. I will then discuss the basic rationale underlying the Federal Reserve’s recent policy decisions and place these actions in an international context.

U.S. and Global Outlook

 The U.S. economy has faced significant headwinds, and, although the economy has been expanding since mid-2009, the pace of our recovery has been frustratingly slow. The headwinds include the effects of deleveraging by households, the still-weak U.S. housing market, tight credit conditions in some sectors, spillovers from the situation in Europe, fiscal contraction at all levels of government, and concerns about the medium-term U.S. fiscal outlook. In this environment, households and businesses have been quite cautious in increasing spending. Accordingly, the pace of economic growth has been insufficient to support significant improvement in the job market; indeed, the unemployment rate, at 7.8 percent, is well above what we judge to be its long-run normal level. With large and persistent margins of resource slack, U.S. inflation has generally been subdued despite periodic fluctuations in commodity prices. Consumer price inflation is running somewhat below the Federal Reserve’s 2 percent longer-run objective, and survey- and market-based measures of longer-term inflation expectations have remained well anchored.

The global economic outlook also presents many challenges, as you know. Fiscal and financial strains have pushed Europe back into recession. Japan’s economy is recovering from last year’s tragic earthquake and tsunami, and it continues to struggle with deflation and persistent weak demand. And in the emerging market economies, the rapid snap-back from the global financial crisis has given way to slower growth in the face of weak export demand from the advanced economies. The soft tone of global activity is yet another headwind for the U.S. economy.

Looking ahead, economic projections of Federal Open Market Committee (FOMC) participants prepared for the Committee’s September meeting called for the economic recovery to proceed at a moderate pace in coming quarters, with the unemployment rate declining only gradually. FOMC participants generally expected that inflation was likely to run at or below the Committee’s inflation goal of 2 percent over the next few years. The Committee also judged that there were significant downside risks to this outlook, importantly including the potential for an intensification of strains in Europe and an associated slowing in global growth.

Federal Reserve’s Recent Policy Actions

 All of the Federal Reserve’s monetary policy decisions are guided by our dual mandate to promote maximum employment and stable prices. With the disappointing progress in job markets and with inflation pressures remaining subdued, the FOMC has taken several important steps this year to provide additional policy accommodation. In January, the Committee noted that it anticipated that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through late 2014–a year and a half later than in previous statements. In June, policymakers decided to continue through year-end the maturity extension program (MEP), under which the Federal Reserve purchases long-term Treasury securities and sells short-term ones to help depress long-term yields.

At its September meeting, with the data continuing to signal weak labor markets and no signs of significant inflation pressures, the FOMC decided to take several additional steps to provide policy accommodation. It extended the period over which it expects to maintain exceptionally low levels of the federal funds rate from late 2014 to mid-2015. Moreover, the Committee clarified that it expects to maintain a highly accommodative stance of monetary policy for a considerable period after the economic recovery strengthens. The FOMC coupled these changes in forward guidance with additional asset purchases, announcing that it will purchase agency mortgage-backed securities (MBS) at a pace of $40 billion per month, on top of the $45 billion in monthly purchases of long-term Treasury securities planned for the remainder of this year under the MEP. The FOMC also indicated that it would continue to purchase agency MBS, undertake additional asset purchases, and employ other tools as appropriate until the outlook for the labor market improves substantially in a context of price stability.

The open-ended nature of these new asset purchases, together with their explicit conditioning on improvements in labor market conditions, will provide the Committee with flexibility in responding to economic developments and instill greater public confidence that the Federal Reserve will take the actions necessary to foster a stronger economic recovery in a context of price stability. An easing in financial conditions and greater public confidence should help promote more rapid economic growth and faster job gains over coming quarters.

As I have said many times, however, monetary policy is not a panacea. Although we expect our policies to provide meaningful help to the economy, the most effective approach would combine a range of economic policies and tackle longer-term fiscal and structural issues as well as the near-term shortfall in aggregate demand. Moreover, we recognize that unconventional monetary policies come with possible risks and costs; accordingly, the Federal Reserve has generally employed a high hurdle for using these tools and carefully weighs the costs and benefits of any proposed policy action.

International Aspects of Federal Reserve Asset Purchases

 Although the monetary accommodation we are providing is playing a critical role in supporting the U.S. economy, concerns have been raised about the spillover effects of our policies on our trading partners. In particular, some critics have argued that the Fed’s asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies. These capital flows are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows.

I am sympathetic to the challenges faced by many economies in a world of volatile international capital flows. And, to be sure, highly accommodative monetary policies in the United States, as well as in other advanced economies, shift interest rate differentials in favor of emerging markets and thus probably contribute to private capital flows to these markets. I would argue, though, that it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies, for several reasons.

First, the linkage between advanced-economy monetary policies and international capital flows is looser than is sometimes asserted. Even in normal times, differences in growth prospects among countries–and the resulting differences in expected returns–are the most important determinant of capital flows. The rebound in emerging market economies from the global financial crisis, even as the advanced economies remained weak, provided still greater encouragement to these flows. Another important determinant of capital flows is the appetite for risk by global investors. Over the past few years, swings in investor sentiment between “risk-on” and “risk-off,” often in response to developments in Europe, have led to corresponding swings in capital flows. All told, recent research, including studies by the International Monetary Fund, does not support the view that advanced-economy monetary policies are the dominant factor behind emerging market capital flows.1 Consistent with such findings, these flows have diminished in the past couple of years or so, even as monetary policies in advanced economies have continued to ease and longer-term interest rates in those economies have continued to decline.

Second, the effects of capital inflows, whatever their cause, on emerging market economies are not predetermined, but instead depend greatly on the choices made by policymakers in those economies. In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth. However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation. In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package–you can’t have one without the other.

Of course, an alternative strategy–one consistent with classical principles of international adjustment–is to refrain from intervening in foreign exchange markets, thereby allowing the currency to rise and helping insulate the financial system from external pressures. Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to help counteract any adverse effects of currency appreciation on growth. The resultant rebalancing from external to domestic demand would not only preserve near-term growth in the emerging market economies while supporting recovery in the advanced economies, it would redound to everyone’s benefit in the long run by putting the global economy on a more stable and sustainable path.

Finally, any costs for emerging market economies of monetary easing in advanced economies should be set against the very real benefits of those policies. The slowing of growth in the emerging market economies this year in large part reflects their decelerating exports to the United States, Europe, and other advanced economies. Therefore, monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well. In principle, depreciation of the dollar and other advanced-economy currencies could reduce (although not eliminate) the positive effect on trade and growth in emerging markets. However, since mid-2008, in fact, before the intensification of the financial crisis triggered wide swings in the dollar, the real multilateral value of the dollar has changed little, and it has fallen just a bit against the currencies of the emerging market economies.


 To conclude, the Federal Reserve is providing additional monetary accommodation to achieve its dual mandate of maximum employment and price stability. This policy not only helps strengthen the U.S. economic recovery, but by boosting U.S. spending and growth, it has the effect of helping support the global economy as well. Assessments of the international impact of U.S. monetary policies should give appropriate weight to their beneficial effects on global growth and stability.


 1. See, for example, Atish R. Ghosh, Jun Kim, Mahvash S. Qureshi, and Juan Zalduendo (2012), “Surges (PDF),” International Monetary Fund Working Paper WP/12/22 (Washington: IMF, January); International Monetary Fund (2011), Recent Experiences in Managing Capital Inflows–Cross-Cutting Themes and Possible Policy Framework (PDF) (Washington: IMF, February); and Kristin J. Forbes and Francis E. Warnock (forthcoming), “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment,” Journal of International Economics.

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 STATISTICAL UPDATE – XBMA Quarterly Review for Third Quarter 2012

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 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 M&A volume in Q3 was US$538 billion, down 13% compared to Q2 2012, but the cross-border component remained strong and is on pace to match 2011annual volumes.
  • Despite companies’ substantial cash stockpiles and the availability of cheap debt, M&A activity stagnated somewhat in Q3.  Some companies appear to have taken a wait-and-see approach to the results of imminent political transitions in both the United States and China. Other deterrents to deal volume include the continued crisis in Europe, a weak U.S. recovery and slowing growth in key markets such as China and Brazil.
  • North American and Asian-Pacific M&A activity increased, while European M&A declined for the first time in three quarters. The United States and Europe accounted for a combined 64% of Q3 M&A volume.
  • 41% of global M&A has been cross-border this year – the highest proportion since 2007.
  • The number of “Mega deals” (exceeding US $10 billion in value) decreased as compared to Q2 2012 (only two deals in Q3 compared to six in Q2) but increased as compared to Q1 2012 (1 deal in Q1); both Mega deals this quarter featured Chinese acquirers.  Medium and large deal activity remains substantially higher for both domestic and cross-border deals than in 2009, but is still down 44% from the high of 2007.
  • Energy & Power continued to lead global and cross-border deal activity on a quarterly and annualized basis, and cross-border activity in the Industrials and Media/Entertainment sectors each reached peak levels in Q3.

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 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 UPDATE – Cherry Picking in Cross-Border Acquisitions

Editors’ Note:   This paper was contributed by E. Han Kim, Professor of Finance at the University of Michigan, Stephen M. Ross School of Business, and co-authored by Yao Lu of Tsinghua University, School of Economics & Management.

Highlights: This paper attempts to explain the tendency of foreign acquirers to choose better performing firms in emerging markets, which limits underperforming firms’ access to foreign capital. Using a simple law and finance model, the authors offer an explanation based on emerging countries’ weaker investor protection compared to acquirers’ home countries, predicting a positive relation between the gap in the strength of investor protection (between acquiring and target countries) and the intensity to cherry pick.

Main Article:

In the paper, Cherry Picking in Cross-Border Acquisitions, professors E. Han Kim and Yao Lu investigate how investor protection (IP) affects the allocation of foreign capital inflows at the firm level. A simple model provides an explanation for a well documented, but little understood phenomenon on international capital flows—the tendency of foreign investors to target better-performing firms in emerging markets.

When a foreign acquirer’s country has stronger IP than a target country, the acquirer’s controlling shareholder values private benefits of control less than controlling shareholders of local firms because stronger IP imposes greater constraints on diversion of corporate resources for private benefits. Within the target country, controlling shareholders of firms with more profitable investments take fewer private benefits and, hence, demand lower control premiums. Foreign acquirers, which value control premiums less, will target firms with more profitable investments. The tendency to cherry pick will intensify (moderate) as the IP gap between the acquirer and target countries increases (decreases).

This prediction is tested with data on cross-border acquisition bids. Of 33 acquirer and target countries in our sample, 20 countries undertook corporate governance reforms (CGRs). These CGRs, which took place in a staggered fashion, generate within-country variation in IP, allowing identification of the effect of changes in the IP gap between acquirer and target countries. Consistent with the prediction, we find a significant increase in the cherry-picking tendency after strong-IP acquirer countries increase the IP gap by undertaking CGRs.

The authors also find CGRs undertaken by target countries reduce foreign acquirers’ tendency to cherry pick. These findings imply weak IP in target countries prevents poorly performing firms from gaining access to foreign investors, restricting the spread of the potential benefits of globalization. More generally, these findings highlight the importance of IP in guiding international capital flows not only across countries, but also across firms within a country.

Recent studies demonstrate that cross-border acquisitions are an important channel to spread corporate governance systems from strong to weak legal regimes (e.g., Rossi and Volpin, 2004; Bris and Cabolis, 2008; Chari, Ouimet, and Tesar, 2010). The paper identifies an important distortion in that channel. Cherry picking implies the transmission of governance systems through cross-border acquisitions occurs mainly for better performing firms, leaving largely untouched poorly performing firms, which may be in greater need of governance improvement. Improving the legal environments of weak-IP capital-importing countries should help alleviate the distortion.

The full paper is available for download here.

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.

INDIAN UPDATE – The Competition Commission of India’s Approach to Penalties: The Need for Guidelines

Editors’ Note:  This is contributed by Zia Mody, founding partner of AZB & Partners and a member of XBMA’s Legal Roundtable.  Ms. Mody has led many of India’s most significant corporate transactions, been recognized by Business Today as one of the Most Powerful Women in Indian Business and received the Economic Times Award for Corporate Excellence as Businesswoman of the Year.


  • Recently, the Competition Commission of India (“CCI”) has been imposing significant penalties in the range of 5% to 10% of the turnover of enterprises violating India’s Competition Act, 2002.  In one cartel case, CCI imposed a penalty equivalent to 50% of the profits made by the concerned enterprises.
  • CCI’s increasing penchant for imposing significant fines and the Competition Appellate Tribunal’s reluctance to grant unconditional stay on the payment of penalty before a final determination of guilt has brought to fore the issue of quantifying the penalty amount.
  • This article briefly discusses the rules that CCI is required to follow while assessing the penalty amount, how they fall woefully short of providing a cogent framework for quantifying the penalty amount and argues for the adoption of detailed guidelines on computation of penalty, possibly on similar lines as in more mature jurisdictions, such as the European Union and the United States.

Main Article:

The Competition Act empowers CCI to impose substantial penalties for infringing the provisions of the Competition Act.  For entering into anti-competitive agreements or abusing dominant position, the penalty may go up to 10% of the average turnover of each erring enterprise for the three financial years immediately preceding the finding of guilt.  The penalty gets harsher in case of cartel agreements and may extend up to the higher of 10% of the average turnover or three times the profits made by the guilty enterprises during the entire duration of the cartel agreement.

Initially, CCI appeared a bit hesitant in invoking its vast powers and imposing stringent penalties.  But its recent decisions, particularly in cartel cases, show that it has shunned its initial reluctance and is using the power to levy fines to send out a strong message — clean up or face significant penalty.  In quick succession, CCI has imposed penalties in the range of 5% to 10% of the turnover of the erring enterprises in several cases.  In one cartel case, CCI has imposed a penalty equivalent to 50% of the profits made by the concerned enterprises.  CCI’s decisions have naturally been challenged before the COMPAT.  Simultaneously, the concerned parties have also sought an interim stay on CCI’s decision, including on the payment of fines.  While COMPAT has been accepting the appeals and applications for interim stay, it has done so on the pre-condition of payment of a significant portion of the penalty amount.  CCI’s increasing penchant for imposing significant fines and COMPAT’s reluctance to grant unconditional stay on the payment of penalty before a final determination of guilt has brought to fore the issue of quantifying the penalty amount.  This article briefly discusses the rules that CCI is required to follow while assessing the penalty amount, how they fall woefully short of providing a cogent framework for quantifying the penalty amount and argues for the adoption of detailed guidelines on computation of penalty, possibly on similar lines as in more mature jurisdictions, such as the European Union and the United States.

Section 27 of the Competition Act gives a wide discretion to CCI to decide on the quantum of penalty.  It merely states that CCI may impose such penalty, as it may deem fit.  Under Indian law, the grant of discretion cannot be absolute or arbitrary and has to be exercised in a fair and reasonable manner.  CCI’s recent decisions imposing mammoth penalties tell a different story.  Be it the fine of 6.3 billion Indian rupees (approximately 116.6 million USD) on DLF for abusing its dominant position or the fine of 63 billion Indian rupees (approximately 1.16 billion USD) on the top ten cement manufacturers for forming a cartel, CCI’s orders contain no indication of how these figures were arrived at.  As noted earlier, fines under the Competition Act are linked to and may extend up to 10% of the turnover of the erring enterprises and in cases of a cartel agreement they may extend up to three times of the profit made by the guilty enterprises.  CCI’s decisions say nothing about how it decides to impose a fine equaling the maximum 10% limit in certain cases and in certain others equaling only 5% of the turnover.  In a recent cartel case, CCI has even imposed a fine equaling 0.5 times the profit (i.e. 50% of the profit), again without providing any reasons.  A broad assertion by CCI that the fines have been fixed taking into account the facts and circumstances of the case cannot be said to meet the requirement of fair and reasonable exercise of discretionary powers.

The current approach of CCI may perhaps end up defeating the very purpose of why the Competition Act provides for levying penalties.  First, an order which imposes very high penalties and does not contain a description of how the penalty amount has been determined is bound to be litigated, the obvious expectation being that COMPAT or the Supreme Court of India (“SC”) would strike down such an order.  If the orders of CCI are litigated, it would defeat the entire purpose of the carrot and stick approach that CCI has been advocating through its lesser penalty regulation.  Second, if the penalty is not commensurate with the magnitude of the offence, it would not have the desired deterrent effect.  Moreover, an excessive and disproportionate levy of penalty will end up providing undue and unfair advantage to the infringing parties’ competitors.  Faced with unduly burdensome cost of compliance, the penalized firms may not only lose their competitiveness, but being so burdened and simultaneously weakened because of undue advantage accruing to their rivals, they may even be forced to exit the market.  In the long run, CCI’s practice may chill competition rather than protect and promote.  The immediate question for CCI, therefore, is how to make the process of determining the quantum of penalty transparent and error-free.  The first step would be to give the concerned parties an opportunity to be heard separately on the issue of quantum of penalty.  Such an opportunity was indeed envisaged in the initial version of Regulation 48 of the CCI (General) Regulations, 2009 (“General Regulations”), which was later amended to effectively do away with the opportunity.  The end result is that parties have to make their submission on the quantum of penalty at a stage when they do not even know whether CCI will hold them guilty of infringement.  Amending the General Regulations to provide the parties an opportunity to be heard post the determination of guilt by CCI will go a long way in making the entire process of assessing the penalty amount transparent.

CCI can perhaps take solace and at the same time learn from the experience of other competition regulators which have grappled with similar issues in the early days of their competition law enforcement endeavors.

For instance, the process of calculation of the quantum of fines in the European Union had been criticized as being vague and nebulous, and the procedure for calculating the quantum of fines by the European Commission (“EC”) was compared to a lottery system, where random figures appear magically at the end of the decision.  EC responded by introducing the Commission Guidelines (“1998 EC Guidelines”) on fines in 1998.  These 1998 EC Guidelines were further revised in 2006 and now specify a two-step process for calculating the final amount of fine.  In the first step, EC determines a base amount of penalty calculated by taking into account the duration and gravity of the infringement.  In the second step, this amount is increased, where aggravating circumstances like retaliation against parties or refusal to co-operate with the investigation are present and reduced where attenuating factors like a passive role in infringement or reasonable doubt exist.

Similarly, in the United States, the Department of Justice (“US-DOJ”) and the US courts arrive at the penalty amount by referring to the United States Sentencing Guidelines (“USSG”) and the Antitrust Criminal Penalty Enhancement & Reform Act, 2004 (“ACPERA”).  Similar to the 1998 EC Guidelines, the USSG and the ACPERA also envisage a two-step process of quantifying the penalty amount.  First, the US-DOJ/courts arrive at a base amount calculated on the basis of parameters like profit made by the organization and pecuniary loss caused by it.  In the second step, the base amount is multiplied by a margin ranging from 0.75 to 4 based on factors such as high level involvement or tolerance of the conduct, prior criminal history, violation of an order of injunction, any obstruction of justice, co-operation and acceptance of responsibility.  In short, competition law regulators/courts in two of the most mature competition law jurisdictions — the European Union and the US, prescribe and adhere to a set of objective parameters to calculate penalties for infringements of competition law.  They exercise their discretion within the framework specified in penalty guidelines and by taking account of factors such as gravity of the infringement, advantages that the offending party/parties have enjoyed as a result of the infringement, the repeated or occasional nature of the infringement, the extent of participation in the infringement, cooperation with the authority during the proceedings, the presence of competition compliance programmes and the behavior of the offender in eliminating the prohibited practices and repairing the damage caused to the competition.

Calculation of penalty using a set of objective parameters is important for the purposes of efficient competition law enforcement.  A lack of guiding principles for quantifying the penalty amount may lead to arbitrary and unjustified penalties, and CCI will invariably see each of its orders being litigated before COMPAT and SC.  Pre-empting rebuke from the appellate courts for something that may be addressed by adopting clear and objective guidelines, as noted above, should not be very difficult for CCI.  Such an approach will not only help CCI emerge as a stronger regulator but also provide comfort to the industry by reducing the uncertainties and arbitrariness that characterize the present method of assessing penalty.

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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