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Guide for Chinese companies acquiring US companies

Law Offices of Yu & Associates

For many years now, the tide of Chinese companies acquiring foreign companies, including US companies, has been steadily rising. This of course has to do with the Chinese government's "Going Out" strategy, as well as the quest of Chinese companies for growth opportunities. We predict that the trend of Chinese companies, especially privately held companies, acquiring overseas companies will continue to rise over the next decade.

In general, the Chinese acquiring company will select the target company through their own channels and their knowledge of the industry, and then hire attorneys and accountants to handle the legal and financial aspects. But now there are also Chinese companies who so strongly desire to acquire an overseas company that they not only seek out professionals to handle the legal aspects of acquisition, but also to help them find a suitable target company to acquire. Evidently the trend toward acquiring overseas companies is strong indeed.

Acquiring a US company from abroad is a complicated process. It can happen quickly or slowly, depending on the pace of the negotiations, the willingness of both parties to complete the process, and how quickly the details can be resolved to come to an agreement. The primary concern of the Chinese company and their legal team is how to protect the Chinese company's interests using effective legal means during the entire acquisition process. The following is a concise introduction to the process of acquiring a US company from China, including building an acquisition team, preliminary due diligence and letter of intent, formal due diligence, obtaining approval from China's Ministry of Commerce, compliance with US anti-trust policies and export controls, negotiating and signing the purchase agreement, and closing.

1. Building an acquisition team

Acquiring an overseas company is a complex matter, involving the laws and financial regulations of at least two different countries. Therefore, you need a team of seasoned professionals who will work together to make the acquisition go smoothly and successfully. The key members of this team are attorneys in the US and China, accountants, tax professionals and asset assessment companies, each of whom handle their own specialties and complement one another. The accountant and/or tax expert will handle financial matters, performing an audit of the target company's finances and management and analyzing and evaluating the company's unhealthy assets and related transactions in order to reduce the risk related to the acquisition. The US attorneys will handle legal matters, analyzing the acquisition plan, drafting the Letter of Intent, conducting the due diligence investigation and arranging the signing and closing of the purchase agreement. Chinese companies generally prefer to engage Chinese-American attorneys who are fluent in Chinese and English to provide legal services in the US. The attorneys in China, meanwhile, are responsible for the obtaining the Chinese government's approval and assisting the US attorneys in communicating with the Chinese company. An experienced and hardworking team is a key ingredient to the success of your proposed acquisition.

2. Preliminary due diligence and Letter of Intent

In a cross-border takeover, before the two parties sign a Letter of Intent, the acquirer will first perform a preliminary due diligence investigation, due to the complexity of the acquisition. This preliminary stage can be completed by the Chinese company, through the efforts of the key personnel and attorneys involved in the acquisition process. Preliminary due diligence allows the acquirer to become acquainted with the target company's finances, operation, personnel, relationships with suppliers and customers, and use and licensing of patented and proprietary technology, etc.

Usually, after the Chinese acquiring company has selected a potential target company for acquisition, they will proceed through the following steps: initiating preliminary negotiations; sending management and technical personnel to visit the US company, meet with its personnel and see its facilities; engaging attorneys to review various documents; discussing the acquisition plan and format with attorneys; having the attorney draft a Letter of Intent; and then based on the Letter of Intent, beginning negotiations with the target company. The Letter of Intent should be presented after the preliminary due diligence and before the formal due diligence, and the acquirer should obtain the target company's signature before the formal due diligence process begins, to prevent the target company from continuing to seek another acquiring company or negotiate with other potential acquiring companies.

The Letter of Intent should first and foremost clarify whether the acquisition will be through purchase of stocks or assets. If the acquisition method is through purchase of stocks, then after the acquisition, the acquirer C that is, the Chinese company C must bear all the legal liabilities of the target company, such as debts, legal disputes, unpaid taxes, missing permits, environmental responsibilities, and incomplete financial documentation. It's all too common that an acquiring company lacks thorough knowledge of the target company before acquisition and doesn't perform a thorough due diligence investigation, and as a result the hidden problems of the target company come to light only after the acquisition. If the acquisition method is through purchase of assets, then the risk is much lower, as the acquirer is only purchasing the target company's assets and not stock rights, and therefore doesn't become responsible for the target company's liabilities. With the asset acquisition method, however, there are more complex tax issues than with the stock acquisition method.

In summary, the objectives of the preliminary due diligence and the Letter of Intent are: 1) ascertain whether the company is a suitable target for acquisition, and whether the preliminary due diligence uncovered any substantial problems that were previously unknown; 2) establish the acquisition price and method (stock vs. assets) in the Letter of Intent; 3) determine whether the target company truly wishes to sell the company and what their motivation is for selling the company; 4) maintain good relations with the target company, in order to lay a foundation for smooth and successful completion of the formal due diligence and the rest of the acquisition process.

3. Formal due diligence

After both parties have signed the Letter of Intent, then you can proceed to the next step, the formal due diligence investigation. The formal due diligence is broader and deeper than the preliminary one. The success of the whole acquisition process hinges on the due diligence, because during the acquisition process, the two parties have unequal access to information, and the acquirer therefore takes on a rather large risk. An in-depth due diligence can help reduce the acquirer's risk as much as possible.

Through both legal due diligence and financial due diligence, the acquiring company should get to the bottom of the target company's past and current finances and operations; the value of their assets, patents and technology; their legal disputes; whether the target company's customers will be maintained after the takeover; and how their internet sales and market coverage will be affected, among other issues. The purpose of the due diligence is for the acquirer to understand every aspect of the target company, in order to avoid irrevocable losses later.

The due diligence investigation primarily includes: the target company's organizational structure, shareholders, financial reporting, management structure, number and distribution of employees, their salaries and benefits, the company's product sales, sales agreements, investment agreements, loans, mortgages, potential risks in contracts where the target company is guarantor, the company's tax situation, assets, scope of operations, intellectual property rights, debts owed and credit extended, current or upcoming lawsuits, adherence to environmental protection regulations, any insurance settlements or claims, and any potential anti-trust issues. The acquiring company's attorneys will analyze any legal risks and their severity and report to the acquiring company, in preparation for the next round of negotiations and preparing the purchase agreement. The results of a due diligence investigation sometimes mean that the acquiring company changes their price or their acquisition plan or reconsiders some details. If the results of the due diligence are greatly inconsistent with the acquiring company's previous information, the acquiring company should proceed cautiously, or even give up the acquisition plan altogether.

4. Obtaining approval from China's Ministry of Commerce

While performing a due diligence investigation of the US target company, the Chinese company will also need to obtain the approval of several Chinese government agencies in order to invest in or acquire a company abroad. The main regulating agencies are the Ministry of Commerce (MOFCOM), the State Administration of Foreign Exchange (SAFE) and the National Development and Reform Commission (NDRC). If the Chinese company is state-owned, it will also need the approval of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). Before acquiring an overseas company, the Chinese company must apply to its local government's business department for a "Company Overseas Investment Certificate," and if an especially large amount of funds is concerned, then the company must apply directly to MOFCOM. At the same time, the Chinese company should apply to the NDRC for approval. After completing these application procedures, the Chinese company can take the approval certificates to SAFE to apply for foreign currency in preparation for closing on the purchase agreement.

Due to China's control of foreign exchange and the complicated and lengthy nature of the government approval process, the length of time required for this stage is outside of the company's control, which poses a risk for the Chinese company. Therefore, Chinese companies will sometimes set up a company in the target country or in the Virgin Islands before starting the acquisition process in order to reduce the uncertainty on this account.

5. US anti-trust policies and export control

After the due diligence process, if both parties still wish to go ahead with the takeover, then the attorneys of both parties will need to make sure to comply with US anti-trust requirements and export controls. If the purchase price is extremely high, then under the Hart-Scott-Rodino Act, the acquirer will need to submit a pre-merger notification. The Chinese company will also have to apply for an export license, particularly if the target company deals with sensitive high-tech products. The Committee on Foreign Investment in the United States (CFIUS) will conduct a national security review and decide within 30 days whether to withdraw the case or investigate further. The purchase agreement should clearly confront the risks associated with these uncertainties.

6. Negotiation and purchase agreement

The purchase agreement should be signed only after the formal due diligence is completely finished. After the due diligence investigation, the acquiring company will have a deeper understanding of the target company and the risk involved in the takeover, and may need to have a difficult discussion with the target company over some items in the purchase agreement. During these discussions, the attorneys play an extremely important role. The attorneys understand the core of the dispute, the goals and viewpoints of both sides and the bottom line for compromise, and they know how to minimize disagreements and reach an agreement.

The purchase agreement should clearly include all the details of the acquisition issues, especially the following key points:

  1. Price and acquisition method.
  2. Guarantees. The acquiree should guarantee that the financial reports, benefit programs, patents, etc. that they provided to the acquirer were truthful. The acquiree should also guarantee that they have revealed all information pertinent to the takeover to the acquirer, without omitting anything.
  3. Prerequisite conditions. This section sets out tasks that each of the two parties must complete before the deal is closed, such as the Chinese company obtaining a foreign investment license from China's Ministry of Commerce.
  4. Legal jurisdiction. It should be clearly spelled out in the agreement which laws will be applied and which resolution methods will be used in the event of a dispute, in order to avoid uncertainty if a dispute occurs.

7. Closing

The last step of the acquisition process is closing. Only once this is completed can the takeover be considered completed. In complicated cases, especially those involving the transfer of shares of a publicly traded company, it is challenging to undertake payment of consideration at the same time as closing. If one doesn't plan carefully beforehand, the security of the transaction can be affected, leading to losses for the acquiring company. Therefore, both parties should prepare meticulously for the closing stage to ensure that it proceeds without mishaps. The attorneys should also clearly stipulate in the purchase agreement that not closing in a timely fashion amounts to default on the agreement and include punitive measures such as retaining the balance to guarantee that closing goes smoothly.

8. Post-acquisition

After the acquisition is completed and the Chinese company becomes the owner of a controlling number of shares, the next task at hand is how to make the transition happen quickly and smoothly. Due to differences in the legal system and cultural values, the Chinese company is likely to encounter quite a few unexpected difficulties in the first days of the takeover. The most pressing issue is how to get the management and employees to settle down and continue normal operations. The first thing to do is hold meetings with management and with all the employees to clarify the company's objectives going forward, mode of operations, personnel assignments and whether there will be layoffs, in order to pacify the troops and avoid disruption of work during the transition period because of differences in ideology and culture. Second, the Chinese company will need to become familiar with US corporate laws and management principles, with the help of the US attorneys. They should also gradually adjust and amend the decision-making procedures of the shareholders and Board of Directors in the company's corporate governance documentation in order to assert their control over the Board and management. Lastly, the Chinese company should strategically operate the new company in order to meet their projected business goals.


The above is a general introduction to immigration policies, and should not be construed as individual legal advice. For specific legal questions, please contact the Law Offices of Yu & Associates. Attorney Xiaohui (Sharon) Yu is a graduate of New York University School of Law, one of the top five law schools in the US, and has practiced law at some of the top firms in the US, UK and China.

Tel: 301-838-8986, Fax: 202-595-1918; E-mail: syu@yulegal.com, Address: 110 N. Washington St., Suite 328E, Rockville, MD 20850. (All rights reserved.)

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