As Asian companies go global and foreign buyers look to make acquisitions in Asia, complying with increased regulation is becoming a key concern, according to lawyers.
"There has been a proliferation of merger control regimes globally and also in the enforcement of those regimes, which has inevitably worried potential buyers," said Roger Denny, head of M&A Asia Pacific at Clifford Chance. "It is an area where we believe good preparation and communication with stakeholders is key, in which case the issues can usually be managed successfully," he added.
A recent survey conducted by FinanceAsia highlights buyers' growing concern. A total of 66 out of 170 respondents said that worries about local protectionism and regulatory issues were a drag on inbound M&A in the region.
The poll of regional bankers, key investors, commercial lawyers and companies was conducted in partnership with global law firm Clifford Chance and close to half the 172 respondents are managing directors, chief executive officers or partners.
The survey also showed concern over flouting the US Foreign Corrupt Practices Act (FCPA), an act that prohibits the payment of bribes to foreign officials to obtain or retain business. In the survey, one respondent said that joint ventures with local companies, especially state-owned enterprises, are high-risk, not least because of the potential risk of falling foul of the FCPA.
Recent acquisitions by Chinese companies in the US have also come under the regulator's lens. For example, Lenovo's acquisition of IBM's server unit this year drew scrutiny from the Committee on Foreign Investment in the United States (Cfius). Similarly last year, WH Group's (formerly known as Shuanghui International) acquisition of US hog producer Smithfield Foods in 2013 also attracted debate in US congress.
"Regulation and compliance is a growing area of focus for M&A deals," said David Blumenthal, a partner at Latham & Watkins.
However, Chinese companies have also become savvier when dealing with regulators as they have become more seasoned with the process of dealing with regulators.
“Chinese companies have become more sophisticated in dealing with cross-border regulatory issues and always developed plans or strategies at an early stage of a transaction to cover this aspect when they make outbound acquisitions,” said Alex Zhang, head of White & Case’s greater China M&A practice.
Anti-monopoly law enforcement
Many multinational companies now have a significant presence in China and even mergers that do not involve Chinese companies are subject to anti-monopoly laws if such companies have a sizeable presence in China. Glencore Xstrata’s sale of a copper mine Las Bambas this year, for example, was one of the conditions the Chinese authorities laid out to allow Glencore’s merger with Xstrata.
“China’s anti-monopoly law has been in force for about six years and, during this time, Chinese Ministry of Commerce (Mofcom) has gained experience in applying the law to specific transactions," said Latham & Watkin's Blumenthal.
"While this experience and the rules and practices Mofcom has developed based thereon gives parties to M&A deals more certainty, Mofcom has taken an active role in enforcing the anti-monopoly law, which can have an impact on companies pursuing global M&A deals. Given the relatively low thresholds for triggering anti-monopoly review, many deals will trigger it," he added.
The Chinese regulators have also been cracking down on companies that operate cartels, or flout rules. "Since 2013, the Chinese regulator has increased its enforcement and fines for violations of China anti-monopoly laws, a number of companies in LCD panel, infant formula, auto parts, insurance and cement sectors have been fined for such reason,” said Zhang.
However, for foreign buyers looking to do deals in China, there is one bright spot, which is that the Chinese government has been trying to simplify the approval process.
“Starting from last year, the State Council has been trying hard to de-centralise the approval process for inbound investments to the lower level of government,” said White & Case's Zhang. “Mofcom has also introduced a simplified filing process for merger clearance purpose and if you meet the criteria you can get approval fast,” added Zhang.
