A New Normal: US-China M&A and CFIUS Developments

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The AmCham China Outbound Investment Forum is honored to have hosted three esteemed White & Case LLP lawyers, Farhad Jalinous, Gregory Pryor, and Stacia Sowerby, to provide the AmCham China business community with an overview of the current US and China investment market,  discuss the ramifications of the newly approved Foreign Investment Risk Review Modernization Act (FIRRMA) on industries, and White & Case LLP’s winning strategies on how to make an investment and maximize clients’ profit.

Market Overview and Major Trends that Affect Investment

Since 2017, Chinese investment in the US has continued to decrease. Between H1 2016 and H1 2018 Chinese investment into the US dropped from nearly US $32 billion to just US $1.82 billion. Further, the number of deals taking place in that same time dropped nearly 50 percent. What resulted in these dramatic changes involves many factors, but some have likely bore more of the responsibility than others.

China FDI into US 2014 to 2018 drops, falling from 32 billion to 1.82 billion

This regression may be primarily attributed to two factors: the recent US-China trade war and scrutiny over Chinese investment. The combined results of these two developments have put both sides at odds in terms of what defines a good and profitable investment, dampening the formerly booming FDI environment.

Recent US-China Trade War

US China Trade War Timeline

 

Adapted from Stealable Slides: Trade Dispute Timeline

The US-China tariff situation has an enormous effect on US-China trade relations. A wide range of products and industries are affected by the implemented tariffs, as well as the proposed tariffs. According to the studies conducted by the experts of White & Case, with the uncertainties attached to the recent US-China trade conflict Chinese investors have adopted a “wait and see” approach to overseas investments . Meanwhile, a growing concern has emerged regarding the deal certainty between Chinese buyers and US sellers.

Increased Scrutiny Over Chinese Investment

The unfair trade practice investigation against China was one of the first trade actions initiated by the Trump Administration. Subject to the direction of the President, the USTR was authorized to investigate and take action against “trade violations” or “discriminatory trade practices”. However, Gregory Pryor pointed out that “Chinese Foreign Investment Controls and aggressive CFIUS application has a negative impact on China outbound investment to the US.”

Despite this, there should be continued optimism for ongoing activities of mergers and acquisitions, according to Farhad Jalinous. The recent tax reform cuts the corporate tax rate and lowers tax on repatriation of overseas cash. 75 percent of respondents to White & Case’s US M&A survey say a reduction in corporate tax rate indicates an increased appetite for M&A. On the other hand, there is a strong drive from people of both countries to petition their governments to return to the negotiating table, and forge a better and more mutually beneficial trade relationship.

Winning M&A Strategies

Nowadays, the world has become a very strong seller's market both price-wise and contract-wise for those with attractive assets. To maximize your chance of successfully buying a desired company, Gregory Pryor, Partner and Head of Americas M&A, shared his professional advice and experience on winning strategies.

Pryor advocates Three Assumptions before finalizing and closing a purchase.

  1. Assumption of Financing Risk
  • Ensure financing has been obtained by the buyer, as the condition will NOT be included in the purchase agreement.
  • Buyer is required to use commercially reasonable efforts to arrange and complete financing.
  • Buyer may be required to pursue “alternative financing”.
  • If the transaction does not close due to a financing failure, the buyer should have to pay RTF to the target.
  1. Assumption of Operating Risk,
  • Buyer must accept that once the contract’s been signed, the purchase must be closed.
  1. Assumption of regulatory risk (Antitrust/CFIUS)
  • A “Hell or High Water” provision must be put into action - Buyer agrees to do whatever it takes to get the deal through.
  • Divesting assets, holding businesses separate, or licensing assets.
  • Foregoing governance rights.
  • Increasing the consideration if it takes a long time to secure clearance.

For information on CFIUS development, please see the AmCham China INSIGHTS for this event. For additional inquiries, please contact the experts at White & Case.