Linklaters: Getting over the Line-Clearing Regulatory Hurdles to Outbound M&A
In 2016, cross-border deal making was led by China: Chinese outbound M&A has been estimated in press reports at approximately $220bn in 2016, double the level of approximately $110bn in 2015.
However, as the volume of deals and the range of Chinese and Chinese-controlled entities involved have increased, the scrutiny of these deals by domestic and international regulators has sharpened significantly, resulting in several high-profile deals being delayed or cancelled (often for concerns relating to security or national interest). Press reports and analyst commentary indicate that in 2016 Chinese outbound deals worth tens of billions of dollars were blocked or withdrawn across the world: estimates range from approximately $40bn-75bn, depending on the source and assumptions used.
Regulatory concern often relates to the sector of the acquisition target. Many of the delayed or withdrawn deals are in sectors considered by the host government as being “critical” or “significant” to national security or national interest.
This includes sectors such as:
• energy infrastructure (e.g. the blocking of the acquisition of Ausgrid in Australia),
• high-end technology (e.g. the blocking of the acquisition of Aixtron in Germany), or
• electronics (e.g. the termination of the sale of Philips’ lighting unit Lumileds in the US).
All of these industries are intertwined with concerns about the wider social impact of such deals if the relevant national infrastructure is compromised. Indeed, national security has been cited as the main concern for regulatory resistance to some deals, including from across several countries at once. An example of this is the withdrawal of the German government’s approval for the acquisition of Aixtron by Fujian Grand Chip in October 2016, and the US government’s blocking of the acquisition of Aixtron’s US subsidiary on the grounds that the Committee on Foreign Investment in the United States (“CFIUS”) had concerns as to the deal being a potential risk to US security. Whilst Chinese firms investing outbound are not alone in facing scrutiny when investing in such industries, the prevalence of this issue for Chinese investors means it is one that cannot be ignored.
These issues are coupled with policy shifts from the Chinese government, which is now more actively regulating major outbound investment to address, amongst other things, perceived irrational investment outside areas of an acquirer’s core business.. The Chinese government continues to support genuine strategic outbound investment made by the country’s industrial leaders but is also seeking to apply greater scrutiny of outbound investments.
Concern is rising over whether deals can get over the line under this increasing scrutiny. This short paper aims to provide background and assistance on the potential regulatory barriers for Chinese outbound M&A across key jurisdictions by providing high level guidance and policy recommendations for succeeding in such deals, as well as country-specific information.