By Yong Kaichang King & Wood Mallesons’ Corporate group
In Part 1 of this Article, we discussed the choosing of your lawyers, reviewing legal fees, forming the transaction structure, setting a timetable and managing due diligence. We now continue with the remaining topics.
Handling regulatory approvals
PRC outbound investment approvals and currency controls were tightened last year in a bid, amongst other things, to curb outbound investments where buyers have no core competence and which do not improve domestic production. Since then, clarification and further notices have been issued by the PRC regulators, the latest being the Administrative Measures for Enterprise Outbound Investment issued by the National Development and Reform Commission on 26 December 2017 (which will be effective on 1 March 2018). There is more clarity now on the latest PRC outbound investment policies and market outlook is becoming more optimistic. Government or regulatory approvals in the target country may also be required, especially if the acquisition involves a sensitive industry, region or asset.
The global political and socio-economic climate is in a state of flux with a new wave of protectionism and anti-globalism. Plan ahead and pro-actively engage with the relevant regulators to ensure that your transaction can be completed in a prompt and smooth manner.
Understanding transaction documents
Recognize that your transaction documents are a unique set of documents that need to specifically and comprehensively address parties’ issues, risks and concerns in the transaction at hand. There is no transaction document template that would apply to all transactions and all circumstances, whereby parties would just need to fill in their name and details. Even certain boilerplate provisions that are regarded as market-standard should still be reviewed and revised where necessary to fit your transaction.
The first draft of each transaction document should in principle be prepared by the party whose interests the document is primarily intended to protect. For example, the first draft of a sale and purchase agreement should be prepared by the buyer, as the seller would be inclined to produce a simple first draft with little or no warranties. Similarly, the first draft of a shareholders agreement should be prepared by the minority shareholder, as the majority shareholder who would effectively control the company by itself would be inclined to produce a simple first draft with little or no minority shareholder protection clauses. Otherwise, the chance of extensive additions and redrafting by the counterparty would be higher, which would incur more time and costs in the process. Also, a badly-drafted first draft would need to be substantively amended and possibly even redrafted, which would also incur more time and costs. Thus, always instructing your lawyers to only review (and not draft) transaction documents in the belief that it would save costs may not ultimately work out.
A good set of transaction documents need to be legally sound. They also need to clearly and comprehensively:
- set out parties’ intentions and agreements;
- allocate rights and responsibilities; and
- anticipate likely risks and future events and set out how they are to be managed,all with the aim of avoiding or minimizing future disputes between parties.
Have a list of what your key issues and focus on them. Don’t lose the forest for the trees. Pick your battles and don’t waste time and effort fighting on every point.
Understand prevailing international market standards for transaction arrangements and provisions. For example, in a global seller’s market marked by increased wariness over the PRC outbound investment approval and currency control regime, requirements for deposits and reverse break fees are becoming the norm. Don’t, however, blindly accept what your counterparty claims to be “market standard”. Market standards are not uniform between countries; what is “market standard” in the seller’s country may not be “market standard” in the buyer’s country. What is eventually agreed will, to a large extent, depend on which party is in a stronger bargaining position.
Tailor your negotiation approach according to:
- the cultural background of the counterparty;
- the relative bargaining strength of the parties; and
- the specific commercial context of your transaction.
For example, a buyer could choose to be less aggressive where the seller will remain as a minority shareholder and joint venture partner, and thus be “in the same boat” as the buyer after closing. As opposed to where the seller will take his money and exit completely on closing.
Put yourself into the shoes of the counterparty. If a joint venture is contemplated, ensure that both your goals and interests are aligned so as to avoid being strange bedfellows.
Be commercial. Adopt a give-and-take approach. For every difficult problem, it is always possible, with the assistance of a good lawyer and as long as parties keep the end goal in mind, to work out a creative solution that is mutually satisfactory. Negotiate with a win-win outcome in mind.
Effect of Closing
Closing is only a milestone in the transaction. It is not the end.
From a legal perspective, the fact that a transaction has been signed and closed does not automatically mean that legal and regulatory matters were all properly sorted out and well-handled. Whether or not a transaction was well-managed will really only be revealed when there is a dispute between parties or an investigation by the relevant authorities. A well-managed transaction and properly-drafted transaction documents will stand up to scrutiny in the event of any court, legal or regulatory challenge.
From a business perspective, closing is the beginning of the integration of two separate business identities and cultures, which must be managed well if the business is to continue to prosper. Retention of key staff, choosing a bridging team with the appropriate background and language capabilities, promoting assimilation between teams, and maintaining regular and open communication, are all important factors in this process.
Ensure that your transaction documents have a clear procedure for dispute resolution, which should as far as possible aim to resolve possible differences between parties in an amicable manner without needing to go to court or arbitration.
The governing law and dispute resolution clause in your transaction document is not a simple boilerplate clause. It should be drafted considering conflicts of laws principles and factors such as:
- whether a court or arbitration mechanism would be more suitable for the parties (e.g. would privacy and confidentiality be needed? would specialist or technical knowledge be needed to adjudicate the matter?);
- the maturity of the relevant legal systems;
- the location of each party’s assets; and
- the ease and cost of enforcement of judgments or decisions.