2020版公司与并购趋势与发展之中国篇（英文版）.pdf

Definitive global law guides offering comparative analysis from top-ranked lawyers chambers GLOBAL PRACTICE GUIDE Corporate M&A China: Trends & Developments Shifang Guo, Evan Sun, Jeffrey Zhu and Qing Ren Global Law Office 20202 CHINA TreNds ANd d evelopmeNT s Trends and Developments Contributed by: Shifang Guo, Evan Sun, Jeffrey Zhu and Qing Ren Global Law Office see p.8 CovId-19 o utbreak The novel coronavirus (COVID-19) outbreak is, without doubt, currently the top issue bringing significant uncertainties to the Peoples Republic of China (China). Further, effects are spread globally, affecting the global economy and is, therefore, having a knock-on effect on socio-economic activities. With the poten- tial negative impact on GDP growth in China in 2020, there may be new opportunities, especially in the corporate M&A market. For example, in sectors severely impacted by the COVID-19 outbreak such as the catering and traveling industry, reorgani- sation or M&A activities are expected to increase considerably. Investments in remote office systems, such as ZOOM, or online education and the likes are also expected to prosper. To put the COVID-19 outbreak in context, the overall effect of the Severe Acute Respiratory Syndrome (SARS) crisis in 2003 pale in comparison due to its minor and short-lived effects. SARS was only widespread in some cities in China such as Beijing and Guangzhou. In contrast, the COVID-19 outbreak first took place in Wuhan, a large industrial and transportation hub in central China, right before the lunar new year holiday. Before the city was locked down, the virus had spilled across China and even beyond the Chinese border due to the trans- portation flow of people heading home for the long lunar new year holiday. Economically, in 2003, China was at the starting point of a rapid development resulting from the accession to the W orld Trade Organisation (WTO). State-owned enterprises were under a reform to retreat from various industries, leaving great opportunities for entrepreneurs. Increasing foreign capital flew into China as a result of strong exports and encouraging foreign direct investment (FDI) policies. The government had a vast space in which to implement an entire set of expansionary fiscal policies. Today, China has entered a stage of steady domestic develop- ment and is facing an increasingly complicated external envi- ronment, which is further intensified by the trade disputes between China and the United States (USA). The depression of the global market to be caused by the pandemic will, unsur- prisingly, hold back the Chinese M&A market. After years of fiscal expansion, the government is increasingly cautious on using economic stimulus tools. Under which, going into 2020, the COVID-19 outbreak causes even more uncertainties and complexity factors to surface, which is likely to affect socio- economic activities and potential deals in the Chinese M&A market. Amid the COVID-19 outbreak, the Chinese government react- ed swiftly to the situation by promulgating a plethora of poli- cies, including requiring banks to provide financing support, subsidising certain enterprises for interest payment, allowing enterprises to postpone the payment of rent and labour insur- ance, and postponing the deadlines for listed companies for the disclosure of financial reports. Certain industrial sectors and enterprises may get more support than before. For instance, enterprises engaging in the development of equipment to fight the epidemic may enjoy lower financing costs. Even with such supporting policies, enterprises short of cash flow will still find it difficult to survive the epidemic if it were to last for months. This will drive dealmakers with abundant cash to look for cheaper targets. Moreover, the epidemic would cause major changes to work and life-style. Certain industries may benefit from the increasing demand for products and services that can help people live and work under the threats of widespread infectious diseases, whilst other, outdated business models might be abandoned. Conse- quently, dealmakers will adjust the valuation methods to reflect the changes. Lastly, the long break of economic activity in many cities may hit global supply chains such that enterprises might have to consider moving production out of China, and enter- prises short of liquidity might have to dispose of their assets, both resulting in an increase in cross-border transactions. COVID-19 may also have impacts on the performance of exe- cuted transactions. Chinese governmental authorities, trade associations, arbitration institutions and courts have declared that they will assist enterprises in obtaining force majeure cer- tificates. However, whether a force majeure argument can be justified remains to be decided in the context of a specific trans- action and disputes on the causation in relation to the influence that the COVID-19 outbreak caused may occur. Disputes could also arise out of a “material adverse change/material adverse effect” clause, under which termination rights can be triggered. In addition, due to the travel restrictions and potential exposure risks involved in face-to-face meetings, dealmakers and advi- sory firms will require more innovative solutions in conducting due diligence and further executing the full M&A life cycle. The outbreak could also increase uncertainty during the period from the signing and closing of a deal. 3 TreNds ANd d evelopmeNT s CHINA Contributed by: Shifang Guo, Evan Sun, Jeffrey Zhu and Qing Ren, Global Law Office Us-China Trade disputes Phase One agreement The USA and China have been engaged in an economic conflict since 2018 when President Trump imposed tariffs and trade barriers on China (among other nations). Negotiation attempts have brought execution of the “Phase One” agreement on 15 January 2020. The Phase One act, formally known as the Eco- nomic and Trade Agreement between the United States of America and the Peoples Republic of China, became effective on 14 February 2020. Currently, its execution faces uncertainties and complexities as a result of the COVID-19 outbreak. Under the deal, China committed, inter alia, to increase US imports by at least USD200 billion above the 2017 level within the next two years and to improve its protection of intellectual property rights. The USA has conceded to halve part of the new tariffs imposed on China. The signing of the Phase One agree- ment is seen as a temporary truce rather than an end of the dispute, as a large portion of the tariffs imposed still remain. It is believed that the Phase One agreement only deals with the easier aspects of the disputes between the parties. Influence on outbound China investments In terms of M&A, global M&A fell by 16% from the same period last year in the third quarter of 2019, hitting the lowest quarter volume since 2016 according to data compiled by Refinitiv. In the same report, statistics show that deals in Asia plunged by 20% due to the US-China trade dispute and Hong Kongs pro- democracy protests, reaching its lowest since 2017. Throughout 2019, due to the volatility brought about by the trade dispute, companies were seeing more risks, and were less likely to take an aggressive approach in engaging in M&A activities. Deals decreased significantly and became more slow-paced due to the cautious attitude. Discrepancies between the parties made it dif- ficult to come to a consensus, which resulted in frequent cases of deals being called off just before closing. The growing uncertain- ties of market prospects and fears of a continuous downward spiral of Chinas economy, compounded by other negative fac- tors such as outbreak of the COVID-19 epidemic, may cause M&A activities to continue to plunge even further in 2020. For outbound investments, the so-called “Made in China 2025” programme has raised an alarm for US lawmakers and the USA has since tightened the restrictions on Chinese-led investments and mergers by intensifying scrutiny and broadening the juris- diction of the Committee on Foreign Investment in the US (CFIUS). The new powers will make it possible for CFIUS to thoroughly scrutinise and restrict investments from China, par- ticularly in the high-technology and other sensitive industries involving “critical technologies” . Although the new program for foreign investment review by CFIUS does not single out specific countries, it is generally believed that the selected industries primarily reflect concerns with Chinese investment trends. Fur- thermore, the technological rivalry between the USA and China has quickly escalated with the campaign against Chinese tech- nological companies such as ZTE and Huawei, and the Trump Administration barring US companies from using Chinese telecommunications network equipment in the USA. This in turn results in retaliation, with China delaying its approval on or blocking deals involving US companies such as Qualcomms proposed USD44 billion takeover of the Dutch chipmaker, NXP . The increased screening from CIFUS and the technological rivalry have hugely affected China s outbound investment in the USA. Analysts in EY have stated that Chinese acquisition of American companies fell by almost 95% from its highest point of USD55.3 billion in 2016 to USD3 billion in 2018. Increas- ing difficulties in investing in the USA have triggered Chinese firms to alter their investment schemes by investing in other regions such as the European Union (EU) and Southeast Asian countries. Coupled with the “One Belt One Road” initiative, there is an increasing number of deals made in Asia, Europe and Africa in industries such as infrastructure, natural resource, agriculture and logistics. Resulting in relocation Throughout the trade dispute, the US government has imposed tariffs on more than USD360 billion of Chinese goods, and Chi- na retaliated with tariffs on more than USD110 billion of US products. The tariffs being imposed on Chinese products have caused China-based manufacturers, both domestic and foreign invested, to invest in or relocate to other regions or countries. More investments on value-added projects are being moved to the Taiwan and Singapore, among others, while more manu- facturing capacities of the lower end of the supply chain are being moved to other developing countries, such as Vietnam, Indonesia and India. Influence on inbound foreign investments The trade dispute and the relocation of investments away from China have caused China to further open its market to foreign investment and level the playing field for foreign investors. Amid the trade dispute, the People s Republic of China Foreign Invest- ment Law and its implementing regulations (Foreign Invest- ment Law) came into force on 1 January 2020. The new statute relaxes regulations on foreign investments by streamlining the investment administration process, emphasising the protection of investments to respond to foreign investors concerns, and giving equal treatment to domestic and foreign-invested com- panies, except where investments are made in industries which are prohibited or restricted under the Special Administrative Measures for the Access of Foreign Investment (Negative List).4 CHINA TreNds ANd d evelopmeNT s Contributed by: Shifang Guo, Evan Sun, Jeffrey Zhu and Qing Ren, Global Law Office During the trade dispute, China shortened the Negative List twice, in 2018 and 2019, loosening restrictions on foreign investment and allowing for larger foreign ownership of key industries such as financial services, energy, telecommunica- tions, automotive, etc. For example, under the latest Negative List, the limit on foreign ownership in securities companies was increased from a third to 51% with the undertaking that 100% foreign ownership will be allowed by 2021. Similarly, foreign investors currently may hold up to 50% ownership in automo- tive business (except for special vehicles and new energy vehi- cles), and each foreign investor may invest in up to two auto- motive manufacturers. The Chinese government undertakes to remove the forgoing restrictions in 2020 and 2022, respectively. The use of the Negative List aims to reduce the scope of discre- tionary administrative review on foreign investment transac- tions and to build confidence from foreign investors due to the certainty in being able to rely on a definitive official list rather than discretionary interpretation of the laws and policies. Being one of the largest markets, globally, Chinas liberation by further opening its market will attract investors to devour the opportunities lying within the loosened restrictions. Enhanced foreign investor protections are also expected to increase inbound investment and M&A deals. Chinas transformation of the economy Recent trends also suggest that the trade dispute is contribut- ing to Chinas transformation of its economy from an export- driven economy to one driven by consumption, technology and innovation. It is a popular view that the trade dispute with the USA has served as a wake-up call for China, whereby China cannot afford to continue to rely on western technologies for its development and growth. Therefore, China must change from being a major manufacturing power to a leader in technological innovations. As such, sectors such as consumption, technologies and healthcare deserve more attention from investors looking for new opportunities in China. Chinas strengthening of intellectual property protection To a large extent, the trade dispute and the Phase One agree- ment have expedited Chinas steps to strengthen its protection of intellectual property rights. China has long adopted a practice of trading its market for technologies. As a result, foreign inves- tors often need to transfer their intellectual property rights as a condition for entry into the Chinese market. The USA has a long history of complaining about Chinas feeble protection of intellectual property and weak enforcement against intellectual property infringements. But even without the trade dispute, enhancing protection of intellectual property rights is inevitable for China as “it trans- forms from a major intellectual property consumer to a major intellectual property producer” . Under the new Foreign Invest- ment Law, forced transfer of intellectual property by foreign companies using administrative measures are explicitly prohib- ited and stronger protections for foreign intellectual property and trade secrets are stressed. The amended Trademark Law and the proposed amendments to the Patent Law both stipulate to increase punitive damages for malicious infringement. Overall, the trade dispute between the USA and China are not only about trade and business. It is also the inevitable result of the competition