Important Considerations for Canadian Companies Dealing with Chinese Investors
June 28, 2010
In recent years, more and more Chinese enterprises are making investments in Canada. Such investments are taking various forms, including acquisition of the target Canadian corporation or business, acquisition of majority control in the target Canadian corporation or its business, or entering into a joint venture and becoming a major but non-controlling shareholder of the target Canadian corporation or business. The purpose of this article is to set out briefly a "Top 10" list of matters for Canadian companies to consider in dealing with investors from China.
1. Identity and Status of the Chinese Investors
The first thing that must be ascertained is whether the Chinese investor is a state-owned enterprise (SOE) or a privately owned enterprise, and if it is state-owned, whether it is a central government SOE or provincial or other level of SOE. The status of the Chinese investor will impact the approval process, decision-making and flexibility in investment. Understanding this issue early on in the negotiation will be most helpful to the Canadian company in coming up with an appropriate approach to not only negotiating the transaction, but also to establishing parameters for the ongoing relationship.
2. Nature of the Investment
It is important to understand the objectives of the proposed investment for the Chinese investor, e.g., how important is it to gain majority control; or is it off-take, access to project management, economic return or access to technology that is most important to the Chinese investor? This will help the Canadian company to map out a negotiation strategy and approach that will lead to a successful deal.
3. Who is/are the Key Decision Maker/s within the Chinese Investor?
In order to avoid unnecessary frustration, it is important for the Canadian company to understand the decision-making process within the Chinese investor, including who is the key person/group that need/s to be convinced before the deal can proceed and how best to establish contact or access to that person/group to understand their needs and requirements. This can differ substantially between SOEs and privately owned enterprises, and may differ from one Chinese company to another depending on background, history, etc. It may not be easy for a Canadian company to get to the bottom of this, and the experience of your advisors in dealing with Chinese investors of different types may turn out to be critical.
4. Understanding the Required Approvals from the Different Government Authorities
This includes understanding the approvals required for the transaction from the Chinese government side, e.g., their National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM), which represent China’s central and provincial governments, respectively, and their State Administration of Foreign Exchange (SAFE). It also includes understanding the time-lines involved, as well as the requirements for any Canadian approvals or consents. It is also very important that, as early as possible, a time-line setting out all the external/third-party variables is settled and agreed upon so that all parties understand exactly what will happen, and when.
5. Language and Translation Requirements
For some Chinese enterprises, the key decision-makers may not be fully comfortable with the English language, and it is therefore important to have a plan for dealing with effective communication during negotiation and document drafting. Translation of legal documents can be time-consuming and costly. However, it is important for the Canadian company to consider having someone (either a reliable staff member or a staff member of an advisor) who can understand Chinese (both oral Mandarin and the written language). This will help ensure that there is no major miscommunication during the transaction process that could lead to a last-minute "surprise" or an "unbridgeable misunderstanding" after a lot of time and effort has been invested.
6. Preparing for Due Diligence –Business, Financial and Legal
As in any other transaction, the more prepared the investee company is to respond to due diligence requests, the more smoothly the deal will proceed. This is especially important with Chinese investors, as they come from a different business culture and it is important to agree early on to a due diligence process and time-line that both parties are comfortable with. Depending on the level of international experience of the Chinese investor, it is also important to ensure that they engage advisors that are familiar with the North American transaction process as early as possible.
7. Public Relationship Issues
Depending on the size and nature of the deal, early planning on public relationship and perception of the transaction may be a deal breaker or maker. This is especially important for high-profile transactions involving sensitive Canadian businesses or well-known Canadian household names. This may also play a large role in businesses that may be considered "national security" under the Investment Canada Act.
Signing an appropriate confidentiality agreement with the Chinese investor at the earliest possible time is advisable. It is also important to note that if news or rumours about a possible deal with a Chinese investor gets out too early, that may have a major adverse impact on the Chinese investor’s willingness and ability to proceed with the transaction. It is therefore important from a Canadian company perspective to make sure that the existence of and information about the proposed transaction is only made known to senior executives on a need-to-know basis and that tight control is maintained on confidentiality.
9. Expectation of Involvement Post-Closing and Secondment of Employees of Chinese Investors
This is particularly important for transactions that will involve a joint-venture or continual cooperation between the Canadian company and the Chinese investor. The parties need to identify what positions the Chinese investor will need, post-closing, at the board and management level. It is also important to understand the implications of local requirements for directors and management, especially if the Canadian company is a corporation listed on a stock exchange or is a reporting issuer. There are corporate governance practices in North America that are different from those of the People’s Republic of China, including in areas such as requirements for independent directors, for directors’ attendance at board meetings, and for directors’ contributions to the board. There are also clearance requirements (background check) for directors and officers of listed companies. Clear communication and realistic expectations on these fronts will make the execution of the transaction much smoother.
10. Governing Law and Dispute Resolution
Although this may seem to be merely detail, early agreement on governing law and dispute resolution may help the parties to move forward on difficult issues, especially if there is to be an ongoing relationship between the parties post-closing. Apart from the selection of traditional arbitration rules and an arbitration centre (Hong Kong and Singapore being two preferred centres), there may need to be thought given to experts taking on a quasi-arbitrator role, such as involvement of an accounting firm (usually neutral) in resolution of dispute over financial and accounting matters of a proposed joint venture, etc. Understanding and getting comfortable with the relevant arbitration rules and credibility of relevant arbitration centres, and determining experts available to take on quasi-arbitrator roles in relevant areas, sometimes can get the parties through difficult issues involving uncertainties after closing.
As in any other transaction, knowing your partner, preparing yourself as much as you can, and obtaining advice from experienced people in the relevant field will be keys to a successful transaction and will help establish the right parameters for the ongoing relationship. Canadian companies should not let myths and unfounded worries related to Chinese investors stop them from pursuing what could be exciting investment and business opportunities. Companies from around the world have already been ahead of Canadian companies in benefitting from investments from China and the potential offered by the huge Chinese markets. Canadian companies have a lot to offer, ranging from resources to technology, so we hope the next decade will see the joining of forces between Canadian companies and Chinese companies to create stronger and more efficient global leaders in multiple industries.
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