White Paper: Acquisitios by Chinese companies in US

By Andrew M. Ross: 0 Comment(s)Print E-mail China.org.cn, February 20, 2012

Adjust font size:

Selected U..S. Legal Issues –Including Over Stated Concerns

Non-U.S. companies looking to engage in transactions in the United States, often seem to have three initial primary legal concerns. This paper will address them briefly and explain why these should generally not be a concern, and if a company's strategic basis for the deal is significant and sound or the opportunity is very attractive, in most cases they should outweigh these legal considerations.

CFIUS is a U.S. term heard commonly in the Chinese business community and in that community is often perceived very negatively and as a means by which the United States government purposely and improperly keeps Chinese companies out of the U.S., even while perhaps favoring other countries. However, this is simply not a correct interpretation of the law, nor in the view of many, if not most, U.S. advisors, a correct perception of U.S. policy. As is well known, the Chinese-U.S. relationship is often complicated, but the U.S. has a long-standing policy of openness to foreign direct investment and sophisticated U.S. political figures and their advisors, including those on the "right wing" or conservative side, as a whole do not disfavor Chinese deals in the U.S. which do not involve national security concerns or loss of U.S. jobs, and statements to the contrary are often misunderstood and exaggerated or made for selected domestic political constituencies.President Obama himself and members of his administration have made many statements supporting Chinese foreign direct investments in the U.S.

The actual manner in which the CFIUS process works is quite detailed, and a discussion of this is beyond the scope of this paper. But in its most simplified terms, CFIUS authorizes the President of the United States to prohibit a deal, or even to unwind a deal which has already been completed, if the President finds "credible evidence . . . to believe that the foreign [person] exercising control [over a U.S. business]might take action that threatens to impair [U.S.] national security." Technically, a committee of the U.S. federal government, also called CFIUS, makes a recommendation to the President whether to block the deal for the above reason, but as a practical matter the committee informs the parties to the deal if it is going to do so, in which case the parties virtually always terminate the deal, although in limited instances they seek to restructure it so as to obtain approval. As set forth in Annex A, very few China to U.S.deals have been blocked or abandoned because of CFIUS and in general it is a highly over-inflated concern.

The CFIUS analysis starts with an examination of the business of the U.S. company being acquired, not the business of the foreign buyer, and thus, the issue of national security starts there. Although "national security" is not well defined, there are various factors to consider such as whether the transaction involves companies in defense-relatedareas, protecting critical infrastructure, compliance with important U.S. national security policies, including export controls, classified contracts and foreign government control of the buyer. Nevertheless, since CFIUS only comes into play when there are U.S. national security concerns, in most deals it has absolutely no relevance. For example, what does national security have to do with a clothing manufacturer or seller, or a video game company, or wind turbines, or consulting firms, or the many completed pharmaceutical deals or even most technologies? Moreover, even in those very rare circumstances when national security might be relevant there are on occasion legitimate ways to both attempt to properly work around CFIUS' restrictions and in any event to deal with CFIUS in a low key manner involving little or no publicity or embarrassment or loss of face. A joint venture may be subject to CFIUS if the U.S. company contributes a business to the joing venture, but CFIUS does not apply to start-ups.

The Foreign Corrupt Practices Act (FCPA) is another U.S. law which often greatly concerns foreign companies. However, again its significance is misunderstood and any negative impact is quite limited in this context. In brief, the FCPA prohibits certain types of payments to non-U.S. government officials by U.S. businesses and certain other parties as described below, even though the payments may be perfectly legal and/or an accepted business practice in the foreign country.A U.S. business is subject to the FCPA before it is bought by a foreign entity and continues to be subject to the FCPA after it is bought by a foreign entity.The FCPA also applies to all companies with securities registered under the U.S. securities laws, such as, for example, Chinese and other foreign companies which have "gone public" in the U.S.

However, and here is the major distinction, unlike the U.S. business itself, or a non-U.S. company with securities registered under the U.S. securities laws, a non-U.S. company without registered securities, including such a Chinese company, which invests in or acquires a U.S. business does not as a result of this transaction become subject to the Act as to its own activities on behalf of itself or on behalf of any of its non-U.S. subsidiaries or affiliates. Neither do its non-U.S. subsidiaries or affiliates. The only restriction the Chinese company incurs is that in the same way the U.S. business was and continues to be subject to these restrictions on foreign payments, the Chinese buyer is prohibited from engaging in such activities on behalf of its acquired U.S. business, but is not otherwise restricted. Put another way, nothing really changes and the FCPA doesn't apply to any activities of a Chinese acquirer or investor, except that the Chinese company cannot make a payment on behalf of the U.S. business, if those payments would be illegal under the FCPA if they had been made by the U..S. business. Understood that way this should not be a serious obstacle to most prospective buyers.

The third legal concern voiced on occasion is that the United States is a country of so many laws and these laws are very strict, thus making business difficult and expensive. This is only partially true and must be considered in comparison to other jurisdictions as well as the benefits to be derived from these laws.

For example, while the author of this paper is not a Chinese lawyer and therefore cannot claim knowledge of Chinese labor and employment laws, the author's impression is that in general the U.S. has laws which are more favorable to workers than does China. On the other hand, as a U.S. lawyer who has done deals in European Union countries, it is very clear to the author that European employment and labor laws generally are much more favorable to workers than those in the U.S. Therefore, strictness is relative.

Further, one must bear in mind that in making an acquisition in the United States, the other U.S. companies a target is competing with generally are subject to the exact same laws, thus the laws do not necessarily create a competitive disadvantage. There is also a positive benefit regarding the multitude of laws. This is that overall it provides businesses with much greater certainty as to what actions they may or may not legally engage in, and in general on a day-to-day basis provides very little role for government officials and bureaucrats to involve themselves in the affairs of a company. Such predictability and freedom of independent decision making is an often overlooked factor in cost savings.