Given the current rhetoric emerging from the White House, US-Chinese relations look increasingly fragile. However, as frayed as diplomatic ties may continue to get, market forces will still generate deal activity between the two countries. As the old adage goes, “money never sleeps”.
Over the last couple of years, Chinese investors have played an increasingly active role in the US market. As 2016 moves into 2017 this showed no signs of slowing with outbound M&A activity in the US still frothing in recent months with a number of notable deals announced across a range of industries.
A recent report authored by JPMorgan outlined the crucial factors that have driven this trend, noting that China’s vigorous M&A activity in the US has been accompanied by equally fervent activity in Asia Pacific, the report indicates that China’s movement away from a manufacturing-based economy and dearth of available domestic assets are two reasons why it has been looking to buy in the world’s largest market.
Concrete examples in the M&A space are easy to find. One particularly notable deal happened this past September in the tech sector when Chinese private equity firm Orient Hontai Capital acquired a majority stake in US mobile marketing start-up AppLovin (see DEAL DATA record). The deal drew special interest because the tech industry has emerged as a favorite target for Chinese purchasers in the US.
Another significant acquisition occurred less than a month later when a subsidiary of the Chinese HNA Group acquired aircraft leasing company CIT Group in a $10 billion deal (see DEAL DATA record). The subsidiary was NYSE-listed and Ireland-headquartered company Avolon Holdings, which had itself been the target of a $7.6 billion acquisition by Bohai Leasing, a subsidiary of HNA.
In the light of this trend working with Chinese buyers has taken on an increasingly important dimension for US M&A lawyers and alongside the obvious possibilities there are also a range of challenges that US firms will need to address to better facilitate outbound Sino-US transactions.
On the national level, there are obvious hurdles that arise from both countries’ vigorous regulatory bodies. In the case of the US, the Committee on Foreign Investment in the United States (CFIUS) – tasked with reviewing any security concerns that a cross-border deal may entail - has been particularly circumspect when it comes to approving Chinese purchases of US-based entities.
Moreover, the disparate characters of the legal markets in the US and China create some difficulties. Unlike the rather open and competitive legal market in the US, the one in China, although changing, is still very fragmented. With only a few well-known firms, even larger international deals may include Chinese firms that their US counterparts have never worked with.
At the more intimate firm-to-firm level, language, billing practices and national differences in the role that attorneys play on transactions are also obstacles.
Although he describes his experience on US M&A deals as having been “so far, so good,” partner Huang Yongqing at Chinese law firm Jingtian & Gongcheng recognises that working on transactions in the US is not without its difficulties. The two issues Huang has usually encountered on M&A deals with the US at the individual firm level have emerged in relation to fee arrangement and to language.
Regarding the former, Chinese firms prefer to bill per transaction, while US firms charge by the hours spent on a transaction. The difference leads to a sense of frustration from the Chinese side when it comes to determining costs, but according to Huang international law firms in recent years have become more flexible with regards to local billing practices and the two sides can usually come to an amicable solution. However, Huang claims that there remains a real “need to be more creative” to address cross-border billing complications.
For lawyers used to a business world driven by English, the demands of Mandarin can be difficult, but as Huang points out, it is very important to “have a serious business lawyer who can communicate with a Chinese buyer in Mandarin”. Davis Polk & Wardwell corporate partner and IFLR1000 Leading Lawyer Alan Denenberg concurs, saying that language isn’t quite as big of an issue as it was in previous years, but that many US firms are often without top industry lawyers who speak Mandarin.
“Language is useful for US-PRC deals if the firm has lawyers who are fluent speakers,” says Deneberg, but as he points out US companies tend to retain partners who they trust and are familiar with and language is often relegated to a secondary consideration.
Clearly, then, there are opportunities for US and Chinese firms to bring their working practices more in-line in order to better facilitate transactional opportunities. However there are other factors at play in Sino-American business relationships that are out of the hands of individual firms, most notably the inclinations of regulatory bodies.
Huang claims that in certain industries like high-tech there are more concerns for Chinese buyers on whether deals in the US can be closed on time. That uncertainty is for example a product of foreign restrictions for Chinese buyers by bodies such as the previously mentioned CFIUS. Similarly, Denenberg mentions an increasingly challenging Chinese regulatory regime that has imposed additional requirements for Chinese firms moving currency outside of the country.
Written before the election of Donald Trump, the aforementioned JP Morgan report may now have a different resonance given how his regime has threatened to change pre-existing trade relationships, and the regulatory difficulties given above will only become exacerbated.
However, speaking shortly after the election, Huang sounds a note of hopefulness. Although Trump’s election was “really a surprise to the Chinese people,” Huang mentions that Trump had seemed to be somewhat more pragmatic on China. Ultimately for Huang, “the US needs China and China needs the US.”