Acquiring An Existing Business in China: A Survival Guide

Published on 2012-04-17

On Tuesday 9 April, the British Chamber of Commerce held an introductory seminar explaining the essential considerations involved when acquiring an existing business in China.

On Tuesday 9 April, the British Chamber of Commerce held an introductory seminar explaining the essential considerations involved when acquiring an existing business in China.

China remains a highly attractive destination country for foreign investment and expansion but the legal and practical challenges of acquiring an existing business are very different from those encountered in the UK and it is crucial to be aware of them before going forward.

Making the Deal?
To kick-start the process, various preliminary, pre-legal documents (letter of intent, lockup agreements, MOU etc.) are needed to guarantee exclusivity. Once confidentiality is assured, there are several ways to structure the acquisition. You can either:

  • Agree an asset deal - cherry pick what you want to avoid acquiring liabilities although special licenses and permits are not necessarily transferable.
  • Agree an equity deal – take ownership of all registered capital and special licenses/permits as well as any outstanding contingent liabilities.
  • Or a combination of both – a more complex hybrid deal to get the best of both worlds.

Assume the Worst
Particularly in China, Mr. Epstein called for a healthy dose of skepticism. Due diligence was highlighted as the key stage in an acquisition and the final deal structure should only be agreed upon its completion. Deals can and have changed dramatically after due diligence especially in terms of what should be paid and how.

There can be a lot of dormant liabilities within companies, not necessarily deal breakers in their own right but understanding them is essential in order to make an accurate risk-reward assessment and decide a purchase price.

Consider Arbitration
With arbitration you can effectively ‘choose your lawyer’ and be guaranteed they have commercial law experience. When selecting an arbitration commission there are two options. You can either choose CIETAC (China International Economic and Trade Arbitration Commission) recommended for lower value disputes. Or alternatively, you can select an offshore arbitration committee but make sure it is a country party to the New York Convention as it makes foreign awards far easier to enforce in China.

Dual Language Documentation
Further mistakes stem from assuming perfect corroboration of dual language documents. In fact, a lot of disputes arise from interpretation of words and so it is vital not to underestimate the value of and skill involved in a high quality translation. With so many other variables, you must eliminate all other risks as far as possible so avoid cheap translation services.