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A couple of months ago, co-blogger Steve Dickinson, wrote an article [link no longer exists] on China mergers and acquisitions for China In Business Magazine. Towards the end of that article, Steve set out, in layman’s terms, the following realities of China M&A:
● Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.
● Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.
● Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.
● Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.
Agco, the world’s third largest tractor manufacturer, apparently has not been listening. In a recent Financial Times article, entitled, “Agco chief ploughs a difficult furrow,” Agco CEO, Martin Richenhagen, expresses his frustration with trying to “take a majority stake in First Tractor, a state-controlled company that is the country’s biggest tractor maker.”
Richenhagen offers the following opinions on Chinese law:

“There is no proper written law in China,” says Mr. Richenhagen.
“A lot of what is described as law is decided on the basis of feelings or political fashion,” he said.

The article notes that “US-based Deere, the world’s biggest farm equipment maker – already has a factory in China.” That is the difference. Deere recognized what the Chinese government has been saying for years: that foreign companies are generally free to come into China to create something new, but that the government will be very wary in allowing foreign companies to take a majority stake in a big, thriving, Chinese company, particularly one that might be tied to defense.
Steve’s commentary on the article is as follows:

1. The Chinese government is never going to allow a majority takeover by a foreigner of a major state owned manufacturer. Foreign investors who continue to take this approach to investment in China are wasting their time. The most the Chinese will allow is a minority stake if this benefits China by injecting capital, transferring technology or providing access to new markets.
2. The unwillingness of the Chinese side to allow for control over a joint venture is standard policy. Even when the Chinese allow for a greater than 50% ownership in a joint venture, they nearly always take action to ensure that the practical control of the venture stays on the Chinese side.
3. China is very clear on its policy. If a company wants to come to China and create a new tractor factory, China welcomes the investment. Unlike many countries in Asia and elsewhere, China generally will not restrict the investment to protect its domestic enterprises. That is why China is the number one recipient of foreign investment. The laws and regulations on such foreign investment are clear and complete. What China will not allow is foreign purchases of existing domestic enterprises.
4. The complaints in the article about Chinese law and policy are not fair. The problem for this investor is that it is trying to do something not permitted under Chinese law and policy. We get similar comments all the time from potential investors. They ask us how things work in China and we tell them. Then they complain that this does not fit with their idea of how China should be. Often they ignore our advice and waste much time and money doing something that is not possible in China. This is their mistake; it is not a matter of lack of law in China.

Can you hear me now?

  • On a somewhat tenuously related note, I’ve been thinking recently about what will happen this year if/when the Enterprise Bankruptcy Law begins to apply to State-Owned Enterprises, as its supposed to. Will 2008 witness the first test case in which a creditor hauls an SOE into court? I wonder…

  • JT

    So China’s restrictions on foreign M&A are public and fair, but US restrictions on Chinese M&A (3Com) are racist? Hasn’t the Chinese government marked out “telecommunications” as an area where M&A is verboten?

  • I don’t recall anyone in China getting too bothered about US restrictions on Huawei. My personal feeling is that some deal will go through, but it will be restructured a bit.
    As far as law goes…. I’m surprised how often people confuse “there is no law in China” with “there is a law but it doesn’t say what I think it should.” In the case of foreign mergers and accquistions, the rules are quite clear on what companies can and can’t do.

  • Eric Minto

    I do not agree with Dickinsons perspective. China’s laws as concerns FDI (and M&A) are governed by the Catalogue for the Guidance Foreign Investment in China, which specifically states what industries may be invested in 100% and which require a partner. Maybe Steve should read it sometime. China is directed in this matter by national policy not on a desire to rip off Anmericans or pass off their damaged goods, and it is naeive of you to suggest it is.

  • john

    there are laws in china.but sometimes it doesn’t seem to be enough in dealing with such M&As.the local goverments’ interest sometimes is different from the central government.so they will interprete the rule in a style which will be totally different from the central government will do. when it occurs, there will leave to the parties involved a legal risk.

  • fatbrick

    JT ,,
    Do you ever understand the difference between minority and majority?

  • Pffefer

    JT, the difference is the Chinese are not targeting any country particularly (foreign companies, whether it be American or Cambodian), the Americans are targeting particular countries like China (Chinese companies? No way whatsoever!). Plus, China made the do’s and do not’s of foreign acquisition pretty clear (as Dan’s post has pointed out), the US has not.

  • I wouldn’t get too moralistic about mergers and acquisitions. Getting the required government approvals is part of the chess game that you have to play in any country.
    In this case Bain and 3Com didn’t quite do their homework, when faced with some junior congressmen opposed to the deal, they didn’t react fast enough to either address their concerns or to organize a countergroup of congressmen in favor of the deal. This allowed the issue to get escalated up to John Dingell, and once you have the head of the House Commerce committee against the deal and no one in favor of it, the game was over.

  • Eric

    Mr. Harris,
    What is Chinese law concerning foreign, unsolicited tender offers for a majority stake in a publicly traded company (hostile takeovers), where the target corporation is not a “strong, successful” company? What about when the acquirer is a domestic firm?
    Thanks.

  • steve

    not so relevant to m&a, but an interesting china biz read none the less…
    http://www.civic-exchange.org/eng/upload/files/200802_beyondPRD.pdf

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