China has recently become Germany’s largest investor. The participation in and acquisition of German enterprises increased over the last years significantly whereas not only the investment focus is broadening but also the amount of investments is increasing. Especially the well-known German mid-cap enterprises and so called “hidden champions” are very attractive for Chinese investors looking for advanced technologies and innovations linked to the excellent brand “Made in Germany”.
M&A transactions and negotiations
However, communication difficulties, cultural differences and deviating understanding of M&A processes impact Chinese-German M&A transactions and partially have the consequence that promising transactions fail. To achieve a successful M&A transaction, there are some dos and don’ts to consider during the M&A process.
First, it should be mentioned that the German approach regarding M&A transactions differs from the Chinese approach. Irrespective of obvious language difficulties, the differ-ences in communication and negotiation style often lead to misunderstandings. For example, if an agreement is reached during the negotiations on a certain topic, it is principally the expectation that there are no re-negotiations. That being said, the overall approach is to “close” a topic – quite often at the end of the negotiations in package deals – and not to keep it “open” as long as possible to avoid the impression one may have “lost” during the negotiations.
Furthermore, the internationally common transaction structures as well as the usually comprehensive and complex English transaction documentation contribute to the difficulties of Chinese-German M&A transactions. It is, thus, of importance to engage experienced and trusted advisors already at the very beginning of a potential M&A process to avoid potential issues impacting the entire M&A process (for example regarding the content, negotiation and conclusion of a Letter of Intent where it is important for a Chinese investor to understand that the terms and conditions of the Letter of Intent will form the basis of all negotiations; i.e. even if it is not binding in all parts, the German negotiation partner will always refer to what has been agreed in the Letter of Intent and the position of the Chinese investor is weakened if he wishes to deviate from the content of the Letter of Intent).
In light of the usually comprehensive and complex English transaction documentation, any and all aspects thereof should be diligently reviewed and internally discussed prior to the negotiation of a Chinese-German M&A transaction. This refers amongst other to the concept, structure and interaction of the various contractual provisions of the purchase agreement (e.g. purchase price adjustment mechanisms, signing and closing mechanism, conditions precedent, representations and warranties, indemnities or covenants). It is highly recommendable to reserve sufficient time for detailed internal discussions together with the respective advisors to clarify the transaction structure, negotiation positions in order to finally speed up the M&A process. In this context Chinese investors partially underestimate the importance of sharing all relevant internal information and ideas with their advisors and it may be helpful to mention in this respect that e.g. German legal advisors are bound by German law to maintain strict confidentiality and have to act has representatives solely in the interest of their client. Certainly, the German negotiation partners will do so as well.
In addition, it is important for Chinese investors to understand the structured M&A process and timelines usually established in Germany. Particularly in an auction process, a Chinese investor will rather likely have only chances to succeed if and to the extent he can demonstrate compliance with the established timelines and steps. This obviously requires dedicated and highly responsive in-house teams and external advisors working on the various work streams in parallel (e.g. legal, financial, tax and commercial due diligence, drafting, negotiation and re-drafting of transaction documentation, financing and approval processes to name only a few aspects).
Chinese governmental approval process
Notwithstanding European or German governmental approval requirements (such as antitrust clearance, foreign investment clearance etc.) relative to a Chinese-German M&A transaction, the Chinese governmental approval process needs to be addressed by the Chinese investor as early as possible with respect to foreign direct investment from mainland China (but not from Hong Kong). Of course, non-disclosure agreements and respective confidentiality obligations entered into as standard procedure prior to any M&A transaction have to be observed.
Depending on the size and scope of the envisaged Chinese-German M&A transaction the local and/or central Chinese authorities – generally NDRC, MOFCOM and SAFE – need to be involved. This holds especially true, since the process and timing in China is hardly understandable and visible for German negotiation partners.
Also part of the overall assessment of the planned transaction by the German negotiation partner is transaction security. This means not only financing security but amongst others also comfort in relation to the chances of obtaining the required Chinese governmental approvals. Since the final application for such approvals can only be filed after execution of the relevant transaction documentation, pre-approvals should be obtained to clarify the viability of the intended transaction. As a matter of fact, the transaction documentation will always address this by including conditions and timelines for the various closing conditions which need to be cleared prior to a closing of the deal. Also it is important for the German negotiation partner to be involved in the Chinese governmental approval process by way of receiving constant information on the status thereof.
It can be said that quite often minor bits and pieces determine success or failure of a Chinese-German M&A transaction. Understanding of the respective other parties negotiation culture, patience and willingness to creative solutions are required to achieve successful Chinese-German M&A transaction and, following thereto, successful investments in German enterprises with long-lasting benefits and return of investment for the Chinese investor.
Noerr LLP, office Frankfurt/Main, Germany
(Dr. Till Kosche)