Risk Managment in Chinese M&A Transactions

"Against the backdrop of China's accession to the WTO and the continuous lifting of restrictions on foreign investment in many industries, China is going through an extraordinary period of merger and acquisition activity. However, executing M&A transactions in China is not for the faint of heart, and making successful investments and striking good deals require more than a gold-rush mentality. In particular, taking an overly cautious approach might result in missing out on great opportunities, while an undisciplined or overly optimistic approach might well lead to disaster.

"Consequently, it is essential that dealmakers and their counsel take an informed, balanced, and practical approach to the myriad and unique risks presented by Chinese M&A transactions.

"Matters that require careful attention in Chinese M&A transactions include regulatory restrictions on commercial enterprise, governmental approvals that are required in connection with purchases and sales of businesses, confirmation of title to assets, assessment of potential liabilities, and structure of purchase price and other amounts potentially payable to the seller.

"Circumstances in China that tend to make these matters challenging include a legal and regulatory system that is in a state of flux, unavailability and unreliability of public records, unfamiliar customs and practices, a "sellers' market" created by a significant influx of investment capital, and regulatory restrictions applicable to deferred payments of purchase price.

"This Commentary [from Jones Day] identifies several key areas of risk associated with M&A transactions in China, with the aim of helping dealmakers identify and address important issues at an early stage."