China M&A: Can You Hear Me Now?
A couple of months ago, co-blogger Steve Dickinson, wrote an article 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?
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