Preliminary regulatory barriers life sciences acquirers face in China/U.S. cross-border transactions

When entering into an acquisition of a U.S. life sciences company, Chinese acquirers will often face a number of preliminary hurdles from regulators in both the People’s Republic of China (PRC) and the United States that they should address at the outset of the transaction.

In the PRC, cross-border transactions need approval from, or registration with, the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), and the State Administration of Foreign Exchange (SAFE). NDRC and MOFCOM review cross-border deals for investments, while SAFE regulates foreign exchange controls in China.

Conversely, in the United States, cross-border transactions between Chinese acquirers and U.S. targets will most likely be subject to antitrust review by the Federal Trade Commission and the Department of Justice to ensure that the deal will not harm competition. Further, the transaction could also trigger national security review by the Committee on Foreign Investment in the United States (CFIUS), whose jurisdiction was significantly expanded by the recently enacted Foreign Investment Risk Review Modernization Act (FIRRMA).

NDRC, MOFCOM, CFIUS reviews impact cross-border transactions

The approval or registration processes with NDRC, MOFCOM, and CFIUS could drag on for quite a long period of time and impact a Chinese acquirer’s ability to transact deals outside of the PRC. The regulations may also make a Chinese acquirer’s bid inferior to a domestic acquirer in a competitive bidder situation.

For example, a seller with two competing bids (one from a PRC acquirer and one from a non-PRC acquirer) will have to review each bid and decide which is more competitive, assessing, in addition to the monetary considerations, which bid is more likely to close if accepted by the seller. The process of obtaining MOFCOM, NDRC and SAFE approval or registrations (depending on the size and the nature of the specific deals), which by their nature lack transparency, may cause a U.S. seller to view the bid by a Chinese institutional investor as slightly inferior, thereby reducing the competitiveness of that bid as compared to a non-Chinese bidder.

Similarly, CFIUS review makes a Chinese acquisition risky in terms of the certainty of closing a transaction. Much like NDRC and MOFCOM, CFIUS reviews a transaction for national security concerns. CFIUS has the power to recommend to the President of the United States that the transaction be blocked. While CFIUS filings were not previously legally required (although CFIUS could voluntarily review transactions on its own), the new FIRRMA rules expand CFIUS’ power and require approval for some transactions before closing. In particular, transactions involving “critical technologies” will be required to obtain CFIUS approval and, although “critical technologies” are not well-defined, certain life sciences transactions can potentially fall within this definition. As a result, Chinese acquirers targeting U.S. life sciences companies now may be required to make CFIUS filings, thereby giving them a competitive disadvantage in a competing bidder situation due to the risk that the deal could get blocked or materially delayed.

SAFE regulations can delay process of cross-border transaction

The tightening of SAFE rules has also made it more challenging for PRC acquirers to obtain assets outside of the country. As part of regulating foreign exchange controls, SAFE monitors foreign exchange bank accounts and approves foreign currency and movement of the Renmibi in cross-border M&A transactions. Because foreign currency is exchanged in U.S./PRC cross-border transactions, SAFE rules require that the parties to the transaction complete the registration with the banks that have been delegated powers by SAFE before funds can be wired from mainland China to other jurisdictions in connection with the closing.

Under the SAFE rules, the acquirer and target in a cross-border transaction must submit documents to the banks that have been delegated with powers by SAFE. The banks will examine the foreign exchange, and SAFE, although not directly involved in such review process, still has influence over the banks. In addition, the general view is that, while not an official rule, banks generally may report the outbound payments in excess of US$5 million to the local SAFE, and report payments in excess of US$50 million to the central SAFE. This procedure lengthens the outbound payment process and can, in and of itself, be a competitive disadvantage for a Chinese investor.

Acquirers should address barriers, engage counsel early in transaction

From the outset of a transaction, PRC acquirers seeking a U.S. target should assess all of these regulatory barriers, as they present challenges to successfully closing an outbound deal. However, these hurdles can be overcome through early identification and analysis. The sooner a PRC acquirer engages counsel to examine these issues, the easier it will be to assure a seller that the acquirer has considered potential issues, is comfortable with them, and has a plan to overcome them.

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